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
      1934For
      the Fiscal Year Ended December 31,
2008




OR


o
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ___________________ to
      ______________________




Commission
      File Number: 000-52178ES
      Bancshares, Inc.(Exact
      Name of Registrant as Specified in its
Charter)




Maryland
                      
                      
                      
                      20-4663714(State
      or Other Jurisdiction of Incorporation or Organization)
                      
                      (I.R.S.
      Employer Identification
No.)




68
      North Plank Road, Newburgh, New York
                      
                      
                      12550(Address
      of Principal Executive Offices)
                      (Zip
      Code)




(866)
      646-0003(Issuer’s
      Telephone Number including area code)Securities
      Registered Pursuant to Section 12(b) of the
Act:
 None




Name
      of Each ExchangeTitle
      of Class
                    
                    
                    
                    On
      Which Registered




Securities
Registered Pursuant to Section 12(g) of the Act:




Common
Stock, par value $0.01 per share




Warrants
to purchase common stock, par value $0.01 per share




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 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 reports), and (2) has been subject to such requirements for the past 90
days.




(1) YES x NO o




(2) YES x NO o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x




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
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filer
                    o
                    
                    Accelerated
      filer
                    oNon-accelerated
      filer
                    o
                    
                    Smaller
      reporting company
                    x


(Do not
check if 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 o NO x




As of
June 30, 2008 the aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant, computed by reference to the
closing price of the common stock as of June 30, 2008 was $10.4
million.




As of
March 26, 2009, there were 1,865,005 shares of the Registrant’s common stock,
par value $0.01 per share, outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE


1.
            Proxy
      Statement for the 2009 Annual Meeting of Stockholders (Parts II and
      III).







ES
BANCSHARES, INC.




ANNUAL
REPORT ON FORM 10-K


DECEMBER
31, 2008




Table
of Contents


PagePART
      I
                
                
                
                4Item
      1.
                
                Business
                
                4Item
      1A.
                
                Risk
      Factors
                
                32Item
      1B.
                
                Unresolved
      Staff Comments
                
                38Item
      2.
                
                Properties
                
                38Item
      3.
                
                Legal
      Proceedings
                
                38Item
      4.
                
                Submission
      of Matters to a Vote of Security Holders
                
                38PART
      II
                
                
                
                39Item
      5.
                
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                
                39Item
      6.
                
                Selected
      Financial Data
                
                39Item
      7.
                
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                39Item
      7A.
                
                Quantitative
      and Qualitative Disclosure About Market Risk
                
                51Item
      8.
                
                Financial
      Statements and Supplementary Data
                
                52Item
      9.
                
                Changes
      In And Disagreements With Accountants On Accounting And Financial
      Disclosure
                
                81Item
      9A(T).
                
                Controls
      And Procedures
                
                81Item
      9B.
                
                Other
      Information
                
                81PART
      III
                
                
                
                82Item
      10.
                
                Directors,
      Executive Officers and Corporate Governance
                
                82Item
      11.
                
                Executive
      Compensation
                
                82Item
      12.
                
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                
                82Item
      13.
                
                Certain
      Relationships and Related Transactions, and Director
      Independence
                
                83Item
      14.
                
                Principal
      Accountant Fees and Services
                
                83PART
      IV
                
                
                
                84Item
      15.
                
                Exhibits
      and Financial Statement Schedules
                
                84


3


PART I


Item
      1.
              Business




OVERVIEW




Who
We Are and How We Generate Income




ES
Bancshares, Inc. (the “Registrant” or “Company”) was incorporated under the laws
of the State of Maryland in August 2006, to serve as the bank holding company
for the previously formed nationally chartered commercial bank, Empire State
Bank, National Association (the “Bank”). The Registrant was organized at the
direction of the Board of Directors of the Bank for the purpose of becoming a
bank holding company pursuant to a plan of reorganization under which the former
shareholders of the Bank became the shareholders of the Company. Since the
reorganization, the Registrant has functioned primarily as the holder of all of
the Bank’s common stock.




The Bank
commenced operations in June 2004 as a national bank chartered by the Office of
the Comptroller of the Currency (the “OCC”). Effective March 9, 2009, the Bank
converted its charter to a New York State commercial bank.




As a
community-oriented full service commercial bank, the Bank offers a variety of
financial services to meet the needs of communities in its market area. The
Bank’s mission is to help its customers by offering a full range of consumer and
business deposit and lending products tailored to meet each customer’s specific
financial needs coupled with in-depth knowledge and service from the Bank’s
experienced staff. The Bank engages in full service commercial and consumer
banking business, including accepting time and demand deposits from consumers,
businesses and local municipalities surrounding its branch offices. These
deposits, together with funds generated from operations and borrowings, are
invested primarily in both owner and non-owner occupied commercial real estate
loans, residential mortgages, multi-family loans, secured and unsecured
commercial and consumer loans, home equity loans, construction loans; GNMA,
FNMA, and FHLMC mortgage-backed securities; U.S. government agency securities
and certificates of deposit at other financial institutions, as well as the
Certificate of Deposit Account Registry Service ( “CDARS” ). Additionally, the
Bank offers non-deposit products such as annuities and mutual funds, merchant
credit and debit card processing, automated teller machines, cash management
services, online banking services, safe deposit boxes and individual retirement
accounts.




The
information in this Annual Report on Form 10-K reflects principally the
financial condition and results of operations of the Bank. The Bank’s results of
operations are primarily dependent on its net interest income, which is mainly
the difference between interest income on loans and investments and interest
expense on deposits and borrowings as well as the level of its provision for
loan losses. The Bank also generates non interest income, such as fee income on
deposit accounts, the sale of residential mortgages and the sale of mutual funds
and annuities. The level of its non interest expenses, such as salaries and
benefits, occupancy and equipment costs, and other general and administrative
expenses further affects the Bank’s net income. Certain reclassifications have
been made to prior year amounts and the related discussion and analysis to
conform to the current year presentation.


4




2008
Summary


●
                During
      2008, the Bank filed an application to convert to a New York State
      commercial bank charter, which became effective March 9,
    2009;●
                The
      Bank held a six-month CD in the amount of $1.0 million that was due to
      mature on Monday, September 8, 2008 at Silver State Bank in Henderson,
      Nevada. On Friday, September 5, 2008, Silver State Bank was closed by the
      Nevada Financial Institutions Division, and the Federal Deposit Insurance
      Corporation (FDIC) was appointed receiver. In lieu of a basis to partially
      write-down the uninsured portion, the Bank recognized a loss on the entire
      uninsured amount. On March 13, 2009 the Bank received a partial recovery
      check from the FDIC in the amount of $14,730 that was recognized as income
      in the first quarter of 2009. If any further recovery of the $900,000
      uninsured amount is subsequently received, it will be added to income from
      operations. However, there can be no assurance whether, or when, any
      recovery will be received;●
                For
      the year ended December 31, 2008, the Company showed a net loss of $1.93
      million or $1.09 per diluted share as compared to a net loss of $708,000
      or $0.41 per diluted share for the year ended December 31,
      2007;●
                A
      net interest margin of 2.86% for 2008 as compared to 2.92% for
      2007;●
                Consistent
      with our plan to grow our earnings base subject to market conditions,
      total assets increased to $145.3 million at December 31, 2008, an increase
      of 54.7% over December 31, 2007;●
                Loan
      and deposit growth in Staten Island, New York. In December 2008, the Bank
      relocated its branch office on Staten Island, allowing for a larger
      operation that was outgrowing its existing space;●
                The
      Bank increased its one-to four-family real estate loans from $1.9 million
      to $21.4 million in order to sustain asset growth while protecting asset
      quality;●
                Principal
      loan growth on Staten Island and in Brooklyn as well as the Hudson Valley
      of New York. Loans are occasionally originated in New Jersey and on Long
      Island;●
                Total
      deposits of $124.7 million at December 31, 2008, with an increase in
      deposits of 51.5% over December 31, 2007;●
                The
      Bank remains well capitalized at December 31, 2008, with a Tier I Capital
      ratio of 6.8%;●
                Effective
      June 28, 2008, the Company modified the terms of its 327,690 outstanding
      common stock shareholder warrants. The Company’s Board of Directors
      reduced the exercise price of the common stock warrants from $10.00 to
      $6.75. The Board of Directors also extended the expiration term of the
      common stock warrants from June 28, 2008 to October 31, 2008. These common
      stock warrants were originally issued in connection with the Bank’s
      initial public offering on April 28, 2004. Each purchaser in the offering
      was provided with a common stock warrant to purchase one share for every
      five shares purchased. Previously on April 15, 2007 the Company extended
      the original expiration term of the Company’s common stock warrants from
      June 28, 2007 to June 28, 2008 and reduced the original exercise price of
      the Company’s common stock warrants from $12.50 to
  $10.00;


5




●
                Effective
      June 30, 2008, the Company also reduced the exercise price of its 190,000
      organizer warrants from $10.00 to $6.75 for a period ending on October 31,
      2008 after which date the exercise price reverted back to $10.00 per
      share. The organizer warrants, which had an original exercise price of
      $10.00 per share and expiration date of June 28, 2009, were granted to the
      Bank’s organizers in connection with the opening of the
    Bank;●
                During
      the quarter ended September 30, 2008, there were 102,038 warrants
      exercised at an exercise price of $6.75, which raised $688,757 in
      additional capital for the Company. The total number of warrants exercised
      was comprised of 29,890 common stock purchase warrants and 72,148
      organizer warrants;●
                The
      current economic crisis has adversely affected the Company, like most bank
      holding companies, and could have further adverse effects on its loan
      quality, loan volume, securities portfolio, stock price and its ability to
      raise capital to fund its growth
plan.




Market
Area




Although
the Bank’s primary market area is located in the New York counties of Orange and
Ulster, and the Borough of Staten Island, New York, the Bank also conducts
business in certain other communities within Dutchess, Putnam, Rockland,
Westchester and Nassau counties, New York as well as the other boroughs of New
York City.




Back
office banking operations are mostly conducted through its full service main
office in Orange County located at 68 North Plank Road in Newburgh, New York.
Newburgh is located along the Hudson River approximately sixty miles north of
New York City and sixty miles south of Albany. Additionally, the Bank operates a
second full service office in New Paltz, within the county of Ulster,
approximately twenty miles northeast of its main office. Among other things, New
Paltz is home to the State University of New York (SUNY) at New Paltz and Mohonk
Mountain House, a five-star, world renowned resort. These cities and the
surrounding areas are generally known as the Mid-Hudson Valley, which is located
along New York State’s Hudson River and amidst its Catskill Mountains. The
Newburgh-New Paltz area consists of many small towns that have experienced
economic growth and social transformation. The area offers affordable housing;
and therefore, people continue to relocate to the community.




In
November of 2007, the Bank relocated its Staten Island office into a larger
space and expanded its operations on Staten Island from a loan production office
to open its third full service branch. The office in Staten Island is located
approximately ninety miles south of the Bank’s Newburgh location. The borough of
Staten Island is the least populated but third largest geographically of New
York City’s boroughs. The island is comprised of numerous suburban-style
residential neighborhoods and small businesses.




Deposit
generation primarily stems from the areas surrounding our branch offices
including, but not limited to, the Town of Newburgh, the Village of New Paltz
and the borough of Staten Island. However, the Bank’s electronic remote deposit
service (“remote capture”) allows customers to make deposits from their own
business premises without visiting the Bank’s branch office allowing for deposit
growth from the communities without full service branches. During the first
quarter of 2008, the Bank closed its loan production office in Lynbrook, Nassau
County, New York.


6




Competition




The
market for financial services is rapidly changing and intensely competitive and
is likely to become more competitive as the number and types of market entrants
increase. The Bank faces substantial competition for both deposits and loans
from inside and outside the market area, and all phases of the Bank’s business
are highly competitive. The Bank faces direct competition from a significant
number of financial institutions operating in its market areas, many with a
statewide or regional presence, and in some cases, a national presence. Several
branches of these financial institutions aggressively compete for the same local
customer base. Most of these competitors are significantly larger than the Bank,
and therefore have greater financial and marketing resources and lending limits
than those of the Bank. Most of its competitors have been in business for a
number of years with well established client bases. The Bank considers its major
competition to be other commercial banks, savings and loan associations, savings
banks and credit unions many of which are substantially larger than we are.
Other larger competitors include mortgage brokers and financial services firms
other than financial institutions such as investment and insurance companies as
well as other institutional lenders. Increased competition within the Bank’s
market areas may limit growth and profitability. Additionally, the fixed cost of
regulatory compliance remains high for smaller community banks such as the Bank,
as compared to their larger competitors that are able to achieve economies of
scale.




Lending
Activities




The Bank
offers a variety of loan products, including commercial real estate loans
secured by owner occupied commercial real estate, as well as mortgage loans
secured by one- to-four family residences; loans secured by investment real
estate owned by individuals who meet certain financial requirements; commercial
revolving lines of credit and term loans; construction or development loans;
home equity loans and lines of credit; multi-family real estate loans; and to a
lesser extent consumer loans. Generally, we engage in secondary market sales of
our fixed rate and adjustable rate residential mortgage originations. In the
latter half of 2008, the Bank took advantage of wider market spreads by
retaining in portfolio its mortgage originations. During the same period, we
reduced our construction and development loan originations in light of the
deteriorating economic conditions. At December 31, 2008, there were no loans
held for sale on the Bank’s balance sheet.




During
2008, the Bank continued to experience lending growth trends. Although these
loans are made to a diversified pool of unrelated borrowers across numerous
businesses, concentration of loans in our primary market areas may increase
risk. Unlike larger banks that are more geographically diversified, the Bank’s
loan portfolio consists primarily of real estate loans secured by commercial,
residential, and multifamily real estate properties located in the Bank’s
principal lending areas in the Mid Hudson Valley region of New York as well as
the boroughs of Staten Island and Brooklyn in New York City. While these
communities represent our principal markets, the Bank has made loans outside
these areas where the nature and quality of such loans was consistent with the
Bank’s lending policies. Local economic conditions have a significant impact on
the volume of loan originations and the quality of our loans, the ability of
borrowers to repay these loans, and the value of collateral securing these
loans. The current economic crisis (including significant layoffs in the
financial services industry within the greater New York metropolitan area) is
adversely impacting local economic conditions and could negatively affect the
financial results of the Bank’s operations. Additionally, the Bank has a
significant amount of commercial real estate loans of which the majority is not
occupied by the owner, so decreases in tenant occupancy may also have a negative
effect on the ability of borrowers to make timely repayments of their loans,
which would have an adverse impact on the Bank’s earnings.


7




The
interest rates charged by the Bank on loans are affected primarily by the demand
for such loans, the supply of money available for lending purposes, the rates
offered by its competitors, the Bank’s relationship with the customer, and the
related credit risks of the transaction. These factors are affected by general
and economic conditions including, but not limited to, monetary policies of the
federal government, including the Federal Reserve Board, legislative policies
and governmental budgetary matters.




Loan
Portfolio Composition.The
following table sets forth the composition of our loan portfolio in dollars and
percentages by type of loan including a reconciliation of gross loans receivable
after consideration of the allowance for loan losses and net deferred
costs.


At
      December 31, 2008
                            
                            At
      December 31, 2007Amount
                            
                            Percent
                            
                            Amount
                            
                            Percent(Dollars
      in thousands)Loans
      held-for-sale:One-to
      four-family
                            
                            $
                            —
                            
                            
                            —
                            %
                            $
                            350
                            
                            
                            0.1
                            %Real
      estate loans:One-to
      four-family
                            
                            
                            21,397
                            
                            
                            22.5
                            
                            
                            1,913
                            
                            
                            2.7Commercial
                            
                            
                            35,436
                            
                            
                            37.3
                            
                            
                            32,426
                            
                            
                            45.2Multi-family
                            
                            
                            7,847
                            
                            
                            8.3
                            
                            
                            6,997
                            
                            
                            9.7Construction
      or development
                            
                            
                            3,931
                            
                            
                            4.1
                            
                            
                            7,319
                            
                            
                            10.2Home
      equity (1)
                            
                            
                            8,017
                            
                            
                            8.4
                            
                            
                            7,256
                            
                            
                            10.1Total
      real estate loans
                            
                            
                            76,628
                            
                            
                            80.7
                            
                            
                            55,911
                            
                            
                            78.0Other
      loans:Commercial
      business (1)
                            
                            
                            17,138
                            
                            
                            18.0
                            
                            
                            14,335
                            
                            
                            20.0Consumer
                            
                            
                            1,212
                            
                            
                            1.3
                            
                            
                            1,459
                            
                            
                            2.0Total
      other loans
                            
                            
                            18,350
                            
                            
                            19.3
                            
                            
                            15,794
                            
                            
                            22.0Total
      loans
                            
                            
                            94,978
                            
                            
                            100.0
                            
                            
                            71,705
                            
                            
                            100.0Less:Deferred
      loan costs (fees) net
                            
                            
                            512
                            
                            
                            
                            
                            
                            364Allowance
      for loan losses
                            
                            
                            (862
                            )
                            
                            
                            
                            
                            (624
                            )Total
      loans receivable, net
                            
                            $
                            94,628
                            
                            
                            
                            
                            $
                            71,445







(1)
Includes lines of credit.


8




Loan
Maturity Schedule.The following table shows the remaining contractual
maturity of our loans at December 31, 2008. Loans are shown as due based on
their contractual terms to maturity. Demand loans, loans having no stated
repayment schedule or contractual maturity and overdrafts, are reported as due
in one year or less. Adjustable rate loans are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale
clauses.


Amounts
      (in thousands) due in:
                                                      
                                                      One-
      to Four- Family
      &
                                                        Home
      Equity
                                                        Loans
                                                      
                                                      
                                                      Multi
      Family
                                                        &
      Commercial Real
      Estate
                                                      
                                                      
                                                      Commercial
      Business
                                                      
                                                      
                                                      Construction
      or Development
                                                      
                                                      
                                                      Consumer
                                                      
                                                      
                                                      Total(In
      thousands)One
      year or less
                                                      
                                                      $
                                                      —
                                                      
                                                      
                                                      $
                                                      1,565
                                                      
                                                      
                                                      $
                                                      8,268
                                                      
                                                      
                                                      $
                                                      3,431
                                                      
                                                      
                                                      $
                                                      572
                                                      
                                                      
                                                      $
                                                      13,836After
      one year through five years
                                                      
                                                      
                                                      337
                                                      
                                                      
                                                      
                                                      3,098
                                                      
                                                      
                                                      
                                                      4,282
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      72
                                                      
                                                      
                                                      
                                                      7,789After
      five years
                                                      
                                                      
                                                      29,077
                                                      
                                                      
                                                      
                                                      38,620
                                                      
                                                      
                                                      
                                                      4,588
                                                      
                                                      
                                                      
                                                      500
                                                      
                                                      
                                                      
                                                      568
                                                      
                                                      
                                                      
                                                      73,353Total
      loans
                                                      
                                                      $
                                                      29,414
                                                      
                                                      
                                                      $
                                                      43,283
                                                      
                                                      
                                                      $
                                                      17,138
                                                      
                                                      
                                                      $
                                                      3,931
                                                      
                                                      
                                                      $
                                                      1,212
                                                      
                                                      
                                                      $
                                                      94,978




The
following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at December 31, 2008 that are contractually due after
December 31, 2009.


Due
      After One YearFixed
                                                                    
                                                                    
                                                                    Adjustable
                                                                    
                                                                    
                                                                    Total(In
      thousands)One-
      to Four-Family & Home Equity Loans
                                                                    
                                                                    $
                                                                    14,106
                                                                    
                                                                    
                                                                    $
                                                                    15,308
                                                                    
                                                                    
                                                                    $
                                                                    29,414Multi-Family
      & Commercial Real Estate
                                                                    
                                                                    
                                                                    9,463
                                                                    
                                                                    
                                                                    
                                                                    32,255
                                                                    
                                                                    
                                                                    
                                                                    41,718Commercial
      Business
                                                                    
                                                                    
                                                                    4,141
                                                                    
                                                                    
                                                                    
                                                                    4,190
                                                                    
                                                                    
                                                                    
                                                                    8,331Construction
      or Development
                                                                    
                                                                    
                                                                    0
                                                                    
                                                                    
                                                                    
                                                                    500
                                                                    
                                                                    
                                                                    
                                                                    500Consumer
                                                                    
                                                                    
                                                                    41
                                                                    
                                                                    
                                                                    
                                                                    1,138
                                                                    
                                                                    
                                                                    
                                                                    1,179Total
      loans
                                                                    
                                                                    $
                                                                    27,751
                                                                    
                                                                    
                                                                    $
                                                                    53,391
                                                                    
                                                                    
                                                                    $
                                                                    81,142


9




Loans are
shown in the period based on final contractual maturity. The total amount of
loans due after December 31, 2009 which have predetermined interest rates is
$27.8 million, while the total amount of loans due after such date which have
floating or adjustable interest rates is $53.4 million. The Bank’s residential
mortgage portfolio is underwritten to conventional secondary market guidelines
and does not include any subprime loans.




The Bank
is subject to limits on the amount we may lend to one borrower. At December 31,
2008, the regulatory limit on loans to one borrower was approximately $2.6
million, and the largest credit facility to one borrower was $1.5 million. This
relationship consists of a $1.5 million line of credit to a large law firm which
is secured by the firm’s receivables and backed by personal guarantees. At
December 31, 2008, this obligation was performing in accordance with its
repayment terms.




There are
risks, including the risk of non-payment, associated with each type of loan that
the Bank markets. All loan originations are subject to written underwriting
standards and loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications submitted by the prospective borrower
and, in the case of certain real estate secured loans, property valuations
prepared by independent appraisers in accordance with the Bank’s appraisal
policy. Underwriting guidelines, which may include analysis of significant
factors such as credit reports, financial statements, tax returns, and
confirmations, are designed primarily to determine the borrower’s ability to
repay. The Bank’s lending policy places the responsibility on the employee
processing an application to ensure that all required support documentation is
obtained prior to the submission of the application to a loan officer for
approval. In addition, the loan officer verifies that the application meets
underwriting guidelines as approved by the Bank’s Board of Directors under its
credit policy. Additionally, each application file is reviewed to assure its
accuracy and completeness. A quality control process includes reviews by an
independent third partyof
underwriting decisions, appraisals and documentation.




Generally,
the Bank requires title insurance or abstracts on mortgage loans as well as fire
and extended coverage casualty insurance in amounts at least equal to the
principal amount of the loan or the value of improvements on the property,
depending on the type of loan. In certain instances, federal regulations or the
Bank’s terms of the credit approval require flood insurance on the property
collateralizing the loan.




The
primary risks associated with consumer loans relate to the borrower, such as the
risk of a borrower’s unemployment as a result of deteriorating economic
conditions or the amount and nature of a borrower’s other existing indebtedness,
and the value of the collateral securing the loan if the Bank must take
possession of the collateral. Consumer loans also have risks associated with
concentrations of loans in a single type of loan.




Largest
loan concentrations by industry is the construction industry, followed by the
real estate industry, and then the food accommodations industry. At December 31,
2008, the Company had no other concentrations of loans in any one industry
exceeding 10% of its total loan portfolio. An industry for this purpose is
defined as a group of businesses that are engaged in similar activities and have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.




Commercial
Real Estate and Multi-family Lending.Mixed-use properties as well as
other income producing properties located in our market area secure our
commercial real estate loans. Multi-family real estate loans are generally
secured by rental properties that may include walk-up apartments. Management
anticipates that the majority of commercial real estate and multi-family loans
originated over the next few years will have balances of $1.0 million or
less.


10




Commercial
real estate and multi-family loans generally carry a maximum term of twenty five
years with rates that adjust based on a specific index plus a margin. These
loans are generally originated in amounts of up to 80% of the lesser of the
appraised value or the purchase price of the property, with a projected debt
service coverage ratio of at least 120%. An independent appraiser approved by
the Bank values the properties securing commercial real estate and multi-family
loans, and subsequently management reviews all appraisals on multi-family or
commercial real estate loans. In addition, underwriting procedures require
verification of the borrower’s credit history, income and financial statements,
banking relationships, references and income projections for the property. When
feasible, personal guarantees are obtained on these loans. For loans in excess
of $250,000, an environmental studymay
be performed.




Set forth
below is information regarding the types of commercial real estate and
multi-family loans in our loan portfolio at December 31, 2008 and
2007.


At
      December 31,2008
                
                
                2007Commercial
      Real Estate and
                  Multi-Family
      Mortgage Types
                
                Number
      of
                  Loans
                
                
                Balances
      (in
                  thousands)
                
                
                Number
      of
                  Loans
                
                
                Balances
      (in
                  thousands)Apartments
                
                
                18
                
                
                $
                7,848
                
                
                
                16
                
                
                $
                7,490Offices
                
                
                16
                
                
                
                7,327
                
                
                
                5
                
                
                
                2,291Warehouses
                
                
                3
                
                
                
                1,341
                
                
                
                7
                
                
                
                4,347Restaurants
                
                
                5
                
                
                
                3,401
                
                
                
                7
                
                
                
                5,157Mixed
      use
                
                
                33
                
                
                
                15,269
                
                
                
                25
                
                
                
                11,019Other
                
                
                16
                
                
                
                8,097
                
                
                
                19
                
                
                
                9,119Total
                
                
                91
                
                
                $
                43,283
                
                
                
                79
                
                
                $
                39,423




Commercial
real estate and multi-family loans generally present a higher level of risk than
loans secured by one- to four- family residences. This greater risk is due to
several factors, including the generally larger loan amounts to borrowers that
are typically dependant on the income generated by the project. In addition,
such loans are vulnerable to adverse economic conditions, such as today’s
economic crisis, which impact tenants’ ability to pay rent on a timely basis and
thus impact the borrower’s ability to repay the loan. There can be no assurance
regarding the amount of credit problems we experience in our commercial real
estate and multi-family loans.




Commercial
Business Lending.The Bank offers term loans and lines of credit to local
businesses for working capital, machinery and equipment purchases, expansion and
other business purposes. The terms of these loans generally do not exceed seven
years while commercial lines of credit are generallyreviewed
annually. The interest rates on such loans are generally variable and indexed to
the highest prime rate published in The
Wall Street Journal plus or minus a margin although some loans are
contracted under fixed rate agreements. Recently we have begun making floating
rate loans with rate floors. At December 31, 2008 we had $16.3 million of
commercial business loans outstanding, representing 18.0% of the total loan
portfolio and an additional $7.0 million of funds committed, but undrawn, under
commercial lines of credit.




The
Bank’s commercial business lending policy requires credit file documentation,
analysis of the borrower’s capacity to repay the loan, a review of the adequacy
of the borrower’s capital and collateral, and an evaluation of conditions
affecting the borrower. Analysis of the borrower’s present and future cash flows
is also an important aspect of the current credit analysis.


11




Primary
risks associated with commercial business loans are the cash flow of the
business, the experience and quality of the borrower’s management, the business
climate, and the impact of economic factors. Unlike residential mortgage loans,
which generally are made on the basis of the borrower’s ability to make
repayment from his or her employment and other income, and which are secured by
real property whose value tends to be more easily ascertainable, commercial
business loans are of higher risk and typically are made on the basis of the
borrower’s ability to make repayment from the cash flow of the borrower’s
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself. For this reason and, particularly with respect to loans to builders,
such loans may be negatively impacted by adverse changes in the economy,
including today’s economic crisis. Further, the collateral securing such loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.




Set forth
below is information regarding the types of commercial business loans in our
loan portfolio at December 31, 2008 and 2007.


At
      December 31,2008
                
                
                2007Commercial
      Business Loans
                
                Number
      of
                  Loans
                
                
                (Dollars
      in
                  thousands)
                  Balances
                
                
                Number
      of
                  Loans
                
                
                (Dollars
      in
                  thousands)
                  BalancesBuilder
      lines of credit
                
                
                8
                
                
                $
                1,804
                
                
                
                16
                
                
                $
                4,489Working
      capital
                
                
                101
                
                
                
                6,231
                
                
                
                24
                
                
                
                2,449Real
      estate acquisition & Investment
                
                
                16
                
                
                
                5,386
                
                
                
                15
                
                
                
                3,581Business
      acquisition
                
                
                3
                
                
                
                504
                
                
                
                2
                
                
                
                180Equipment
      purchase
                
                
                11
                
                
                
                513
                
                
                
                6
                
                
                
                431Attorney
      lines of credit
                
                
                2
                
                
                
                1,500
                
                
                
                2
                
                
                
                1,500Other
                
                
                7
                
                
                
                1,200
                
                
                
                16
                
                
                
                1,705Total
                
                
                148
                
                
                $
                17,138
                
                
                
                81
                
                
                $
                14,335




One-
to Four-Family and Home Equity Residential Real Estate Lending.
At December 31, 2008, we had $29.4 million, or 30.1% of our total loan
portfolio, in loans secured by one- to four- family residential properties
including $6.2 million in advances under home equity lines of credit, and $1.9
million in home equity loans. We offer both fixed rate and adjustable rate
one-to four-family residential first mortgage loans. Our fixed-rate one- to
four-family loans are underwritten in accordance with Fannie Mae and Freddie Mac
guidelines and may be sold in the secondary market, servicing released, in order
to minimize interest rate risk exposure. During 2008, we retained a greater
percentage of our fixed-rate one- to four-family residential loans than in
previous years as a part of our growth plan.




The
interest rates on such loans are generally based on competitive factors.
Adjustable rate one- to four-family loans are based on a specific index plus a
margin and may be retained for portfolio purposes.Management
believes that the conservatorship of Fannie Mae and Freddie Mac did not have,
nor is expected to have, a material effect on the Company’s results of
operations or financial position.




In
underwriting one- to four-family residential real estate loans, we evaluate the
borrower’s ability to make principal, interest and escrow payments, as well as
the value of the property that will secure the loan and debt-to-income ratios.
Currently the Bank originates residential mortgage loans for our own
portfoliowith
loan-to-value ratios of up to 80% for owner-occupied homes and up to 70% for
non-owner occupied homes. With private mortgage insurance to reduce our exposure
to 80% or less, the Bank will originate residential mortgage loans for our own
portfolio with loan-to-value ratios of up to 95% for owner-occupied homes.
Originated residential mortgage loans that are immediately sold to the secondary
market can have loan-to-value ratios of up to 100% for owner-occupied homes, and
up to 85% for non-owner occupied homes. Residential mortgage loans customarily
include due-on-sale clauses giving the Bank the right to declare the loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the property subject to the mortgage and the loan
is not repaid.


12




Home
equity lines of credit and home equity term loans are secured by a lien on the
borrower’s residence and are generally limited to a maximum of $200,000. Bank
credit policy requires the same underwriting standards for home equity lines and
loans as are used for one- to four-family residential first mortgage loans held
in for the Bank’s portfolio. However, because our home equity lines of credit
tend to be originated at higher loan to values, and lower debt coverage ratios
than our one-to four-family loans, they are generally considered to carry a
higher degree of credit risk.




The
interest rates for home equity lines of credit float at a stated margin above
and below the highest prime rate published in The Wall Street Journal and are
capped at 18.0% and a floor determined by the rate plus margin over the life of
the loan. The Bank offers home equity lines of credit for terms of up to 30
years with interest only paid for the first ten years of the loan term. At
December 31, 2008, we had $6.2 million of outstanding advances under home equity
lines of credit and an additional $5.5 million of funds committed, but undrawn,
under home equity lines of credit. Home equity term loans are made at fixed
interest rates and are offered at terms up to 15 years generally with
loan-to-value ratios of up to 75%. At December 31, 2008, our home equity loans
totaled $1.9 million. Home equity term loans represent loans originated in the
Bank’s geographic markets with loan to value ratios generally of 75% or
less.




Loans
secured by residential co-ops and condominiums located in our market area are
offered on substantially the same terms as one- to four-family loans. At
December 31, 2008, we had $ 519,000 in condominium and co-op loans.




Reflecting
our conservative underwriting standards, we do not have any loans in our loan
portfolio that are considered sub-prime.




Construction
and Land Lending. Construction loans are originated to builders and
individuals for the construction of both residential and commercial real estate
properties. Construction loan agreements generally provide that loan proceeds
are disbursed in increments, subsequent to the Bank’s review of the progress of
the construction of the dwelling, as the project progresses. At December 31,
2008, the construction loan portfolio totaled $3.9 million, or 4.1% of the total
loan portfolio, and an additional $1.1 million of funds committed but undrawn.
At December 31, 2008, the Bank had one loan with a balance of $929,000 for
construction of a residential condominium project and another loan for
construction of office rentals or condominiums with an outstanding balance of
$1,100,000.




A limited
number of land development loans are originated primarily for the purpose of
developing residential subdivisions. These loans to builders and developers are
for the development of one- to four-family lots in our market area. Land loans
are originated with adjustable rates of interest tied to the prime rate of
interest with terms of five years or less. Land loans are generally made in
amounts up to a maximum loan-to-value ratio of 50% on raw land and up to 75% on
developed building lots based upon an independent appraisal. At December 31,
2008, our land development loan portfolio totaled $ 734,000, or 0.8% of the
total loan portfolio, which was made for the purpose of developing residential
lots.


13




Construction
loans to builders of one- to four-family residences generally carry terms of up
to two years with interest only payments required. The maximum loan-to-value
ratio on loans to builders for the construction of residential real estate is
80%. When practical, the Bank seeks to obtain personal guarantees on such loans.
We generally limit loans to builders for the construction of homes on
speculation for sale to two homes per builder. At December 31, 2008, we had
$449,000 of construction loans outstanding to builders of one- to four- family
residences. This consisted of two separate loans, both of which were speculative
construction and both of which were secured by real estate mortgages and backed
by personal guarantees.




The Bank
originates commercial real estate construction loans to experienced local
developers only when there is a written take-out commitment from an acceptable
financial institution or government agency, or when the Bank grants an internal
commitment for permanent financing evidenced by a written document in the credit
file. The maximum loan-to-value ratio on loans to builders for the construction
of commercial real estate is 80%. At December 31, 2008, we had $218,000 of
construction loans outstanding to builders of commercial real estate
properties.




Construction
loans to individuals for the construction of their residences convert to
permanent residential mortgage loans at the end of the construction phase, which
typically runs up to one year. Upon conversion to permanent mortgages, these
loans have rates and terms comparable to those offered by the Bank on its
one-to-four family residential mortgage loan products. During the construction
phase the borrower pays interest only at a specified margin over the prime rate.
The maximum loan-to-value ratio of owner-occupied single-family construction
loans is 80%. Takeouts for residential construction loans are generally
underwritten pursuant to the same guidelines used for originating permanent
residential loans. At December 31, 2008, the Bank had no construction loans
outstanding to borrowers intending to occupy the premises upon completion of the
construction.




Construction
and land loans are obtained principally through referrals from management’s
contacts in the business community as well as from existing and walk-in
customers. The application process includes a submission of accurate plans,
specifications and costs of the project to be constructed or developed. These
items are used as a basis to determine the appraised value of the subject
property. Loans are based on the lesser of current independent appraised value
or the cost of land plus the building construction.




Pricing
on construction and land development lending generally affords the Bank an
opportunity to receive interest at rates higher than those obtainable from
permanent residential loans and to receive higher origination and other loan
fees. In addition, construction and land loans are generally made with
adjustable rates of interest or for relatively short terms. Nevertheless,
construction and land lending is generally considered to involve a higher level
of credit risk than one- to four-family residential lending due to the
concentration of principal in a limited number of loans and borrowers, as well
as the effects of general economic conditions (including the current economic
crisis and decline in real estate values) on development properties and on real
estate developers. In addition, the nature of these loans is such that they are
more difficult to evaluate and monitor. Finally, the risk of loss on a
construction loan is largely dependent upon the accuracy of the initial estimate
of the property’s value upon completion of construction, as compared to the
estimated cost of construction, including interest, and upon the estimated time
to sell or lease such properties. If the estimate of value proves to be
inaccurate, or the length of time to sell or lease it is greater than
anticipated, the property could have a value upon completion that is
insufficient to assure full repayment of the loan. The Bank may be required to
advance funds beyond the amount originally committed to allow completion of the
project.




Consumer
Lending. The Bank originates a variety of consumer loans, including
automobile, home improvement, deposit account and other loans for household and
personal purposes. At December 31, 2008, consumer loans totaled $1.2 million, or
1.3% of total loans outstanding. Consumer loan terms vary according to the type
of loan and value of collateral, length of contract and creditworthiness of the
borrower. Our consumer loans are made at fixed or variableinterest
rates, with terms of up to 5years.


14




The
underwriting standards employed for consumer loans include a determination of
the applicant’s payment history on other debts and the ability to meet existing
obligations and payments on the proposed loan. Although creditworthiness of the
applicant is a primary consideration, the underwriting process also includes a
comparison of the value of the security, if any, in relation to the proposed
loan amount.




Consumer
loans may entail greater credit risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or are secured by
rapidly depreciable assets. Collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower’s continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances, including adverse personal circumstances caused by duress in the
current economy. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans.




Originations,
Purchases and Sales of Loans




Loan
applications are taken at each of our offices as well as through mortgage
originators. Applications are processed and approved at our Loan Center, which
is located in the corporate headquarters. We also employ commissioned loan
originators and utilize outside mortgage brokers for lending business
development. Total loan originations amounted to $47.8 million for the year
ended December 31, 2008. While we originate a variety of business and personal
loans, our ability to originate loans is dependent upon the relative customer
demand for loans in our market. Additionally, the local economy and the interest
rate environment affect demand.




To reduce
our vulnerability to changes in interest rates, we generally sell in the
secondary market our fixed-rate residential mortgage originations in addition to
certain current year originations of adjustable-rate loans. However during the
latter half of 2008, the Bank took advantage of wider market spreads by holding
its mortgage originations in portfolio. Residential mortgage sales amounted to
$4.4 million for the year ended December 31, 2008. There were no loans held for
sale on the Bank’s balance sheet at December 31, 2008.


15




The
following table sets forth our loan originations, sales, repayments and other
portfolio activity for the periods indicated.


Years
      Ended December 31,2008
                
                
                2007(In
      thousands)Beginning
      unpaid principal balance
                
                $
                71,795
                
                
                $
                61,443Loans
      Originated:Real
      estate loansOne-to
      four-family
                
                
                22,885
                
                
                
                14,898Commercial
      real estate
                
                
                6,846
                
                
                
                8,078Construction
                
                
                1,375
                
                
                
                8,379Home
      equity line of credit
                
                
                2,716
                
                
                
                3,902Commercial
      line of credit
                
                
                9,035
                
                
                
                8,511Commercial
      business loans
                
                
                3,742
                
                
                
                2,234Consumer
      loans
                
                
                1,187
                
                
                
                2,674Total
      loans originated
                
                
                47,786
                
                
                
                48,676Loans
      Sold:One-to
      four-family real estate loans
                
                
                (4,367
                )
                
                
                (14,174
                )Participated
      to others
                
                
                (1,434
                )
                
                
                (2,862
                )Principal
      repayments and paydowns:Total
      principal repayments
                
                
                (18,082
                )
                
                
                (21,028
                )Unpaid
      principal balance at end of period
                
                
                94,978
                
                
                
                72,055Less:Net
      deferred loan costs
                
                
                512
                
                
                
                364Allowance
      for loan leases
                
                
                (862
                )
                
                
                (624
                )Net
      loans at end of period
                
                $
                94,628
                
                
                $
                71,795




Asset
Quality




Delinquency
Procedures.
When a borrower fails to make a required payment on a loan, attempts to cure the
delinquency are first made by contacting the borrower. Late notices will be sent
when a payment is more than sixteen days past due, and a late charge will
generally be assessed at that time. Additional written and verbal contacts may
be made with the borrower between thirty and ninety days after the due date. If
the loan is contractually delinquent over sixty days, a thirty day demand letter
is sent to the borrower and, after the loan is contractually delinquent over
ninety days, appropriate action begins to foreclose on the property. If
foreclosed, the property will be sold at auction and may be purchased by the
Bank. Delinquent consumer loans are generally handled in a similar manner.
Procedures for repossession and sale of consumer collateral are subject to
various requirements under New York consumer protection
laws.




Real
estate acquired as a result of foreclosure or by deed in lieu of foreclosure
will be classified as other real estate owned until it is sold. When property is
acquired or expected to be acquired by foreclosure or deed in lieu of
foreclosure, it will be recorded at estimated fair value less the estimated cost
of disposition, with the resulting write-down charged to the allowance for loan
losses. After acquisition, all costs incurred in maintaining the property will
be expensed. Costs relating to the development and improvement of the property,
however, will be capitalized.


16




Non-Performing
Assets.




Regulations
require that the Company classify its own assets on a regular basis and
establish prudent valuation allowances based on such classifications. There are
three classifications for problem assets: substandard, doubtful, and loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as substandard or doubtful require the Company to
establish general allowances for loan losses. If an asset or portion thereof is
classified as loss, the Company must either establish specific allowances for
loan losses in the amount of 100% of the portion of the asset classified loss,
or charge off such amount. On the basis of management’s review, at December 31,
2008, the Bank had $ 994,018 in assets classified as substandard. There were no
assets classified as doubtful or loss.




At
December 31, 2008, there were five loans totaling $749,000 that were delinquent
past sixty days. Two of these loans totaling $249,000 are secured by both a
first and second real estate mortgage on commercial parking lot property located
in Staten Island. Foreclosure proceedings were started on both loans, and the
expected foreclosure date is not expected until 2010. The Bank recently
collateralized a third loan with a principal balance of $500,000 that was
originally unsecured, with a second mortgage on a sub-division project located
in Rockland County. The Bank is attempting to work out suitable repayment
arrangements. One of the remaining two loans is secured by a security agreement
pledging the corporate borrower’s assets, and the other loan is unsecured with a
principal balance of approximately $11,000. At December 31, 2007 the Bank had
one nonaccrual loan in the amount of $183,000.




Loans are
reviewed monthly and any loan whose collectability is doubtful is placed on
nonaccrual status. Loans are placed on nonaccrual status when either principal
or interest is 90 days or more past due, unless, in the judgment of management,
the loan is well collateralized and in the process of collection. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is reversed
from interest income related to current year income and charged to the allowance
for loan losses with respect to income that was recorded in the prior fiscal
year. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectability of the loan. At December 31, 2008 and 2007, the Bank did
not have any troubled debt restructurings or foreclosed assets acquired in
settlement of loans, as defined by Statement of Accounting Financial Standard
(SFAS) No. 114, acquired in settlement of loans. Attributed to the current
downturn in the economic climate, the Bank has some evidence of an increase in
non-performing assets. The largest non-performing loan, totaling approximately
$499,500, was an unsecured line of credit at origination. Since that time the
line has been secured with a second mortgage lien on a subdivision in Rockland
County, New York. The property has been recently reappraised, and considering
all financing the combined loan to value is approximately 68%.




The
following table sets forth the amount and categories of our non-performing
assets at the dates indicated.


17




At
      December 31,2008
                
                
                2007(Dollars
      in thousands)Nonaccrual
      loans:Real
      estate loans:One-
      to four-family
                
                $
                —
                
                
                $
                —Commercial
                
                
                250
                
                
                
                —Multi-family
                
                
                —
                
                
                
                —Construction
      or development
                
                
                499
                
                
                
                183Home
      equity
                
                
                —
                
                
                
                —Total
      real estate loans
                
                
                749
                
                
                
                183Other
      loans:Commercial
      business
                
                
                —
                
                
                
                —Consumer
                
                
                —
                
                
                
                —Total
      other loans
                
                
                —
                
                
                
                —Foreclosed
      assets, net
                
                
                —
                
                
                
                —Total
      nonaccrual non-performing assets
                
                $
                749
                
                
                $
                183Ratios:Non-performing
      loans to total loans
                
                
                0.79
                %
                
                
                0.25
                %Non-performing
      loans to total assets
                
                
                0.52
                %
                
                
                0.19
                %Non-performing
      assets to total assets
                
                
                0.52
                %
                
                
                0.19
                %




In
connection with the filing of our periodic reports with the Office of the
Comptroller of the Currency (“OCC”) and in accordance with our classification of
assets policy, we regularly review the problem loans in our portfolio to
determine whether any loans require classification in accordance with applicable
regulations. On the basis of this review of our assets, at December 31, 2008, we
had classified the following assets:


One-
      to
                                                Four-
                                                Family
                                              
                                              
                                              Multi-
                                                Family
                                              
                                              
                                              Commercial
                                                Real
      Estate
                                              
                                              
                                              Land
                                              
                                              
                                              Consumer
                                              
                                              
                                              Commercial
                                                Business
                                              
                                              
                                              Total(In
      thousands)Sub-Standard
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              149
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              845
                                              
                                              
                                              $
                                              994Doubtful
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Loss
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Total
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              149
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              845
                                              
                                              
                                              $
                                              994




Our
classified assets consist of (i) non-performing loans and (ii) loans and other
assets of concern discussed herein. As of the date hereof, these asset
classifications are believed to be consistent with those of the OCC. Certain
classified assets are still accruing interest income at December 31, 2008. The
largest of these loans, totaling approximately $149,000, has an established
interest reserve escrow balance. Two of the remaining loans were under ninety
days delinquent, and the last loan was paid in full during the first quarter of
2009.


18




Allowance
for Loan Losses. The allowance for loan losses is established and
maintained through a provision for loan losses based on probable incurred losses
inherent in the Bank’s loan portfolio. Management evaluates the adequacy of the
allowance on a quarterly basis. If the allowance for loan losses is not
sufficient to cover actual loan losses, the Bank’s earnings could
decrease.




The
allowance for loan losses consists of amounts specifically allocated to
non-performing loans and potential problem loans as well as allowances
determined for each major loan category. Loan categories such as single-family
residential mortgages and consumer loans are generally evaluated on an aggregate
or “pool” basis by applying loss factors to the current balances of the various
loan categories. The loss factors are determined by management based on an
evaluation of historical loss experience, delinquency trends, volume and type of
lending conducted, and the impact of current economic conditions in our market
area. Finally, management evaluates and considers the allowance ratios and
coverage percentages of both peer group and regulatory agency data.




Management’s
evaluation of the adequacy of the allowance, which is subject to periodic review
by the OCC (and since our March 2009 charter conversion, by the New York Banking
Department), takes into consideration such factors as the historical loan loss
experience, peer group ratios, known and inherent risks in the portfolio,
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, estimated value of underlying
collateral, and current economic conditions that may affect borrowers’ ability
to pay. Due to our brief period of operations, peer group information is the
primary determinant. Other factors as discussed above will become more prominent
in the methodology as we develop a history of experience. While management
believes that it uses the best information available to determine the allowance
for loan losses, unforeseen market conditions could result in
adjustments to the allowance for loan losses, and net earnings could be
significantly affected, if circumstances differ substantially from the estimates
made in making the final determination.




The
following table sets forth activity in the allowance for loan losses for the
periods indicated.


Years
      Ended
                                    December
      31,(Dollars
      in Thousands)2008
                                  
                                  
                                  2007Balance
      at beginning of year
                                  
                                  $
                                  624
                                  
                                  
                                  $
                                  581Charge-offsReal
      estate mortgage loans
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Commercial
      loans and lines of credit
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Home
      equity and consumer loans
                                  
                                  
                                  7
                                  
                                  
                                  
                                  —Construction
      loans
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Total
      charge-offs
                                  
                                  
                                  7
                                  
                                  
                                  
                                  —RecoveriesReal
      estate mortgage loans
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Commercial
      loans and lines of credit
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Home
      equity and consumer loans
                                  
                                  
                                  1
                                  
                                  
                                  
                                  —Construction
      loans
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Total
      recoveries
                                  
                                  
                                  1
                                  
                                  
                                  
                                  —Provision
      for losses
                                  
                                  
                                  244
                                  
                                  
                                  
                                  43Balance
      at end of period
                                  
                                  $
                                  862
                                  
                                  
                                  $
                                  624Ratio
      of net charge-offs to average total loans
                                  
                                  
                                  0.01
                                  %
                                  
                                  
                                  0.00
                                  %Ratio
      of allowance for loan losses to total loans
                                  
                                  
                                  0.83
                                  %
                                  
                                  
                                  0.95
                                  %


19




The
following table sets forth the breakdown of the allowance for loan losses by
loan category at December 31, 2008 and December 31, 2007, excluding $350,000 of
one- to four-family loans held for sale at December 31, 2007. The allocation of
the allowance to each category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any
category.


At
      December 31,2008
                                                          
                                                          
                                                          2007Loan
      Loss
                                                            Allowance
                                                          
                                                          
                                                          Loan
                                                            Balances
      by
                                                            Category
                                                          
                                                          
                                                          Percent
      of
                                                            Loans
      to
                                                            Total
                                                            Loans
                                                          
                                                          
                                                          Loan
      Loss
                                                            Allowance
                                                          
                                                          
                                                          Loan
                                                            Balances
      by
                                                            Category
                                                          
                                                          
                                                          Percent
      of
                                                            Loans
      to
                                                            Total
                                                            Loans(Dollars
      in thousands)Allowance
      allocated to:Residential
      and commercial mortgages
                                                          
                                                          $
                                                          456
                                                          
                                                          
                                                          $
                                                          64,680
                                                          
                                                          
                                                          
                                                          68.1
                                                          %
                                                          
                                                          $
                                                          313
                                                          
                                                          
                                                          $
                                                          41,336
                                                          
                                                          
                                                          
                                                          57.6
                                                          %Commercial
      business loans
                                                          
                                                          
                                                          327
                                                          
                                                          
                                                          
                                                          17,138
                                                          
                                                          
                                                          
                                                          18.0
                                                          
                                                          
                                                          
                                                          185
                                                          
                                                          
                                                          
                                                          14,335
                                                          
                                                          
                                                          
                                                          20.0Home
      equity line of credit loans
                                                          
                                                          
                                                          51
                                                          
                                                          
                                                          
                                                          8,017
                                                          
                                                          
                                                          
                                                          8.5
                                                          
                                                          
                                                          
                                                          34
                                                          
                                                          
                                                          
                                                          7,256
                                                          
                                                          
                                                          
                                                          10.1Other
      loans
                                                          
                                                          
                                                          19
                                                          
                                                          
                                                          
                                                          5,143
                                                          
                                                          
                                                          
                                                          5.4
                                                          
                                                          
                                                          
                                                          13
                                                          
                                                          
                                                          
                                                          8,778
                                                          
                                                          
                                                          
                                                          12.2Unallocated
                                                          
                                                          
                                                          9
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          79
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —Total
      allowance
                                                          
                                                          $
                                                          862
                                                          
                                                          
                                                          $
                                                          94,978
                                                          
                                                          
                                                          
                                                          100.0
                                                          %
                                                          
                                                          $
                                                          624
                                                          
                                                          
                                                          $
                                                          71,705
                                                          
                                                          
                                                          
                                                          100.0
                                                          %




Environmental
Issues




The Bank
encounters certain environmental risks in our lending activities. The existence
of hazardous materials may make it unattractive for a lender to foreclose on the
properties securing its loans. In addition, under certain conditions, under
federal and state environmental laws, lenders may become liable for costs of
cleaning up hazardous materials found on property securing their loans. In
addition, the presence of hazardous materials may have a substantial effect on
the value of such property as collateral and may cause economic difficulties for
the borrower, causing the loan to go into default. Although environmental risks
are usually associated with loans secured by commercial real estate, risks may
also exist for loans secured by residential real estate if, for example, there
is nearby commercial contamination or if the residence was constructed on
property formerly used for commercial purposes. To control our environmental
risk, if we determine that the investigation of property securing a commercial
mortgage loan is warranted, we will require an environmental assessment by an
approved engineer as part of the underwriting review.




As of
December 31, 2008, we were unaware of any environmental issues with respect to
any of our mortgage loans that would subject us to any material liability at
this time. Hidden or future environmental contamination could adversely affect
the values of properties securing loans in our portfolio.


20




Investment
Activities




General.
The Bank’s investment policy is to invest funds among categories of investments
and maturities based upon our asset/liability management policies, investment
quality, loan and deposit volume, liquidity needs and performance
objectives.




SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, requires
that securities be classified into three categories: trading, held to maturity,
and available for sale. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and are reported at fair value with unrealized gains and losses included in
earnings. Debt securities for which we have the positive intent and ability to
hold to maturity are classified as held to maturity and reported at amortized
cost. All other securities not classified as trading or held to maturity are
classified as available for sale. Available for sale securities are reported at
fair value with unrealized gains and losses included in a separate component of
stockholders’ equity. At December 31, we had no securities classified as
trading. At December 31, 2008, $5.2 million, or 18.1%, of the investment
portfolio was classified as available for sale. The remaining $23.5 million, or
81.9%, of the investment portfolio was classified as held-to-maturity. The
held-to-maturity classification included $19.5 million of mortgage-backed
securities and $4.1 million of U.S. Government agencies. There were no
investment securities of a single issuer which exceeded 10% of our stockholders’
equity, other than U.S. Government or federal agency obligations.




Mortgage-backed
securities in our investment portfolio are either expressly guaranteed by the
United States federal government as in the case of Ginnie Mae securities, or
hold the implied guarantee of the United States government as in the case of
substantially all of the remaining mortgage backed securities held in our
portfolio.




In
addition to mortgage-backed securities, we also invest in other high-quality
securities such as United States agency obligations with various maturities. See
Note 2 of the Notes to Financial Statements for additional information regarding
our securities portfolio.




We have
also invested in a limited number of trust preferred securities totaling $1.3
million at year end issued by other financial institutions. Management believes
that these investment securities remain within the Bank’s investment policy
guidelines.




All
national banks are required to be members of the Federal Reserve System (“FRB”)
and to purchase stock in the FRB within the Federal Reserve district in which
the national bank is located. In accordance with this requirement, at December
31, 2008, we owned 5,970 shares totaling $298,500 in common stock of the Federal
Reserve Bank of New York.




We are
also a member of the Federal Home Loan Bank of New York (“FHLB-NY”). A condition
of membership requires that the Bank purchase capital stock in the FHLB-NY.
Pursuant to this requirement, at December 31, 2008, we owned 5,486 shares
totaling $527,700 in capital stock of the FHLB-NY.


21




The
following table sets forth the amortized cost and fair value of our securities,
by accounting classification category and by type of security, at the dates
indicated. At December 31, 2007, we had no securities classified as
held-to-maturity.


At
      December 31,2008Amortized
                              Cost
                            
                            
                            Fair
      Value(In
      thousands)Investment
      securities held to maturity:U.S.
      Government agencies
                            
                            $
                            4,070
                            
                            
                            $
                            4,111Mortgage-backed
      securities
                            
                            
                            19,459
                            
                            
                            
                            20,055Total
      investment securities
                            
                            $
                            23,529
                            
                            
                            $
                            24,166




At
      December 31,2008
                                                            
                                                            
                                                            2007Amortized
                                                              Cost
                                                            
                                                            
                                                            Fair
      Value
                                                            
                                                            
                                                            Amortized
                                                              Cost
                                                            
                                                            
                                                            Fair
      Value(In
      thousands)Investment
      securities available for sale:U.S.
      Government agencies
                                                            
                                                            $
                                                            2,079
                                                            
                                                            
                                                            $
                                                            2,095
                                                            
                                                            
                                                            $
                                                            5,358
                                                            
                                                            
                                                            $
                                                            5,377Mortgage-backed
      securities
                                                            
                                                            
                                                            1,807
                                                            
                                                            
                                                            
                                                            1,759
                                                            
                                                            
                                                            
                                                            1,672
                                                            
                                                            
                                                            
                                                            1,660Bank
      Trust Preferred Securities
                                                            
                                                            
                                                            1,302
                                                            
                                                            
                                                            
                                                            1,120
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —Subtotal
                                                            
                                                            
                                                            5,188
                                                            
                                                            
                                                            
                                                            4,974
                                                            
                                                            
                                                            
                                                            7,030
                                                            
                                                            
                                                            
                                                            7,037FRB
      stock
                                                            
                                                            
                                                            299
                                                            
                                                            
                                                            
                                                            299
                                                            
                                                            
                                                            
                                                            324
                                                            
                                                            
                                                            
                                                            324FHLB
      stock
                                                            
                                                            
                                                            528
                                                            
                                                            
                                                            
                                                            528
                                                            
                                                            
                                                            
                                                            89
                                                            
                                                            
                                                            
                                                            89Total
      investment securities and restricted stock
                                                            
                                                            $
                                                            6,015
                                                            
                                                            
                                                            $
                                                            5,801
                                                            
                                                            
                                                            $
                                                            7,443
                                                            
                                                            
                                                            $
                                                            7,450


22




The
following table sets forth certain information regarding the amortized cost,
fair value, weighted average yield and stated maturity of our securities at the
dates indicated. The entire amortized cost and fair value of such securities are
included in the maturity period that reflects the final security payment date.
Accordingly, no effects are given to periodic repayments or possible
prepayments. At December 31, 2007, there were no securities classified as held
to maturity.




Held
to Maturity


2008Amortized
                  Cost
                
                
                Fair
      Value
                
                
                Weighted
                  Average
                  YieldU.S.
      Government Agencies:Due
      less than one year
                
                $
                —
                
                
                $
                —
                
                
                
                —One
      year to less than three years
                
                
                2,570
                
                
                
                2,606
                
                
                
                3.20Three
      years to less than five years
                
                
                1,500
                
                
                
                1,505
                
                
                
                3.83Five
      years to ten years
                
                
                —
                
                
                
                —
                
                
                
                —More
      than ten years
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                $
                4,070
                
                
                $
                4,111
                
                
                
                3.43
                %Mortgage-backed
      securities:Due
      less than one year
                
                $
                —
                
                
                $
                —
                
                
                
                —
                %One
      year to less than five years
                
                
                —
                
                
                
                —
                
                
                
                —
                %Five
      years to less than ten years
                
                
                2,791
                
                
                
                2,886
                
                
                
                4.72Due
      After 10 years
                
                
                16,668
                
                
                
                17,169
                
                
                
                5.20Total
                
                
                19,459
                
                
                
                20,055
                
                
                
                5.13
                %Total
      Held to Maturity Investment Securities
                
                $
                23,529
                
                
                $
                24,166
                
                
                
                4.84
                %




23




At
      December 31,Available
      for Sale
                                      
                                      2008
                                      
                                      
                                      2007Amortized
                                        Cost
                                      
                                      
                                      Fair
      Value
                                      
                                      
                                      Weighted
                                        Average
                                        Yield
                                      
                                      
                                      Amortized
                                        Cost
                                      
                                      
                                      Fair
      Value
                                      
                                      
                                      Weighted
                                        Average
                                        Yield(Dollars
      in thousands)U.S.
      Government Agencies:Due
      less than one year
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      
                                      —One
      year to less than three years
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      499
                                      
                                      
                                      
                                      502
                                      
                                      
                                      
                                      5.16Three
      years to less than five years
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,000
                                      
                                      
                                      
                                      997
                                      
                                      
                                      
                                      5.00Five
      years to ten years
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,700
                                      
                                      
                                      
                                      1,708
                                      
                                      
                                      
                                      6.00More
      than ten years
                                      
                                      2,079
                                      
                                      
                                      
                                      2,095
                                      
                                      
                                      
                                      5.77
                                      
                                      
                                      
                                      2,159
                                      
                                      
                                      
                                      2,170
                                      
                                      
                                      
                                      6.01Total
                                      
                                      $
                                      2,079
                                      
                                      
                                      $
                                      2,095
                                      
                                      
                                      
                                      5.77
                                      %
                                      
                                      $
                                      5,358
                                      
                                      
                                      $
                                      5,377
                                      
                                      
                                      
                                      5.74
                                      %Mortgage-backed
      securities:Due
      less than one year
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      
                                      —
                                      %
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      
                                      —
                                      %One
      year to less than five years
                                      
                                      
                                      571
                                      
                                      
                                      
                                      581
                                      
                                      
                                      
                                      4.44
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Five
      years to less than ten years
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Due
      After 10 years
                                      
                                      
                                      1,226
                                      
                                      
                                      
                                      1,178
                                      
                                      
                                      
                                      4.42
                                      
                                      
                                      
                                      1,672
                                      
                                      
                                      
                                      1,660
                                      
                                      
                                      
                                      4.04Total
                                      
                                      $
                                      1,807
                                      
                                      
                                      $
                                      1,759
                                      
                                      
                                      
                                      4.43
                                      %
                                      
                                      $
                                      1,672
                                      
                                      
                                      $
                                      1,660
                                      
                                      
                                      
                                      4.04
                                      %Bank
      Trust Preferred Securities:Due
      less than one year
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —One
      year to less than five years
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Five
      years to less than ten years
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Due
      After 10 years
                                      
                                      
                                      1,302
                                      
                                      
                                      
                                      1,120
                                      
                                      
                                      
                                      7.96
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Total
                                      
                                      $
                                      1,302
                                      
                                      
                                      
                                      1,120
                                      
                                      
                                      
                                      7.96
                                      %
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Total
      Available for Sale Investment Securities
                                      
                                      $
                                      5,188
                                      
                                      
                                      $
                                      4,974
                                      
                                      
                                      
                                      5.85
                                      %
                                      
                                      $
                                      7,030
                                      
                                      
                                      $
                                      7,037
                                      
                                      
                                      
                                      5.34
                                      %




Sources
of Funds




Deposits
and Borrowings




General.
The Bank’s primary sources of funds are deposits although funds are also derived
from loan and investment securities principal repayments and maturities,
interest earned on loans and securities, lines of credit with other financial
institutions including the Federal Home Loan Bank and other funds provided from
operations.




Deposits.
The Bank offers a variety of deposit accounts having a wide range of interest
rates and terms which vary according to the minimum balance required, the time
period the funds must remain on deposit and the interest rate, among other
factors. We rely primarily on competitive pricing policies, marketing and
quality customer service to attract and retain these deposits. The variety of
deposit accounts offered allows the Bank to effectively compete to obtain funds
and to respond with flexibility to changes in consumer demand. Pricing of
deposits is managed in keeping with asset and liability objectives, taking into
account both profitability and growth.


24




The
following table sets forth the distribution of deposit accounts and the related
weighted average rates at the dates indicated.


At
      December 31,2008
                                  
                                  2007Amount
                                  
                                  Percent
      of Total
      Deposits
                                  
                                  Weighted
      Average
      Rate
                                  
                                  Amount
                                  
                                  Percent
      of Total
      Deposits
                                  
                                  Weighted
      Average
      Rate(Dollars
      in thousands)Demand
      deposit accounts
                                  
                                  
                                  12,840
                                  
                                  
                                  10.3
                                  %
                                  
                                  —
                                  %
                                  $
                                  7,249
                                  
                                  
                                  8.8
                                  %
                                  
                                  —
                                  %NOW
      accounts
                                  
                                  
                                  2,308
                                  
                                  
                                  1.9
                                  
                                  
                                  0.70
                                  
                                  
                                  1,711
                                  
                                  
                                  2.1
                                  
                                  
                                  2.09Money
      market accounts
                                  
                                  
                                  28,309
                                  
                                  
                                  22.7
                                  
                                  
                                  2.73
                                  
                                  
                                  39,776
                                  
                                  
                                  48.3
                                  
                                  
                                  4.20Regular
      savings accounts
                                  
                                  
                                  12,136
                                  
                                  
                                  9.7
                                  
                                  
                                  2.15
                                  
                                  
                                  10,132
                                  
                                  
                                  12.3
                                  
                                  
                                  3.49Certificate
      of deposit accounts
                                  
                                  
                                  69,169
                                  
                                  
                                  55.4
                                  
                                  
                                  3.93
                                  
                                  
                                  23,474
                                  
                                  
                                  28.5
                                  
                                  
                                  5.01Total
                                  
                                  $
                                  124,762
                                  
                                  
                                  100.0
                                  %
                                  
                                  3.02
                                  %
                                  $
                                  82,342
                                  
                                  
                                  100.0
                                  %
                                  
                                  3.93
                                  %




The
following table sets forth, by interest rate ranges, the amount of savings
certificate accounts outstanding at the dates indicated and the period to
maturity of certificate of deposit accounts outstanding at December 31, 2008 and
December 31, 2007.


Period
      to Maturity
                                                                                  At
      December 31, 2008Less
      than
                                                                                  One
      Year
                                                                                
                                                                                
                                                                                One
      to
                                                                                  Three
      Years
                                                                                
                                                                                
                                                                                More
      than
                                                                                  Three
      Years
                                                                                
                                                                                
                                                                                Total
                                                                                
                                                                                
                                                                                Percent
                                                                                  of
      Total(Dollars
      in thousands)2.01%
      to 3.00%
                                                                                
                                                                                $
                                                                                3,505
                                                                                
                                                                                
                                                                                $
                                                                                —
                                                                                
                                                                                
                                                                                $
                                                                                —
                                                                                
                                                                                
                                                                                $
                                                                                3,505
                                                                                
                                                                                
                                                                                
                                                                                5.1
                                                                                %3.01%
      to 4.00%
                                                                                
                                                                                
                                                                                27,538
                                                                                
                                                                                
                                                                                
                                                                                3,391
                                                                                
                                                                                
                                                                                
                                                                                322
                                                                                
                                                                                
                                                                                
                                                                                31,251
                                                                                
                                                                                
                                                                                
                                                                                45.24.01%
      to 5.00%
                                                                                
                                                                                
                                                                                12,154
                                                                                
                                                                                
                                                                                
                                                                                16,517
                                                                                
                                                                                
                                                                                
                                                                                307
                                                                                
                                                                                
                                                                                
                                                                                28,978
                                                                                
                                                                                
                                                                                
                                                                                41.95.01%
      and above
                                                                                
                                                                                
                                                                                1,603
                                                                                
                                                                                
                                                                                
                                                                                3,113
                                                                                
                                                                                
                                                                                
                                                                                719
                                                                                
                                                                                
                                                                                
                                                                                5,435
                                                                                
                                                                                
                                                                                
                                                                                7.8Total
                                                                                
                                                                                $
                                                                                44,800
                                                                                
                                                                                
                                                                                $
                                                                                23,021
                                                                                
                                                                                
                                                                                $
                                                                                1,348
                                                                                
                                                                                
                                                                                $
                                                                                69,169
                                                                                
                                                                                
                                                                                
                                                                                100.0
                                                                                %At
      December 31, 20074.00%
      and below
                                                                                
                                                                                $
                                                                                1,011
                                                                                
                                                                                
                                                                                $
                                                                                5
                                                                                
                                                                                
                                                                                $
                                                                                —
                                                                                
                                                                                
                                                                                $
                                                                                1,016
                                                                                
                                                                                
                                                                                
                                                                                4.3
                                                                                %4.01%
      to 5.00%
                                                                                
                                                                                
                                                                                6,374
                                                                                
                                                                                
                                                                                
                                                                                608
                                                                                
                                                                                
                                                                                
                                                                                438
                                                                                
                                                                                
                                                                                
                                                                                7,420
                                                                                
                                                                                
                                                                                
                                                                                31.65.01%
      and above
                                                                                
                                                                                
                                                                                9,924
                                                                                
                                                                                
                                                                                
                                                                                2,751
                                                                                
                                                                                
                                                                                
                                                                                2,363
                                                                                
                                                                                
                                                                                
                                                                                15,038
                                                                                
                                                                                
                                                                                
                                                                                64.1Total
                                                                                
                                                                                $
                                                                                17,309
                                                                                
                                                                                
                                                                                $
                                                                                3,364
                                                                                
                                                                                
                                                                                $
                                                                                2,801
                                                                                
                                                                                
                                                                                $
                                                                                23,474
                                                                                
                                                                                
                                                                                
                                                                                100.0
                                                                                %




25




The
following table sets forth the maturity distribution and related weighted
average interest rates for certificates of deposit at December 31,
2008:


Amount
              
              
              Weighted
                Average
                Rate
              
              
              Amount
              
              
              Weighted
                Average
                Rate
              
              
              Amount
              
              
              Weighted
                Average
                Rate(Dollars
      in thousands)Within
      three months
              
              $
              13,075
              
              
              
              3.80
              %
              
              $
              9,249
              
              
              
              3.85
              %
              
              $
              22,324
              
              
              
              3.82
              %After
      three but within six months
              
              
              7,154
              
              
              
              3.40
              
              
              
              5,688
              
              
              
              3.35
              
              
              
              12,842
              
              
              
              3.38After
      six but within 12 months
              
              
              6,038
              
              
              
              4.22
              
              
              
              3,596
              
              
              
              3.95
              
              
              
              9,634
              
              
              
              4.12Total
      within one year
              
              
              26,267
              
              
              
              3.79
              
              
              
              18,533
              
              
              
              3.72
              
              
              
              44,800
              
              
              
              3.76After
      one but within two years
              
              
              3,849
              
              
              
              4.53
              
              
              
              1,598
              
              
              
              4.10
              
              
              
              5,447
              
              
              
              4.40After
      two but within three years
              
              
              10,258
              
              
              
              4.12
              
              
              
              7,316
              
              
              
              4.00
              
              
              
              17,574
              
              
              
              4.16After
      three but within five years
              
              
              1,148
              
              
              
              4.80
              
              
              
              200
              
              
              
              4.63
              
              
              
              1,348
              
              
              
              4.77Total
              
              $
              41,522
              
              
              
              3.97
              %
              
              $
              27,647
              
              
              
              3.88
              %
              
              $
              69,169
              
              
              
              3.93
              %




Borrowings.
We have borrowings for approximately $10.1 million. Bank borrowings, including
Federal Funds purchased lines of credit, outstanding balances on correspondent
bank lines of credit and FHLB advances, increased $9.4 million to $9.5 million
at December 31, 2008 from the prior year-end. The Company had an outstanding
balance of $615,000 and $89,000 drawn against its committed credit facility with
its correspondent bank, Atlantic Central Bankers Bank at December 31, 2008 and
2007, respectively. Separately, the Bank has additional unused credit lines of
$5.0 million, also with our correspondent bank, Atlantic Central Bankers
Bank.




Employees




At
December 31, 2008, the Bank had 36 full-time equivalent employees as compared to
35 at December 31, 2007. Employees are not represented by a collective
bargaining unit, and the Bank’s relationship with its employees is considered to
be good.




REGULATION
AND SUPERVISION




General.Effective March 9, 2009, the Bank converted to a New York State
commercial bank charter, and as such, is regulated by the New York Banking
Department (the “Department”) and the Federal Deposit Insurance Corporation. The
Bank is a member of the Federal Home Loan Bank of New York, and is also a member
of the Federal Reserve System.




This
regulation and supervision establishes a comprehensive framework of activities
in which the Bank may engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves.




Insurance
of Deposit Accounts.The
Bank is a member of the Deposit Insurance Fund, which is administered by the
FDIC. The Bank’s deposit accounts are insured by the FDIC, generally up to a
maximum of $100,000 for each separately insured depositor and up to a maximum of
$250,000 for self-directed retirement accounts. However, the FDIC increased the
deposit insurance available on all deposit accounts to $250,000, effective until
December 31, 2009. In addition, certain noninterest-bearing transaction accounts
maintained with financial institutions participating in the FDIC’s Temporary
Liquidity Guarantee Program are fully insured regardless of the dollar amount
until December 31, 2009. The Bank has opted to participate in the FDIC’s
Temporary Liquidity Guarantee Program. See “Temporary Liquidity Guarantee
Program.”


26




The FDIC
imposes an assessment against financial institutions for deposit insurance. This
assessment is based on the risk category of the institution and currently ranges
from 5 to 43 basis points of the institution’s deposits. On February 27, 2009,
the FDIC issued a final rule that increases the current deposit insurance
assessment rates to a range from 12 to 45 basis points beginning April 1, 2009.
Additionally, the FDIC has issued an interim rule that would impose a special 20
basis points assessment on deposits as of June 30, 2009, which would be paid on
September 30, 2009. There is a proposal to reduce the special assessment from 20
basis points to 10 basis points if Congress increases the FDIC’s borrowing
capacity from the Department of Treasury. This special assessment would total
approximately $250,000 (20 basis points) or $125,000 (10 basis points) based on
our deposits as of December 31, 2008.




Insurance
of deposits may be terminated by the FDIC upon a finding that an institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. We do not currently know of any practice,
condition or violation that might lead to termination of our deposit
insurance.




Temporary
Liquidity Guarantee Program. On October 14, 2008, the FDIC announced a
new program – the Temporary Liquidity Guarantee Program. This program has two
components. One guarantees newly issued senior unsecured debt of a participating
organization, up to certain limits established for each institution, issued
between October 14, 2008 and June 30, 2009. The FDIC will pay the unpaid
principal and interest on a FDIC-guaranteed debt instrument upon the uncured
failure of the participating entity to make a timely payment of principal or
interest in accordance with the terms of the instrument. The guarantee will
remain in effect until June 30, 2012. In return for the FDIC’s guarantee,
participating institutions will pay the FDIC a fee based on the amount and
maturity of the debt. The Bank determined to participate in this component of
the Temporary Liquidity Guarantee Program.




The other
component of the program provides full federal deposit insurance coverage for
non-interest bearing transaction deposit accounts, regardless of dollar amount,
until December 31, 2009. An annualized 10 basis point assessment on balances in
noninterest-bearing transaction accounts that exceed the existing deposit
insurance limit of $250,000 will be assessed on a quarterly basis to insured
depository institutions that have not opted out of this component of the
Temporary Liquidity Guarantee Program. The Bank is participating in this
component of the Temporary Liquidity Guarantee Program.




U.S.
Treasury’s Troubled Asset Relief Program Capital Purchase Program. The
Emergency Economic Stabilization Act of 2008 was enacted in October 2008 and
provides the U.S. Secretary of the Treasury with broad authority to implement
certain actions to help restore stability and liquidity to U.S. markets. One of
the provisions resulting from the legislation is the Troubled Asset Relief
Program Capital Purchase Program (“CPP”), which provides for direct equity
investment in perpetual preferred stock by the U.S. Treasury Department in
qualified financial institutions. The program is voluntary and requires an
institution to comply with a number of restrictions and provisions, including
limits on executive compensation, stock redemptions and declaration of
dividends. The CPP provides for a minimum investment of one percent of total
risk-weighted assets and a maximum investment equal to the lesser of three
percent of total risk-weighted assets or $25 billion. Participation in the
program is not automatic and is subject to approval by the U.S. Treasury
Department. The Company elected to submit an application to participate in the
CPP.


27




Bank
Holding Company Regulation.ES Bancshares, Inc., as a bank holding
company controlling the Bank, is subject to the Bank Holding Company Act of
1956, as amended (“BHCA”), and the rules and regulations of the Federal Reserve
Board under the BHCA applicable to bank holding companies. The Company is
required to file reports with, and otherwise comply with the rules and
regulations of the Federal Reserve Board.




Such
regulation and supervision govern the activities in which a bank and its holding
company may engage and are intended primarily for the protection of the
insurance fund and depositors. These regulatory authorities have extensive
enforcement authority over the institutions that they regulate to prohibit or
correct activities that violate law, regulation or a regulatory agreement or
which are deemed to be unsafe or unsound banking practices. Enforcement actions
may include the appointment of a conservator or receiver, the issuance of a
cease and desist order, the termination of deposit insurance, the imposition of
civil money penalties on the institution, its directors, officers, employees and
institution-affiliated parties, the issuance of directives to increase capital,
the issuance of formal and informal agreements, the removal of or restrictions
on directors, officers, employees and institution-affiliated parties, and the
enforcement of any such mechanisms through restraining orders or other court
actions. Any change in laws and regulations, whether by the Department, the OCC,
the FDIC, the Federal Reserve Board or through legislation, could have a
material adverse impact on the Bank and the Company and their operations and
stockholders. Additional information on regulatory requirements is set forth in
Note 11 to the Consolidated Financial Statements.




The
Company files certain reports with the Securities and Exchange Commission
(“SEC”) under the federal securities laws. The Company’s operations are also
subject to extensive regulation by other federal, state and local governmental
authorities and it is subject to various laws and judicial and administrative
decisions imposing requirements and restrictions on part or all of its
operations. Management believes that the Company is in substantial compliance,
in all material respects, with applicable federal, state and local laws, rules
and regulations. Because the Company’s business is highly regulated, the laws,
rules and regulations applicable to it are subject to regular modification and
change. There can be no assurance that these proposed laws, rules and
regulations, or any other laws, rules or regulations, will not be adopted in the
future, which could make compliance more difficult or expensive or otherwise
adversely affect the Company’s business, financial condition or
prospects.




Loans
to One Borrower.Federal law and regulation limit the amount that the
Bank may lend to any one borrower to 15% of the Bank’s capital and surplus plus
an additional 10% of the Bank’s capital and surplus if such additional amount is
fully secured by readily marketable collateral. At December 31, 2008, the Bank’s
regulatory limit on loans to one borrower was $2.6 million. At that date, we
were in compliance with our legal lending limit.




Regulatory
Capital Requirements. Federally insured banks are required to maintain
minimum levels of regulatory capital. Capital adequacy is measured within the
guidelines defined as either Tier 1 or Tier 2 capital. Tier 1 capital consists
primarily of common stock and retained earnings. Tier 2 capital consists
primarily of certain debt instruments and a portion of loan loss reserves. There
are two measures of capital adequacy for banks, the Tier 1 leverage ratio and
the risk-based requirements. A bank must maintain a minimum Tier 1 leverage
ratio of 4 percent of total assets. In addition, Tier 1 capital must equal 4
percent of risk-weighted assets and total Tier 1 and Tier 2 capital must equal 8
percent of risk-weighted assets. A bank’s total “risk based assets” is
determined by assigning our assets and off-balance sheet items to one of four
risk categories based upon our relative credit risks. The greater the risk
associated with an asset, the greater the amount of such asset that will be
subject to capital requirements.


28




Federal
banking agencies, under certain circumstances, are required to take prompt
corrective action against banks that fail to meet their capital requirements.
The OCC is generally required to take action to restrict the activities of an
“undercapitalized institution” (generally defined to be one with less than
either a 4 percent Tier 1 leverage ratio, a 4 percent Tier 1 risk-based capital
ratio or an 8 percent total Tier 1 and Tier 2 risk-based capital ratio). Any
such bank may not increase its assets, acquire another institution, establish a
branch or engage in any new activities, and generally may not make capital
distributions. The OCC is authorized to impose the additional restrictions that
are applicable to significantly undercapitalized associations.




To be
considered “adequately capitalized,” a bank must generally have a leverage ratio
of at least 4 percent, a Tier 1 capital to risk-weighted assets ratio of a least
4 percent and total Tier 1 and Tier 2 capital to risk-weighted assets ratio of a
least 8 percent. To be categorized as “well capitalized,” a bank must maintain a
minimum total risk-based capital ratio of 10 percent, a Tier1 risk-based capital
ratio of at least 6 percent and a Tier 1 leverage ratio of at least 5 percent.
At December 31, 2008, we met the definition of “well capitalized” under the
regulatory framework for prompt corrective action.




Community
Reinvestment Act and Fair Lending. Under the federal Community
Reinvestment Act (“CRA”), we have a continuing and affirmative obligation
consistent with safe and sound banking practices, to help meet the credit needs
of our entire community, including low and moderate, income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution’s discretion to develop the types
of products and services that it believes are best suited to our particular
community, consistent with the CRA. The CRA requires the OCC, in connection with
the examination of the Bank to assess our record of meeting the credit needs of
our community and to take such record into account in our evaluation of certain
applications, such as a merger or the establishment of a branch. The OCC may use
an unsatisfactory rating as the basis for the denial of an application. We must
also comply with the Federal Equal Credit Opportunity Act and the New York
Executive Law, which prohibits creditors from discrimination in their lending
practices on basis specified in these statutes.




Transactions
with Affiliates and Insiders. Federal regulations govern transactions
between the Bank and its affiliates. In general, an affiliate is any company
that controls, is controlled by, or under common control, with the Bank. Federal
law limits the extent to which the Bank or its subsidiaries may engage in
“covered transactions” with any one affiliate to 10% of our capital stock and
surplus, and contains an aggregate limit of 20% of our capital stock and
surplus. Covered transactions include loans, asset purchases, the issuance of
guarantees and similar transactions. Our loans to insiders are required to be
made on terms that are as favorable to us as transactions with non-insiders and
approved in advance by a majority of our disinterested
directors.




The
Bank’s authority to extend credit to its directors, executive officers and 10%
shareholders, as well as to entities controlled by such persons, is currently
governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve
Act and Regulation O of the Federal Reserve Board. Among other things, these
provisions require that extensions of credit to insiders (i) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features, and (ii) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of The Bank’s
capital. In addition, extensions of credit in excess of certain limits must be
approved by The Bank’s Board of Directors. The Bank is in compliance with
Regulation O.


29




Payment
of Dividends.During 2008, the OCC regulated the amount of dividends the
Bank can pay the Company. All dividends must be paid out of undivided profits
and cannot be paid out from capital. In general, if all OCC capital requirements
are satisfied both before and after a dividend payment, a dividend may be paid,
in any year, equal to the current year’s net income plus retained net income for
the preceding two years that is still available for dividend. A dividend may not
be declared if the Bank is considered “undercapitalized” under OCC
regulations.




Federal
Securities Law. The stock of the Company is registered with the SEC under
the Exchange Act. The Company is subject to the information, reporting, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act as administered and enforced by the
OCC.




The
registration under the Securities Act of 1933 of shares of the common stock in a
stock offering does not cover the resale of the shares. Shares of the common
stock purchased by persons who are not affiliates of the Company may be resold
without registration. Shares purchased by an affiliate of the Company will be
subject to the resale restrictions of Rule 144 under the Securities Act of 1933.
If the Company meets the current public information requirements of Rule 144
under the Securities Act of 1933, each affiliate of the Company who complies
with the other conditions of Rule 144, including those that require the
affiliate’s sale to be aggregated with those of other persons, would be able to
sell in the public market, without registration, a number of shares not to
exceed, in any three month period, the greater of 1% of the outstanding shares
of the Company, or the average weekly volume of trading in the shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act of 1933.




Federal
Reserve Bank




As a
member of the Federal Reserve Bank (“FRB”) system, the Bank is required to
maintain a minimum investment in FRB stock. Any excess may be redeemed by the
Bank or called by the FRB at par. At its discretion, the FRB may declare
dividends on this stock. The Bank had $298,500 and $324,000 invested in FRB
stock at December 31, 2008 and December 31, 2007, respectively, which is carried
at cost due to the fact that it is a restricted security.




Federal
Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time accounts. Since these reserves are
maintained as vault cash or other non-interest bearing accounts, they have the
effect of reducing a bank’s earnings. At December 31, 2008, we were in
compliance with these reserve requirements.




USA
PATRIOT Act.The USA PATRIOT Act, signed into law in 2001, gives the
federal government new powers to address terrorist threats through enhanced
domestic security measures, expanded surveillance powers, increased information
sharing and broadened anti-money laundering requirements. The USA PATRIOT Act
also requires the federal banking agencies to take into consideration the
effectiveness of controls designed to combat money-laundering activities in
whether to approve a merger or other acquisition application of a member
institution. Accordingly, if we engage in a merger or other acquisition, our
controls to combat money laundering would be considered as part of the
application process. We have established policies, procedures and systems
designed to comply with these regulations.


30




Sarbanes-Oxley
Act of 2002. The Sarbanes-Oxley Act of 2002 addresses, among other
issues, corporate governance, auditing and accounting, executive compensation,
and enhanced and timely disclosure of corporate information. As directed by the
Sarbanes-Oxley Act of 2002, our Chief Executive Officer and Chief Financial
Officer each are required to certify that our quarterly and annual reports do
not contain any untrue statement of a material fact. The rules adopted by the
Securities and Exchange Commission under the Sarbanes-Oxley Act of 2002 have
several requirements, including having these officers certify that: they are
responsible for establishing, maintaining and regularly evaluating the
effectiveness of our internal controls; they have made certain disclosures to
our auditors and the audit committee of the board of directors about our
internal controls; and they have included information in our quarterly and
annual reports about their evaluation and whether there have been significant
changes in our internal controls or in other factors that could significantly
affect internal controls.




We
incurred additional expense in 2008 in order to comply with the provisions of
the Act and the regulations that have been promulgated to implement the Act,
particularly those regulations relating to the establishment of internal
controls over financial reporting.


31




Item
      1A.
              Risk
      Factors




The risks
set forth below, in addition to the other risks described in this Annual Report
on Form 10-K, may adversely affect our business, financial condition and
operating results. In addition to the risks set forth below and the other risks
described in this annual report, there may also be additional risks and
uncertainties that are not currently known to us or that we currently deem to be
immaterial that could materially and adversely affect our business, financial
condition or operating results. As a result, past financial performance may not
be a reliable indicator of future performance, and historical trends should not
be used to anticipate results or trends in future periods. Further, to the
extent that any of the information contained in this Annual Report on Form 10-K
constitutes forward-looking statements, the risk factors set forth below also
are cautionary statements identifying important factors that could cause our
actual results to differ materially from those expressed in any forward-looking
statements made by or on behalf of us.




The
United States Economy Is In A Deep Recession. A Prolonged Economic Downturn,
Especially One Affecting Our Geographic Market Area, Could Materially Affect our
Business and Financial Results.




The
United States economy entered a recession in the fourth quarter of 2007.
Throughout the course of 2008 and in the first quarter of 2009, economic
conditions continued to worsen, due in large part to the fallout from the
collapse of the sub-prime mortgage market. While we did not originate or invest
in sub-prime mortgages, our lending business is tied, in part, to the housing
market. Declines in home prices, increases in foreclosures and higher
unemployment have adversely affected the credit performance of real
estate-related loans, resulting in the write-down of asset values. The
continuing housing slump also has resulted in reduced demand for the
construction of new housing, further declines in home prices, and increased
delinquencies on our construction, residential and commercial mortgage loans.
Further, the ongoing concern about the stability of the financial markets in
general has caused many lenders to reduce or cease providing funding to
borrowers. These conditions may also cause a further reduction in loan demand,
and increases in our non-performing assets, net charge-offs and provisions for
loan losses.




Legislative or Regulatory
Actions Responding to Financial and Market Weakness Could Affect Us Adversely.
There Can Be No Assurance that Actions of the U.S. Government, Federal Reserve
and Other Governmental and Regulatory Bodies for the Purpose of Stabilizing the
Financial Markets Will Achieve the Intended Effect.




In
response to the financial crises affecting the banking system and financial
markets, the U.S. Congress has passed legislation and the U.S. Treasury has
promulgated programs designed to purchase assets from, provide equity capital
to, and guarantee the liquidity of the financial services industry.
Specifically, Congress adopted the Emergency Economic Stabilization Act of 2008,
under which the U.S. Treasury has the authority to expend up to $700 billion to
assist in stabilizing and providing liquidity to the U.S. financial system. On
October 14, 2008, the U.S. Treasury announced the Capital Purchase Program,
under which it will purchase up to $250 billion of non-voting senior preferred
shares of certain qualified financial institutions in an attempt to encourage
financial institutions to build capital to increase the flow of financing to
businesses and consumers and to support the economy. In addition, Congress
temporarily increased FDIC deposit insurance from $100,000 to $250,000 per
depositor through December 31, 2009. The FDIC has also announced the creation of
the Temporary Liquidity Guarantee Program which is intended to strengthen
confidence and encourage liquidity in financial institutions by temporarily
guaranteeing newly issued senior unsecured debt of participating organizations
and providing full insurance coverage for noninterest-bearing transaction
deposit accounts (such as business checking accounts, interest-bearing
transaction accounts paying 50 basis points or less and lawyers’ trust
accounts), regardless of dollar amount until December 31, 2009. Finally, in
February 2009, the American Recovery and Reinvestment Act of 2009 was enacted,
which is intended to expand and establish government spending programs and
provide certain tax cuts to stimulate the economy. The U.S. government continues
to evaluate and develop various programs and initiatives designed to stabilize
the financial and housing markets and stimulate the economy, including the U.S.
Treasury’s recently announced Financial Stability Plan and the recently
announced foreclosure prevention program.


32




The
potential exists for additional federal or state laws and regulations regarding
lending and funding practices and liquidity standards, and bank regulatory
agencies are expected to be active in responding to concerns and trends
identified in examinations, and the issuance of many formal enforcement orders
is expected. Actions taken to date, as well as potential actions, may not have
the beneficial effects that are intended, particularly with respect to the
extreme levels of volatility and limited credit availability currently being
experienced. In addition, new laws, regulations, and other regulatory changes
will increase our costs of regulatory compliance and of doing business, and
otherwise affect our operations. Our FDIC insurance premiums have increased (and
may continue to increase), and a special assessment has been implemented,
because market developments have significantly depleted the insurance fund of
the FDIC and reduced the ratio of reserves to insured deposits. New laws,
regulations, and other regulatory changes, along with negative developments in
the financial services industry and the credit markets, may significantly affect
the markets in which we do business, the markets for and value of our loans and
investments, and our ongoing operations, costs and profitability.




Recent
Negative Developments in the Financial Services Industry and the Credit Markets
May Subject Us to Additional Regulation.




As a
result of the recent financial crisis, the potential exists for the promulgation
of new federal or state laws and regulations regarding lending and funding
practices and liquidity standards, and bank regulatory agencies are expected to
be active in responding to concerns and trends identified in examinations, which
are expected to result in the issuance of many formal enforcement orders.
Negative developments in the financial services industry and the credit markets,
and the impact of new legislation in response to these developments, may
negatively affect our operations by restricting our business operations,
including our ability to originate or sell loans and pursue business
opportunities. Compliance with such regulation also will likely increase our
costs.




Our
Expenses Will Increase as a Result of Increases in FDIC Insurance
Premiums.




The FDIC
imposes an assessment against financial institutions for deposit insurance. This
assessment is based on the risk category of the institution and currently ranges
from 5 to 43 basis points of the institution’s deposits. On February 27, 2009,
the FDIC issued a final rule that increases the current deposit insurance
assessment rates to a range from 12 to 45 basis points beginning April 1, 2009.
Additionally, the FDIC has issued an interim rule that would impose a special 20
basis points assessment on deposits as of June 30, 2009, which would be paid on
September 30, 2009. There is a proposal to reduce the special assessment from 20
basis points to 10 basis points if Congress increases the FDIC’s borrowing
capacity from the Department of Treasury. This special assessment would total
approximately $250,000 (20 basis points) or $125,000 (10 basis points) based on
our deposits as of December 31, 2008.




Lack
of Consumer Confidence in Financial Institutions May Decrease Our Level of
Deposits.




Our level
of deposits may be affected by lack of consumer confidence in financial
institutions, which have caused fewer depositors to be willing to maintain
deposits that are not FDIC-insured accounts. That may cause depositors to
withdraw deposits and place them in other institutions or to invest uninsured
funds in investments perceived as being more secure, such as securities issued
by the U.S. Treasury. These consumer preferences may force us to pay higher
interest rates to retain deposits and may constrain liquidity as we seek to meet
funding needs caused by reduced deposit levels.


33




Our
Emphasis on Commercial Real Estate Loans and Commercial Business Loans May
Expose Us to Increased Lending Risks.




At
December 31, 2008, $47.1 million, or 49.7% of our loan portfolio, consisted of
commercial real estate loans, including construction and development loans.
Commercial real estate loans constitute a greater percentage of our loan
portfolio than any other loan category, including one-to four-family real estate
loans, which totaled $21.4 million, or 22.5% of our total loan portfolio, at
December 31, 2008. In addition, at December 31, 2008, $17.1 million, or 18.0% of
our loan portfolio, consisted of commercial business loans.




Commercial
real estate loans and commercial business loans generally expose a lender to a
greater risk of loss than one- to four-family residential loans. Repayment of
commercial real estate and commercial business loans generally depends, in large
part, on sufficient income from the property or the borrower’s business,
respectively, to cover operating expenses and debt service. Commercial real
estate loans typically involve larger loan balances to single borrowers or
groups of related borrowers compared to one- to four-family residential mortgage
loans. Changes in economic conditions that are beyond the control of the
borrower and lender (including today’s economic crisis) could affect the value
of the security for the loan, the future cash flow of the affected property, or
the marketability of a construction project with respect to loans originated for
the acquisition and development of property. See “Business—Lending
Activities.”




An
Inadequate Allowance for Loan Losses Would Negatively Affect Our Results of
Operations.




We are
exposed to the risk that our customers will be unable to repay their loans
according to their terms and that any collateral securing the payment of their
loans will not be sufficient to avoid losses. Credit losses are inherent in the
lending business and could have a material adverse effect on our operating
results. Volatility and deterioration in the broader economy may also increase
our risk of credit losses. The determination of an appropriate level of
allowance for loan losses is an inherently uncertain process and is based on
numerous assumptions. The amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates,
that may be beyond our control, and charge-offs may exceed current estimates. We
evaluate the collectability of our loan portfolio and provide an allowance for
loan losses that we believe is adequate based upon such factors as, including,
but not limited to: the risk characteristics of various classifications of
loans; previous loan loss experience; specific loans that have loss potential;
delinquency trends; the estimated fair market value of the collateral; current
economic conditions; the views of our regulators; and geographic and industry
loan concentrations. If any of our evaluations are incorrect and borrower
defaults result in losses exceeding our allowance for loan losses, our results
of operations could be significantly and adversely affected. We cannot assure
you that our allowance will be adequate to cover probable loan losses inherent
in our portfolio.


34




The
Need to Account for Assets at Market Prices May Adversely Affect Our Results of
Operations.




We report
certain assets, including investments and securities, at fair value. Generally,
for assets that are reported at fair value we use quoted market prices or
valuation models that utilize market data inputs to estimate fair value. Because
we carry these assets on our books at their fair value, we may incur losses even
if the asset in question presents minimal credit risk. Given the continued
disruption in the capital markets, we may be required to recognize
other-than-temporary impairments in future periods with respect to securities in
our portfolio. The amount and timing of any impairment recognized will depend on
the severity and duration of the decline in fair value of the securities and our
estimation of the anticipated recovery period.




Other-Than-Temporary
Impairment (OTTI) Could Reduce Our Earnings.




We
evaluate our investment securities for other-than-temporary impairment (OTTI) as
required by SFAS 115. When a decline in fair value below cost is deemed to be
other-than-temporary, the related loss must be recognized as a charge to
earnings and the investment is recorded at fair value. In determining whether or
not OTTI exists management considers several factors, including but not limited
to, the length of time and extent that fair value has been less than cost, the
financial condition and near term prospects of the issuer, adverse changes to
projected cash flows, credit rating downgrades, and our ability and intent to
hold the security for a period sufficient to allow for any anticipated recovery
in fair value.




Our
Continuing Concentration of Loans in Our Primary Market Area May Increase Our
Risk.




Our
success depends primarily on the general economic conditions in the counties in
which we conduct business. Unlike large banks that are more geographically
diversified, we provide banking and financial services to customers primarily in
our market area. The local economic conditions in our market area have a
significant impact on our loans. A significant decline in general economic
conditions caused by inflation, recession, unemployment or other factors beyond
our control, would affect the local economic conditions and could adversely
affect our financial condition and results of operations. Additionally, because
we have a significant amount of commercial real estate loans, decreases in
tenant occupancy also may have a negative effect on the ability of many of our
borrowers to make timely repayments of their loans, which would have an adverse
impact on our earnings.




Future
Changes in Interest Rates Could Reduce Our Profits




Our
ability to make a profit largely depends on our net interest income, which could
be negatively affected by changes in interest rates. Net interest income is the
difference between:


●
              the
      interest income we earn on our interest-earning assets, such as loans and
      securities; and●
              the
      interest expense we pay on our interest-bearing liabilities, such as
      deposits and borrowings.




Our
liabilities generally have shorter maturities than our assets. This imbalance
can create significant earnings volatility as market interest rates change. In
periods of rising interest rates, the interest income earned on our assets may
not increase as rapidly as the interest paid on our liabilities, resulting in a
decline in our net interest income. In periods of declining interest rates, our
interest income is generally positively affected although such positive effects
may be reduced or eliminated by prepayments of loans and redemptions of callable
securities. In addition, when long-term interest rates are not significantly
higher than short-term rates thus creating a “flat” yield curve, the Company’s
interest rate spread will decrease thus reducing net interest income. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Management of Market Risk.”





35




Changes
in interest rates also affect the current market value of our interest-earning
securities portfolio. Generally, the value of securities moves inversely with
changes in interest rates. At December 31, 2008, the fair value of our
securities classified as available for sale totalled $5.0 million. Unrealized
net losses on available-for-sale securities totalled $215,000 at December 31,
2008 and are reported, net of tax, as a separate component of shareholder’s
equity. However, a rise in interest rates could cause a decrease in the fair
value of securities available for sale in future periods which would have an
adverse effect on shareholder’s equity. Depending on market conditions, we often
place more emphasis on enhancing our net interest margin rather than matching
the interest rate sensitivity of our assets and liabilities. In particular, we
believe that the increased net interest income resulting from a mismatch in the
maturity of our asset and liabilities portfolios can, during periods of stable
or declining interest rates provide high enough returns to justify increased
exposure to sudden and unexpected increases in interest rates. As a result, our
results of operations and the economic value of our equity will remain
vulnerable to increases in interest rates and to declines in the difference
between long- and short-term rates. See “Managements Discussion and Analysis of
Financial Condition and Results of Operations—Management of Market
Risk.”




If
Our Investment in The Federal Home Loan Bank Of New York is Classified as
Other-Than-Temporarily Impaired or as Permanently Impaired, Our Earnings and
Stockholders’ Equity Could Decrease.




We own
common stock of the Federal Home Loan Bank of New York. We hold this stock to
qualify for membership in the Federal Home Loan Bank System and to be eligible
to borrow funds under the Federal Home Loan Bank of New York’s advance program.
The aggregate cost and fair value of our Federal Home Loan Bank common stock as
of December 31, 2008 was $528,000 based on its par value. There is no market for
our Federal Home Loan Bank common stock.




Recent
published reports indicate that certain member banks of the Federal Home Loan
Bank System may be subject to accounting rules and asset quality risks that
could result in materially lower regulatory capital levels. In an extreme
situation, it is possible that the capitalization of a Federal Home Loan Bank,
including the Federal Home Loan Bank of New York, could be substantially
diminished or reduced to zero. Consequently, we believe that there is a risk
that our investment in Federal Home Loan Bank of New York common stock could be
impaired at some time in the future, and if this occurs, it would cause our
earnings and stockholders’ equity to decrease by the after-tax amount of the
impairment charge.




If
the Federal Home Loan Bank of New York Stops Paying Dividends, This Will
Negatively Affect Our Earnings.




Certain
Federal Home Loan Banks stopped paying dividends in 2008, and are prohibited
from paying dividends in the future so long as they fail to meet any of their
regulatory capital requirements. We received dividends of $16,000 on our Federal
Home Loan Bank of New York stock in 2008. The failure of the Federal Home Loan
Bank to pay dividends in the future will cause our earnings and stockholders’
equity to decrease. We do not accrue dividends until declared.





36




Future
Legislative or Regulatory Actions Responding to Perceived Financial and Market
Problems Could Impair Our Rights Against Borrowers




There
have been proposals made by members of Congress and others that would reduce the
amount distressed borrowers are otherwise contractually obligated to pay under
their mortgage loans and limit a lender’s ability to foreclose on mortgage
collateral. Were proposals such as these, or other proposals limiting our rights
as a creditor, to be implemented, we could experience increased credit losses or
increased expense in pursuing our remedies as a creditor. Should such
legislation be implemented, Empire State Bank could be directly impacted for
those loans held directly within the portfolio. Such legislation could also have
a major impact on loans held within the structure of mortgage-backed securities
and thus indirectly impact us by decreasing the value of securities held in the
investment portfolio.




A
Breach of Information Security Could Negatively Affect Our
Earnings.




Increasingly,
we depend upon data processing, communication and information exchange on a
variety of computing platforms and networks, and over the internet. We cannot be
certain all our systems are entirely free from vulnerability to attack, despite
safeguards we have instituted. In addition, we rely on the services of a variety
of vendors to meet our data processing and communication needs. Disruptions to
our vendors’ systems may arise from events that are wholly or partially beyond
our vendors’ control (including, for example, computer viruses or electrical or
telecommunications outages). If information security is breached, despite the
controls we have instituted, information can be lost or misappropriated,
resulting in financial loss or costs to us or damages to others. These costs or
losses could materially exceed the amount of insurance coverage, if any, which
would adversely affect our earnings.




We
Are Subject to Extensive Regulatory Oversight




We and
our subsidiaries are subject to extensive regulation and supervision. Regulators
have intensified their focus on bank lending criteria and controls, and on the
USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance
requirements. There is also increased scrutiny of our compliance with the rules
enforced by the Office of Foreign Assets Control. In order to comply with
regulations, guidelines and examination procedures in the anti-money laundering
area, we have been required to adopt new policies and procedures and to install
new systems. We cannot be certain that the policies, procedures and systems we
have in place are flawless. Therefore, there is no assurance that in every
instance we are in full compliance with these requirements. Our failure to
comply with these and other regulatory requirements can lead to, among other
remedies, administrative enforcement actions, and legal proceedings. In
addition, recently enacted, proposed and future legislation and regulations have
had, will continue to have or may have significant impact on the financial
services industry. Regulatory or legislative changes could make regulatory
compliance more difficult or expensive for us, and could cause us to change or
limit some of our products and services, or the way we operate our
business.




Although
the Bank is Well Capitalized, it is Possible That the Bank Could Be Required to
Maintain Higher Levels of Capital as a Result of Our Commercial Real Estate
Concentration, Which Could Require Us to Obtain Additional Capital, and May
Adversely Affect Shareholder Returns.




The
federal banking regulators have issued guidance for those institutions which are
deemed to have concentrations in commercial real estate lending. Pursuant to the
supervisory criteria contained in the guidance for identifying institutions with
a potential commercial real estate concentration risk, institutions which have
(1) total reported loans for construction, land development, and other land
which represent in total 100% or more of an institution’s total risk-based
capital; or (2) total commercial real estate loans representing 300% or more of
the institution’s total risk-based capital and the institution’s commercial real
estate loan portfolio has increased 50% or more during the prior 36 months, are
identified as having potential commercial real estate concentration risk.
Institutions which are deemed to have concentrations in commercial real estate
lending are expected to employ heightened levels of risk management with respect
to their commercial real estate portfolios, and may be required to hold higher
levels of capital. The Bank, like many community banks, has a concentration in
commercial real estate loans. Management has extensive experience in commercial
real estate lending, and has implemented and continues to maintain heightened
portfolio monitoring and reporting, and strong underwriting criteria with
respect to its commercial real estate portfolio.





37




Item
      1B.
                Unresolved
      Staff Comments




None.


Item
      2.
              Properties




The
following table sets forth information concerning our properties at December 31,
2008. Our premises had an aggregate net book value of approximately $488,000 at
that date.


Year
                    
                    
                    
                    Net
      Book Value at
                      December
      31, 2008Location
                    
                    Acquired/Leased
                    
                    Owned
      or Leased(Dollars
      in thousands)Corporate
      Headquarters And Main Office:68
      North Plank Road
                    
                    2004
                    
                    Leased
                    
                    
                    $
                    220Newburgh,
      New York 12550Branch
      Offices:257
      Main Street
                    
                    2004
                    
                    Leased
                    
                    
                    $
                    74New
      Paltz, New York 125611361
      North Railroad Avenue
                    
                    2007
                    
                    Leased
                    
                    
                    $
                    154Staten
      Island, NY 10306




Item
      3.
                Legal
      Proceedings




From
time to time, we are involved as plaintiff or defendant in various legal
proceedings arising in the ordinary course of business. At December 31, 2008, we
were not involved in any legal proceedings, the outcome of which would be
material to our financial condition or results of operations.


Item
      4.
              Submission
      of Matters to a Vote of Security
Holders




No
matter was submitted to a vote of security holders, through the solicitation of
proxies or otherwise, during the quarter ended December 31, 2008.





38




PART II


Item
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
Securities




(a) The
Common Stock of ES Bancshares, Inc., is traded on the OTCBB market under the
symbol “ESBS.” At December 31, 2008 the common stock was held by approximately
627 shareholders of record. The following table shows the range of high and low
market prices for our stock for the quarters indicated. There were no dividends
declared or paid in any quarter. The payment of any future cash dividends is
dependent on the results of operations and financial condition of the Company as
well as tax considerations, economic and market conditions, regulatory
restrictions, regulatory capital requirements and other factors.


Year
      ended
                                December
      31,
                                2008
                              
                              
                              High
                              
                              
                              Low
                              
                              
                              Cash
      Dividends
                                DeclaredFourth
      quarter
                              
                              
                              $
                              6.00
                              
                              
                              $
                              3.75
                              
                              
                              $
                              —Third
      quarter
                              
                              
                              
                              6.00
                              
                              
                              
                              5.00
                              
                              
                              
                              —Second
      quarter
                              
                              
                              
                              7.00
                              
                              
                              
                              5.50
                              
                              
                              
                              —First
      quarter
                              
                              
                              
                              7.75
                              
                              
                              
                              6.80
                              
                              
                              
                              —Year
      ended
                                December
      31,
                                2007
                              
                              
                              High
                              
                              
                              Low
                              
                              
                              Cash
      Dividends
                                DeclaredFourth
      quarter
                              
                              
                              $
                              8.25
                              
                              
                              $
                              6.50
                              
                              
                              $
                              —Third
      quarter
                              
                              
                              
                              9.00
                              
                              
                              
                              7.25
                              
                              
                              
                              —Second
      quarter
                              
                              
                              
                              9.25
                              
                              
                              
                              7.85
                              
                              
                              
                              —First
      quarter
                              
                              
                              
                              9.50
                              
                              
                              
                              8.00
                              
                              
                              
                              —




(b)
              Not
      applicable.(c)
              Not
      applicable




Item
      6.
                Selected
      Financial Data




This item
is not applicable to smaller reporting companies.





39




Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




Forward-Looking
Statements




This
Report on Form 10-K includes “forward-looking statements” within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended, that are based on the current beliefs of, as well as assumptions
made by and information currently available to, the management of the Company.
All statements other than statements of historical facts included in this
Report, including, without limitation, statements contained under the caption
“Management’s Discussion and Analysis” regarding the Company’s business strategy
and plans and objectives of the management of the Company for future operations,
are forward-looking statements. When used in this Report, the words
“anticipate,” “believe,” “estimate,” “project,” “predict,” “expect,” “intend” or
words or phrases of similar import, as they relate to the Company or the
Company’s management, are intended to identify forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, such expectations may not prove to be
correct. All forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those anticipated,
believed, estimated, projected, predicted, expected or intended including:
statements of our goals, intentions and expectations; statements regarding our
business plans and prospects and growth and operating strategies; statements
regarding the asset quality of our loan and investment portfolios; estimates of
our risks and future costs and benefits; our ability to manage the risk in our
loan portfolio; significantly increased competition among depository and other
financial institutions; our ability to execute our plan to grow our assets on a
profitable basis; our ability to execute on a favorable basis any plan we may
have to acquire other institutions or branches or establish new offices; changes
in the interest rate environment that reduce our margins or reduce the fair
value of financial instruments and inflation; general economic conditions,
either nationally or in our market area; adverse changes in the securities and
national and local real estate markets (including real estate values); whether
we are accepted into the U.S. Treasury’s Capital Purchase Program and whether we
determine to participate in such program; our ability to grow our new Staten
Island office; legislative or regulatory changes that adversely affect our
business; our ability to enter new markets successfully and take advantage of
growth opportunities; changes in consumer spending, borrowing and savings
habits; the effect of a dramatically slowing economy on our lending portfolio
including our commercial real estate and business loans; the impact of the U.S.
government’s economic stimulus program and its various financial institution
rescue plans including TARP; changes in accounting policies and practices, as
may be adopted by the bank regulatory agencies and the authoritative accounting
and auditing bodies; and changes in our organization, compensation and benefit
plans.




The
Company does not intend to update these forward-looking statements. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by applicable cautionary statements.




General




The
Company’s results of operations are dependent primarily on net interest income,
which is the difference between the interest income earned on its
interest-earning assets, such as loans and securities, and the interest expense
on its interest-bearing liabilities, such as deposits and borrowed funds, as
well as the level of its provisions for loan losses. Results of operations are
also affected by non-interest income and expense, and the provision for loan
losses. Non-interest income consists primarily of service charges, gains on sale
of assets, and other fees. Non-interest expense consists primarily of employee
compensation and benefits, occupancy expenses, data processing fees, deposit
insurance premiums, certain losses on assets and other operating expenses. The
Company’s results of operations are also significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government policies, changes in accounting standards and actions of
regulatory agencies.




Analysis
of Net Interest Income




Net
interest income is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. Net interest income
depends on the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rates earned or paid on them,
respectively.




The
following table sets forth average balance sheets for interest earning assets
and interest bearing liabilities, average yields and costs, and certain other
information for the years ended December 31, 2008 and 2007, respectively. The
yields and costs were derived by dividing interest income or expense by the
average balance of assets and liabilities for the period shown. Substantially
all average balances were computed based on daily balances. The yields include
deferred fees and discounts, which are considered yield adjustments, and
purchase discounts and premiums that are amortized or accreted to interest
income. No tax-equivalent adjustments were made.





40




Year
      Ended December 31,
                                
                                
                                Year
      Ended December 31,2008
                                
                                
                                2007Average
                                  Balance
                                
                                
                                Interest
                                
                                
                                Average
                                  Yield/Cost
                                
                                
                                Average
                                  Balance
                                
                                
                                Interest
                                
                                
                                Average
                                  Yield/CostAssetsInterest-earning
      assets:Loans
      receivable (1)
                                
                                $
                                82,413
                                
                                
                                $
                                5,167
                                
                                
                                
                                6.27
                                %
                                
                                $
                                69,470
                                
                                
                                $
                                5,078
                                
                                
                                
                                7.31
                                %Investment
      Securities (2)
                                
                                
                                21,373
                                
                                
                                
                                1,070
                                
                                
                                
                                5.01
                                %
                                
                                
                                7,970
                                
                                
                                
                                398
                                
                                
                                
                                5.00
                                %Fed
      funds sold
                                
                                
                                6,522
                                
                                
                                
                                131
                                
                                
                                
                                2.02
                                %
                                
                                
                                8,585
                                
                                
                                
                                444
                                
                                
                                
                                5.17
                                %Certificates
      of deposit
                                
                                
                                6,117
                                
                                
                                
                                221
                                
                                
                                
                                3.61
                                %
                                
                                
                                5,951
                                
                                
                                
                                320
                                
                                
                                
                                5.39
                                %FRB
      & FHLB stock
                                
                                
                                721
                                
                                
                                
                                37
                                
                                
                                
                                5.13
                                %
                                
                                
                                446
                                
                                
                                
                                24
                                
                                
                                
                                5.38
                                %Other
      investments
                                
                                
                                53
                                
                                
                                
                                1
                                
                                
                                
                                1.88
                                %Total
      interest-earning assets
                                
                                
                                117,199
                                
                                
                                
                                6,627
                                
                                
                                
                                5.65
                                %
                                
                                
                                92,422
                                
                                
                                
                                6,264
                                
                                
                                
                                6.78
                                %Cash
      and due from banks
                                
                                
                                3,279
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                2,130Allowance
      for loan losses
                                
                                
                                (683
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (604
                                )Non-interest-earning
      assets
                                
                                
                                2,099
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1,852Total
      assets
                                
                                $
                                121,894
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                95,800Liabilities
      and Stockholders’ EquityInterest-bearing
      liabilities:NOW
      accounts
                                
                                $
                                2,327
                                
                                
                                
                                28
                                
                                
                                
                                1.21
                                %
                                
                                $
                                1,337
                                
                                
                                
                                17
                                
                                
                                
                                1.25
                                %Money
      market accounts
                                
                                
                                30,049
                                
                                
                                
                                766
                                
                                
                                
                                2.55
                                %
                                
                                
                                46,446
                                
                                
                                
                                2,245
                                
                                
                                
                                4.83
                                %Regular
      savings accounts (3)
                                
                                
                                12,845
                                
                                
                                
                                320
                                
                                
                                
                                2.49
                                %
                                
                                
                                7,799
                                
                                
                                
                                276
                                
                                
                                
                                3.55
                                %Certificates
      of deposit
                                
                                
                                47,963
                                
                                
                                
                                1,925
                                
                                
                                
                                4.01
                                %
                                
                                
                                20,445
                                
                                
                                
                                1,024
                                
                                
                                
                                5.01
                                %Total
      interest-bearing deposits
                                
                                
                                93,184
                                
                                
                                
                                3,039
                                
                                
                                
                                3.26
                                %
                                
                                
                                76,027
                                
                                
                                
                                3,562
                                
                                
                                
                                4.69
                                %Borrowings
                                
                                
                                7,199
                                
                                
                                
                                239
                                
                                
                                
                                3.33
                                %
                                
                                
                                72
                                
                                
                                
                                6
                                
                                
                                
                                8.13
                                %Total
      interest-bearing liabilities
                                
                                
                                100,383
                                
                                
                                
                                3,278
                                
                                
                                
                                3.27
                                %
                                
                                
                                76,099
                                
                                
                                
                                3,568
                                
                                
                                
                                4.69
                                %Non-interest-bearing
      liabilities
                                
                                
                                11,651
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                8,680Total
      liabilities
                                
                                
                                112,034
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                84,779Stockholders’
      equity
                                
                                
                                9,860
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                11,021Total
      liabilities and stockholders’ equity
                                
                                $
                                121,894
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                95,800Net
      interest income
                                
                                
                                
                                
                                
                                $
                                3,349
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                2,696Average
      interest rate spread (4)
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                2.39
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                2.09
                                %Net
      interest margin (5)
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                2.86
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                2.92
                                %Net
      interest-earning assets (6)
                                
                                $
                                16,816
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                16,323Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                116.75
                                %
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                121.45
                                %







(1)
                  Balances
      are net of deferred loan costs and include loans held for
      sale.(2)
                  Average
      balances represent amortized cost.(3)
                  Includes
      mortgage escrow accounts(4)
                  Average
      interest rate spread represents the difference between the yield on
      average interest-earning assets and the cost of average interest-bearing
      liabilities(5)
                  Net
      interest margin represents net interest income divided by average total
      interest-earning assets.(6)
                  Net
      interest-earning assets represent total interest-earning assets less total
      interest-bearing
liabilities.





41




The
following table presents the dollar amount of changes in interest income and
interest expense for the major categories of our interest-earning assets and
interest-bearing liabilities. Information is provided for each category of
interest-earning assets and interest-bearing liabilities with respect to (i)
changes attributable to changes in volume (i.e., changes in average balances
multiplied by the prior-period average rate) and (ii) changes attributable to
rate (i.e., changes in average rate multiplied by prior-period average
balances). For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.


Years
      Ended December 31,
                    2008
      vs. 2007
                  
                  
                  Years
      Ended December 31,
                    2007
      vs. 2006Increase
      (Decrease)
                    Due
      to
                  
                  
                  
                  
                  
                  Increase
      (Decrease)
                    Due
      toRate
                  
                  
                  Volume
                  
                  
                  Net
                  
                  
                  Rate
                  
                  
                  Volume
                  
                  
                  Net(In
      thousands)
                  
                  
                  (In
      thousands)Interest-earning
      assets:Loans
      receivable
                  
                  $
                  (857
                  )
                  
                  $
                  946
                  
                  
                  $
                  89
                  
                  
                  $
                  126
                  
                  
                  $
                  1,377
                  
                  
                  $
                  1,503Fed
      funds sold
                  
                  
                  (206
                  )
                  
                  
                  (106
                  )
                  
                  
                  (312
                  )
                  
                  
                  16
                  
                  
                  
                  (56
                  )
                  
                  
                  (40
                  )Certificates
      of deposit
                  
                  
                  (108
                  )
                  
                  
                  9
                  
                  
                  
                  (99
                  )
                  
                  
                  9
                  
                  
                  
                  146
                  
                  
                  
                  155FRB
      & FHLB stock
                  
                  
                  (4
                  )
                  
                  
                  15
                  
                  
                  
                  11
                  
                  
                  
                  —
                  
                  
                  
                  2
                  
                  
                  
                  2Investment
      securities
                  
                  
                  2
                  
                  
                  
                  670
                  
                  
                  
                  672
                  
                  
                  
                  34
                  
                  
                  
                  (42
                  )
                  
                  
                  (8
                  )Other
      investments
                  
                  
                  —
                  
                  
                  
                  2
                  
                  
                  
                  2
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      interest-earning assets
                  
                  
                  (1,173
                  )
                  
                  
                  1,536
                  
                  
                  
                  363
                  
                  
                  
                  185
                  
                  
                  
                  1,427
                  
                  
                  
                  1,612Interest-bearing
      liabilities:NOW
      accounts
                  
                  
                  (1
                  )
                  
                  
                  12
                  
                  
                  
                  11
                  
                  
                  
                  13
                  
                  
                  
                  1
                  
                  
                  
                  14Money
      market accounts
                  
                  
                  (685
                  )
                  
                  
                  (794
                  )
                  
                  
                  (1,479
                  )
                  
                  
                  38
                  
                  
                  
                  629
                  
                  
                  
                  667Regular
      savings accounts
                  
                  
                  (136
                  )
                  
                  
                  180
                  
                  
                  
                  44
                  
                  
                  
                  52
                  
                  
                  
                  114
                  
                  
                  
                  166Certificates
      of deposit
                  
                  
                  (481
                  )
                  
                  
                  1,382
                  
                  
                  
                  901
                  
                  
                  
                  53
                  
                  
                  
                  155
                  
                  
                  
                  208Total
      interest-bearing deposits
                  
                  
                  (1,303
                  )
                  
                  
                  780
                  
                  
                  
                  (523
                  )
                  
                  
                  156
                  
                  
                  
                  899
                  
                  
                  
                  1,055Borrowings
                  
                  
                  (347
                  )
                  
                  
                  579
                  
                  
                  
                  232
                  
                  
                  
                  —
                  
                  
                  
                  5
                  
                  
                  
                  5Total
      interest-bearing liabilities
                  
                  
                  (1,650
                  )
                  
                  
                  1,359
                  
                  
                  
                  (291
                  )
                  
                  
                  156
                  
                  
                  
                  904
                  
                  
                  
                  1,060Net
      change in interest income
                  
                  $
                  477
                  
                  
                  $
                  177
                  
                  
                  $
                  654
                  
                  
                  $
                  29
                  
                  
                  $
                  523
                  
                  
                  $
                  552




Comparison
of Financial Condition at December 31, 2008 and December 31, 2007




Total
assets.Total
assets at December 31, 2008 increased $51.4 million, or 54.7%, to $145.3 million
from $93.9 million at December 31, 2007. The increase in assets was primarily
attributable to a $21.5 million increase in total securities, a $23.1 million
increase in total loans receivable, net, and a $10.4 million increase in total
cash and due from banks, partially offset by a $4.7 million decrease in federal
funds sold. These increases in assets were primarily funded by increased
interest bearing deposits of $36.8 million, or 49.0%, over the prior year end.
Additionally, during the second quarter of 2008 the Bank borrowed approximately
$10.0 million using wholesale funding. These decisions were based on a strategy
for accelerated growth of the balance sheet. We believe that growing our
earnings base is a key factor in improving our results of operations. Over the
past year, the US Treasury yield curve trended from flat or inverted to an
upward slope providing us with the opportunity to improve our net interest
margin. Furthermore, cutbacks in lending by our competitors during the latter
half of 2008 allowed us to expand our lending activities while maintaining high
underwriting standards. Finally, the opening of our full service Staten Island
office in November 2007 has provided us with an improved platform to conduct
banking operations in that market.





42




Net
loans.Net loans increased $23.2 million, or 32.4%, to $94.6 million at
December 31, 2008 from $71.4 million at December 31, 2007. The increase in net
loans was primarily attributable to the $20.7 million, or 37.1% increase in
commercial and residential real estate mortgage loans, which increased from
$55.9 million at December 31, 2007 to $76.6 million at December 31, 2008. The
$20.7 million net increase included $19.5 million in primarily fixed rate
one-to-four family residential real estate loans and $3.0 million in commercial
real estate loans. Commercial loans and commercial lines of credit increased
$2.8 million, or 19.6%, from $14.3 million at December 31, 2007 to $17.1 million
at December 31, 2008, and home equity and consumer loans increased $1.0 million,
or 11.6%, from $8.7 million at December 31, 2007 to $9.2 million at December 31,
2008. While the increases in fixed loans has exposed the Company to additional
interest rate risk, management has analyzed this risk and believes that the
growth in the balance sheet is justified in light of the Company’s conservative
underwriting philosophy and when weighed against the potential to increase its
earnings due to the additional interest rate spread. In 2008 the above increases
were partially offset by a decrease in construction or development loans of $3.4
million, or 46.5%, from $7.3 million to $3.9 million. At December 31, 2008 there
were three nonaccrual loans at a total value of $749,000. The Bank did not have
any troubled debt restructurings which involved forgiving a portion of interest
or principal on any loans or making loans at a rate materially less than that of
market rates or foreclosed assets acquired in settlement of loans, at and for
the year ending December 31, 2008.




Total
securities.Total securities at December 31, 2008 increased $21.5
million, or 305.0%, to $28.5 million from $7.0 million at December 31, 2007.
Securities available for sale decreased by $2.1 million, or 29.3%, primarily as
the result of prepayments on its Ginnie Mae mortgage-backed securities portfolio
coupled with calls of relatively higher-yielding government sponsored agency
notes that were called as a result of the recent decline in interest rates.
Securities held to maturity increased by $23.5 million, net, as the Bank
invested approximately $18.3 million of its excess deposits and borrowed funds
from the Federal Home Loan Bank of New York into Fannie Mae and Freddie Mac pass
through mortgage-backed securities and $4.7 million into government sponsored
agency notes, which included $1.0 million in Fannie Mae notes and $3.7 million
in Federal Home Loan Bank notes. Both the loan and securities increases reflect
our growth strategy. We hope to replace some of our securities with loans in the
future depending on market conditions.




Certificates
of deposit at other financial institutions.Certificates
of deposit at other financial institutions increased $834,000, or 14.4%, to $6.6
million at December 31, 2008 from $5.8 million at December 31, 2007. All
certificates have terms of twelve months or less. In addition, all of our
certificates at December 31, 2008 were in amounts of $100,000 or
less.




Cash
and cash equivalents.Cash and cash equivalents at December 31, 2008
increased $5.7 million, or 84.5%, to $12.5 million from $6.8 million at December
31, 2007, as management determined to ensure that sufficient liquidity was
readily available to meet the Company’s immediate funding
needs.




Federal
Home Loan Bank stock.As
a result of its utilization of secured advances from the Federal Home Loan Bank
of New York, the Bank increased its investment in Federal Home Loan Bank of New
York capital stock from $89,000 at December 31, 2007 to $528,000 at December 31,
2008.





43




Deposits.Interest bearing deposits grew $36.8 million, or 49.0%, to $111.9 million
at December 31, 2008 from $75.1 million at December 31, 2007. The net growth
over the year consisted of a $45.7 million increase in certificates of deposit,
a $2.0 million increase in savings accounts and a $0.6 million increase in NOW
accounts, partially offset by an $11.5 million decrease in money market
accounts. During 2008 non-interest bearing accounts increased $5.6 million, or
77.1%, from $7.3 million to $12.8 million. The increases in our various deposit
categories reflect our ability to attract and service new deposit relationships
in order to support the increases to our total assets. The decline in money
market accounts followed decreases in the interest rate offered on that type of
deposit, and depositors elected to transfer balances into higher-yielding
certificates of deposit. A significant contributing factor to the increase in
total deposits was the opening of the Bank’s third full service branch office in
Staten Island, New York in November 2007. As of December 31, 2008, 27% of the
Bank’s total deposits were attributable to this new branch. Brokered deposits
totaled $4.0 million at December 31, 2008 versus $3.8 million at December 31,
2007.




Borrowings.Borrowings
increased from $89,000 at December 31, 2007 to $10.1 million at December 31,
2008 primarily as a result of our borrowing $10.0 million from the Federal Home
Loan Bank of New York in five-year amortizing and structured advances to
purchase mortgage-backed securities. At December 31, 2008, the weighted average
term to maturity of our borrowings was approximately 3.8
years.




Stockholders’
equity.Stockholders’ equity decreased by $1.2 million to $9.2 million at
December 31, 2008 from $10.4 million at December 31, 2007. The decrease was
primarily attributable to a net loss for the year of $1.9 million and a $222,000
increase in net unrealized loss in market value of securities
available-for-sale, partially offset by a combined $993,000 in capital stock and
additional paid in capital from warrant holders who exercised their warrants
during the year. The ratio of stockholders’ equity to total assets decreased to
6.3% at December 31, 2008 from 11.1% at December 31, 2007. Book value per share
decreased to $5.26 at December 31, 2008 from $6.03 at December 31, 2007. See
“Liquidity and Capital Resources” for information regarding the Bank’s
regulatory capital amounts and ratios.




During
2008 we reduced the exercise price of our two classes of warrants in an effort
to raise additional capital to support our operations and growth plans. See Note
9 of the Notes to our Consolidated Financial Statements. In addition, the
Company applied to the United State Treasury (“UST”) to participate in its
Capital Purchase Program through the issuance of preferred stock and warrants to
the UST. If our application is approved by UST, we expect to receive up
to $2.88 million in capital from the UST and will use the capital infusion
to support our growth plans. While we will focus our efforts on prudently
growing the loan portfolio and generating deposits in our markets, the Bank may
also choose to invest a portion of the funds in securities. The Bank may also
choose to use the additional capital to leverage the balance sheet using
wholesale borrowings within our asset/liability management strategies and policy
guidelines.




Results
of Operations for the Years Ended December 31, 2008 and December 31,
2007




General.For the year ended December 31, 2008, the Company recognized a net loss
of $1.9 million, or ($1.09) per diluted share, as compared to a net loss of
$708,000, or ($0.41) per diluted share, for the year ended December 31, 2007.
The $1.2 million increase in net loss was primarily the result of the $900,000
loss recognized on the loss of uninsured principal that had been on deposit at
the failed Silver State Bank in Henderson, Nevada, together with the increased
operating expenses that resulted from the opening of the Company’s third full
service branch banking office in November 2007.





44




Interest
Income.Interest income for the year ended December 31, 2008 totaled $6.6
million, an increase of $363,000 from $6.3 million for the year ended December
31, 2007. The amount of interest income earned resulted from an increase in
average interest-earning assets to $117.2 million for the year ended December
31, 2008 from $92.4 million for the year ended December 31, 2007, offset by a
decrease in the average annual yield on interest earning assets from 6.78% to
5.65% year over year as a result of new originations at lower rates,
refinancings, and interest rate reductions in adjustable, floating rate loans,
particularly those tied to the prime rate. At December 31, 2008, average loan
balances increased from $69.5 million to $82.4 million over the prior year end,
while their average annual yield decreased from 7.31% to 6.27%. At December 31,
2008, the average balance of the investment securities portfolio increased by
$13.4 million, from $8.0 million to $21.4 million, while the average balances of
its fed funds sold decreased approximately $2.1 million, from $8.6 million to
$6.5 million, as compared to the year ended December 31, 2007. The average
annual yield earned by the investment securities portfolio remained relatively
stable at 5.01% as compared to 5.00% for the year ended December 31, 2007. The
average annual yield earned on federal funds sold decreased to 2.02% from 5.17%
for the year ended December 31, 2008 as a result of the significant decrease in
short-term interest rates during 2008.




During
the year ended December 31, 2008 the Company continued to maintain an
approximate $6.1 million average balance invested in a variety of certificates
of deposit at other financial institutions with maturities ranging from three to
twelve months. Due to the decrease in short-term interest rates available in the
marketplace, the average annual yield on these assets decreased from 5.39% for
the year ended December 31, 2007 to 3.61% for the year ended December 31,
2008.




Interest
Expense.Total interest expense for the year ended December 31, 2008
decreased by $290,000 when compared to the year ended December 31, 2007. The
decrease primarily resulted from the decrease in the average annual cost of
interest bearing liabilities from 4.69% for the year ended December 31, 2007 to
3.27% for the year ended December 31, 2008. This decrease primarily resulted
from reductions in short term interest rates in the market. Average balances of
total interest bearing liabilities increased to $100.4 million for the year
ended December 31, 2008 as compared to $76.1 million for 2007. This increase
primarily resulted from an increase in average other borrowings of approximately
$7.1 million year over year. The average annual cost of other borrowings was
3.33% for the year ended December 31, 2008, as compared to 8.13% for 2007. This
increase in borrowed funds was used primarily to fund the increase in the
investment securities portfolio.




Average
money market account balances decreased $16.4 million, from $46.4 million for
the year ended December 31, 2007 to $30.0 million for the year ended December
31, 2008. The average annual costs for money market accounts decreased 228 basis
points, from 4.83% for the year ended December 31, 2007 to 2.55% for the year
ended December 31, 2008. The average balances of the Bank’s certificates of
deposit portfolio increased to $48.0 million at an average annual cost of 4.01%
for the year ended December 31, 2008, from $20.4 million at an average annual
cost of 5.01% for the prior year. For the year ended December 31, 2008, average
regular savings account balances increased $5.0 million to $12.8 million from
$7.8 million for the year ended December 31, 2007, while the average costs
decreased 106 basis points to 2.49% from 3.55% from the prior year.




Provision
for Loan Losses.The provision for loan losses for the year ended December 31, 2008
increased approximately $201,000 to $244,000 from $43,000 for the year ended
December 31, 2007, primarily as a result of loan growth, the loan portfolio’s
overall risk profile under current market conditions, and the economic weakness
in the Bank’s market areas. Management’s objective is to maintain an allowance
for losses that is sufficient to absorb probable and quantifiable losses based
upon current knowledge of the loan portfolio, current market conditions and
credit granting activities.




Net
Interest Income.Net interest income was approximately $3.3 million for
the year ended December 31, 2008 as compared to $2.7 million for the year ended
December 31, 2007. The average interest rate spread increased to 2.39% from
2.09% for 2008 versus 2007, while the net interest margin decreased to 2.86%
from 2.92% year over year.





45




Non-Interest
Income.Non-interest income for the year ended December 31, 2008 totaled
$700,000, which represented an increase of $109,000 from the $591,000 for the
year ended December 31, 2007. Most of the change resulted from a $141,000
increase in service charges and fees earned from an increased number of deposit
and loan customer relationships, partially offset by a $138,000 decrease in the
net gain on the sale of real estate mortgage loans, as we decided during the
year to hold a greater percentage of our originated real estate mortgages in our
loan portfolio taking advantage of higher market spreads on these loans. There
was also an $87,000 increase in other non-interest income, attributable
primarily to increased earnings from the sale of mutual funds and
annuities.




Non-Interest
Expense.Non-interest expense for the year ended December 31, 2008 increased $1.7
million to $5.7 million from $4.0 million for the year ended December 31, 2007.
Compensation and benefits increased $308,000, or 15.1%, from the increase in
personnel needed to staff the new full-service branch in Staten Island, New York
that opened in November 2007. This new branch office was primarily responsible
for the increase in occupancy and equipment expense and contributed to the
increase in data processing fees. In addition to increase in compensation and
benefits, non-interest expense increased due to our recognition of a $900,000
loss, which was the uninsured portion of a six-month certificate of deposit that
had been invested at Silver State Bank in Henderson, Nevada, a failed depository
institution taken over by the Nevada Financial Institutions Division and the
FDIC in September 2008. On March 13, 2009 the Bank received a partial recovery
check from the FDIC in amount of $14,730 that was recognized as income in the
first quarter of 2009. If any further recovery of the $900,000 uninsured amount
is later received, it will be added to income from operations. However, there
can be no assurance whether, or when, any recovery will be received. Other
non-interest expense increased by $316,000 to approximately $1.4 million for the
year ended December 31, 2008 from $1.1 million for the comparable year ended
December 31, 2007. This increase was primarily due to increases in professional
and consulting fees, advertising, FDIC assessments, which increased from
$599,000 during 2007 to $823,000 in 2008, and other operating expenses related
to the expansion of the Bank’s business activities.




Comparison
of Financial Condition at December 31, 2007 and December 31, 2006




Total
assets.Total assets as of December 31, 2007 were $93.9 million, an
increase of $900,000 or 1.0%, from total assets of $93.0 million at December 31,
2006. The increase from December 31, 2006 was primarily the net result of an
increase in loans, which increased $10.5 million, or 17.1%, and decreases in
cash and cash equivalents and securities of $7.6 million, or 52.9% from $14.3
million at December 31, 2006 to $6.8 million at December 31, 2007, and a
decrease in securities of $2.4 million, or 25.5% from $9.4 million at December
31, 2006 to $7.0 million at December 31, 2007.




Total
securities.Total
securities, which are comprised of federal agency securities and mortgage backed
securities, decreased by $2.4 million, or 25.5%, to $7.0 million at December 31,
2007 from $9.4 million at December 31, 2006. During the year ended December 31,
2007 funds provided by principal payments and maturities of securities were
primarily utilized to support the growth in total
loans.




Loans
receivable, net.Total loans receivable, net, which exclude real estate
mortgage loans held for sale, as of December 31, 2007 were $71.4 million, an
increase of $10.5 million from $61.0 million at December 31, 2006. The increase
was primarily attributable to the Bank’s ability to attract and acquire new
business relationships, principally in the commercial mortgage sector and, to a
lesser extent, to commercial, construction, home equity and consumer loans. Real
estate mortgage loans, which consist primarily of commercial mortgage loans,
increased $6.4 million, or 18.1%, to $41.5 million at December 31, 2007 from
$32.2 million at December 31, 2006. At December 31, 2007 commercial loans and
lines of credit totaled $14.3 million, which represented an increase of $3.4
million, or 31.5% over the $10.9 million balance at December 31, 2006, and home
equity and consumer loans increased $2.7 million, or 44.1% to $8.7 million from
$6.0 million as of the same respective dates. Construction and development loans
decreased $2.0 million, or 21.8% from $9.1 million at December 31, 2006 to $7.1
million at December 31, 2007. The increase in loans receivable, net, was
primarily attributable to the Bank’s ability to attract and acquire new business
relationships, principally in the commercial mortgage sector and, to a lesser
extent, to commercial, construction, home equity and consumer
loans.





46




Deposits.Deposits as of December 31, 2007 were $82.3 million as compared to $81.5
million at December 31, 2006, which represented an increase of $867,000, or 1.1%
between the year-end amounts. Although the Bank’s total deposits increased a
small percentage, the mix shifted as customers transferred funds from money
market accounts and into certificates of deposit and savings accounts in
reaction to the change in interest rates following the easing of short-term
interest rates during the latter part of 2007. Transaction accounts (demand and
NOW deposits) totaled $9.0 million and represented 10.9% of total deposits at
December 31, 2007, compared to $9.6 million, or 11.7% of total deposits, at
December 31, 2006, and money market account balances, which totaled $39.8
million at December 31, 2007, represented 48.3% of total deposits as of that
date compared to $48.0 million, or 59.0% of total deposits, one-year earlier.
The decreases in those categories were offset by increases in certificates of
deposit and savings account balances. Certificates of deposit increased $4.2
million, or 21.7% to $23.5 million at December 31, 2007, while savings accounts
increased $5.5 million, or 120.2% to $10.1 million as of the same date. At
December 31, 2007 certificates of deposit and savings accounts represent 28.5%
and 12.3% of total deposits, respectively, as compared to 23.7% and 5.6% of
total deposits at December 31, 2006. The Bank supplements its core deposits with
higher costing certificates of deposit and certain savings products that offer a
market-competitive interest rate in order to promote the fourth-quarter opening
of its third full-service branch in Staten Island, New
York.




Borrowed
funds.At December 31, 2007 borrowed funds outstanding amounted to
$89,000 as compared to $53,000 at December 31, 2006. These funds were used
primarily for the costs associated with the Bank’s reorganization into a bank
holding company and for certain operating expenses incurred by the Company
unrelated to the Bank.




Stockholders’
equity.Stockholders’ equity decreased $500,000, or (5.1%) from $10.9
million at December 31, 2006 to $10.4 million at December 31, 2007. The decrease
in equity resulted primarily from the $708,000 net loss for the year that was
partially mitigated by a $106,000 increase in the accumulated other
comprehensive gain associated with the increase in the unrealized gains on the
Bank’s securities available for sale. Additionally, the sum of the Company’s
capital stock and additional paid in capital increased by $42,000 from December
31, 2006 to December 31, 2007 as a result of the exercise of 2,210 shareholder
warrants and adjustment associated with stock based
compensation.




Comparison
of Operating Results for the Years Ended December 31, 2007 and December 31,
2006




General.Net loss for the year ended December 31, 2007, was $708,000, a decrease
of $719,000, or 50.4%, compared to net loss of more than $1.4 million for the
prior year. Basic and fully diluted loss per share decreased to ($0.41) for the
year ended December 31, 2007 from ($0.83) for the year ended December 31, 2006.
The decrease in net loss reflected a $1.6 million increase in interest income
that was partially offset by a nearly $1.1 million increase in interest expense,
a $433,000 decrease in the provision for loan loss, a $183,000 increase in
non-interest income, and a $449,000 increase in non-interest expense. Losses
from operations are expected to continue until the Bank achieves sustainable
levels of loans and deposits.





47




Interest
Income.Interest income for the year ended December 31, 2007 increased to
nearly $6.3 million, an increase of $1.6 million, or 34.7% compared to the year
ended December 31, 2006. The increase was attributable to the overall increase
in average interest-earning assets, which increased to $92.4 million for the
year ended December 31, 2007 from $72.3 million for the year ended December 31,
2006, and the higher yields that were realized in 2007 as compared to 2006. The
average yield on interest-earning assets for the year ended December 31, 2007
was 6.78%, which was 34 basis points higher than the 6.44% average yield on the
Bank’s interest-earning assets for the year ending December 31, 2006. This
increase was primarily due to higher average balances of loans and certificates
of deposit along with higher yields for both asset segments coupled with a
decrease in the average balances for Fed Funds sold and securities available for
sale.




Interest
Expense.Interest expense for the year ended December 31, 2007 on total
interest-bearing deposits increased by $1.1 million to $3.6 million from $2.5
million when compared to the year ended December 31, 2006. The increase was
primarily due to the increase in average interest-bearing deposit balances and,
to a lesser extent, higher competitive interest rates. Average interest-bearing
deposit balances increased $20.9 million, from $55.1 million for the year ended
December 31, 2006 to $76.0 million for the year ended December 31, 2007, while
the average rates paid on interest-bearing deposits increased 14 basis points,
from 4.55% to 4.69%, over the same respective
periods.




Provision
for Loan Losses.For the year ended December 31, 2007 the provision for loan losses
decreased $433,000 as compared to the year ended December 31, 2006. Much of the
provision in 2006 resulted primarily from a changed and enhanced methodology for
establishing provisions for the allowance for loan losses that the Bank adopted
at that time. Formerly, as a de novo institution, the Bank did not have any
historical loan losses to enable management to estimate the probable credit
losses imbedded within the portfolio. Alternatively, along with other criteria,
the Bank previously considered peer group credit loss data each period in
providing the provision, which, based on the moderate growth exhibited by the
loan portfolio, was deemed appropriate. However, in light of the significant
increase in commercial real estate loan, commercial business loan, and
construction loan balances, the Bank expanded its current risk analysis
methodologies. Management bifurcated the loan portfolio segments into various
pools in order to better evaluate the risks to credits associated by distinct
geographic and business type concentrations. Additional risk was associated to
portions of the increase in commercial real estate loan balances that resulted
from participations because of potential different lead-bank underwriting
standards, and to the absence of a direct relationship between the Bank and
those borrowers. Moreover, management determined that the weakening local
economy likely had a detrimental impact on the Bank’s business borrowers, most
of which have had only a short-term relationship with the Company. Accordingly,
based on that quantitative and qualitative overall assessment, the Company
concluded that a more significant provision for 2006 was appropriate given the
relatively unseasoned nature of the loan portfolio. Management utilized the
framework adopted in 2006 in establishing the 2007
provision.




Non-Interest
Income.Total
non-interest income for the years ended December 31, 2007 and December 31, 2006
totaled $591,000 and $408,000, respectively. The increases in service charges
and fees resulted primarily from incremental service fees earned from a larger
base of customer deposit and loan accounts. The increase in the net gain on
sales of real estate mortgage loans held for sale resulted from an increased
volume of sold loans in the year ended December 31, 2007 as compared to 2006.
For the year ended December 31, 2007 the Company realized a $12,000 loss on the
sale of securities available for sale as the proceeds from a lower yielding
investment were redeployed into relatively higher yielding loans. The increase
in other non-interest income was primarily attributable to sales of fixed
annuities that the Bank commenced selling in 2006.





48




Non-Interest
Expense.Non-interest
expense for the year ended December 31, 2007 was approximately $4.0 million as
compared to $3.5 million for year ended December 31, 2006. Compensation and
benefits increased $230,000 primarily as a result of the hiring of business
development officers and staff for the Bank’s third full-service branch office
in Staten Island, New York which opened in November, 2007. Occupancy and
equipment increased $12,000 primarily as a result of increases in rent,
utilities and maintenance costs, and to costs related to the increases in
personnel. The $47,000 increase in data processing service fees was also
primarily attributable to the Bank’s growth and to servicing a larger customer
base. The $160,000 increase in all other non-interest expenses was primarily due
to increases in professional and consulting fees and other operating expenses
related to the expansion of the Company’s business activities and the opening of
its first branch in the Staten Island, New York
marketplace.




Income
Tax Expense.We received no tax benefit from our net operating losses as
they are being carried forward and will be available to reduce future taxable
income.




Liquidity
and Capital Resources




The
primary sources of funds are deposits, wholesale funding from the Federal Home
Loan Bank of New York or other bank borrowings, capital, proceeds from the sale
of loans, and principal and interest payments on loans and securities. While
maturities and scheduled payments on loans and securities provide an indication
of the timing of the receipt of funds, other sources of funds such as loan
prepayments and deposit inflows are less predictable due to the effects of
changes in interest rates, economic conditions and competition.




The
primary investing activities of the Company are the origination of loans and the
purchase of investment securities. Investing activities are funded primarily by
net deposit inflows, sales of loans, principal repayments on loans and
securities, and borrowed funds. For the years December 31, 2008 and 2007, we
originated loans of approximately $47.8 million and $48.7 million, respectively,
including real estate mortgage loans held for sale. At December 31, 2008 and
2007, we had outstanding loan origination commitments of $4.7 million and $12.2
million respectively. There were no one-to-four family real estate mortgage
loans held for sale at December 31, 2008, versus $2.6 million held for sale at
December 31, 2007. In addition, there were $10.7 million in undisbursed lines of
credit and construction loans in process (combined) at December 31, 2008, versus
$9.6 million at December 31, 2007. The Company anticipates that it will have
combined sufficient funds available to meet its current loan originations and
other commitments.




At
December 31, 2008 and 2007 total deposits were approximately $124.8 million and
$82.3 million, respectively, of which approximately $69.1 million and $23.5
million were in certificates of deposit. Certificates of deposit scheduled to
mature in one year or less from December 31, 2008 and 2007 totaled $44.8 million
and $17.3 million, respectively. Based on past experience the Company
anticipates that most such certificates of deposit can be renewed upon their
expiration.




As stated
earlier, The Company completed its holding company formation during the quarter
ended September 30, 2006. To pay the various costs associated with the
formation, as well as other subsequent expenses as incurred, the Company secured
a credit facility of $200,000 from its wholesale correspondent bank, Atlantic
Central Bankers Bank, of which the Company had exercised $114,000 at June 30,
2008. During the quarter ended June 30, 2008, the Company obtained a replacement
credit facility with Atlantic Central Bankers Bank for $3.2 million. Incremental
proceeds drawn from the credit facility are for the purpose of providing funds
as needed to the Bank to maintain strong capital ratios and enable it to grow at
a managed pace and potentially add new branch locations. As of December 31, 2008
the refinanced balance of the facility was $615,000.




In
general the Bank monitors and manages its liquidity on a regular basis by
maintaining appropriate levels of liquid assets so that funds are available when
needed. Excess liquidity is invested in overnight federal funds sold and other
short-term investments. As a member of the Federal Home Loan Bank of New York,
the Bank has the availability of credit secured by qualifying collateral. At
December 31, 2008 the Bank had $21.0 million of such unencumbered collateral
available. Additionally, the Bank has unused credit lines of $5.0 million if the
need arises with its correspondent bank, Atlantic Central Bankers Bank, which is
separate from the Company’s credit facility mentioned above.





49




Applicable
regulations require banks to maintain a minimum leverage ratio of core (Tier 1)
capital to total adjusted tangible assets of 3.0%, and a minimum ratio of total
capital (core capital and supplementary capital) to risk-weighted assets of
8.0%, of which 4.0% must be core (Tier 1) capital. Under prompt corrective
action regulations, our regulator is required to take certain supervisory
actions with respect to an undercapitalized institution. The regulations
establish a framework for the classification of depository institutions into
five categories: (1) well-capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized, and (5) critically
undercapitalized. Generally an institution is considered well capitalized if it
has a core (Tier 1) capital ratio of at least 5.0%, a core (Tier 1) risk-based
capital ratio of at least 6.0%, and a total risk-based capital ratio of a least
10.0%. As of December 31, 2008, the most recent regulatory notifications
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the institution’s
category.




The
foregoing capital ratios are based in part on specific quantitative measures of
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the bank regulators about capital
components, risk weightings and other factors.




Management
believes that as of December 31, 2008 and 2007, the Bank met all capital
adequacy requirements to which it was subject.




The
following is a summary of the Bank’s actual capital amounts and ratios, compared
to the requirements for minimum capital adequacy and for classification as a
well-capitalized institution at December 31, 2008 and December 31, 2007. The
capital ratios of the Company are not significantly different than those shown
in the table below for the Bank and exceed the requirements to be well
capitalized. In accordance with the applicable regulatory requirements, the
Bank’s actual tangible and Tier 1 capital amounts exclude goodwill, while the
total risk-based capital amounts include the allowance for loan
losses.


Bank
      Actual
                                
                                
                                Minimum
      Capital
                                  Adequacy
                                
                                
                                Classification
      as
                                  Well
      CapitalizedAmount
                                
                                
                                Ratio
                                
                                
                                Amount
                                
                                
                                Ratio
                                
                                
                                Amount
                                
                                
                                Ratio(Dollars
      in thousands)December
      31, 2008Tier
      I (core) capital
                                
                                $
                                9,439
                                
                                
                                
                                6.8
                                %
                                
                                $
                                4,181
                                
                                
                                
                                3.0
                                %
                                
                                $
                                6,968
                                
                                
                                
                                5.0
                                %Risk-based
      capital:Tier
      I
                                
                                
                                
                                9,439
                                
                                
                                
                                10.1
                                
                                
                                
                                N/A
                                
                                
                                
                                N/A
                                
                                
                                
                                5,598
                                
                                
                                
                                6.0Total
                                
                                
                                
                                10,301
                                
                                
                                
                                11.0
                                
                                
                                
                                7,465
                                
                                
                                
                                8.0
                                
                                
                                
                                9,331
                                
                                
                                
                                10.0December
      31, 2007Tier
      I (core) capital
                                
                                $
                                9,886
                                
                                
                                
                                11.5
                                %
                                
                                $
                                2,818
                                
                                
                                
                                3.0
                                %
                                
                                $
                                4,696
                                
                                
                                
                                5.0
                                %Risk-based
      capital:Tier
      I
                                
                                
                                
                                9,886
                                
                                
                                
                                12.5
                                
                                
                                
                                N/A
                                
                                
                                
                                N/A
                                
                                
                                
                                3,865
                                
                                
                                
                                6.0Total
                                
                                
                                
                                10,510
                                
                                
                                
                                13.3
                                
                                
                                
                                5,153
                                
                                
                                
                                8.0
                                
                                
                                
                                6,441
                                
                                
                                
                                10.0





50




Impact
of Inflation and Changing Prices




The
Financial Statements and related Notes have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
require the measurement of financial position and operating results without
considering the change in the relative purchasing power of money over time due
to inflation.  The impact of inflation is reflected in the increased
cost of our operations.  Unlike most industrial companies, nearly all
of our assets and liabilities are financial in nature.  As a result,
our net income is directly impacted by changes in interest rates, which are
influenced by inflationary expectations.  Our ability to match the
interest sensitivity of our financial assets to the interest sensitivity of our
financial liabilities as part of our interest rate risk management program may
reduce the effect that changes in interest rates have on our net
income.  Changes in interest rates do not necessarily move to the same
extent as changes in prices of goods and services.  In the current
interest rate environment, liquidity and the maturity structure of our assets
and liabilities are critical to the maintenance of acceptable levels of net
income.  Management believes that by maintaining a significant portion
of our assets in short-term investments, adjustable rate mortgage-backed
securities and adjustable rate loans, we will be able to redeploy our assets as
rates change.


Item
      7A.
              Quantitative
      and Qualitative Disclosure About Market
Risk




Nearly
all of our assets and liabilities are financial in nature.  As a
result, our net income is directly affected by changes in interest
rates.  We generally do not seek to match the interest sensitivity of
our financial assets to the interest sensitivity of our financial liabilities as
part of our interest rate risk management program.  However,
management believes that by maintaining a significant portion of our assets in
short-term investments, adjustable rate mortgage-backed securities and
adjustable rate loans, we will be able to redeploy a portion of our assets as
rates change.  Although the Company has increased its total assets
during 2008, particularly in longer-term loans and mortgage backed security
investments, it has also increased its cash and cash equivalents, its level of
non-interest bearing deposits, and funded significant portions of its asset
growth with longer-term interest-bearing liabilities in an effect to manage the
vulnerability of its operating results to change in interest
rates.  Nevertheless, as a result of holding long-term fixed-rate
residential loans and securities in its portfolio, the Company is vulnerable to
an increase in its cost of funds used to hold such assets.




A
commonly used tool to manage and analyze the interest rate sensitivity of a bank
is a computer simulation model.  To quantify the extent of risks in
both the Company’s current position and in transactions it might make in the
future, the Company uses a model to simulate the impact of different interest
rate scenarios on net interest income.  The hypothetical impact of a
12 month horizontal and instantaneous interest rate shift is modeled at least
quarterly, representing the primary means the Company uses for interest rate
risk management decisions.




At
December 31, 2008, given a +2.00% shock in interest rates, the model results in
the Company’s net interest income for the next twelve months approximately
$68,000 or 1.84% lower than net interest income in a flat rate
scenario.  The Company did not run a down rate shock at December 31,
2008 as the federal funds rate was at 0-0.25%.




The
Company measures its economic value of equity at risk on a quarterly basis using
the computer model referred to above.  Economic value of equity at
risk measures the Company’s exposure to equity due to changes in a forecast
interest rate environment.  At December 31, 2008, given a +2.00% shock
in interest rates, the model results in the Company’s economic value of equity
at risk changing by $3.8 million or -29.6% lower than in a flat rate
scenario.




In its
modeling, the Company makes significant assumptions about the lag in the rate of
change in various asset and liability categories.  The Company bases
its assumptions on past experience and comparisons with other banks, and tests
the validity of its assumptions by reviewing actual results with projected
expectations.





51




Certain
shortcomings are inherent in the methodology used in the above interest rate
risk measurement. Modeling changes in the economic portfolio value of equity
require making certain assumptions that may or may not reflect the manner in
which actual yields and costs respond to changes in market interest
rates.  Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in interest
rates.  In this regard, the economic value of equity presented assumes
that the composition of our interest-sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
assumes that particular changes in interest rates occur at different times and
in different amounts in response to a designed change in the yield curve for
U.S. Treasuries.  Furthermore, although the economic value of equity
provides an indication of our interest rate risk exposure at a particular point
in time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on our net interest
income.  Finally, the above simulations do not take into account the
changes in the credit risk of our assets which can occur in connection with
change in interest rates.


Item
      8.
              Financial
      Statements and Supplementary
Data




Report
of Management on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Internal control over financial reporting
refers to the process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer, and effected by our Board of
Directors, management and other personnel, 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, and 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 Company’s 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.





52




Management
has used the framework set forth in the report entitled “Internal Control –
Integrated Framework” published by the Committee of Sponsoring Organizations of
the Treadway Commission to evaluate the effectiveness of the Company’s internal
control over financial reporting. Management has concluded that the Company’s
internal control over financial reporting was effective as of the end of the
most recent fiscal year.




This
annual report does not include an attestation report of the Company’s registered
public accounting  firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.


/s/
      Anthony P. CostaAnthony
      P. Costa,Chairman
      and Co-Chief Executive
Officer
  /s/
      Bryan LaheyBryan
      Lahey,Interim
      Principal Accounting
Officer




53




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors and Stockholders


ES
Bancshares, Inc.


Newburgh,
New York




We have
audited the accompanying consolidated statements of financial condition of ES
Bancshares, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in stockholders’ equity and cash flows for the
years 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 audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting.  Accordingly, we express no such
opinion.   An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of ES Bancshares, Inc. as of December
31, 2008 and 2007, and the results of its operations and its cash flows for the
years then ended in conformity with U.S. generally accepted accounting
principles.




/s/
Crowe Horwath LLP




Crowe
Horwath LLP




Livingston,
New Jersey


March 30,
2009





54




ES
Banshares, Inc.


Consolidated
Statements of Financial Condition


(Dollars
in thousands)


December
      31,2008
                    
                    
                    2007ASSETSCash
      and cash equivalents:Cash
      and due from banks
                    
                    $
                    12,454
                    
                    
                    $
                    2,021Federal
      funds sold
                    
                    
                    5
                    
                    
                    
                    4,731Total
      cash and cash equivalents
                    
                    
                    12,459
                    
                    
                    
                    6,752Certificates
      of deposit at other financial institutions
                    
                    
                    6,628
                    
                    
                    
                    5,794Securities:Available
      for sale, at fair value
                    
                    
                    4,974
                    
                    
                    
                    7,037Held
      to maturity, at amortized cost (fair value $24,166)
                    
                    
                    23,529
                    
                    
                    
                    —Real
      estate mortgage loans held for sale at lower of cost or market
      value
                    
                    
                    —
                    
                    
                    
                    350Loans
      receivable
                    
                    
                    94,978
                    
                    
                    
                    71,705Deferred
      cost
                    
                    
                    512
                    
                    
                    
                    364Allowance
      for loan losses
                    
                    
                    (862
                    )
                    
                    
                    (624
                    )Loans
      receivable, net
                    
                    
                    94,628
                    
                    
                    
                    71,445Accrued
      interest receivable
                    
                    
                    603
                    
                    
                    
                    515Federal
      Reserve Bank stock
                    
                    
                    299
                    
                    
                    
                    324Federal
      Home Loan Bank stock
                    
                    
                    528
                    
                    
                    
                    89Goodwill
                    
                    
                    581
                    
                    
                    
                    581Office
      properties and equipment, net
                    
                    
                    757
                    
                    
                    
                    838Other
      assets
                    
                    
                    280
                    
                    
                    
                    191Total
      assets
                    
                    $
                    145,266
                    
                    
                    $
                    93,916LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Deposits:Non-interest
      bearing
                    
                    $
                    12,840
                    
                    
                    $
                    7,249Interest
      bearing
                    
                    
                    111,922
                    
                    
                    
                    75,093Borrowed
      funds
                    
                    
                    10,074
                    
                    
                    
                    89Accrued
      interest payable
                    
                    
                    205
                    
                    
                    
                    103Other
      liabilities
                    
                    
                    994
                    
                    
                    
                    1,000Total
      liabilities
                    
                    
                    136,035
                    
                    
                    
                    83,534Commitments
      and contingencies (Note 8)Stockholders’
      equity:Capital
      stock (par value $0.01: 5,000,000 shares authorized 1,868,505 shares
      issued at December 31, 2008 1,721,437 shares at December 31,
      2007)
                    
                    
                    19
                    
                    
                    
                    17Additional
      paid-in capital
                    
                    
                    17,911
                    
                    
                    
                    16,911Accumulated
      deficit
                    
                    
                    (8,484
                    )
                    
                    
                    (6,553
                    )Accumulated
      other comprehensive income or (loss)
                    
                    
                    (215
                    )
                    
                    
                    7Total
      stockholders’ equity
                    
                    
                    9,231
                    
                    
                    
                    10,382Total
      liabilities and stockholders’ equity
                    
                    $
                    145,266
                    
                    
                    $
                    93,916




See
accompanying notes to financial statements.





55




ES
Bancshares, Inc.


Consolidated
Statements of Operations


Years
Ended December 31, 2008 and 2007


(In
thousands, except share data)


2008
                                  
                                  
                                  2007Interest
      and dividend income:Loans
                                  
                                  $
                                  5,167
                                  
                                  
                                  $
                                  5,078Securities
                                  
                                  
                                  1,070
                                  
                                  
                                  
                                  398Certificates
      of deposit
                                  
                                  
                                  221
                                  
                                  
                                  
                                  320Federal
      funds and other earning assets
                                  
                                  
                                  169
                                  
                                  
                                  
                                  468Total
      interest and dividend income
                                  
                                  
                                  6,627
                                  
                                  
                                  
                                  6,264Interest
      expense:Deposits
                                  
                                  
                                  3,039
                                  
                                  
                                  
                                  3,562Borrowed
      funds
                                  
                                  
                                  239
                                  
                                  
                                  
                                  6Total
      interest expense
                                  
                                  
                                  3,278
                                  
                                  
                                  
                                  3,568Net
      interest income
                                  
                                  
                                  3,349
                                  
                                  
                                  
                                  2,696Provision
      for loan losses
                                  
                                  
                                  244
                                  
                                  
                                  
                                  43Net
      interest income after provision for loan losses
                                  
                                  
                                  3,105
                                  
                                  
                                  
                                  2,653Non-interest
      income:Service
      charges and fees
                                  
                                  
                                  444
                                  
                                  
                                  
                                  303Net
      gain on sales of real estate mortgage loans held for sale
                                  
                                  
                                  61
                                  
                                  
                                  
                                  199Net
      gain (loss) on sales of securities available for sale
                                  
                                  
                                  7
                                  
                                  
                                  
                                  (12
                                  )Other
                                  
                                  
                                  188
                                  
                                  
                                  
                                  101Total
      non-interest income
                                  
                                  
                                  700
                                  
                                  
                                  
                                  591Non-interest
      expense:Compensation
      and benefits
                                  
                                  
                                  2,348
                                  
                                  
                                  
                                  2,040Occupancy
      and equipment
                                  
                                  
                                  822
                                  
                                  
                                  
                                  656Data
      processing service fees
                                  
                                  
                                  284
                                  
                                  
                                  
                                  190Loss
      on investment certificate of deposit
                                  
                                  
                                  900
                                  
                                  
                                  
                                  —Other
                                  
                                  
                                  1,382
                                  
                                  
                                  
                                  1,066Total
      non-interest expense
                                  
                                  
                                  5,736
                                  
                                  
                                  
                                  3,952(Loss)
      before income taxes
                                  
                                  
                                  (1,931
                                  )
                                  
                                  
                                  (708
                                  )Income
      tax expense
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Net
      loss
                                  
                                  $
                                  (1,931
                                  )
                                  
                                  $
                                  (708
                                  )Other
      comprehensive income (loss):Net
      unrealized gain/(loss) on available-for-sale securities
                                  
                                  
                                  (222
                                  )
                                  
                                  
                                  106Comprehensive
      loss
                                  
                                  $
                                  (2,153
                                  )
                                  
                                  $
                                  (602
                                  )Weighted
      average common shares
                                  
                                  
                                  1,766,525
                                  
                                  
                                  
                                  1,720,449(Loss)
      per common share:Basic
                                  
                                  $
                                  (1.09
                                  )
                                  
                                  $
                                  (0.41
                                  )Diluted
                                  
                                  $
                                  (1.09
                                  )
                                  
                                  $
                                  (0.41
                                  )




See
accompanying notes to financial statements.





56




ES
BANCSHARES, INC.


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007


(In
dollars, except share data)


Accumulated
                                Other
                                Comprehensive
                                Income
      or (Loss)Additional
                                Paid-In
                                Capital
                              
                              
                              Accumulated
                                DeficitCapital
      StockShares
                              
                              
                              Amount
                              
                              
                              TotalBalance
      at January 1, 2007
                              
                              
                              1,719,227
                              
                              
                              $
                              17
                              
                              
                              $
                              16,869
                              
                              
                              $
                              (5,845
                              )
                              
                              $
                              (99
                              )
                              
                              $
                              10,942Exercise
      of stock warrants
                              
                              
                              2,210
                              
                              
                              
                              —
                              
                              
                              
                              22
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              22Stock
      based compensation, net
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              20
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              20Comprehensive
      loss:Net
      loss for the period
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (708
                              )
                              
                              
                              —
                              
                              
                              
                              (708
                              )Net
      unrealized gain on available-for-sale securities
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              106
                              
                              
                              
                              106Total
      comprehensive loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (602
                              )Balance
      at December 31, 2007
                              
                              
                              1,721,437
                              
                              
                              
                              17
                              
                              
                              
                              16,911
                              
                              
                              
                              (6,553
                              )
                              
                              
                              7
                              
                              
                              
                              10,382Exercise
      of stock warrants
                              
                              
                              147,068
                              
                              
                              
                              2
                              
                              
                              
                              991
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              993Stock
      based compensation, net
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              9
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              9Comprehensive
      loss:Net
      loss for the period
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (1,931
                              )
                              
                              
                              —
                              
                              
                              
                              (1,931
                              )Net
      unrealized loss on available-for-sale securities
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (222
                              )
                              
                              
                              (222
                              )Total
      comprehensive loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (2,153
                              )Balance
      at December 31, 2008
                              
                              
                              1,868,505
                              
                              
                              $
                              19
                              
                              
                              $
                              17,911
                              
                              
                              $
                              (8,484
                              )
                              
                              $
                              (215
                              )
                              
                              $
                              9,231




See
accompanying notes to financial statements.





57




ES BANCSHARES, INC.
 CONSOLIDATED STATEMENTS OF CASH
FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2008
AND 2007


(In
thousands)


2008
                
                
                2007Cash
      flows from operating activities:Net
      loss for period
                
                $
                (1,931
                )
                
                $
                (708
                )Adjustments
      to reconcile net losses to net cash used in operating
      activities:Provision
      for loan losses
                
                
                244
                
                
                
                43Depreciation
      expense
                
                
                311
                
                
                
                228Amortization
      of deferred fees, discounts and premiums, net
                
                
                (3
                )
                
                
                3Originations
      on loans held for sale
                
                
                (3,986
                )
                
                
                (14,111
                )Proceeds
      from sale of loans held for sale
                
                
                4,397
                
                
                
                14,174Net
      (gain) loss on sales of securities available for sale
                
                
                (7
                )
                
                
                12Net
      gain on sale of real estate mortgage loans held for sale
                
                
                (61
                )
                
                
                (199
                )Loss
      of uninsured deposit at failed financial institution
                
                
                900
                
                
                
                —Gain
      on sale of fixed assets
                
                
                (9
                )
                
                
                —Stock
      compensation expense
                
                
                9
                
                
                
                20Changes
      in assets and liabilities:Increase
      in other assets
                
                
                (177
                )
                
                
                (62
                )Increase
      in accrued expenses and other liabilities
                
                
                96
                
                
                
                534Net
      cash used in operating activities
                
                
                (217
                )
                
                
                (66
                )Cash
      flows from investing activities:Maturity
      of certificates of deposit at other financial institutions
                
                
                11,594
                
                
                
                8,592Purchase
      of certificates of deposit at other financial institutions
                
                
                (13,328
                )
                
                
                (8,640
                )Purchase
      of available-for-sale securities
                
                
                (3,424
                )
                
                
                (6,160
                )Purchase
      of held-to-maturity securities
                
                
                (25,144
                )
                
                
                —Proceeds
      on sales of securities available-for-sale
                
                
                506
                
                
                
                2,061Proceeds
      from principal payments and maturities of securities
                
                
                6,384
                
                
                
                6,596Proceeds
      on sale of fixed assets
                
                
                9
                
                
                
                —Net
      disbursements for loan originations
                
                
                (23,427
                )
                
                
                (10,497
                )Purchase
      of Federal Home Loan Bank stock
                
                
                (463
                )
                
                
                (89
                )Redemption
      of Federal Reserve Bank stock
                
                
                25
                
                
                
                11Redemption
      of Federal Home Loan Bank stock
                
                
                24
                
                
                
                —Leasehold
      improvements and acquisitions of capital assets
                
                
                (230
                )
                
                
                (325
                )Net
      cash used in investing activities
                
                
                (47,474
                )
                
                
                (8,451
                )Cash
      flows from financing activities:Net
      increase in deposits
                
                
                42,420
                
                
                
                868Proceeds
      of advance from line of credit
                
                
                526
                
                
                
                36Repayment
      of advances
                
                
                —
                
                
                
                —Proceeds
      from Federal Home Loan Bank advances
                
                
                10,000
                
                
                
                —Repayment
      of Federal Home Loan Bank advances
                
                
                (541
                )
                
                
                —Proceeds
      from stock issuance
                
                
                993
                
                
                
                22Net
      cash provided by financing activities
                
                
                53,398
                
                
                
                926Net
      increase (decrease) in cash and cash equivalents
                
                
                5,707
                
                
                
                (7,591
                )Cash
      and cash equivalents at beginning of period
                
                
                6,752
                
                
                
                14,343Cash
      and cash equivalents at end of period
                
                $
                12,459
                
                
                $
                6,752Supplemental
      cash flow informationInterest
      paid
                
                $
                3,380
                
                
                $
                3,595Income
      taxes paid
                
                $
                —
                
                
                $
                —




See
accompanying notes to financial statements.





58




NOTES
TO FINANCIAL STATEMENTS




NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Nature
of Operations




Empire
State Bank (the “Bank”) was organized under federal law in 2004 as a national
bank regulated by the Office of the Comptroller of the Currency (“OCC”). The
Bank’s deposits are insured up to legal limits by the FDIC. In March 2009, the
Bank converted its charter to a New York State commercial bank charter, with the
New York Banking Department becoming its primary state regulator.




The Bank
filed a securities offering registration statement on Form SB-2 on December 12,
2003, which was amended and subsequently declared effective by the OCC as of
January 9, 2004. Pursuant to such registration statement, the Bank in a common
stock offering beginning on January 9, 2004 through April 28, 2004, sold
1,650,000 shares of its common stock at a price of $10.00 per share, for an
aggregate consideration of $16,500,000 (the “Offering”). In addition, for every
five (5) shares of common stock purchased by a subscriber in the offering, such
subscriber received a warrant to purchase, within a three-year period, one (1)
share of common stock at an exercise price of $12.50 per share. As discussed in
Note 9, these warrants were subsequently modified




The Board
of Directors entered into an Agreement and Plan of Share Exchange (the “Plan”)
on March 21, 2006, as amended and restated as of May 16, 2006, under which the
Bank reorganized into a one-bank holding company structure (the
“Reorganization”). In connection with the Reorganization, the Bank formed ES
Bancshares, Inc. (the “Company”), a Maryland corporation, to serve as its
holding company. The Reorganization was effected by an exchange of all of the
outstanding shares of Bank Common Stock for shares of Company Common Stock (the
“Share Exchange”). Following the Share Exchange, the Bank became a wholly owned
subsidiary of the Company and former shares of Bank Common Stock represent the
same number of shares of Company Common Stock.




The
Company filed a Registration Statement on Form S-4 that the Securities and
Exchange Commission (the “SEC”) declared effective on May 25, 2006. The Bank’s
shareholders approved the Reorganization at our Annual Meeting of Shareholders
on July 6, 2006. The Reorganization was completed on August 15,
2006.




The
consolidated financial statements include the accounts of ES Bancshares, Inc.
and the Bank, its wholly owned subsidiary. The Company’s financial condition and
operating results principally reflect those of the Bank. All intercompany
balances and amounts have been eliminated.




The Bank
is a full service commercial bank that offers a variety of financial services to
meet the needs of communities in its market area. The Bank attracts deposits
from the general public and uses such deposits to originate commercial loans,
revolving lines of credit, commercial real estate, mortgage loans secured by
one-to four-family residences, home equity lines, and to a lesser extent
construction, land, and consumer installment loans. The Bank also invests in
mortgage-backed and other securities permissible for a federally chartered
commercial bank. The Bank also operated two loan production offices, one in
Staten Island, New York, and another in Lynbrook, New York. However, in November
of 2007 the Staten Island loan production office was closed in conjunction with
the opening of the Bank’s new full service branch in that borough. During the
first quarter of 2008, the Bank closed its loan production office in Lynbrook,
Nassau County, New York. The Bank’s primary area for deposits includes the Town
of Newburgh and the Village of New Paltz, in addition to the communities
surrounding those offices, and the borough of Staten Island. The Bank’s primary
market area for its lending activities consists of the communities within Orange
County, Ulster County, the five boroughs of New York City, and portions of
Dutchess, Rockland, Putnam and Westchester Counties.





59




Basis
of Presentation




The
consolidated financial statements included herein include the accounts of the
Company and the Bank, subsequent to the elimination of all significant
intercompany balances and transactions, and have been prepared by the Company
without audit. In the opinion of management, these financial statements include
all adjustments, consisting of normal recurring accruals, necessary (i) so that
such statements are not misleading and (ii) for a fair presentation of the
financial position and results of operations, for the periods presented. Certain
information and footnote disclosures normally included in accordance with
generally accepted accounting principles of the United States have been
condensed or omitted pursuant to the rules and regulations of the SEC, however,
the Company believes that the disclosures are adequate to make the information
presented not misleading.




The
financial statements have been prepared in conformity with generally accepted
accounting principles of the United States. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, income and expense. Actual results
could differ significantly from these estimates. Material estimates that are
particularly susceptible to significant change relate to the determination of
the allowance for losses on loans, valuation of goodwill and the valuation
allowance on deferred tax assets.




Cash
and Cash Equivalents




Cash and
cash equivalents include cash, deposits with other financial institutions
excluding certificates of deposit, and federal funds sold. Net cash flows are
reported for customer loan and deposit transactions, interest-bearing deposits
in other financial institutions, and federal funds purchased.




Securities




The
Company is required to report readily-marketable equity and debt securities in
one of the following categories: (i) “held-to-maturity” (management has the
positive intent and ability to hold to maturity), which are reported at
amortized cost; (ii) “trading” (held for current resale), which are to be
reported at fair value, with unrealized gain and losses included in earnings;
and (iii) “available for sale” (all other debt and marketable equity
securities), which are to be reported at fair value, with unrealized gains and
losses reported net of taxes, as accumulated other comprehensive income, a
separate component of stockholders’ equity.




Interest
income includes amortization of purchase premium or discount. Premiums and
discounts on securities are amortized on the level-yield method without
anticipating prepayments, except for mortgage backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade
date and determined using the specific identification method.




The
Company evaluates securities for other-than-temporary impairment at least on a
quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to the length of time and the extent to
which the fair value has been less than cost, the financial condition and near
term prospects of the issuer, and 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.





60




Loans
Held for Sale




Loans
originated and intended for sale in the secondary market are carried at the
lower of cost or estimated fair value in the aggregate. All sales are made
without recourse. Gains and losses on the disposition of loans held for sale are
determined on the specific identification basis. Net unrealized losses are
recognized through a valuation allowance by charges to income. There were no
valuation allowances as of December 31, 2008 and December 31, 2007.




Loans
Receivable




Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their unpaid
principal adjusted for any charge-offs, the allowance for loan losses, and any
deferred fees and costs on originated loans and any unamortized premiums or
discounts on purchased loans. Loan origination and commitment fees and certain
direct loan origination costs will be deferred and the net amount amortized as
an adjustment of the related loan’s yield using methods that approximate the
interest method over the contractual life of the loan. Loan interest income is
accrued daily on outstanding balances. The accrual of interest is discontinued
when a loan is specifically determined to be impaired or management believes
that it is probable the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement. A loan is impaired when full
payment under the loan terms is not expected. Commercial and commercial real
estate loans are individually evaluated for impairment. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loans’ existing rate or
at the fair value of collateral if repayment is expected solely from the
collateral. Large groups of smaller balance homogeneous loans, such as consumer
and residential real estate loans, are collectively evaluated for impairment,
and accordingly, they are not separately identified for impairment disclosure.
The accrual of income on loans, including impaired loans, is generally
discontinued when a loan becomes more than 90 days delinquent as to principal
and interest or when other circumstances indicate that collection is
questionable, unless the loan is well secured and in the process of collection.
Income on nonaccrual loans, including impaired loans, will be recognized only in
the period in which it is collected, and only if management determines that the
loan principal is fully collectable. Loans are returned to an accrual status
when a loan is brought current as to principal and interest and when reasons for
doubtful collection no longer exist.




Allowance
for Loan Losses




The
allowance for loan losses is increased by provisions for loan losses charged to
income. Losses are charged to the allowance when all or a portion of a loan is
deemed to be uncollectible. Subsequent recoveries of loans previously charged
off are credited to the allowance for loan losses when realized. The allowance
for loan losses is a significant estimate based upon management’s periodic
evaluation of the loan portfolio under current economic conditions, considering
factors such as the Company’s past loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower’s ability to
repay, and the estimated value of the underlying collateral. Establishing the
allowance for loan losses involves significant management judgment, utilizing
the best available information at the time of review. Those judgments are
subject to further review by various sources, including the Bank’s regulators,
who may require the Company to recognize additions to the allowance based on
their judgment about information available to them at the time of their
examination. While management estimates loan losses using the best available
information, future adjustments to the allowance may be necessary based on
changes in economic and real estate market conditions, further information
obtained regarding known problem loans, the identification of additional problem
loans, and other factors. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that in management’s
judgment should be charged off.





61




During
2007, the Company completed an analysis of its methodology to establish
provisions for the allowance for loan losses. Based upon the ongoing growth in
the loan portfolio, the composition of loans and the development of a historical
record of loan repayments, management believed it appropriate to consider the
known inherent risks in the loan portfolio, including the overall rapid growth
of the portfolio, concentrations of credit, adverse situations that may affect
the borrowers’ ability to repay, the estimated value of any underlying
collateral, and current economic conditions to determine its provision for loan
losses.




Premises
and Equipment




Leasehold
improvements and furniture and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation expense is recognized on a
straight-line basis over the estimated useful lives of the related assets, which
are 2 to 7 years for furniture and equipment. Amortization of leasehold
improvements is recognized on a straight-line basis over the terms of the
respective leases, resulting in amortization periods ranging from approximately
8 to 10 years. Costs incurred to improve or extend the life of existing assets
are capitalized. Repairs and maintenance are charged to expense.




Goodwill




Goodwill
results from business acquisitions and represents the excess of the purchases
price over the fair value of the acquired assets and liabilities and
identifiable intangible assets. Goodwill is assessed at least annually for
impairment and any such impairment will be recognized in the period
identified.




Income
Taxes




Income
tax expense is the total of the current year income tax due or refundable and
the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax amounts for the temporary differences
between carrying amounts and tax bases of assets and liabilities, computed using
tax rates. Temporary differences are differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. Realization of deferred tax assets is dependent
upon the generation of future taxable income. A valuation allowance is provided
when it is more likely than not that some portion of the deferred tax asset will
not be realized. Because the Bank has limited operating history, management
recorded a valuation allowance against the total amount of deferred tax
assets.




The
Company adopted FASB Interpretation 48, Accounting
for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. A tax
position is recognized as a benefit only if it is “more likely than not” that
the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For
tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no affect on the Company’s financial
statements.




The
Company recognizes interest and/or penalties related to income tax matters in
income tax expense. The Company and its subsidiaries are subject to U.S. federal
income tax as well as income tax of the state of New York. The Company is no
longer subject to examination by taxing authorities for years before
2005.





62




Federal
Reserve Bank




As a
member of the Federal Reserve Bank (“FRB”) system, the Bank is required to
maintain a minimum investment in FRB stock. Any excess may be redeemed by the
Bank or called by the FRB at par. At its discretion, the FRB may declare
dividends on this stock. The Bank had $298,500 and $324,400 invested in FRB
stock at December 31, 2008 and December 31, 2007, respectively, which is carried
at cost due to the fact that it is a restricted security.




Federal
Home Loan Bank of New York




The Bank
became a member of the Federal Home Loan Bank of New York (“FHLB”) on March 13,
2007. As a member the Bank was required to purchase FHLB capital stock, in the
amount of $527,700 and $89,000 at December 31, 2008 and 2007, respectively. The
amount is carried at cost because it is a restricted security. The FHLB may
declare dividends on this stock at its discretion.




Lines
of Credit




The
Company has a line of credit with a correspondent bank for an amount of up to
$3,200,000. This credit facility is secured by 100% of the outstanding shares of
the Bank for a period of two years. As of December 31, 2008, the outstanding
balance is $615,000. The Company utilized this credit facility primarily to
provide funds to the Company to downstream to the Bank to enable it to maintain
strong capital ratios and leverage the balance sheet by increasing assets. The
line of credit also repaid the amounts due to the same correspondent bank on its
previously drawn line of credit, to fund operating expenses and to provide funds
for an interest reserve to be applied toward monthly interest payments. Under
the debt covenants on this line of credit, the Bank is required to remain well
capitalized under the regulatory definition.




The
Company has a line of credit with the same correspondent bank for an amount of
up to $5.0 million. This credit facility is on a secured basis for $2.5 million
for a period of one hundred eighty (180) calendar days and an unsecured basis of
$2.5 million for a period of fourteen (14) calendar days. The Bank did not
utilize this credit facility at any time during 2008 or 2007.




Comprehensive
Income (Loss)




Comprehensive
income or loss represents the sum of the net loss and items of “other
comprehensive income or loss” that are reported directly in stockholders’
equity, such as the change during the period in the net unrealized gain or loss
on securities available for sale. The Bank reports its total comprehensive
income (loss) in the statement of changes in stockholders’ equity.




Stock
Options




The
Company has a stock-based compensation plan as more fully described in Note 9.
For accounting purposes, the Bank recognizes expense for shares of common stock
awarded under the Bank’s Stock Option Plan over the vesting period at the fair
market value of the shares on the date they are awarded. Total expense incurred
during the years ending December 31, 2008 and 2007 relating to the options was
$9,000 and $20,000, respectively.





63




Net
Loss Per Common Share




The
Company reports both basic and diluted earnings per share (“EPS”). Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (such as stock warrants and
options) were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Diluted
EPS is computed by dividing income by the weighted-average number of shares
outstanding for the period plus common-equivalent shares computed using the
treasury stock method. None of the warrants or stock options were considered in
computing diluted EPS because to do so would have been
anti-dilutive.




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. Management does not
believe there now are such matters that will have a material effect on the
financial statements.




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.




Adoption
of new accounting standards




In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued Staff
Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays
the effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. In October 2008, FASB
issued FASB Staff Position (FSP) No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active, which clarifies
the application of FASB Statement No. 157, Fair Value Measurements, in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. The impact of adoption was not
material.




In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. The standard provides companies with
an option to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The new standard is effective for the
Company on January 1, 2008. The Company did not elect the fair value option for
any financial assets or financial liabilities as of January 1,
2008.





64




On
November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB
105, Application of Accounting Principles to Loan Commitments, stated that in
measuring the fair value of a derivative loan commitment, a company should not
incorporate the expected net future cash flows related to the associated
servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the
expected net future cash flows related to the associated servicing of the loan
should be included in measuring fair value for all written loan commitments that
are accounted for at fair value through earnings. SAB 105 also indicated that
internally-developed intangible assets should not be recorded as part of the
fair value of a derivative loan commitment, and SAB 109 retains that view. SAB
109 is effective for derivative loan commitments issued or modified in fiscal
quarters beginning after December 15, 2007. The impact of adoption was not
material.




Effect
of Newly Issued But Not Yet Effective Accounting Standards




In
December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations
(“FAS 141(R)”), which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. FAS No. 141(R) is effective for fiscal years beginning on
or after December 15, 2008. Earlier adoption is prohibited. The adoption of this
standard is not expected to have a material effect on the Company’s results of
operations or financial position.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”),
which will change the accounting and reporting for minority interests, which
will be recharacterized as noncontrolling interests and classified as a
component of equity within the consolidated balance sheets. FAS No. 160 is
effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. Earlier adoption is prohibited and the Company does not
expect the adoption of FAS No. 160 to have a significant impact on its results
of operations or financial position.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS No. 133”. FAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133 for derivative instruments
and hedging activities. FAS No. 161 requires qualitative disclosure about
objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains
and losses on such instruments, as well as disclosures about credit-risk
features in derivative agreements. FAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The adoption of this standard is
not expected to have a material effect on the Company’s results of operations or
financial position.





65




NOTE
2 – INVESTMENT SECURITIES
  The
following is a summary of the amortized cost, gross unrealized gains and losses,
and estimated fair market value of investment securities available-for-sale at
December 31, 2008 and December 31, 2007.
 December
      31, 2008(in
      thousands)Amortized
                            
                            Gross
      Unrealized
                            
                            FairCost
                            
                            Gains
                            
                            Losses
                            
                            ValueMortgaged-backed
      securities
                            
                            $
                            1,807
                            
                            $
                            —
                            
                            $
                            (47
                            )
                            $
                            1,760U.S.
      Government Agencies
                            
                            
                            2,080
                            
                            
                            15
                            
                            
                            —
                            
                            
                            2,095Trust
      Preferred Securities
                            
                            
                            1,302
                            
                            
                            —
                            
                            
                            (183
                            )
                            
                            1,119Total
                            
                            $
                            5,189
                            
                            $
                            15
                            
                            $
                            (230
                            )
                            $
                            4,974
  December
      31, 2007(in
      thousands)Amortized
                                  
                                  Gross
      Unrealized
                                  
                                  FairCost
                                  
                                  Gains
                                  
                                  Losses
                                  
                                  ValueMortgaged-backed
      securities
                                  
                                  $
                                  1,672
                                  
                                  $
                                  —
                                  
                                  $
                                  (12
                                  )
                                  $
                                  1,660U.S.
      Government Agencies
                                  
                                  
                                  5,358
                                  
                                  
                                  22
                                  
                                  
                                  (3
                                  )
                                  
                                  5,377Total
                                  
                                  $
                                  7,030
                                  
                                  $
                                  22
                                  
                                  $
                                  (15
                                  )
                                  $
                                  7,037
  The
following is a summary of the amortized cost, gross unrecognized gains and
losses, and estimated fair market value of investment securities held to
maturity at December 31, 2008. There were no investment securities held to
maturity at December 31, 2007.
 December
      31, 2008(in
      thousands)Amortized
                                            
                                            Gross
      Unrecognized
                                            
                                            FairCost
                                            
                                            Gains
                                            
                                            Losses
                                            
                                            ValueMortgaged-backed
      securities
                                            
                                            $
                                            19,459
                                            
                                            $
                                            596
                                            
                                            $
                                            —
                                            
                                            $
                                            20,055U.S.
      Government Agencies
                                            
                                            
                                            4,070
                                            
                                            
                                            41
                                            
                                            
                                            —
                                            
                                            
                                            4,111Total
                                            
                                            $
                                            23,529
                                            
                                            $
                                            637
                                            
                                            $
                                            —
                                            
                                            $
                                            24,166
  66
  The
following is a summary of the amortized cost and estimated fair market value of
investment securities available-for-sale and held-to-maturity at December 31,
2008, with amounts shown by remaining term to contractual maturity. Securities
not due at a single maturity date, primarily mortgaged-backed securities, are
shown separately.
 December
      31, 2008(in
      thousands)Amortized
                        Cost
                      
                      
                      Fair
                        ValueAvailable-for-sale:Mortgaged-backed
      securities
                      
                      $
                      1,807
                      
                      
                      $
                      1,760U.S.
      Government AgenciesDue
      less than one year
                      
                      
                      —
                      
                      
                      
                      —One
      year to less than three years
                      
                      
                      —
                      
                      
                      
                      —Three
      years to less than five years
                      
                      
                      —
                      
                      
                      
                      —Five
      years to ten years
                      
                      
                      —
                      
                      
                      
                      —More
      than ten years
                      
                      
                      2,080
                      
                      
                      
                      2,095Trust
      Preferred Securities
                      
                      
                      1,302
                      
                      
                      
                      1,119Total
                      
                      $
                      5,189
                      
                      
                      $
                      4,974
  December
      31, 2008(in
      thousands)Amortized
                        Cost
                      
                      
                      Fair
                        ValueHeld-to-maturity:Mortgaged-backed
      securities
                      
                      $
                      19,459
                      
                      
                      $
                      20,055U.S.
      Government AgenciesDue
      less than one year
                      
                      
                      —
                      
                      
                      
                      —One
      year to less than three years
                      
                      
                      2,570
                      
                      
                      
                      2,606Three
      years to less than five years
                      
                      
                      1,500
                      
                      
                      
                      1,505Five
      years to ten years
                      
                      
                      —
                      
                      
                      
                      —More
      than ten years
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      $
                      23,529
                      
                      
                      $
                      24,166
  The
following tables summarize, for all securities in an unrealized loss position at
December 31, 2008 and December 31, 2007, the aggregate fair values and gross
unrealized losses by the length of time those securities had been in a
continuous loss position.
 December
      31, 2008Less
      Than 12 Months
                
                12
      Months or More
                
                TotalFair
                  Value
                
                Unrealized
                  Loss
                
                Fair
                  Value
                
                Unrealized
                  Loss
                
                Fair
                  Value
                
                Unrealized
                  Loss(In
      thousands)Mortgaged-backed
      securities
                
                $
                —
                
                $
                —
                
                $
                1,178
                
                $
                47
                
                $
                1,178
                
                $
                47U.S.
      Government Agencies
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Trust
      Preferred Securities
                
                
                1,119
                
                
                183
                
                
                —
                
                
                —
                
                
                1,119
                
                
                183Total
      temporarily impaired
                
                $
                1,119
                
                $
                183
                
                $
                1,178
                
                $
                47
                
                $
                2,297
                
                $
                230
  67
  December
      31, 2007Less
      Than 12 Months
                                    
                                    12
      Months or More
                                    
                                    TotalFair
                                      Value
                                    
                                    Unrealized
                                      Loss
                                    
                                    Fair
                                      Value
                                    
                                    Unrealized
                                      Loss
                                    
                                    Fair
                                      Value
                                    
                                    Unrealized
                                      Loss(In
      thousands)Mortgaged-backed
      securities
                                    
                                    $
                                    —
                                    
                                    $
                                    —
                                    
                                    $
                                    1,660
                                    
                                    $
                                    (12
                                    )
                                    $
                                    1,660
                                    
                                    $
                                    (12
                                    )U.S.
      Government Agencies
                                    
                                    
                                    2,077
                                    
                                    
                                    (3
                                    )
                                    
                                    —
                                    
                                    
                                    —
                                    
                                    
                                    2,077
                                    
                                    
                                    (3
                                    )Total
      temporarily impaired
                                    
                                    $
                                    2,077
                                    
                                    $
                                    (3
                                    )
                                    $
                                    1,660
                                    
                                    $
                                    (12
                                    )
                                    $
                                    3,737
                                    
                                    $
                                    (15
                                    )
  The Bank
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to the length of time and the extent to which
the fair value has been less than cost, the financial condition and near term
prospects of the issuer, and the intent and ability of the Bank 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 Bank may consider whether the securities are issued by the
federal government or its agencies, whether downgrades by bond rating agencies
have occurred, and the results of reviews of the issuer’s financial
condition.
  At
December 31, 2008, three debt securities have unrealized losses of approximately
$47,000, that have existed for more than twelve months, from the Bank’s cost
basis, and are largely due to changes in interest rates. The fair value is
expected to recover as the securities approach their maturity date.
  Unrealized
losses on securities less than twelve months have not been recognized into
income because the issues have acceptable ratings, continue to perform,
management has the intent and ability to hold for the foreseeable future, and
the decline in fair value is largely due to changes in interest rates. The fair
value is expected to recover as the issues approach maturity.
  At
December 31, 2007, three debt securities had unrealized losses of approximately
$12,000, and two others have unrealized losses of approximately $3,000, that
have existed for less than thirty months, and less than twelve months,
respectively, from the Bank’s cost basis, and are largely due to changes in
interest rates. The fair value is expected to recover as the securities approach
their maturity date or reset date.
  68
  Sales of
available for sale securities were as follows (in thousands):
 2008
                      
                      
                      2007Proceeds
                      
                      $
                      506
                      
                      
                      $
                      2,061Gross
      gains
                      
                      
                      7
                      
                      
                      
                      —Gross
      losses
                      
                      
                      —
                      
                      
                      
                      12
  Securities
pledged at year-end 2008 had an approximate carrying amount of $10,931,000 and
were pledged to secure FHLB-NY advances.
  NOTE
3 – LOANS
  The
following is a summary of loans receivable at December 31, 2008 and December 31,
2007.
 December
      31,2008
                          
                          
                          2007(In
      thousands)Real
      estate loans:One-to
      four-family
                          
                          $
                          21,397
                          
                          
                          $
                          1,913Commercial
                          
                          
                          35,436
                          
                          
                          
                          32,426Multi-family
                          
                          
                          7,847
                          
                          
                          
                          6,997Construction
      or development
                          
                          
                          3,931
                          
                          
                          
                          7,319Home
      equity
                          
                          
                          8,017
                          
                          
                          
                          7,256Total
      real estate loans
                          
                          
                          76,628
                          
                          
                          
                          55,911Other
      loans:Commercial
      business
                          
                          
                          17,138
                          
                          
                          
                          14,335Consumer
                          
                          
                          1,212
                          
                          
                          
                          1,459Total
      other loans
                          
                          
                          18,350
                          
                          
                          
                          15,794Total
      loans
                          
                          
                          94,978
                          
                          
                          
                          71,705Deferred
      loan costs net
                          
                          
                          512
                          
                          
                          
                          364Allowance
      for loan losses
                          
                          
                          (862
                          )
                          
                          
                          (624
                          )Total
      loans receivable, net
                          
                          $
                          94,628
                          
                          
                          $
                          71,445
  69
  Individually
impaired loans were as follows:
 2008
                    
                    
                    2007(In
      thousands)Year-end
      loans with no allocated allowance for loan losses
                    
                    $
                    1,014
                    
                    
                    $
                    —Year-end
      loans with allocated allowance for loan losses
                    
                    
                    749
                    
                    
                    
                    183Total
                    
                    $
                    1,763
                    
                    
                    $
                    183Amount
      of the allowance for loan losses allocated
                    
                    $
                    75
                    
                    
                    $
                    4Average
      of individually impaired loans during year
                    
                    $
                    187
                    
                    
                    $
                    46Interest
      income recognized during impairment
                    
                    
                    —
                    
                    
                    
                    —Cash-basis
      interest income recognized
                    
                    
                    —
                    
                    
                    
                    —Nonaccrual
      loans and loans past due 90 days still on accrual were as
      follows:Loans
      past due over 90 days still on accrual
                    
                    $
                    35
                    
                    
                    $
                    —Nonaccrual
      loans
                    
                    
                    749
                    
                    
                    
                    183
  Nonaccrual
loans and loans past due 90 days still on accrual include both smaller balance
homogeneous loans that are collectively evaluated for impairment and
individually classified impaired loans.
  At
year-end 2008 and 2007, the Company had no interest only loans, and no loans
with potential for negative amortization.
  The Bank
has extended credit to various directors, senior officers and their affiliates.
Loans to related parties during 2008 were as follows:
 Beginning
      balance at December 31, 2007
                      
                      $
                      3,540New
      loans
                      
                      
                      481Repayment
                      
                      
                      (285
                      )Ending
      balance at December 31, 2008
                      
                      $
                      3,736
  The
balance at December 31, 2008 includes unused commitments totaling
$467,000.
  NOTE
4 – ALLOWANCE FOR LOAN LOSSES
  Activity
in the allowance for loan losses is summarized as follows for the years ended
December 31, 2008 and December 31, 2007.
 December
      31,2008
                                            
                                            
                                            2007(In
      thousands)Balance
      at beginning of year
                                            
                                            $
                                            624
                                            
                                            
                                            $
                                            581Provision
      for losses
                                            
                                            
                                            244
                                            
                                            
                                            
                                            43Charge-offs
                                            
                                            
                                            (7
                                            )
                                            
                                            
                                            —Recoveries
                                            
                                            
                                            1
                                            
                                            
                                            
                                            —Balance
      at end of year
                                            
                                            $
                                            862
                                            
                                            
                                            $
                                            624
  70
  NOTE
5 – PREMISES AND EQUIPMENT
  The
following is a summary of premises and equipment at December 31, 2008 and
December 31, 2007.
 December
      31,2008
                                                          
                                                          
                                                          2007(In
      thousands)Furniture,
      fixtures and equipment
                                                          
                                                          $
                                                          852
                                                          
                                                          
                                                          $
                                                          851Leasehold
      improvements
                                                          
                                                          
                                                          858
                                                          
                                                          
                                                          
                                                          6691,710
                                                          
                                                          
                                                          
                                                          1,520Less
      accumulated depreciation and amortization
                                                          
                                                          
                                                          (953
                                                          )
                                                          
                                                          
                                                          (682
                                                          )Total
      premises and equipment, net
                                                          
                                                          $
                                                          757
                                                          
                                                          
                                                          $
                                                          838
  Depreciation
expense was $311,000 and $228,000 for 2008 and 2007, respectively.
  NOTE
6 – DEPOSITS
  The
following is a summary of deposit balances at December 31, 2008 and December 31,
2007.
 December
      31,2008
                                                
                                                
                                                2007(In
      thousands)Demand
      deposit accounts
                                                
                                                $
                                                12,840
                                                
                                                
                                                $
                                                7,249NOW
      accounts
                                                
                                                
                                                2,308
                                                
                                                
                                                
                                                1,711Money
      market accounts
                                                
                                                
                                                28,309
                                                
                                                
                                                
                                                39,776Regular
      savings accounts
                                                
                                                
                                                12,136
                                                
                                                
                                                
                                                10,132Certificates
      of deposit
                                                
                                                
                                                69,169
                                                
                                                
                                                
                                                23,474Total
                                                
                                                $
                                                124,762
                                                
                                                
                                                $
                                                82,342
  The
following summarizes certificates of deposit by remaining term to contractual
maturity at December 31, 2008.
 Account
                            Balances(In
      thousands)Under
      one year
                          
                          $
                          44,800One
      year to under two years
                          
                          
                          5,447Two
      years to under three years
                          
                          
                          17,574Three
      years to under four years
                          
                          
                          1,148Four
      years to under five years
                          
                          
                          200Total
      certificates of deposit
                          
                          $
                          69,169
  Certificates
of deposit of $100,000 or more totaled $30.6 million and $5.7 million at
December 31, 2008 and December 31, 2007, respectively. Deposits from directors,
senior officers and their affiliates were approximately $2.8 million and $2.6
million at December 31, 2008 and December 31, 2007,
respectively.
  71
  NOTE
7 – INCOME TAXES
  The
following summarizes components of income tax expense for the years ended
December 31, 2008 and December 31, 2007.
 December
      31,2008
                    
                    
                    2007(In
      thousands)Current:Federal
      expense (benefit)
                    
                    $
                    —
                    
                    
                    $
                    —State
      expense (benefit)
                    
                    
                    —
                    
                    
                    
                    ——
                    
                    
                    
                    —Deferred:Federal
      expense (benefit)
                    
                    
                    (585
                    )
                    
                    
                    (241
                    )State
      expense (benefit)
                    
                    
                    (161
                    )
                    
                    
                    (64
                    )City
      Tax expense (benefit)
                    
                    
                    (7
                    )
                    
                    
                    —Tax
      expense (benefit) before valuation allowance
                    
                    
                    (753
                    )
                    
                    
                    (305
                    )Valuation
      allowance
                    
                    
                    753
                    
                    
                    
                    305Tax
      expense
                    
                    $
                    —
                    
                    
                    $
                    —
  The
following is a reconciliation of the Bank’s statutory federal income tax rate to
its effective tax rate at December 31, 2008 and December 31, 2007.
 December
      31,2008
                        
                        
                        2007(In
      thousands)Federal
      tax expense (benefit) at statutory rate
                        
                        $
                        (657
                        )
                        
                        $
                        (241
                        )State
      and local income taxes, net of federal income tax benefit
                        
                        
                        (106
                        )
                        
                        
                        (74
                        )Other
                        
                        
                        10
                        
                        
                        
                        10Tax
      benefit before valuation allowance
                        
                        
                        (753
                        )
                        
                        
                        (305
                        )Valuation
      allowance
                        
                        
                        753
                        
                        
                        
                        305Net
      tax benefit
                        
                        $
                        —
                        
                        
                        $
                        —
  72
  The
following summarizes the components of the Bank’s deferred tax assets and
deferred tax liabilities at December 31, 2008 and December 31,
2007.
 2008
                        
                        
                        2007(In
      thousands)Deferred
      tax assets:Net
      operating loss carry forwards
                        
                        $
                        2,389
                        
                        
                        $
                        2,219Stock
      option compensation
                        
                        
                        31
                        
                        
                        
                        33Charitable
      contributions carry forward
                        
                        
                        108
                        
                        
                        
                        105Depreciation
                        
                        
                        141
                        
                        
                        
                        57Loss
      on investment CD
                        
                        
                        360
                        
                        
                        
                        —Mark-to-market
      loans
                        
                        
                        —
                        
                        
                        
                        2Reserve
      for loan losses
                        
                        
                        345
                        
                        
                        
                        250Other
                        
                        
                        40
                        
                        
                        
                        —3,414
                        
                        
                        
                        2,666Less:
      Valuation allowance
                        
                        
                        (3,000
                        )
                        
                        
                        (2,266
                        )Net
      deferred tax assets
                        
                        
                        414
                        
                        
                        
                        400Deferred
      tax liabilities:Accrual
      to cash adjustment
                        
                        
                        (138
                        )
                        
                        
                        (177
                        )Accretion
      of bond discount
                        
                        
                        (1
                        )
                        
                        
                        (23
                        )Intangible
      asset amortization
                        
                        
                        (70
                        )
                        
                        
                        (54
                        )Deferred
      loan fees
                        
                        
                        (205
                        )
                        
                        
                        (146
                        )Deferred
      tax liabilities
                        
                        
                        (414
                        )
                        
                        
                        (400
                        )Net
      deferred tax asset (liability)
                        
                        $
                        —
                        
                        
                        $
                        —
  The net
operating losses of $5,603,000 are available to reduce future taxable income and
can be carried forward until 2025. The charitable contribution carried forward
is also available to reduce future taxable income and will begin expiring in
2009.
  Realization
of deferred tax assets is dependent upon the generation of future taxable
income. A valuation allowance is provided when it more likely than not that some
portion of the deferred tax asset will not be realized. Because the Bank has no
earnings history, management believes it is prudent to record a valuation
allowance against the deferred tax assets.
  For the
years ended December 31, 2008 and 2007, the Bank was subject to a minimum tax on
assets for New York State purposes in the amount of $19,000 and $14,000,
respectively, which is included in other expense.
  NOTE
8 – COMMITMENTS AND CONTINGENCIES
  Legal
Proceedings
  The
Company has not been a party to any legal proceedings, which may have a material
effect on the Company’s results of operations and financial condition. However,
in the normal course of its business, the Company may become involved as
plaintiff or defendant in proceedings such as judicial mortgage foreclosures and
proceedings to collect on loan obligations and to enforce contractual
obligations.
  73
  Operating
Lease Commitments
  The Bank
is obligated under non-cancelable operating leases for its main office location
in Newburgh, New York and its branch office locations in New Paltz, New York and
Staten Island, New York. The leases are for initial terms of 10 years, 15 years,
and 10 years, respectively and have various renewal options. Rent expense under
operating leases was $317,000 and $312,000 for the years ended December 31, 2008
and 2007, respectively. The combined future minimum rent commitments under the
non-cancelable operating leases, excluding taxes and insurance, before
considering renewal options that generally are present, are as
follows:
 2009
                      
                      $
                      269,0002010
                      
                      
                      276,0002011
                      
                      
                      279,0002012
                      
                      
                      282,0002013
                      
                      
                      184,000Later
                      
                      
                      991,000Total
                      
                      $
                      2,281,000
  Off-Balance
Sheet Financial Instruments
  Loan
origination commitments and lines of credit are contractual agreements to lend
to customers within specified time periods at interest rates and on other terms
specified in the agreements. These financial instruments involve elements of
credit risk and interest rate risk in addition to the amounts for funded loans
recognized in the balance sheet. The contractual amounts of commitments and
lines of credit represent the Bank’s maximum potential exposure to credit loss
(assuming that the agreements are fully funded and any collateral proves to be
worthless), but do not represent future cash requirements since certain
agreements may expire without being fully funded. Loan commitments generally
have fixed expiration dates (ranging up to three months) or other termination
clauses and may require the payment of a fee by the customer. Commitments and
lines of credit are subject to the same credit approval process applied in the
Bank’s general lending activities, including a case-by-case evaluation of the
customer’s creditworthiness and related collateral requirements. Substantially
all of these commitments and lines of credit have been provided to customers
within the Bank’s primary lending area. Loan origination commitments at December
31, 2008 consisted of adjustable and fixed rate, with interest rates ranging
from 4.0% to 7.0% and terms generally not exceeding 90 days.
  The
contractual amounts of financial instruments with off-balance sheet risk at
year-end were as follows:
 2008
                                                                
                                                                2007(In
      thousands)Fixed
      Rate
                                                                
                                                                
                                                                Variable
      Rate
                                                                
                                                                
                                                                Fixed
      Rate
                                                                
                                                                
                                                                Variable
      RateCommitments
      to make loans
                                                                
                                                                $
                                                                4,423
                                                                
                                                                
                                                                $
                                                                8,697
                                                                
                                                                
                                                                $
                                                                3,297
                                                                
                                                                
                                                                $
                                                                8,915Unused
      lines of credit
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                7,721
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                11,143Standby
      letters of credit
                                                                
                                                                
                                                                604
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                354
                                                                
                                                                
                                                                
                                                                —
  74
  NOTE
9 – EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS
  Warrants
  At
December 31, 2007 the Bank had 327,690 total common stock shareholder warrants
issued and outstanding. These warrants were convertible into common shares at an
exercise price of $10.00 exercisable through June 27, 2008. Additionally, there
were 190,000 organizer warrants granted to the Bank’s nineteen organizers in
connection with the opening of the Bank as of December 31, 2004. The organizer
warrants are convertible into common shares at an exercise price of $10.00
exercisable through June 27, 2009. The organizer warrants, valued at $323,000,
were expensed at the time of issuance in accordance with SFAS123. The fair value
was determined using the minimum value method using the following assumptions:
Grant date of June 28, 2004, $10.00 strike price, $10.00 fair value of a share
of capital stock at grant date, risk-free rate of 3.8%, no dividends, five (5)
year life and no volatility. During the year ended December 31, 2007 2,210
shareholder warrants were exercised for which the Company received
$22,100.
  Effective
June 30, 2008 the Company modified the terms of the common stock shareholder
warrants to purchase common stock of the Company attached to the 2004 Offering
by reducing the exercise price of $10.00 to $6.75, and extended the expiration
date from June 28, 2008 to October 31, 2008. Previously, on April 15, 2007, the
Company modified the original expiration term of the warrants from June 28, 2007
to June 28, 2008 and reduced the original exercise price from $12.50 to
$10.00.
  Also
effective June 30, 2008, the Company reduced the exercise price of its 190,000
issued and outstanding organizer warrants from $10.00 to $6.75 for a period
ending on October 31, 2008 after which the exercise price reverted back to
$10.00 per share. There was no additional expense recognized as a result of any
of the modifications.
  During
2008, the there were 147,068 warrants exercised at $6.75. As of November 1st,
2008 all common stock warrants have expired. As of December 31, 2008, 92,652
organizer warrants were still outstanding.
  Stock
Options
  On
October 19, 2004 the Board of Directors approved the adoption of the Company’s
Stock Option Plan which allows for a total of 180,000 shares of authorized but
unissued common stock reserved for issuance under the Stock Option Plan,
although option exercises may also be funded using treasury shares or shares
acquired in open market purchases. These options have a 10-year term and may be
either non-qualified stock options or incentive stock options. These options
were not deemed granted until shareholder approval occurred on May 3, 2005. The
options vest at a rate of 20% on each of five annual vesting dates except for
65,000 options granted to Directors, which vested immediately. Each option
entitles the holder to purchase one share of common stock at an exercise price
equal to the fair market value of the stock on the grant date.
  75
  The
Company accounts for stock options under Statement of Financial Accounting
Standards No. 123 (revised 2004) “Share-based Payment” (“SFAS 123(R)”), using
the modified prospective transition method. For accounting purposes, the Company
recognizes expense for shares of common stock awarded under the Company’s Stock
Option Plan over the vesting period at the fair market value of the shares on
the date they are awarded.
  A summary
of options outstanding under the Bank’s Stock Option Plan as of December 31,
2008, and changes during the year then ended is presented below.
 Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life
      in YearsOutstanding
      at beginning of year
                      
                      
                      157,750
                      
                      
                      $
                      10.47Granted
                      
                      
                      5,000
                      
                      
                      
                      9.00Exercised
                      
                      
                      —Forfieited
      or expired
                      
                      
                      (5,000
                      )
                      
                      
                      10.00Outstanding
      at end of year
                      
                      
                      157,750
                      
                      
                      $
                      10.42
                      
                      
                      
                      6.2Intrinsic
      value (,000’s)
                      
                      $
                      —Options
      exerciseable at year-end
                      
                      
                      123,550
                      
                      
                      $
                      10.48
                      
                      
                      
                      6.2Intrinsic
      value (,000’s)
                      
                      $
                      —
  As of
December 31, 2008, there was approximately $20,000 of total unrecognized
compensation cost related to nonvested stock options granted under the Stock
Option Plan. The cost is expected to be recognized over a period of
approximately 15 months.
  At
December 31, 2008, there were 22,250 shares available for future grant. The fair
value of each option award is estimated on the date of grant using a closed form
option valuation (Black-Scholes) model that uses the assumptions noted in the
table below. Expected volatilities are based on historical volatilities of the
Company’s common stock. The Company uses historical data to estimate option
exercise and post-vesting termination behavior. The expected term of options
granted is based on historical data and represents the period of time that
options granted are expected to be outstanding, which takes into account that
the options are not transferable. The risk-free interest rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect at the
time of the grant.
  76
  2008
                      
                      
                      2007Risk
      free interest rate
                      
                      
                      3.02
                      %
                      
                      
                      4.81
                      %Expected
      option life
                      
                      
                      5.0
                      
                      
                      
                      5.0Expected
      stock price volatility
                      
                      
                      0.10
                      %
                      
                      
                      0.10
                      %Dividend
      yield
                      
                      
                      0.00
                      %
                      
                      
                      0.00
                      %Weighted
      average fair value of options granted during the year
                      
                      $
                      —
                      
                      
                      $
                      —
  401(k)
Plan
  A
401(k) benefit plan allows employee contributions up to 15% of their
compensation. The Bank did not make any matching contributions in 2008 or
2007.
  NOTE
10 – FAIR VALUE
  Statement
157 establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be
used to measure fair value:
  Level
1: Quoted prices (unadjusted) for identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement
date.
  Level
2: Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities, quoted prices in markets that are not
active, or other inputs that are observable or can be corroborated by observable
market data.
  Level
3: Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
  The fair
values of securities available for sale are determined by obtaining quoted
prices on nationally recognized securities exchanges (Level 1 inputs) or matrix
pricing, which is a mathematical technique widely used in the industry to value
debt securities without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities’ relationship to other
benchmark quoted securities (Level 2 inputs).
  77
  Assets
and liabilities measured at fair value on a recurring basis are summarized
below.
 Observable
                          
                          UnobservableDecember
      31,
                            2008
                          
                          Identical
      Assets
                            (Level
      1)
                          
                          Inputs
                            (Level
      2)
                          
                          Inputs
                            (Level
      3)AssetsAvailable
      for sale securities
                          
                          $
                          4,974
                          
                          $
                          —
                          
                          $
                          4,974
                          
                          $
                          —
  Assets
and Liabilities Measured on a Non-Recurring Basis
  The fair
value of impaired loans with specific allocations of the allowance for loan
losses is generally based on recent real estate appraisals. These appraisals may
utilize a single valuation approach or a combination of approaches including
comparable sales and the income approach. Adjustments are routinely made in the
appraisal process by the appraisers to adjust for differences between the
comparable sales and income data available. Such adjustments are typically
significant and result in a Level 3 classification of the inputs for determining
fair value.
  Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:
 Fair
      Value Measurements
                  in
      thousands
                  at
      December 31, 2008 UsingIdentical
                  Assets
                  (Level
      1)
                
                Observable
                  Inputs
                  (Level
      2)
                
                Unobservable
                  Inputs
                  (Level
      3)Assets:Impaired
      loans
                
                $
                —
                
                $
                —
                
                $
                1,688
  The
following represent impairment charges recognized during the
period:
  Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $1,763,000 with a
valuation allowance of $75,000, resulting in an additional provision for loan
losses of $75,000 for the period.
  Carrying
amount and estimated fair values of financial instruments at year end were as
follows:
 2008
                    
                    
                    2007Carrying
                      Amount
                    
                    
                    Fair
                      Value
                    
                    
                    Carrying
                      Amount
                    
                    
                    Fair
                      ValueFinancial
      assetsCash
      and due from banks
                    
                    $
                    12,454
                    
                    
                    $
                    12,454
                    
                    
                    $
                    2,021
                    
                    
                    $
                    2,021Federal
      Funds Sold
                    
                    
                    5
                    
                    
                    
                    5
                    
                    
                    
                    4,731
                    
                    
                    
                    4,731Securities
      available for sale
                    
                    
                    4,974
                    
                    
                    
                    4,974
                    
                    
                    
                    7,037
                    
                    
                    
                    7,037Securities
      held to maturity
                    
                    
                    23,529
                    
                    
                    
                    24,166
                    
                    
                    
                    N/A
                    
                    
                    
                    N/ALoans,
      net
                    
                    
                    94,628
                    
                    
                    
                    96,610
                    
                    
                    
                    71,445
                    
                    
                    
                    72,050Federal
      Home Loan Bank stock
                    
                    
                    528
                    
                    
                    
                    N/A
                    
                    
                    
                    89
                    
                    
                    
                    N/AFederal
      Reserve Bank Stock
                    
                    
                    299
                    
                    
                    
                    N/A
                    
                    
                    
                    324
                    
                    
                    
                    N/AAccrued
      interest receivable
                    
                    
                    603
                    
                    
                    
                    603
                    
                    
                    
                    515
                    
                    
                    
                    515Financial
      liabilitiesDeposits
                    
                    $
                    124,762
                    
                    
                    $
                    125,747
                    
                    
                    $
                    82,342
                    
                    
                    $
                    83,144Federal
      Home Loan Bank advances
                    
                    
                    9,459
                    
                    
                    
                    9,682
                    
                    
                    
                    N/A
                    
                    
                    
                    N/AOther
      borrowings
                    
                    
                    615
                    
                    
                    
                    547
                    
                    
                    
                    89
                    
                    
                    
                    89Accrued
      interest payable
                    
                    
                    205
                    
                    
                    
                    205
                    
                    
                    
                    103
                    
                    
                    
                    103Off-balance-sheet
      credit-related items:Loan
      commitments
                    
                    
                    21,445
                    
                    
                    
                    21,445
                    
                    
                    
                    23,709
                    
                    
                    
                    23,709
  78
  The
methods and assumptions used to estimate fair value are described as
follows:
  Carrying
amount is the estimated fair value for cash and cash equivalents, interest
bearing deposits, accrued interest receivable and payable, demand deposits,
short-term debt, and variable rate loans or deposits that reprice frequently and
fully. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current market rates applied to the estimated life and credit
risk. Fair value of debt is based on current rates for similar financing. It was
not practicable to determine the fair value of FHLB or FRB stock due to
restrictions placed on its transferability. The fair value of off-balance-sheet
items is not consider material.
  NOTE
11- REGULATORY CAPITAL REQUIREMENTS
  OCC
regulations require Banks to maintain a minimum leverage ratio of core (Tier 1)
capital to total adjusted tangible assets of 3.0%, and a minimum ratio of total
capital (core capital and supplementary capital) to risk-weighted assets of
8.0%, of which 4.0% must be core (Tier 1) capital.
  Under its
prompt corrective action regulations, the OCC is required to take certain
supervisory actions with respect to an undercapitalized institution. The
regulations establish a framework for the classification of depository
institutions into five categories: (1) well-capitalized, (2) adequately
capitalized, (3) undercapitalized, (4) significantly undercapitalized, and (5)
critically undercapitalized. Generally an institution is considered well
capitalized if it has a core (Tier 1) capital ratio of at least 5.0%, a core
(Tier 1) risk-based capital ratio of at least 6.0%, and a total risk-based
capital ratio of a least 10.0%. At year-end 2008, the most recent regulatory
notifications categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the institution’s
category.
  The
foregoing capital ratios are based in part on specific quantitative measures of
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the OCC about capital components, risk
weightings and other factors.
  Management
believes that, as of December 31, 2008 and December 31, 2007, the Bank met all
capital adequacy requirements to which it was subject.
  79
  The
following is a summary of the Bank’s actual capital amounts and ratios, compared
to the OCC requirements for minimum capital adequacy and for classification as a
well-capitalized institution at December 31, 2008 and December 31, 2007. The
capital ratios of the Company are not significantly different than those shown
in the table below for the Bank and exceed the requirements to be well
capitalized. In accordance with the applicable regulatory requirements, the
Bank’s actual tangible and Tier 1 capital amounts exclude goodwill, while the
total risk-based capital amounts include the allowance for loan
losses.
 Bank
      Actual
                
                Minimum
      Capital
                  Adequacy
                
                Classification
      as
                  Well
      CapitalizedAmount
                
                Ratio
                
                Amount
                
                Ratio
                
                Amount
                
                Ratio(Dollars
      in thousands)December
      31, 2008Tier
      I (core)capital
                
                $
                9,439
                
                
                6.8
                %
                $
                4,181
                
                
                3.0
                %
                $
                6,968
                
                
                5.0
                %Risk-based
      capital:Tier
      I
                
                
                9,439
                
                
                10.1
                
                
                N/A
                
                
                N/A
                
                
                5,598
                
                
                6.0Total
                
                
                10,301
                
                
                11.0
                
                
                7,465
                
                
                8.0
                
                
                9,331
                
                
                10.0
  Bank
      Actual
                  
                  Minimum
      Capital
                    Adequacy
                  
                  Classification
      as
                    Well
      CapitalizedAmount
                  
                  Ratio
                  
                  Amount
                  
                  Ratio
                  
                  Amount
                  
                  Ratio(Dollars
      in thousands)December
      31, 2007Tier
      I (core)capital
                  
                  $
                  9,886
                  
                  
                  11.5
                  %
                  $
                  2,818
                  
                  
                  3.0
                  %
                  $
                  4,696
                  
                  
                  5.0
                  %Risk-based
      capital:Tier
      I
                  
                  
                  9,886
                  
                  
                  12.5
                  
                  
                  N/A
                  
                  
                  N/A
                  
                  
                  3,865
                  
                  
                  6.0Total
                  
                  
                  10,510
                  
                  
                  13.3
                  
                  
                  5,153
                  
                  
                  8.0
                  
                  
                  6,441
                  
                  
                  10.0
  The OCC
regulates the amount of dividends and other capital distributions that the Bank
may pay to the Company. All dividends must be paid out of undivided profits and
cannot be paid out from capital. In general, if the Bank satisfies all OCC
capital requirements both before and after a dividend payment, the Bank may pay
a dividend to the Company, in any year, equal to the current year’s net income
plus retained net income for the preceding two years that is still available for
dividend.
  NOTE
12 – BORROWINGS
  The
Company had $10,074,000 and $89,000 in outstanding borrowings as of December 31,
2008 and 2007. As disclosed in Note 1, the Company had $615,000 and $89,000 in
an outstanding line of credit as of December 31, 2008 and 2007. The remaining
outstanding borrowings were Federal Home Loan Bank advances.
  Advances
from the Federal Home Loan Bank were as follows (in thousands):
 2008
                  
                  2007Maturities April 1,
      2013 through May 1, 2013, floating rates with an average rate of
      3.16%
                  
                  $
                  9,459
                  
                  $
                  —
  Each advance is payable at
its maturity date, with a prepayment penalty for fixed rate advances. The
advances were collateralized by $10,931,000 of investment securities. Based on
this collateral and the Company’s holdings of FHLB stock, the Company is
eligible to borrow up to a total of $10,000,000 at year-end
2008.
  80




Payment
Information: Required payments over the next five years are (in
thousands):
 2009
                          
                          $
                          9122010
                          
                          
                          9122011
                          
                          
                          9122012
                          
                          
                          9122013
                          
                          
                          5,811
  Item
      9.
                  Changes
      In And Disagreements With Accountants On Accounting And Financial
      Disclosure
  Information
required by this item is incorporated herein by reference from our definitive
Annual Meeting Proxy Statement (the “Proxy Statement”), specifically the section
captioned “Proposal II – Ratification of Appointment of Independent Registered
Public Accounting Firm—Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures.”
 Item
      9A(T).
                Controls
      And Procedures
  (a)
Evaluation of Disclosure Controls and Procedures
  We have
adopted disclosure controls and procedures designed to facilitate our financial
reporting. The disclosure controls currently consist of communications among the
Chief Executive Officer, the Chief Operating Officer, the Chief Financial
Officer and each department head to identify any transactions, events, trends,
risks or contingencies which may be material to our operations. In addition, the
Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and
the Audit Committee meet on a quarterly basis and discuss the Company’s material
accounting policies. The Company’s Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of these interim disclosure controls as
of December 31, 2008 and found them to be adequate.
  (b)
Management’s Report on Internal Control over Financial Reporting
  The
Report of Management on Internal Control over Financial Reporting is on page 53
of the Form 10-K. This report does not include an attestation report of the
company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management’s report in this annual report.
  (c)
Changes in Internal Control over Financial Reporting
  We
maintain internal control over financial reporting. There have not been any
significant changes in such internal control over the financial reporting in the
last quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
 Item
      9B.
                Other
      Information
  None.
  81
  PART
III
 Item
      10.
                Directors,
      Executive Officers and Corporate
Governance
  Directors
  The
Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller
or persons performing similar functions. The Code of Ethics is available on the
Company’s website at www.esbna.com.
  Information
concerning directors and executive officers of the Registrant is incorporated
herein by reference to our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 7, 2009 a copy of which will be filed not later
than 120 days after the close of the fiscal year covered by this
report.
 Item
      11.
                Executive
      Compensation
  Information
concerning executive compensation is incorporated herein by reference to our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 7, 2009, a copy of which will be filed not later than 120 days after the
close of the fiscal year covered by this report.
 Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
  Information
concerning security ownership of certain beneficial owners and management is
incorporated herein by reference to our definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 7, 2009, a copy of which will
be filed not later than 120 days after the close of the fiscal year covered by
this report.
  Set forth
below is information, as of December 31, 2008 regarding equity compensation
plans categorized by those plans that have been approved by stockholders and
those plans that have not been approved by stockholders.
 Number
      of Securities
      to be Issued
      Upon Exercise
      of Outstanding
      Options
      (1),
      Warrants
      and Rights
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        Number
      of Securities
      Remaining
      Available
      For Future
      Issuance
                                                                                                                                                                                          Under
      Equity Compensation
      Plans (3)Weighted
                                                                                                                                                                                          Average
      Exercise
                                                                                                                                                                                          Priceof
      Outstanding
                                                                                                                                                                                          Options,
                                                                                                                                                                                          Warrants
      and
                                                                                                                                                                                          Rights (2)Equity
      compensation plans approved by stockholders
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        157,750
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        10.42
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        22,250Equity
      compensation plans not approved by stockholders
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        —
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        —
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        —Total
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        157,750
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        $
                                                                                                                                                                                        10.42
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        
                                                                                                                                                                                        22,250
  (footnotes
on next page)
  82
  (1)
                  Consists
      of options to purchase 157,750 shares of common stock under the Empire
      State Bank 2004 Stock Option Agreement.(2)
                  The
      weighted average exercise price reflects the weighted average exercise
      price of stock options awarded from the Empire State Bank 2004 Stock
      Option Agreement.(3)
                  Consists
      of stock options for 22,250 shares of common stock available to be granted
      from the Empire State Bank 2004 Stock Option
  Agreement.
  Item
      13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
  Information
concerning certain relationships and related transactions is incorporated herein
by reference to our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 7, 2009, a copy of which will be filed not later
than 120 days after the close of the fiscal year covered by this
report.
 Item
      14.
                Principal
      Accountant Fees and Services
  Information
concerning principal accountant fees and services is incorporated herein by
reference to our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 7, 2009, a copy of which will be filed not later
than 120 days after the close of the fiscal year covered by this
report.
  83
  PART
IV
 Item
      15.
                Exhibits
      and Financial Statement
Schedules
  Exhibit
      Number
                    
                    Document
                    
                    Reference
      to
                      Previous
      Filing, If
                      Applicable3(1)
                    
                    Articles
      of Incorporation
                    
                    *3(2)
                    
                    Amended
      and Restated Bylaws
                    
                    *4
                    
                    Form
      of Stock Certificate
                    
                    **10.1
                    
                    Employment
      Agreement between ES Bancshares, Inc. and Anthony P. Costa, dated December
      29, 2008
                    
                    ***10.2
                    
                    Employment
      Agreement between Empire State Bank, N.A. and Anthony P. Costa, dated
      December 29, 2008
                    
                    ***10.3
                    
                    Employment
      Agreement between ES Bancshares, Inc. and Philip Guarnieri, dated December
      29, 2008
                    
                    ***10.4
                    
                    Employment
      Agreement between Empire State Bank, N.A. and Philip Guarnieri, dated
      December 29, 2008
                    
                    ***10.5
                    
                    Employment
      Agreement between ES Bancshares, Inc. and Arthur W. Budich, dated December
      29, 2008
                    
                    ***10.6
                    
                    Employment
      Agreement between Empire State Bank, N.A. and Arthur W. Budich, dated
      December 29, 2008
                    
                    ***10.7
                    
                    Employment
      Agreement between ES Bancshares, Inc. and Joseph L. Macchia, dated
      December 29, 2008.
                    
                    ***10.8
                    
                    Employment
      Agreement between Empire State Bank, N.A. and Joseph L. Macchia, dated
      December 29, 2008
                    
                    ***10.9
                    
                    Empire
      State Bank, N.A. 2004 Stock Option Plan
                    
                    **10.10
                    
                    Empire
      State Bank, N.A. 2004 Stock Option Plan Stock Option Agreement-
      Employee
                    
                    ****10.11
                    
                    Empire
      State Bank, N.A. 2004 Stock Option Plan Stock Option Agreement- Outside
      Directors
                    
                    ****23
                    
                    Consent
      of Crowe Horwath
  84
  31.2
                    
                    Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232
                    
                    Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
  
 *
                    Incorporated
      by reference to the Company’s Quarterly Report of Form 10-QSB for the
      period ended September 30, 2006 filed with the SEC on November 14,
      2006.**
                    Incorporated
      by reference to the Company’s Registration Statement on Form S-4 filed on
      April 14, 2006 and subsequently amended on April 18, 2006, May 1, 2006,
      May 16, 2006, and May 23, 2006 and a post-effective amendment filed on
      June 9, 2006.***
                    Incorporate
      by reference to the Company Current Report on Form 8-K filed with the SEC
      on January 5, 2009.****
                    Incorporate
      by reference to the Company’s Annual Report of Form 10-KSB for the year
      ended December 31, 2007 filed with the SEC on March 31,
    2008.
  85
  SIGNATURES
  In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
 ES
      BANCSHARES, INC.Date:
      March 30, 2009
                      By:
                      /s/
      Anthony CostaAnthony
      Costa, Chairman of the Boardand
      Co-Chief Executive Officer(Duly
      Authorized
Representative)
  In
accordance with the Exchange Act this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
 Date:
      March 30, 2009
                    
                    /s/
      Philip GuarnieriPhilip
      Guarnieri, President and Co-ChiefExecutive
      Officer, DirectorDate:
      March 30, 2009
                    
                    /s/
      Bryan LaheyBryan
      Lahey, Interim Principal AccountingOfficerDate:
      March 30, 2009
                    
                    /s/
      William DavenportWilliam
      Davenport, DirectorDate:
      March 30, 2009
                    
                    /s/
      Peter FerrantePeter
      Ferrante, DirectorDate:
      March 30, 2009
                    
                    /s/
      Andrew Finklestein, Esq.Andrew
      Finklestein Esq., DirectorDate:
      March 30, 2009
                    
                    /s/
      Gale Foster, Esq.Gale
      Foster Esq., DirectorDate:
      March 30, 2009
                    
                    /s/
      David Freer, Jr.David
      Freer, Jr., DirectorDate:
      March 30, 2009
                    
                    /s/
      Harold KahnHarold
      Kahn, DirectorDate:
      March 30, 2009
                    
                    /s/
      David MeschesDavid
      Mesches, DirectorDate:
      March 30, 2009
                    
                    /s/
      Michael OstrowMichael
      Ostrow, DirectorDate:
      March 30, 2009
                    
                    /s/
      Albert PaganoAlbert
      Pagano, DirectorDate:
      March 30, 2009
                    
                    /s/
      Peter SavagoPeter
      Savago, DirectorDate:
      March 30, 2009
                    
                    /s/
      Thomas D. WeddellThomas
      D. Weddell, Director
   86