UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549





FORM 10-K /A


(Amendment No. 1)




x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended December 31, 2009
  o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File Number: 000-52178





ES 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 whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files).   YES o     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, 2009 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, 2009 was $8.0 million.





As of March 30, 2010, there were 2,071,070 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.





DOCUMENTS INCORPORATED BY REFERENCE





1.
Proxy Statement for the 2010 Annual Meeting of Stockholders (Parts II and III).





2




Explanatory Note:
 
 This Amendment No. 1 filed on Form 10-K/A is being filed for the sole purpose to add a signature that was inadvertently omitted from the signature page of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the SEC on March 30, 2010.
 
 Other than this additional signature, there are no other amendments or revisions to the Form 10-K.









ES BANCSHARES, INC.





ANNUAL REPORT ON FORM 10-K


DECEMBER 31, 2009





Table of Contents




PagePART I

4Item 1.
Business
4Item 1A.
Risk Factors
32Item 1B.
Unresolved Staff Comments
37Item 2.
Properties
37Item 3.
Legal Proceedings
37Item 4.
Submission of Matters to a Vote of Security Holders
37PART II

38Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
38Item 6.
Selected Financial Data
38Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
38Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
46Item 8.
Financial Statements and Supplementary Data
47Item 9.
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
75Item 9A(T).
Controls And Procedures
75Item 9B.
Other Information
76PART III

77Item 10.
Directors, Executive Officers and Corporate Governance
77Item 11.
Executive Compensation
77Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
77Item 13.
Certain Relationships and Related Transactions, and Director Independence
78Item 14.
Principal Accountant Fees and Services
78PART IV

79Item 15.
Exhibits and Financial Statement Schedules
79
  3
  PART I





Item 1.                   Business





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 and estimates of our risks and future costs and benefits. Among the factors which could cause our actual results of financial condition to differ materially are those set forth in Item 1A as well as the following: 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, future deposit premium levels, adverse changes in the securities and national and local real estate markets (including real estate values); 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, business, construction, multifamily, and home equity loans; the impact of the U.S. government’s economic stimulus program and its various financial institution rescue plans, 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.





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.





4





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, one to four family, multi-family, home equity, commercial, construction and consumer loans; GNMA, FNMA, and FHLMC mortgage-backed securities; U.S. government agency securities and certificates of deposit at other financial institutions.   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 expense, 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.




5


2009 Summary




·
Effective March 9, 2009, the Bank converted to a New York State commercial bank charter.


·
For the year ended December 31, 2009, the Company showed a net loss of ($1.2 million) or ($0.64) per share as compared to a net loss of ($1.93 million) or ($1.09) per share for the year ended December 31, 2008;





·
A net interest margin of 2.77% for 2009 as compared to 2.86% for 2008;





·
Consistent with our plan to grow our earnings base subject to market conditions, total assets increased to $157.0 million at December 31, 2009, an increase of 8.0% over December 31, 2008;





·
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 $21.4 million to $26.8 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;





·
Deposits totaled $135.4 million at December 31, 2009, with an increase in deposits of 8.6% over December 31, 2008;





·
The Bank remains well capitalized at December 31, 2009, with a Tier I Capital ratio of 6.51%;





·
The Company successfully raised $1.05 million in capital during 2009 at prices in excess of book value.





Market Area





Our primary market area is 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.





The Bank’s headquarters are located 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.





6





We also have a growing presence in Staten Island, NY. In December of 2008, the Bank relocated its full service Staten Island office into a larger space, allowing for a larger operation that was outgrowing its space.  The office in Staten Island is located approximately ninety miles south of the Bank’s Newburgh location. The borough of Staten Island is primarily 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.





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





We offer 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; home equity loans and lines of credit; multi-family real estate loans; construction or development 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. During 2009, the Bank selectively retained a portion of its mortgage originations in portfolio where the credit spread was deemed favorable. During the same period, we reduced our construction and development loan originations in light of the deteriorated economic conditions. At December 31, 2009, there were no loans held for sale on the Bank’s balance sheet. Also during 2009, the Bank significantly decreased its concentration in commercial real estate loans.





7





During 2009, 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 or loans to businesses 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 sustained economic downturn (including significant layoffs in the financial services industry within the greater New York metropolitan area) continues to adversely impact local economic conditions and could negatively affect the financial results of the Bank’s operations. While the Bank has decreased its concentration in non-owner occupied commercial real estate loans, it still has a significant amount of loans in this category, 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.





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.





8





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. The Bank had no loans held for sale at December 31, 2009 or 2008.





At December 31,2009


2008Amount


Percent


Amount


Percent(Dollars in thousands)Real estate loans:One-to four-family


26,831



25.1
%


21,397



22.5
%Commercial


39,261



36.7



35,436



37.4Multi-family


9,416



8.8



7,847



8.3Construction or development


2,798



2.6



3,931



4.1Home equity (1)


7,964



7.5



8,017



8.4Total real estate loans


86,270



80.7



76,628



80.7Other loans:Commercial business(2)


20,080



18.8



17,138



18.0Consumer


548



0.5



1,212



1.3Total other loans


20,628



19.3



18,350



19.3Total loans

$
106,898



100.0
%

$
94,978



100.0
%Less:Deferred loan costs (fees) net


585







512Allowance for loan losses


(1,824
)






(862
)Total loans receivable, net

$
105,659






$
94,628


(1)
Does not include unused lines of credit of $5.2 million and $4.4 millionat December 31, 2009 and 2008, respectively.


(2)
Includes business lines of credit of $13.1 million and $12.0 million but does not include unused business lines of $6.4 million and $3.3 million at December 31, 2009 and 2008, respectively.


9





Loan Maturity Schedule.The following table shows the remaining contractual maturity of our loans at December 31, 2009.  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


Multifamily & CRE


Commercial Business


Construction or

Development


Consumer


Total(In thousands)One year or less

$
-


$
-


$
12,419


$
2,752


$
422


$
15,592After one year through five years


372



2,018



4,452



46



126



7,015After five years


34,423



46,658



3,209



-



-



84,291Total loans

$
34,795


$
48,676


$
20,080


$
2,798


$
548


$
106,897






The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2009 that are contractually due after December 31, 2010.




Due After One YearFixed


Adjustable


Total(in thousands)One to Four Family & Home Equity Loans

$
14,584


$
20,212


$
34,796Multifamily & CRE


17,292



31,386



48,678Commercial Business


4,724



2,938



7,662Construction or Development


46



-



46Consumer


123



-



123Total loans

$
36,769


$
54,535


$
91,304


10
  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 $36.8 million, while the total amount of loans due after such date which have floating or adjustable interest rates is $54.5 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, 2009, the regulatory limit on loans to one borrower was approximately $3.0 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, 2009, 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.  Commercial loans also have risks associated with concentrations of credit in a single business.





Largest loan concentration by industry is the real estate industry, followed by the construction industry. At December 31, 2009, 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.





11





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, 2009 and 2008.





At December 31,2009


2008Number of Loans


Balances (in thousands)


Number of Loans


Balances (in thousands)Apartments


25


$
9,416



18


$
7,848Offices


19



8,905



16



7,327Warehouses


4



1,529



3



1,341Restaurants


5



3,269



5



3,401Mixed Use


39



19,436



33



15,269Other


14



6,123



16



8,097Total


106


$
48,678



91


$
43,283




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 generallyrenewed 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, 2009 we had $20.1 million of commercial business loans outstanding, representing 18.8% of the total loan portfolio and an additional $6.4 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.





12





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 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 commercialbusiness 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 adverse economic environment.  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, 2009 and 2008.




At December 31,2009


2008Commercial Business Loans

Number of Loans


Dollars (in thousands)


Number of Loans


Dollars (in thousands)Builder lines of credit


9


$
3,607



8


$
4,489Working capital


94



6,591



101



5,252Real estate acquisition & investment


12



2,237



16



3,581Business acquisition


4



413



3



180Equipment purchase


23



1,720



11



431Attorney lines of credit


2



1,500



2



1,500Other:


22



4,012



7



1,705Total


166


$
20,080



148


$
17,138





One- to Four-Family and Home Equity Residential Real Estate Lending.  At December 31, 2009, we had $34.8 million, or 32.6% of our total loan portfolio, in loans secured by one- to four- family residential properties including $6.4 million in advances under home equity lines of credit, and $1.6 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 and 2009, 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 our 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 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 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.





13





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 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. Loan-to-value ratio on new extensions of credit are limited to 75%. At December 31, 2009, we had $6.4 million of outstanding advances under home equity lines of credit and an additional $5.3 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, 2009, our home equity loans totaled $1.6 million.  Home equity term loans represent loans originated in the Bank’s geographic markets.




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, 2009, we had $1.3 million 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, 2009, the construction loan portfolio totaled $2.8 million, or 2.6% of the total loan portfolio, and an additional $732 thousand of funds committed but undrawn. At December 31, 2009, our largest construction loan had a balance of $1.0 million for construction of a residential condominium project.





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, 2009, our land development loan portfolio was comprised of one loan with a balance of $816,000, or 0.8% of the total loan portfolio, and was made for the purpose of developing residential lots. This loan was nonaccrual at December 31, 2009.





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, 2009, we had $296 thousand of speculative construction loans outstanding to a builder of one- to four- family residences, which was secured by real estate mortgages and backed by personal guarantees.





14





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, 2009, our commercial real estate construction portfolio consisted of one loan in the amount of $218 thousand. This loan was non-accrual as of December 31, 2009.





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, 2009, the Bank had two construction loans totaling $425 thousand outstanding to builders of one-to four family residences where the borrower intends to occupy the property upon completion.





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, 2009, consumer loans totaled $548 thousand, or 0.5% 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.





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.





15





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 $61.8 million for the year ended December 31, 2009. 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 may sell into the secondary market our fixed-rate residential mortgage originations in addition to certain current year originations of adjustable-rate loans.  Sales of loans amounted to $18.5 million for the year ended December 31, 2009. There were no loans held for sale on the Bank’s balance sheet at December 31, 2009 or 2008. At December 31, 2009 we did not service any of these loans for others.


16


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





Years Ended December 31,2009


2008(in thousands)Beginning unpaid principal balance

$
94,978


$
71,795New Loans Originated & AdvancesReal estate loansOne-to four-family


24,465



22,885Commercial real estate


14,840



6,846Construction


911



1,375Home equity line of credit


3,505



2,716Commercial line of credit


12,564



9,035Commercial business loans


4,970



3,742Consumer loans


555



1,187Total loans originated


61,810



47,786Loans Sold:Residential & Home Equity Loans


(18,467
)


(4,367
)Participated to Others


(227
)


(1,434
)Principal repayments:Total principal repayments


(30,332
)


(18,802
)Charge-offs


(215
)


-Transfer to real estate owned


(649
)


-Unpaid principal balance at end of period


106,898



94,978Less:Allowance for loan losses


(1,824
)


(862
)Net deferred loan costs


585



512Net loans at end of period

$
105,659


$
94,628






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.





17





Non-Performing Assets





Regulations require that the Company classify its 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, 2009, the Bank had $249 thousand in assets classified as doubtful and $2.9 million classified as substandard.  There were no assets classified as loss. At December 31, 2008 the Bank had $994 thousand in assets classified as substandard. There were no assets classified as doubtful or loss.





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, 2009 the Bank had a foreclosed asset acquired in settlement of loans.  Attributed to the current downturn in the economic climate, the Bank has seen its non-performing assets increase at December 31, 2009 from the same period a year earlier.





The following table sets forth the amount and categories of our non-performing assets at the dates indicated. At December 31, 2009, we had two loans totaling $1.5 million which represented troubled debt restructures.





18





At December 31,2009


2008(Dollars in thousands)Non-accrual loans:Real estate loans:One-to-four family

$
472


$
-Commercial


1,108



250Multi-family


-



-Construction or development


1,034



499Home equity


-



-Total real estate loans


2,614



749Other Loans:Commercial business


451



-Consumer


-



-Total non-performing loans

$
3,065


$
749REO, net


149



-Total non-performing assets

$
3,214


$
749Ratios:Non-performing loans to total loans


2.87
%


0.79
%Non-performing loans to total assets


1.95
%


0.52
%Non-performing assets to total assets


2.04
%


0.52
%














In connection with the filing of our periodic reports with the New York State Banking Department 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, 2009, we had classified the following assets:




One to Four


Multi-


Commercial








CommercialFamily


Family


Real Estate


Land


Consumer


Business


Total(in thousands)Sub-Standard

$
472


$
-


$
1,322


$
815


$
-


$
257


$
2,866Doubtful


-



-



-



-



-



249



249Loss


-



-



-



-



-



-



-Total

$
472


$
-


$
1,322


$
815


$
-


$
506


$
3,115


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 New York State Banking Department.  Certain classified assets are still accruing interest income at December 31, 2009.These loans consist of one additional commercial loan for $50 thousand which is performing.





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.





19





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 New York State Banking Department and the Federal Reserve Bank of New York, 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.


Twelve Months EndedDecember 31,2009


2008(Dollars in thousands)Balance at beginning of year


862



624Charge-offsReal estate mortgage loans


-



-Commercial loans and lines of credit


(204
)


(7
)Home Equity and consumer loans


(11
)


-Construction loansTotal charge-offs


(215
)


(7
)RecoveriesReal Estate mortgage loans


-



-Commercial loans and lines of credit


-



-Home Equity and consumer loans


2



1Construction loans


-



-Total recoveries


2



1Provision for losses


1,175



244Balance at end of period


1,824



862Ratio of net charge-offs to average total loans


0.21
%


0.01
%Ratio of allowance for loan losses to total loans


1.71
%


0.83
%




20





The following table sets forth the breakdown of the allowance for loan losses by loan category at December 31, 2009 and December 31, 2008.  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 31,2009


2008Loan 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:Commercial Mortgages

$
899


$
48,678



45.5
%

$
370


$
47,214



49.8
%Residential Mortgages


216



26,831



25.1
%


86



21,397



22.5
%Commercial & Business Loans


379



20,080



18.8
%


327



17,138



18.0
%Home Equity Loans and Lines of Credit


161



7,964



7.5
%


51



8,017



8.4
%Other Loans


11



3,346



3.1
%


19



1,212



1.3
%Unallocated


158



-



0.0
%


9



-



0.0
%Total allowance

$
1,824


$
106,899



100.0
%

$
862


$
94,978



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, 2009, 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.





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.





21





The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles 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, 2009 we had no securities classified as trading.  During 2009 management elected to reclassify its entire investment portfolio as available for sale, and at December 31, 2009, the entire investment portfolio, or $28.8 million, was classified as available for sale. 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.





During 2009, we increased our holdings of mortgage backed securities as part of our strategy to deploy liquidity in investment alternatives other than commercial real estate. Mortgage-backed securities in our investment portfolio totaled $25.8 million at December 31, 2009. All 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.  All such securities are pass through securities.





A detail of our mortgage backed securities issuers are as follows:




December 31, 2009Amortized


FairCost


ValueMortgage-backed securities:FNMA

$
19,503


$
19,636FHLMC


5,161



5,225GNMA


986



985Total

$
25,650


$
25,846




In addition to mortgage-backed securities, we also invest in other high-quality securities such as United States agency obligations with various maturities. These totaled $1.6 million at December 31, 2009.  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 individually by Wells Fargo, Deutsche Bank, HSBC, and Barclays Bank.  Management believes that these investment securities remain within the Bank’s investment policy guidelines.





The Bank is a member of the Federal Reserve System (“FRB”) and as such is required to purchase stock in the FRB within the Federal Reserve district in which the Bank is located.  In accordance with this requirement, at December 31, 2009, we owned 6,158 shares totaling $308 thousand 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, 2009, we owned 5,728 shares totaling $573 thousand in capital stock of the FHLB-NY.


22





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, 2009, we had no securities classified as held-to-maturity.





At December 31, 2009


At December 31, 2008Amortized


Fair


Amortized


FairCost


Value


Cost


Value(In Thousands)


(In Thousands)Investment securities available for sale:U.S. Government agencies

$
1,600


$
1,626


$
2,080


$
2,095Mortgage-backed securities (1)


25,650



25,846



1,807



1,759Bank trust preferred securities


1,300



1,284



1,302



1,120Total securities available for sale

$
28,550


$
28,756


$
5,189


$
4,974Investment securities held to maturity:U.S. Government agencies

$
-


$
-


$
4,070


$
4,111Mortgage-backed securities


-



-



19,459



20,055Total securities held to maturity

$
-


$
-


$
23,529


$
24,166
 
 (1) Consisted of government sponsored agency issuances


23








At December 31,Available for Sale

2009


2008Weighted








WeightedAmortized


Fair


Average


Amortized


Fair


AverageCost


Value


Yield


Cost


Value


Yield(Dollars in Thousands)U.S. Government Agencies:Due less than one year

$
600


$
622



3.35
%

$
-


$
-



-
%One year to less than three years


-



-



-



-



-



-Three years to less than five years


-



-



-



-



-



-Five years to ten years


-



-



-



-



-



-More than ten years


1,000



1,004



5.50



2,080



2,095



5.77Total


1,600



1,626



4.69
%


2,080



2,095



5.77
%Mortgage-backed securities:Due less than one year

$
-


$
-



-
%

$
-


$
-



-
%Due after 1 year but within 5 years


374



381



3.54



581



581



4.44Due after 5 years but within 10 years


1,635



1,641



3.30



-



-



-Due After 10 years


23,641



23,824



4.41



1,226



1,178



4.42Total


25,650



25,846



4.32
%


1,807



1,759



4.43
%Bank Trust Preferred SecuritiesDue less than one year

$
-


$
-



-
%

$
-


$
-



-Due after 1 year but within 5 years


-



-



-



-



-



-Due after 5 years but within 10 years


-



-



-



-



-



-Due After 10 years


1,300



1,284



7.97



1,302



1,120



7.96Total


1,300



1,284



7.97
%


1,302



1,120



7.96
%Total investment securities

$
28,550


$
28,756



4.51
%

$
5,189


$
4,974



5.85
%
  At December 31,Held To Maturity

2008WeightedAmortized


Fair


AverageCost


Value


Yield(Dollars in Thousands)U.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

$
-


$
-



-
%Due after 1 year but within 5 years


-



-



-Due after 5 years but within 10 years


2,791



2,886



4.72Due After 10 years


16,668



17,169



5.20Total


19,459



20,055



5.13
%Total investment securities

$
23,529


$
24,166



4.84
%




24





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, FRB, 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.





The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand.  Based on our experience, we believe that demand, NOW, savings and money market accounts may be somewhat more stable sources of deposits than certificates of deposits.  Also, we believe that our deposits allow us a greater opportunity to connect with our customers and offer them other financial services and products. As a result, we have used marketing and other initiatives to increase such accounts.





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




At December 31,2009


2008Amount


Percent of Total Deposits


Weighted Average Rate


Amount


Percent of Total Deposits


Weighted Average Rate(In thousands)Demand deposit accounts

$
14,007



10.35
%


0.00
%

$
12,840



10.30
%


0.00
%NOW accounts


5,292



3.91
%


0.56
%


2,308



1.90
%


0.70
%Money market accounts


37,578



27.76
%


1.36
%


28,309



22.70
%


2.73
%Regular savings accounts


8,995



6.65
%


0.94
%


12,136



9.70
%


2.15
%Certificates of Deposit


69,480



51.33
%


2.88
%


69,169



55.40
%


3.93
%Total

$
135,352



100.00
%


1.94
%

$
124,762



100.00
%


3.02
%


25





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, 2009 and December 31, 2008.





Period to MaturityAt December 31, 2009Less than


One to


More than





Percent ofOne Year


Three Years


Three Years


Total


Total1.01% to 2.00%

$
18,059


$
213


$
-


$
18,272



26.30
%2.01% to 3.00%


9,731



12,263



114


$
22,108



31.82
%3.01% to 4.00%


1,962



14,028



1,277


$
17,267



24.85
%4.01% to 5.00%


2,619



4,766



1,037


$
8,422



12.12
%5.00% and above


1,102



2,309



-


$
3,411



4.91
%Total

$
33,473


$
33,579


$
2,428


$
69,480



100.00
%Period to MaturityAt December 31, 2008Less than


One to


More than






Percent ofOne Year


Three Years


Three Years


Total


Total1.01% to 2.00%

$
-


$
-


$
-


$
-



-
%2.01% to 3.00%


3,505



-



-


$
3,505



5.07
%3.01% to 4.00%


27,538



3,391



322


$
31,251



45.18
%4.01% to 5.00%


12,154



16,517



307


$
28,978



41.89
%5.00% and above


1,603



3,113



719


$
5,435



7.86
%Total

$
44,800


$
23,021


$
1,348


$
69,169



100.00
%




26





The following table sets forth the maturity distribution and related weighted average interest rates for  certificates of deposit at December 31, 2009:





At December 31, 2009Less than $100,000


Greater than $100,000


TotalAmount


Weighted Average Rate


Amount


Weighted Average Rate


Amount


Weighted Average Rate(Dollars in thousands)Within three months

$
5,990



2.14
%

$
4,286



1.90
%

$
10,276



2.04
%After three but within six months


5,291



1.71
%


5,703



1.82
%


10,994



1.76
%After six but within 12 months


5,882



2.76
%


6,321



3.07
%


12,203



2.92
%Total within one year


17,163



2.22
%


16,310



2.32
%


33,474



2.27
%After one but within two years

$
11,618



3.62
%

$
11,029



3.77
%

$
22,647



3.69
%After two but within three years


5,165



2.76
%


5,767



2.97
%


10,932



2.87
%After three but within five years


1,353



3.89
%


1,075



2.30
%


2,428



3.19
%Total


35,299



2.82
%


34,181



2.90
%


69,480



2.86
%




Borrowings.  Borrowings, including Federal Funds purchased, lines of credit, outstanding balances on correspondent bank lines of credit and FHLB advances, remained relatively unchanged at $10.1 million at December 31, 2009 from the prior year-end.  The Company had an outstanding balance of $1.6 million and $615 thousand drawn against its committed credit facility with its correspondent bank, Atlantic Central Bankers Bank at December 31, 2009 and 2008, 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, 2009, the Bank had 34 full-time equivalent employees as compared to 36 at December 31, 2008. 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 Reserve Bank of New York (the “FRB”).  The Bank is a member of the Federal Home Loan Bank of New York, and is also is 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 Federal Deposit Insurance Corporation (“FDIC”). Deposit accounts at the Bank 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, 2013.  In addition, certain noninterest-bearing transaction accounts maintained with financial institutions participating in the FDIC’s Temporary Liquidity Guarantee Program were fully insured regardless of the dollar amount until June 30, 2010.  We opted to participate in the FDIC’s Temporary Liquidity Guarantee Program.  See “—Temporary Liquidity Guarantee Program.”




27





The FDIC imposes an assessment against all depository institutions for deposit insurance. This assessment is based on the risk category of the institution and, prior to 2009, ranged from 5 to 43 basis points of the institution’s deposits. On February 27, 2009, the FDIC published a final rule raising the current deposit insurance assessment rates to a range from 12 to 45 basis points beginning April 1, 2009.





On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009.  The amount of the special assessment for any institution will not exceed 10 basis points times the institution’s assessment base for the second quarter 2009.  Our total expense for the special assessment was $68 thousand.





The Company is participating in the FDIC’s Temporary Account Guarantee (“TAG”) program, which is a part of the FDIC’s TLG program.  The purpose of the TLG is to strengthen confidence and encourage liquidity in the banking system.  Under the TAG, funds in non-interest-bearing accounts, in interest-bearing transaction accounts with interest rate of 0.50% or less and in Interest on Lawyers Trust Accounts will have a temporary unlimited guarantee from the FDIC until June 30, 2010.  The coverage of the TAG is in addition to and separate from coverage available under the FDIC’s general deposit insurance rules, which insure accounts up to $250,000.





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.





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 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 12 to the Consolidated Financial Statements.





28





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.Applicable 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, 2009, the Bank’s regulatory limit on loans to one borrower was $3.1 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.




Federal banking agencies, under certain circumstances, are required to take prompt corrective action against banks that fail to meet their capital requirements.  The FRB 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 FRB 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, 2009, we met the definition of “well capitalized” under the regulatory framework for prompt corrective action.





29





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 Department, 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 Department 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.





Payment of Dividends.Regulations of the New York State Banking Department and the FRB restrict the amount of dividends that 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 such 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 New York State Banking Department regulations.





30





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.





Federal Reserve Bank





As a member of the Federal Reserve Board system, the Bank is required to maintain a minimum investment in stock of the Federal Reserve Bank of New York (the “FRB”).  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 $308 thousand and $299 thousand invested in FRB stock at December 31, 2009 and December 31, 2008, 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 low-interest bearing accounts, they have the effect of reducing a bank’s earnings.  At December 31, 2009, 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.





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 2009 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.





Risks Related to Recent Economic Conditions and Governmental Response Efforts





Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally. The global, United States and New York economies are experiencing significantly reduced business activity and consumer spending as a result of, among other factors, disruptions in the capital and credit markets. Dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. A sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse effects on our business:




• a decrease in the demand for loans or other products and services offered by us;




• a decrease in the value of our loans or other assets secured by residential or commercial real estate;




• a decrease to deposit balances due to overall reductions in the accounts of customers;




• an impairment of our investment securities;




• an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs and provision for credit losses, which would reduce our earnings.




Any future Federal Deposit Insurance Corporation insurance premium increases will adversely affect our earnings.




On May 22, 2009, the Federal Deposit Insurance Corporation adopted a final rule levying a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009.  We recorded an expense of $68 thousand during the quarter ended June 30, 2009, to reflect the special assessment.  Any further special assessments that the Federal Deposit Insurance Corporation levies will be recorded as an expense during the appropriate period.  In addition, the Federal Deposit Insurance Corporation increased the general assessment rate and our prior credits for federal deposit insurance were fully utilized during the quarter ended June 30, 2009.  Therefore, our Federal Deposit Insurance Corporation general insurance premium expense will increase compared to prior periods.





32





Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.





Congress has taken actions that are intended to strengthen confidence and encourage liquidity in financial institutions, and the Federal Deposit Insurance Corporation has taken actions to increase insurance coverage on deposit accounts.  In addition, 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 an institution’s ability to foreclose on mortgage collateral.





The potential exists for additional federal or state laws and regulations, or changes in policy, regarding lending and funding practices and liquidity standards, and bank regulatory agencies have been active in responding to concerns and trends identified in examinations, and have issued many formal enforcement orders.  The New York Banking Department and the Federal Deposit Insurance Corporation govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors.  In addition, new laws, regulations, and other regulatory changes may increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws, regulations, and other regulatory changes 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.  Proposals limiting our rights as a creditor could result in credit losses or increased expense in pursuing our remedies as a creditor.





Future legislative or regulatory actions responding to perceived financial and market problems could impair our ability to foreclose on collateral.





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 an institution’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.  In addition, there have been legislative proposals to create a federal consumer protection agency that may, among other powers, have the ability to limit our rights as a creditor.




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.





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




At December 31, 2009, $51.5 million, or 48.2% 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 $26.8 million, or 25.1% of our total loan portfolio, at December 31, 2009.  In addition, at December 31, 2009, $20.1 million, or 18.8% of our loan portfolio, consisted of commercial business loans.




33





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.





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.





34





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





We evaluate our investment securities for other-than-temporary impairment (OTTI) as required by FASB Accounting Standards Codification and the hierarchy of Generally Accepted Accounting Principles.  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, And management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery.





Our Continuing Concentration of Loans in Our Primary Market Areas 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 areas 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.”




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, 2009, the fair value of our securities classified as available for sale totalled $28.8 million.  Unrealized net gains on available-for-sale securities totalled $207 thousand at December 31, 2009 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. At December 31, 2009, given a +2.00% shock in interest rates, the model results in the Company’s economic value of equity at risk changing by $3.1 million or -24.3% lower than in a flat rate scenario. See “Management's Discussion and Analysis of Financial Condition and Results of Operations.”





35





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, 2009 was $573 thousand 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 have stopped paying dividends 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 $32 thousand on our Federal Home Loan Bank of New York stock in 2009.  The failure of the Federal Home Loan Bank of New York to pay dividends in the future would cause our earnings and stockholders’ equity to decrease.





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.





36





Item 1B.                   Unresolved Staff Comments





None.





Item 2.                      Properties





The following table sets forth information concerning our properties at December 31, 2009.  Our premises had an aggregate net book value of approximately $365,000 at that date.





Location

Year

Acquired/Leased

Owned or Leased

Net Book Value at

December 31, 2009(Dollars in thousands)Corporate Headquarters

And Main Office:68 North Plank Road

Newburgh, New York 12550

2004

Leased (1)

$
161Branch Offices:257 Main Street

New Paltz, New York 12561

2004

Leased (1)

$
611361 North Railroad Avenue

Staten Island, NY 10306

2007

Leased (1)

$
143





(1) Our leases at our Newburgh, New Paltz, and Staten Island branch offices terminate in 2012, 2019, and 2018, respectively.





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, 2009, 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





[Reserved]


37


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, 2009 the common stock was held by approximately 625 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, 2009

High


Low


Cash Dividends DeclaredFourth quarter

$
6.50


$
3.00


$
—Third quarter


4.80



4.01



—Second quarter


5.00



1.50



—First quarter


5.00



1.10



—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



—





(b)           Not applicable.





(c)           Not applicable.





Item 6.
Selected Financial Data





This item is not applicable to smaller reporting companies.





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




General





During 2009 we incurred a net loss of $1.2 million compared to a net loss of $1.9 million during 2008. The smaller 2009 net loss was the result of increased net interest income and non-interest income and lower non-interest expense.





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.





38





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, 2009 and 2008, 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.




39




Year Ended December 31,


Year Ended December 31,2009


2008Average





Average


Average





AverageBalance


Interest


Yield/Cost


Balance


Interest


Yield/CostAssetsInterest-earning assets:Loans


100,951


$
5,784



5.73
%


82,413


$
5,167



6.27
%Fed Funds & other investments


11,661



31



0.26
%


6,522



131



2.01
%Certificates of deposit


3,333



80



2.39
%


6,117



221



3.61
%FRB & FHLB stock


867



51



5.88
%


721



37



5.13
%Securities


32,807



1,562



4.76
%


21,373



1,070



5.01
%Total interest-earning assets

$
149,619


$
7,508



5.02
%

$
117,146


$
6,626



5.66
%Allowance for loan losses


(1,017
)










(683
)Cash & Due from banks


1,623











3,279Other Non-interest earning assets


2,446











2,152Total assets

$
152,672










$
121,894Liabilities and  Stockholders' EquityInterest-bearing liabilities:NOW accounts

$
4,348


$
20



0.45
%

$
2,327


$
28



1.20
%Money Market accounts


34,823



573



1.65
%


30,049



766



2.55
%Regular savings accounts


10,963



151



1.38
%


12,845



320



2.49
%Certficates of Deposit


68,070



2,263



3.32
%


47,963



1,925



4.01
%Total interest-bearing deposits

$
118,204


$
3,007



2.54
%

$
93,184


$
3,039



3.26
%Borrowings


9,852



356



3.61
%


7,199



239



3.32
%Total interest-bearing liabilities

$
128,056


$
3,363



2.63
%

$
100,383


$
3,278



3.27
%Non-interest-bearing liabilities


15,205











11,651Total liabilities


143,261











112,034Stockholders' equity


9,411











9,860Total liabilities and stockholders' equity

$
152,672










$
121,894Net interest income





$
4,145










$
3,348Average interest rate spread(1)










2.39
%










2.39
%Net interest margin (3)










2.77
%










2.86
%Net interest-earning assets(4)

$
21,563










$
16,763Ratio of average interest-earning assetsto average interest-bearing liabilities










116.84
%










116.70
%





(1)
Average interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities


(2)
Net interest margin represents net interest income divided by average total interest-earning assets.


(3)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.


(4)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.


40
  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.





Year Ended December 31,


Year Ended December 31,2009 vs. 2008


2008 vs. 2007Increase (Decrease)





Increase (Decrease)Due to





Due toRate


Volume


Net


Rate


Volume


Net(In thousands)


(In thousands)Interest earninig assets:Loans Receivable

$
(546
)

$
1,162


$
616


$
(857
)

$
946


$
89Due from banks andother money market deposits


(194
)


95



(99
)


(206
)


(106
)


(312
)Certificates of Deposit


(41
)


(100
)


(141
)


(108
)


9



(99
)FRB and FHLB stock


7



4



11



(4
)


15



11Investment Securities


(81
)


573



492



2



670



672Total interest-earning assets


(855
)


1,734



879



(1,173
)


1,534



361Interest-bearing liabilitiesNOW accounts


(33
)


24



(9
)


(1
)


12



11Money market accounts


(313
)


120



(193
)


(685
)


(794
)


(1,479
)Regular savings accounts


(122
)


(47
)


(169
)


(136
)


180



44Certificates of deposit


(470
)


810



340



(481
)


1,382



901Total interest-bearing deposits


(938
)


907



(31
)


(1,303
)


780



(523
)Borrowings


29



88



117



(347
)


579



232Total interest-bearing liabilities


(909
)


995



86



(1,650
)


1,359



(291
)Net change in interest income

$
54


$
739


$
793


$
477


$
175


$
652




Comparison of Financial Condition at December 31, 2009 and December 31, 2008





Total assets.  Total assets at December 31, 2009 increased $11.7 million, or 8.0%, to $157.0 million from $145.3 million at December 31, 2008.  The increase in assets was primarily attributable to an $11.0 million increase in total loans receivable, net, and a $2.3 million increase in total cash and cash equivalents, partially offset by a decrease in certificates of deposits at other institutions of $2.9 million. These increases in assets were primarily funded by an increase in interest-bearing deposits of $9.4 million, or 8.4%, and non-interest bearing deposits of $1.2 million, or 9.3%, over the prior year end. We believe that growing our earnings base in a conservative manner is a key factor in improving our results of operations.  Over the past year, the US Treasury yield curve remained upward sloping providing us with the opportunity to manage our net interest margin.  Furthermore, cutbacks in lending by certain competitors during the latter half of 2008 and throughout 2009 allowed us to maintain our lending activities while focusing on high credit quality.  Finally the Staten Island branch, which opened in 2007, continues to grow and provide the Bank with additional funding.




41





Net loans.Net loans increased $11.0 million, or 11.7%, to $105.7 million at December 31, 2009 from $94.6 million at December 31, 2008.  The increase in net loans was primarily attributable to the $10.8 million, or 16.7% increase in commercial and residential real estate mortgage loans, which increased from $64.7 million at December 31, 2008 to $75.5 million at December 31, 2009.  The $11.4 million net increase included $5.4 million in primarily fixed rate one-to-four family residential real estate loans and $5.4 million in commercial and multifamily real estate loans.  Commercial loans and commercial lines of credit increased $2.9 million, or 17.5%, from $17.1 million at December 31, 2008 to $20.1 million at December 31, 2009. In 2009 the above increases were partially offset by a decrease in construction or development loans of $1.1 million, or 28.2%, from $3.9 million to $2.8 million. At December 31, 2009 there were nine nonaccrual loans at a total value of $3.1 million. Both loans were performing at December 31, 2009. Additionally, the Bank had one foreclosed asset acquired in settlement of loans, at December 31, 2009.





Total securities.Total securities at December 31, 2009 increased $252 thousand, or 0.9%, to $28.8 million from $28.5 million at December 31, 2008.  During 2009, the Bank reclassified its held to maturity portfolio to available for sale.  The Bank sold approximately $14.0 million of mortgage pass-through securities to take advantage of favorable market pricing and to mitigate rapid prepayments on select pools.  A portion of the proceeds along with a portion of the Bank’s excess liquidity were reinvested into government agency mortgage pass thru securities.





Certificates of deposit at other financial institutions.  Certificates of deposit at other financial institutions decreased $2.9 million, or 44.4%, to $3.7 million at December 31, 2009 from $6.6 million at December 31, 2008. In addition, all of our certificates at December 31, 2009 were in amounts covered by FDIC guarantee thresholds.





Cash and cash equivalents.Cash and cash equivalents at December 31, 2009 increased $2.7 million, or 18.7%, to $14.8 million from $12.5 million at December 31, 2008, as management determined to ensure that sufficient liquidity was readily available to meet the Company’s immediate funding needs.





Federal Home Loan Bank stock. The Bank increased its investment in Federal Home Loan Bank of New York capital stock to $573 thousand during the year ended 2009 from $528 thousand at December 31, 2008, an increase of $45 thousand.





Deposits.Interest bearing deposits grew $9.4 million to $121.3 million at December 31, 2009 from $111.9 million at December 31, 2008.  The net growth over the year consisted of a $311 thousand increase in certificates of deposit, a $9.3 million increase in Money Market accounts and a $3.0 million increase in NOW accounts, partially offset by a $3.1 million decrease in regular savings accounts. During 2009 non-interest bearing accounts increased $1.2 million, or 9.3% from $12.8 million to $14.0 million.  The increases in our various deposit categories reflect our ability to attract and service new deposit relationships in order to support the increases in total assets.    A significant contributing factor to the increase in total deposits was the growth and relocation of the Bank’s Staten Island branch.





Borrowings.  Borrowings remained relatively unchanged at $10.1 million from year ended December 2009, increasing only $49 thousand.





Stockholders’ equity.Stockholders’ equity increased by $250 thousand to $9.5 million at December 31, 2009 from $9.2 million at December 31, 2008.  The increase was primarily attributable to an increase of $1.0 million in additional paid-in-capital from $17.9 million at year ending December 31, 2008 to $18.9 million at year ended December 31, 2009 and an increase in the unrealized gain on the investment portfolio of $422 thousand. The increase in additional paid-in-capital is related to the issuance of 202,565 shares during 2009 at a weighted average price of $5.31 per share in a private placement. Partially offsetting these increases was an increase in the accumulated deficit of $1.2 million reflecting our net loss in 2009.





42





Results of Operations for the Years Ended December 31, 2009 and December 31, 2008





General.For the year ended December 31, 2009, the Company recognized a net loss of ($1.2 million), or ($0.64) per share, as compared to a net loss of ($1.9 million), or ($1.09) per share, for the year ended December 31, 2008.





Interest Income.Interest income for the year ended December 31, 2009 totaled $7.5 million, an increase of $881 thousand from $6.6 million for the year ended December 31, 2008.  The increase in interest income resulted from an increase in average interest-earning assets to $149.6 million for the year ended December 31, 2009 from $117.1 million for the year ended December 31, 2008, offset by a decrease in the average annual yield on interest earning assets from 5.66% to 5.02% year over year as a result of new originations and refinancing of existing loans at lower rates.  Also contributing was a decrease in yield realized on the investment portfolio and a decrease in the rate earned on the Bank’s overnight cash placements.  For 2009, average loan balances increased from $82.4 million to $100.9 million over the prior year, while their average annual yield decreased from 6.27% to 5.73%.  For the year ended December 31, 2009, the average balance of the investment securities portfolio increased by $11.4 million, from $21.4 million to $32.8 million, while the average balances of its fed funds sold increased approximately $5.2 million, from $6.5 million to $11.7 million, as compared to the year ended December 31, 2008.  The average annual yield earned by the investment securities portfolio decreased by 25 basis points to 4.76% as compared to 5.01% for the year ended December 31, 2008.  The average annual yield earned on federal funds sold decreased to 0.26% from 2.01% for the year ended December 31, 2009 as a result of the significant decrease in short-term interest rates during 2009.





During the year ended December 31, 2009 the Company decreased its average balance invested in certificates of deposit at other financial institutions from $6.1 million to $3.3 million.  Due to the decrease in short-term interest rates available in the marketplace, the average annual yield on these assets decreased from 3.61% for the year ended December 31, 2008 to 2.39% for the year ended December 31, 2009.





Interest Expense.Total interest expense for the year ended December 31, 2009 increased by $85,000 when compared to the year ended December 31, 2008.  The decrease primarily resulted from the decrease in the average annual cost of interest bearing liabilities from 3.27% for the year ended December 31, 2008 to 2.63% for the year ended December 31, 2009 which is due to the prevailing low interest rate environment. Average balances of total interest-bearing liabilities increased to $128.1 million for the year ended December 31, 2009 as compared to $100.4 million for 2008.  This increase primarily resulted from an increase in total interest bearing deposits of $25.0 million and an increase in average borrowings of approximately $2.7 million year over year. The average annual cost of interest bearing deposits was 2.54% for the year ended December 31, 2009, as compared to 3.26% for 2008. The average annual cost of borrowings was 3.61% for the year ended December 31, 2009, as compared to 3.32% for 2008.  This increase in borrowed funds was used primarily to fund increases in the investment securities portfolio and to draw on a capital line of credit at the Company.





Average money market account balances increased $4.8 million, from $30.0 million for the year ended December 31, 2008 to $34.8 million for the year ended December 31, 2009.  The average annual costs for money market accounts decreased 90 basis points, from 2.55% for the year ended December 31, 2008 to 1.65% for the year ended December 31, 2009.  The average balances of the Bank’s certificates of deposit portfolio increased to $68.1 million at an average annual cost of 3.32% for the year ended December 31, 2009, from $48.0 million at an average annual cost of 4.01% for the prior year.  For the year ended December 31, 2009, average regular savings account balances decreased $1.8 million to $11.0 million from $12.8 million for the year ended December 31, 2008, while the average costs decreased 111 basis points to 1.38% from 2.49% from the prior year.





43





Provision for Loan Losses.  The provision for loan losses for the year ended December 31, 2009 increased approximately $931,000 to $1.2 million from $244,000 for the year ended December 31, 2008, 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 $4.1 million for the year ended December 31, 2009 as compared to $3.3 million for the year ended December 31, 2008.  The average interest rate spread remained the same at 2.39% for 2009 versus 2008, while the net interest margin decreased to 2.77% from 2.86% year over year reflecting the increase in non-performing assets and fed funds and money market investment balances.





Non-Interest Income.Non-interest income for the year ended December 31, 2009 totaled $1.5 million which represented an increase of $757 thousand from the $700 thousand for the year ended December 31, 2008.  Most of the change resulted from an increase in gains on sale of securities available for sale portfolio from $7 thousand for the year ended 2008 versus $457 thousand in 2009. There was also a $129 thousand increase in other non-interest income, attributable primarily to recoveries on the certificate of deposit balance charged off in 2008.





Non-Interest Expense.  Non-interest expense for the year ended December 31, 2009 decreased $78 thousand to $5.2 million from $5.7 million for the year ended December 31, 2008.  Compensation and benefits decreased $20 thousand, or .9%.  In addition to decrease in compensation and benefits, non-interest expense decreased due to a $900 thousand loss on a certificate of deposit at a failed financial institution in the prior period. These decreases were partially offset by an increase in other non-interest expense of $225 thousand to approximately $1.5 million for the year ended December 31, 2009 from $1.3 million for the year ended December 31, 2008.  This increase was primarily due to increases in professional and consulting fees, advertising, and increased FDIC assessments. Also partially offsetting the above decreases in operating expenses is a charge realized on impairment of foreclosed land zoned for a residential subdivision in the amount of $500 thousand.





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, 2009 and 2008, we originated loans of approximately $61.8 million and $47.8 million, respectively, including real estate mortgage loans held for sale.  At December 31, 2009 and 2008, we had outstanding loan origination commitments of $3.0 million and $13.1 million, respectively.  There were no one-to-four family real estate mortgage loans held for sale at either December 31, 2009 or December 31, 2008.  In addition, there were $14.3 million in undisbursed lines of credit and construction loans in process (combined) at December 31, 2009, versus $10.7 million at December 31, 2008.  The Company anticipates that it will have combined sufficient funds available to meet its current loan originations and other commitments.





44





At December 31, 2009 and 2008 total deposits were approximately $135.4 million and $124.8 million, respectively, of which approximately $69.5 million and $69.2 million were in certificates of deposit.  Certificates of deposit scheduled to mature in one year or less from December 31, 2009 totaled $33.5 million.  Based on past experience the Company anticipates that most such certificates of deposit can be renewed upon their expiration.





During the quarter ended June 30, 2008, the Company obtained a 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, 2009 the balance of the facility was $1.6 million, leaving $1.6 million available to support our cash needs at the Company level.





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, 2009 the Bank had $11.6 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.





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, 2009, 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, 2009 and 2008, the Bank met all capital adequacy requirements to which it was subject.





45





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, 2009 and December 31, 2008.  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.





Minimum Capital


Classification asBank Actual


Adequacy


Well CapitalizedAmount


Ratio


Amount


Ratio


Amount


RatioDecember 31, 2009

(Dollars in thousands)Tier I (core) capital

$
10,255



6.5
%

$
4,708



3.0
%

$
7,847



5.0
%Risk-based capital:Tier I


10,255



10.1



N/A



N/A



9,417



6.0Total


11,535



11.3



8,180



8.0



10,225



10.0December 31, 2008Tier I (core) capital

$
9,439



6.8
%

$
2,818



3.0
%

$
4,696



5.0
%Risk-based capital:Tier I


9,439



10.1



N/A



N/A



3,865



6.0Total


10,301



11.0



5,153



8.0



6,441



10.0




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 2009, primarily in longer-term loans, it has also increased its cash and cash equivalents, its level of non-interest bearing deposits, and funded significant portions of its prior year 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.





46





At December 31, 2009, given a +2.00% shock in interest rates, the model results in the Company’s net interest income for the next twelve months approximately $101,000 or 2.02% higher than net interest income in a flat rate scenario.  The Company did not run a down rate shock at December 31, 2009 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, 2009, given a +2.00% shock in interest rates, the model results in the Company’s economic value of equity at risk changing by $3.1 million or -24.3% 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.





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.





47





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. Costa


Anthony P. Costa,


Chairman and Co-Chief Executive Officer





/s/ Thomas Sperzel, Principal


Accounting Officer


48
  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, 2009 and 2008, 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, 2009 and 2008, 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, 2010




49












December 31,


December 31,2009


2008ASSETSCash and cash equivalents:Cash and due from banks

$
9,785


$
12,454Federal funds sold and other money market investments


5,000



5Total cash and cash equivalents


14,785



12,459Certificates of deposit at other financial institutions


3,685



6,628Securities:Available for sale, at fair value


28,756



4,974Held to maturity, at amortized cost


-



23,529(fair value of $24,166 at December 31, 2008)Total securities


28,756



28,503Loans receivable


106,898



94,978Deferred cost


585



512Allowance for loan losses


(1,824
)


(862
)Total loans receivable, net


105,659



94,628Accrued interest receivable


627



603Federal Reserve Bank stock


308



299Federal Home Loan Bank stock


573



528Goodwill


581



581Premises and equipment, net


648



757Prepaid FDIC Assessment


815



-Real estate owned


149



-Other assets


366



280Total assets

$
156,952


$
145,266LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities:Deposits:Non-interest bearing

$
14,007


$
12,840Interest bearing


121,345



111,922Total deposits


135,352



124,762Borrowed funds


10,123



10,074Accrued interest payable


151



205Other liabilities


1,845



994Total liabilities


147,471



136,035Commitments and contingencies (Note 9)Stockholders' equityCapital stock (par value $0.01; 5,000,000 shares authorized;2,071,070 shares issued at December 31, 2009


20



191,868,505 shares issued at December 31, 2008Additional paid-in-capital


18,970



17,911Accumulated deficit


(9,716
)


(8,484
)Accumulated other comprehensive income (loss)


207



(215
)Total stockholders' equity


9,481



9,231Total liabilities and stockholders' equity

$
156,952


$
145,266


See accompanying notes to financial statements


50















For the Twelve MonthsEnded December 31,2009


2008Interest and dividend income:Loans

$
5,784


$
5,167Securities


1,562



1,070Certificates of deposit


80



221Fed Funds and other earning assets


82



169Total interest and dividend income


7,508



6,627Interest expense:Deposits


3,007



3,039Borrowed funds


356



239Total interest expense


3,363



3,278Net interest income


4,145



3,349Provision for loan losses


1,175



244Net interest income after provision for loan losses


2,970



3,105Non-interest income:Service charges and fees


447



444Net gain on sales of real estate mortgage


.loans


236



61Net gain on sale of securities available for sale


457



7Other


317



188Total non-interest income


1,457



700Non-interest expense:Compensation and benefits


2,328



2,348Occupancy and equipment


764



822Data processing service fees


304



284FDIC assessment


273



118Loss on uninsured deposits at other financial institutions


-



900Impairment of foreclosed asset


500



-Other


1,490



1,264Total non-interest expense


5,659



5,736Net loss before income taxes


(1,232
)


(1,931
)Income tax expense


-



-Net (loss)

$
(1,232
)

$
(1,931
)Other comprehensive loss:Net unrealized gain/(loss) on available-for-sale securities


422



(222
)Comprehensive income (loss)

$
(810
)

$
(2,153
)Weighted average:Common shares


1,933,367



1,766,525(Loss) per common share:Basic

$
(0.64
)

$
(1.09
)Diluted

$
(0.64
)

$
(1.09
)




See accompanying notes to financial statements


51




ES BANCSHARES, INC.
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2009 AND 2008
 (In thousands of dollars except, share data)
  AccumulatedAdditional





OtherCapital Stock


Paid-In


Accumulated


ComprehensiveShares


Amount


Capital


Deficit


Gain (Loss)


TotalBalance at January 1, 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 gain 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
)

$
9,231Stock based compensation, net


-



-



11



-



-



11Comprehensive loss:Net loss for the period


-



-



-



(1,232
)


-



(1,232
)Net unrealized gain on available-for-sale securities


-



-



-



-



422



422Total comprehensive loss






















(810
)Net proceeds from issuanceof common stock


202,565



1



1,048











1,049Balance at December 31, 2009


2,071,070



20



18,970



(9,716
)


207


$
9,481See accompanying notes to financial statements


52




ES BANCSHARES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS


For the Twelve MonthsEnded December 31,2009


2008(In thousands)Cash flows from operating activities:Net loss for period

$
(1,232
)

$
(1,931
)Adjustments to reconcile net losses to net cashprovided by operating activities:Provision for loan losses


1,175



244Depreciation expense


255



311Amortization of deferred fees, discounts and premiums, net


(20
)


(3
)Net originations of loans held for sale


-



411Stock compensation expense


11



9Net gain on sale of real estate mortgage loans held for sale


(236
)


(61
)Net gain on sale of securities available for sale


(457
)


(7
)Gain on sale of fixed assets


-



(9
)Loss of unisured deposit at financial institution


-



900Loss on impairment of foreclosed asset


500



-Changes in assets and liabilitiesIncrease in other assets


(919
)


(177
)Increase in accrued expenses and other liabilities


800



96Net cash used in operating activities


(123
)


(217
)Cash flows from investing activities:Maturity of certificates of deposit at other financial institutions


7,348



11,594Purchase of certificates of deposit at other financial institutions


(4,405
)


(13,328
)Purchase of available-for-sale securities


(8,306
)


(3,424
)Purchase of held-to-maturity securities


(16,044
)


(25,144
)Proceeds on sale of securities available for sale


13,653



506Proceeds from principal payments and maturities of securities


10,813



6,384Proceeds on sale of fixed assets


-



9Net disbursements for loan originations


(12,098
)


(23,451
)Purchase of Federal Home Loan Bank stock


(45
)


(439
)Redemption (purchase) of Federal Reserve Bank stock


(9
)


25Redemption of Federal Home Loan Bank stock


-



24Leasehold improvements and acquisitions of capital assets


(146
)


(230
)Net cash used in investing activities


(9,239
)


(47,474
)Cash flows from financing activities:Net increase in deposits


10,590



42,420Proceeds of advance from line of credit & FHLB


1,000



10,526Repayment of advances


(951
)


(541
)Net proceeds from stock issuance


1,049



993Net cash provided by financing activities


11,688



53,398Net increase in cash and cash equivalents


2,326



5,707Cash and cash equivalents at beginning of period


12,459



6,752Cash and cash equivalents at end of period

$
14,785


$
12,459Supplemental cash flow informationInterest paid

$
3,417


$
3,380Income taxes paid

$
-


$
-Transfer of loans to REO

$
649


$
-Transfer of securities from held to maturity to available for sale

$
3,190


$
-See accompanying notes to financial statements


53





NOTES TO FINANCIAL STATEMENTS





NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Nature of Operations





Empire State Bank (the “Bank”) was organized under federal law as a national bank primarily regulated by the Office of the Comptroller of the Currency (“OCC”) in 2004.  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 of December 31, 2009 all such warrants had expired.





In May 2006 the Bank reorganized into the Holding Company structure whereby every share, option, and warrant of the Bank’s stock was converted into a corresponding, share, option, or warrant for ES Bancshares, Inc. (“the Company”).





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 state 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.





Basis of Presentation




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.





54





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 management does not intend to sell and it is more likely than not that management would be required to sell the securities prior to their anticipated recovery.





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, 2009 and December 31, 2008. Management does not retain servicing with respect to these loans.





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.





55





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.





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. The Company’s goodwill is associated with the purchase of a mortgage banking company upon formation of the Bank. 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.





56





The Company follows FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles with respect to accounting for income taxes.  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 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.





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 $308 thousand and $299 thousand invested in FRB stock at December 31, 2009 and December 31, 2008, 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 is a member of the Federal Home Loan Bank of New York (“FHLB”).  As a member the Bank was required to maintain FHLB capital stock, in the amount of $573 thousand and $528 thousand at December 31, 2009 and 2008, 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 another 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, 2009, the outstanding balance is $1.6 million.  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 2009 or 2008.





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.





57





Stock Options





The Company has a stock-based compensation plan as more fully described in Note 10.  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, 2009 and 2008 relating to the options was $11 thousand and $9 thousand, respectively.





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 April 2009, the FASB issued FSP No. 115-2 and No.124-2, Recognition and Presentation of Other-Than-Temporary Impairments which is now under FASB ASC 320, which amends existing guidance for determining whether impairment is other-than-temporary for debt securities.  The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis.  If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings.  For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The impact of adoption was not material.





58





In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which is now under FASB ASC 820. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants.  The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures.  This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively.  Early adoption is permitted for periods ending after March 15, 2009.  The Company adopted this FSP in the second quarter, however, the adoption did not have a material effect on the results of operation or financial position.





On June 12, 2009,  the  FASB  issued  Statements No. 166, Accounting for Transfers of   Financial   Assets,   and  No.  167, Amendments  to  FASB Interpretation  No.  46(R).   Statement  No.  166  is  a  revision  to FASB Statement  No.  140,  Accounting  for  Transfers and Servicing of Financial Assets   and   Extinguishments   of  Liabilities,  and  will  require  more information  about  transfers of financial assets, including securitization transactions,  and  where  entities  have  continuing exposure to the risks related  to  transferred  financial  assets. It eliminates the concept of a “qualifying   special-purpose entity,” changes  the  requirements  for derecognizing financial assets, and requires additional  disclosures. Statement  No. 167 amends FIN 46(R) to replace the quantitative-based risks and  rewards  calculation for determining which enterprise, if any, has a controlling  financial  interest  in  a  variable  interest entity  with a qualitative  approach focused on identifying which enterprise has the power to  direct  the  activities  of  a variable interest entity (VIE) that most significantly   impact  the  entity’s  economic  performance  and  (1)  the obligation  to  absorb  losses  of  the  entity or (2) the right to receive benefits  from  the  entity.    Unlike  FIN 46 (R), this Statement requires ongoing  reconsideration  of  whether  (1)  an  entity  is a VIE and (2) an enterprise is the primary beneficiary of a VIE.  Statement Nos. 166 and 167 will  be  effective  at  the start of the first fiscal year beginning after November  15,  2009.   The adoption of these standards did not have a material impact on the Company’s consolidated financial statements.




On  June  29,  2009,  the  FASB  issued  FASB  Statement  No. 168, The FASB Accounting  Standards  Codification and the Hierarchy of Generally Accepted Accounting  Principles – A Replacement of FASB Statement No. 162 which is now under FASB ASC 105.  With the issuance  of  this  statement, the FASB Accounting Standards CodificationTM (Codification)  became  the source of authoritative U.S. generally accepted accounting  principles  (GAAP)  recognized  by  the  FASB  to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and  Exchange  Commission  (SEC) under authority of federal securities laws are  also  sources  of  authoritative  GAAP  for  SEC  registrants.  On the effective   date   of  this  Statement,  the  Codification  superseded  all then-existing   non-SEC  accounting  and  reporting  standards.  All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. The issuance of the Codification is not intended  to  change  GAAP.  This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.   The adoption  of  this  standard  did not have a material impact on the Company’s consolidated financial statements.


59
  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, 2009 and December 31, 2008.





December 31, 2009(in thousands)Amortized


Gross Unrealized


FairCost


Gains


Losses


ValueMortgage-backed securities-residential

$
25,650


$
398


$
(202
)

$
25,846U.S. Government Agencies


1,600



26



--



1,626Trust Preferred Securities


1,300



4



(20
)


1,284Total

$
28,550


$
428


$
(222
)

$
28,756December 31, 2008(in thousands)Amortized


Gross Unrealized


FairCost


Gains


Losses


ValueMortgage-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




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 securities held to maturity at December 31, 2009.





December 31, 2008(in thousands)Amortized


Gross Unrealized


FairCost


Gains


Losses


ValueMortgage-backed securities

$
19,459


$
596


$
--


$
20,055U.S. Government Agencies


4,070



41



--



4,111Total

$
23,529


$
637


$
--


$
24,166




60


The following is a summary of the amortized cost and estimated fair market value of investment securities available-for-sale at December 31, 2009, 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, 2009(in thousands)Amortized


FairCost


ValueAvailable-for-Sale:Mortgaged-backed securities

$
25,650


$
25,846U.S. Government Agencies and Trust Preferred SecuritiesDue less than one year


--



--One year to less than three years


600



622Three years to less than five years


--



--Five years to ten years


--



--More than ten years


2,300



2,288Total

$
28,550


$
28,756


During 2009 the Company reclassified its entire held to maturity portfolio as available for sale.





The following tables summarize, for all securities in an unrealized loss position at December 31, 2009 and December 31, 2008, the aggregate fair values and gross unrealized losses by the length of time those securities had been in a continuous loss position.





December 31, 2009Less Than 12 Months


12 Months or More


TotalFair


Unrealized


Fair


Unrealized


Fair


UnrealizedValue


Loss


Value


Loss


Value


Loss(In thousands)Mortgage-backed securities

$
5,294


$
30


$
6,044


$
172


$
11,338


$
202U.S. Government Agencies


-



-



-



-



-



-Trust Preferred Securities


347



3



433



17



780



20Total temporarily impaired

$
5,641


$
33


$
6,477


$
189


$
12,118


$
222December 31, 2008Less Than 12 Months


12 Months or More


TotalFair


Unrealized


Fair


Unrealized


Fair


UnrealizedValue


Loss


Value


Loss


Value


Loss(In thousands)Mortgage-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




61





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 management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery.  In analyzing an issuer’s financial condition, the Company 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, 2009, four debt securities had unrealized losses of approximately $189 thousand which had existed for more than twelve months, from the Company’s cost basis and were 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, 2008, three debt securities had unrealized losses of approximately $47,000, that had existed for more than twelve months, from the Company’s cost basis, and were largely due to changes in interest rates.





Sales of available for sale securities were as follows (in thousands):





2009


2008(In thousands)Proceeds

$
13,653


$
506Gross gains


457



7Gross losses


-



-




Securities pledged at year-end 2009 had an approximate carrying amount of $17.2 million and were pledged to secure borrowing facilities as well as certain municipal deposits. Pledged securities at December 31, 2008 had an approximate carrying amount of $10.9 million.





62





NOTE 3 – LOANS





The following is a summary of loans receivable at December 31, 2009 and December 31, 2008.





December 31,2009


2008(In thousands)Real estate loans:One-to four family

$
26,831


$
21,397Commercial


39,261



35,436Multi-family


9,416



7,847Construction or development


2,798



3,931Home equity


7,964



8,017Total real estate loans


86,270



76,628Other loans:Commercial business


20,080



17,138Consumer


548



1,212Total other loans


20,628



18,350Total loans


106,898



94,978Deferred loan costs net


585



512Allowance for loan losses


(1,824
)


(862
)Total loans receivable, net

$
105,659


$
94,628





Individually impaired loans were as follows:


2009


2008(In thousands)Year-end loans with no allocated allowance for loan losses

$
3,065


$
1,014Year-end loans with allocated allowance for loan losses


1,534



749Total

$
4,599


$
1,763Amount of the allowance for loan losses allocated

$
71


$
75Average of individually impaired loans during year

$
3,507


$
187Interest income recognized during impairment


2



-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

$
-


$
35Nonaccrual loans


3,065



749


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. Included in impaired loans above is $1.5 million in loans whose terms have been modified in troubled debt restructurings as of December 31, 2009.  As of  December 31, 2009 the Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.




63





At year-end 2009, the Company had $2.5 million in interest only loans, excluding lines of credit and construction 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 2009 were as follows:


Beginning balance at December 31, 2008

$
3,736New loans


100Repayment


(276
)Ending balance at December 31, 2009

$
3,560
  The balance at December 31, 2009 includes unused commitments totaling $481 thousand.





NOTE 4 – ALLOWANCE FOR LOAN LOSSES





Activity in the allowance for loan losses is summarized as follows for the years ended December 31, 2009 and December 31, 2008.




December 31,2009


2008(In thousands)Balance at beginning of year

$
862


$
624Provision for losses


1,175



244Charge-offs


(215
)


(7
)Recoveries


2



1Balance at end of year

$
1,824


$
862


NOTE 5 – PREMISES AND EQUIPMENT





The following is a summary of premises and equipment at December 31, 2009 and December 31, 2008.





December 31,2009


2008(In thousands)Furniture, fixtures, and equipment

$
971


$
852Leasehold Improvements


885



8581,856



1,710Less: accumulated depreciation and amortization


(1,208
)


(953
)Total premises and equipment, net

$
648


$
757


Depreciation expense was $255,000 and $311,000 for 2009 and 2008, respectively.


64


NOTE 6 – DEPOSITS





The following is a summary of deposit balances at December 31, 2009 and December 31, 2008.





December 31,2009


2008(in thousands)Demand deposit accounts

$
14,007


$
12,840NOW accounts


5,292



2,308Money market accounts


37,578



28,309Regular savings accounts


8,995



12,136Certificates of Deposit


69,480



69,169Total

$
135,352


$
124,762


The following summarizes certificates of deposit by remaining term to contractual maturity at December 31, 2009.





AccountBalances(In thousands)Under one year

$
33,473One year to under two years


22,647Two years to under three years


10,932Three years to under four years


822Four years to under five years


1,606Total certificates of deposit


69,480


Certificates of deposit of $100,000 or more totaled $34.2 million and $30.6 million at December 31, 2009 and December 31, 2008, respectively.  Deposits from directors, senior officers and their affiliates were approximately $3.7 million and $2.8 million at December 31, 2009 and December 31, 2008, respectively.





NOTE 7 – BORROWINGS





The Company had $10.1 million in outstanding borrowings as of December 31, 2009 and 2008.  As disclosed in Note 1, the Company had $1.6 million and $615 thousand in an outstanding line of credit as of December 31, 2009 and 2008.  The remaining outstanding borrowings were Federal Home Loan Bank advances.





Advances from the Federal Home Loan Bank were as follows (in thousands):




2009


2008Maturities April 1, 2013 through May 1, 2013,

fixed rates with an average rate of 3.75%

$
8,508


$
9,459





Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances.  The advances were fully collateralized by 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 $27 million at year-end 2009 including approximately $9 million in term advances outstanding at December 31, 2009.


65


Payment Information:  Required payments over the next five years are (in thousands):


2010

$
1,1522011


1,0252012


1,0602013


5,2712014


0
  NOTE 8 – INCOME TAXES





The following summarizes components of income tax expense for the years ended December 31, 2009 and December 31, 2008.





December 31,2009


2008(In thousands)Current:Federal expense (benefit)

$
-


$
-State expense (benefit)


-



--



-Deferred:Federal expense (benefit)


(130
)


(585
)State  expense (benefit)


(79
)


(161
)City expense (benefit)


(42
)


(7
)Tax expense (benefit) before valuation allowance


(251
)


(753
)Valuation allowance


251



753Tax expense

$
-


$
-
  66
  The following is a reconciliation of the Company’s statutory federal income tax rate to its effective tax rate at December 31, 2009 and December 31, 2008.





December 31,2009


2008(In thousands)Federal tax expense (benefit) at statutory rate

$
(419
)

$
(657
)State and local income taxes, net of federalincome tax benefit


(80
)


(106
)Expiration of charitable contribution carryforward


85Other


163



10Tax benefit before valuation allowance


(251
)


(753
)Valuation allowance


251



753Net tax benefit

$
-


$
-


The following summarizes the components of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2009 and December 31, 2008.





December 31,2009


2008(In thousands)Deferred tax assets:Net operating loss carry forwards

$
2,435


$
2,389Stock option compensation


29



31Charitable contributions carry forward


11



108Depreciation


72



141Loss on investment CD


303



360Reserve for loan losses


751



345Non-accrual loan interest


64



-Other deferred tax assets


22



403,687



3,414Less: Valuation allowance


(3,251
)


(3,000
)Net deferred tax assets


436



414Deferred tax liabilities:Accrual to cash adjustment


(107
)


(138
)Accretion of bond discount


-



(1
)Intangible asset amortization


(88
)


(70
)Deferred loan fees


(241
)


(205
)Deferred tax liabilities


(436
)


(414
)Net deferred tax asset (liability)

$
-


$
-


67





The Company has the following net operating loss carry forwards available to reduce future taxable income.





Federal

State

City


Year(s) ofExpiration1,391,000

1,388,000

-


20251,680,000

1,675,000

-


20261,173,000

1,211,000

-


2027704,000

751,000

-


2028894,000

800,000

-


2029293,000

291,000

80,000


20306,135,000

6,116,000

80,000





In addition, the Company has charitable contribution carry forwards of $27,000 available to reduce future taxable income.  The charitable contributions expire as follows:  $4,000 expires in 2010, $4,000 expires in 2011, $4,000 expires in 2012, $8,000 expires in 2013, and $7,000 expires in 2014.





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, 2009 and 2008, the Bank was subject to a minimum tax on assets for New York State and New York City purposes in the amount of $22,000 and $19,000, respectively, which is included in other expense.





NOTE 9 – 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.





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 $337,000 and $317,000 for the years ended December 31, 2009 and 2008, 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:





2010

$
273,0002011


276,0002012


262,0002013


183,0002014


187,000Thereafter


640,000Total

$
1,821,000


68





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, 2009 consisted of adjustable and fixed rate, with interest rates ranging from 4.0% to 5.5% and terms generally not exceeding 90 days.





The contractual amounts of financial instruments with off-balance sheet risk at year-end were as follows:


2009


2008(In thousands)Fixed Rate


Variable Rate


Fixed Rate


Variable RateCommitments to make loans

$
2,518


$
470


$
4,423


$
8,697Unused lines of credit


354



12,032



-



7,721Standby letters of credit


364



-



604



-
  NOTE 10 – EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS





Warrants





Effective June 30, 2008 the Company modified the terms of the 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 will revert 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.  The organizer warrants were valued at $323,000 and were expensed at the time of issuance in accordance with ASC 718.   There was no additional expense recognized as a result of any of the modifications.





69





During 2008, there were 147,068 warrants exercised at $6.75. As of November 1, 2008, all common stock warrants expired. As of December 31, 2008 there were 92,952 organizer warrants still outstanding. At December 31, 2009, all organizer warrants had expired.





Stock Options





On October 19, 2004 the Board of Directors approved the adoption of the Company’s Stock Option Plan which allows for 180,000 options.  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.





The Company accounts for stock options under 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 day they are awarded.




A summary of options outstanding under the Bank’s Stock Option Plan as of December 31, 2009, and changes during the twelve-month period then ended is presented below.




Shares


Weighted Average Exercise Price


Weighted Average Remaining Contrctual Term (years)


Intrinsic ValueOutstanding at January 1, 2009


157,750


$
10.42Granted


-



-Exercised


-



-Forfeited or expired


(5,500
)


10.45Outstanding at December 31, 2009


152,250


$
10.42



5.2



-Options exercisable at December 31, 2009


143,600


$
10.42



5.1



-Vested and expected to vest


152,250


$
10.42



5.2
  As of December 31, 2009, there was $4 thousand 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 11 months.





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 2009 or 2008.





70





NOTE 11 – FAIR VALUE





Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standards describe three levels of inputs that may be used to measure fair values:




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 – 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 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.




The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:




Investment Securities:  The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).





Impaired Loans:  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 under ASC 820 on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:


Fair Value Measurements atDecember 31, 2009 Using:SignificantQuoted Prices in

Other

SignificantActive Markets for

Observable

UnobservableCarrying

Identical Assets

Inputs

InputsValue

(Level 1)

(Level 2)

(Level 3)(Dollars in thousands)Financial AssetsInvestment securities available-for saleMortgage-backed securities – residential

$
25,846



$
25,846U.S. government agencies


1,626




1,626Other securities


1,284




1,284Total available- for-sale


28,756




28,756


71





Fair Value Measurements atDecember 31, 2008 Using:SignificantQuoted Prices in

Other

SignificantActive Markets for

Observable

UnobservableCarrying

Identical Assets

Inputs

InputsValue

(Level 1)

(Level 2)

(Level 3)(Dollars in thousands)Financial AssetsInvestment securities available-for saleMortgage-backed securities – residential

$
1,760



$
1,760U.S. government agencies


2,095




2,095Other securities


1,119




1,119Total available- for-sale


4,974




4,974





Assets measured at fair value on a non-recurring basis are summarized below:




There were no collateral dependent impaired loans with allowance allocated at December 31, 2009.





Fair Value Measurementsin thousandsat December 31, 2009 UsingIdentical


Observable


UnobservableAssets


Inputs


Inputs(Level 1)


(Level 2)


(Level 3)AssetsREO Property

$
-


$
-


$
149
  Real Estate Owned:  Nonrecurring adjustments to certain commercial real estate properties classified as real estate owned (REO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification.   In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.  Real estate owned had a net carrying amount of $149 thousand, which is made up of the outstanding balance of $649 thousand, net of a valuation allowance of $500 thousand at December 31, 2009, resulting in a write-down of $500 for the year ending December 31, 2009.


Fair Value Measurementsin thousandsat December 31, 2008 UsingIdentical


Observable


UnobservableAssets


Inputs


Inputs(Level 1)


(Level 2)


(Level 3)AssetsImpaired loans

$
-


$
-


$
674
  Total non-accrual loans were $3.1 million and $749 thousand at December 31, 2009 and December 31, 2008, respectively.
  72
    December 31,


December 31,2009


2008Carrying


Fair


Carrying


FairAmount


Value


Amount


ValueFinancial assetsCash and due from banks

$
9,785


$
9,785


$
12,454


$
12,454Federal Funds Sold and money market investments


5,000



5,000



5



5Securities available for sale


28,756



28,756



4,974



4,974Securities held to maturity


-



-



23,529



24,166Loans, net


105,659



106,337



94,628



96,610Federal Home Loan Bank stock


573



N/A



528



N/AFederal Reserve Bank stock


308



N/A



299



N/AAccrued interest receivable


627



627



603



603Financial LiabilitiesDeposits


135,352



136,610



124,762



125,747Federal Home Loan Bank advances


8,508



8,605



9,459



9,682Other borrowings


1,615



1,633



615



547Accrued interest payable


151



151



205



205


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 adjusted for the allowance for loan loss.  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 considered material.





NOTE 12 - REGULATORY CAPITAL REQUIREMENTS





Federal Reserve Board regulations requires that state-chartered, FRB-member banks, such as Empire State Bank, 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 FRB 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 2009 and 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 FRB about capital components, risk weightings and other factors.





Management believes that, as of December 31, 2009 and December 31, 2008, the Bank met all capital adequacy requirements to which it was subject.





73





The following is a summary of the Bank’s actual capital amounts and ratios, compared to the regulatory requirements for minimum capital adequacy and for classification as a well-capitalized institution at December 31, 2009 and December 31, 2008.  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.




Minimum Capital


Classification asBank Actual


Adequacy


Well CapitalizedAmount


Ratio


Amount


Ratio


Amount


RatioDecember 31, 2009

(Dollars in thousands)Tier I (core) capital

$
10,255



6.5
%

$
4,708



3.0
%

$
7,847



5.0
%Risk-based capital:Tier I


10,255



10.1



N/A



N/A



9,417



6.0Total


11,535



11.3



8,180



8.0



10,225



10.0December 31, 2008Tier I (core) capital

$
9,439



6.8
%

$
2,818



3.0
%

$
4,696



5.0
%Risk-based capital:Tier I


9,439



10.1



N/A



N/A



3,865



6.0Total


10,301



11.0



5,153



8.0



6,441



10.0





The New York State Banking Department 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 regulatory 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.








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, 2009 and found them to be adequate.




74





(b) Management’s Report on Internal Control over Financial Reporting




The Report of Management on Internal Control over Financial Reporting is on page 47 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.


75
  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 6, 2010.


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 6, 2010.





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 6, 2010.





Set forth below is information, as of December 31, 2009 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


Weighted Average

Exercise Price

of Outstanding Options, Warrants and Rights (2)


Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (3)Equity compensation plans approved by stockholders


152,250


$
10.42



27,750Equity compensation plans not approved by stockholders


–



–



–Total


152,250


$
10.42



27,750





(1)
Consists of options to purchase 152,250 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 27,750 shares of common stock available to be granted from the Empire State Bank 2004 Stock Option Agreement.





76





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 6, 2010.





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 6, 2010.


77


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 LLP31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002








32

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.
 
 ***
Incorporated by reference to the Company Current Report on Form 8-K filed with the SEC on January 5, 2009.
 
 ****
Incorporated 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.
 78
  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: April 8, 2010
By:
/s/ Anthony CostaAnthony Costa, Chairman of the Board and 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: April 8, 2010
/s/ Philip GuarnieriPhilip Guarnieri, President and Co-Chief

Executive Officer, DirectorDate: April 8, 2010
/s/ Thomas SperzelThomas Sperzel, Chief Financial Officer (Principal Financial

and Accounting Officer)Date: April 8, 2010
/s/ William DavenportWilliam Davenport, DirectorDate: April 8, 2010
/s/ Peter FerrantePeter Ferrante, DirectorDate: April 8, 2010
/s/ Andrew Finklestein, Esq.Andrew Finklestein Esq., DirectorDate: April 8, 2010
/s/ Gale Foster, Esq.Gale Foster Esq., DirectorDate: April 8, 2010
/s/ David Freer, Jr.David Freer, Jr., DirectorDate: April 8, 2010
/s/ Harold KahnHarold Kahn, DirectorDate: April 8, 2010
/s/ David MeschesDavid Mesches, DirectorDate: April 8, 2010
/s/ Michael OstrowMichael Ostrow, DirectorDate: April 8, 2010
/s/ Albert PaganoAlbert Pagano, DirectorDate: April 8, 2010
/s/ Peter SavagoPeter Savago, DirectorDate: April 8, 2010
/s/ Thomas D. WeddellThomas D. Weddell, Director