UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-KSB





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







For the
fiscal year ended December 31, 2007







ES
BANCSHARES, INC.


(Exact Name of Registrant as Specified
in its Charter)








Maryland
            20-4663714(State or other
      jurisdiction of
            (I.R.S. Employer
      Identification No.)Incorporation or
      organization)







68 North
Plank Road, Newburgh, New York 12550


(Address
of principal executive offices)





1 (866)
646-0003


(Issuer’s
telephone number, including area code)





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





None





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





Common
stock, par value $0.01 per share


(Title of
Class)





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


(Title of
Class)







Check
whether the Registrant (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past twelve months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such requirements for the past 90 days.    YES x    NO
o





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB.    YES x    NO
o





The
Registrant’s revenues for the fiscal year ended December 31, 2007 were $6.9
million.





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





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o





The
aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock on March
24, 2008, was approximately $9.5 million.  (The exclusion from such amount
of the market value of the shares owned by any person shall not be deemed an
admission by the Registrant that such person is an affiliate of the
registrant.)







DOCUMENTS
INCORPORATED BY REFERENCE





PART III
of Form 10-KSB--Proxy Statement for the Annual Meeting of Stockholders for the
fiscal year ended December 31, 2007.










ES
BANCSHARES, INC.





ANNUAL
REPORT ON FORM 10-KSB


DECEMBER
31, 2007





Table
of Contents











PagePART
      I
              
              3Item
      1.
              Business
              3Item
      2.
              Properties
              26Item
      3.
              Legal
      Proceedings
              26Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              26PART
      II
              
              27Item
      5.
              Market
      for Registrant’s Common Equity and Related Stockholder
    Matters
              27Item
      6.
              Management’s
      Discussion and Analysis and Results of Operations
              27Item
      7.
              Financial
      Statements
              34Item
      8.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
              38Item
      8A. (T)
              Controls
      and Procedures
              38PART
      III
              
              59Item
      9.
              Directors,
      Executive Officers, Promoters and Control Persons; Compliance With Section
      16(a) of the Exchange Act
              59Item
      10.
              Executive
      Compensation
              59Item
      11.
              Security
      Ownership of Certain Beneficial Owners and Management
              59Item
      12.
              Certain
      Relationships and Related Transactions
              60Item
      13.
              Exhibits
              60Item
      14.
              Principal
      Accountant Fees and Services
              61







2


PART
I





Item
      1.
            Business





General





Empire
State Bank, N.A. (the “Bank”) was organized under federal law as a national bank
to primarily service the communities in and around Orange County and Ulster
County, New York.  Upon receipt of final approval from Office of the
Comptroller of the Currency (“OCC”), the primary regulator of national banks,
and the Federal Deposit Insurance Corporation (the “FDIC”), the Bank commenced
operations on June 28, 2004.





On August 15, 2006, we reorganized into
a one-bank holding company structure (the “Reorganization”).  In
connection with the Reorganization, the Bank formed ES Bancshares, Inc. (the
“Company”), a Maryland corporation, to serve as the Bank’s holding company and
the Bank became a wholly owned subsidiary of the Company and former shares of
Bank Common Stock represent the same number of shares of Company Common
Stock.





As a
community-oriented full service commercial bank, we offer a variety of financial
services to meet the needs of communities in our market area.  We
attract deposits from the general public and expect to use such deposits to
originate commercial, multi-family, one- to four-family, home equity, commercial
real estate, construction, land and consumer installment loans.  We
also invest in mortgage-backed and other securities permissible for a national
bank.





The
executive offices (corporate headquarters) and our lending center located at 68
North Plank Road, Newburgh, New York 12550, and our telephone number at that
address is (845) 561-0003.





Recent
Activity





The Bank
has filed an Application for Conversion to a State Bank with the New York State
Banking Department and intends to file an application to become a member of the
Federal Reserve System of New York.  If these applications are
approved, the New York State Banking Department will serve as the Bank’s primary
state regulator and the Federal Reserve Board, rather than the Office of the
Comptroller of the Currency, will serve as the Bank’s primary federal
regulator.





Market
Area





We
conduct our banking operations through our main office located at 68 North Plank
Road, Newburgh, New York, one full-service banking office located in New Paltz,
New York and another in Staten Island, New York.  We also operate a
loan production office in the village of Lynbrook in Nassau County, New
York.Our primary
market area for deposits includes the Town of Newburgh, the Village of New Paltz
and the borough of Staten Island in addition to the communities surrounding
those offices. Our primary market area for our lending activities consists of
communities within Orange County, Ulster County, Dutchess County, Nassau County,
the five boroughs of New York City and portions of Rockland, Putnam and
Westchester Counties, New York.





Newburgh
is located in Orange County, New York approximately 60 miles north of New York
City and 60 miles south of Albany, New York.  New Paltz is located in
Ulster County, New York approximately 20 miles north of our Newburgh
location.  The Newburgh-New Paltz area consists of many small towns
that are experiencing economic growth and social
transformation.  Staten Island is one






3


of the
five boroughs of New York City and our office in Staten Island is located 88
miles south of our Newburgh location  The borough of Staten
Island is the least populated but third largest geographically of the City’s
five boroughs and is comprised of numerous suburban-style residential
neighborhoods and small businesses.  Significant numbers of people
seeking affordable housing are relocating to the area, most notably from the New
York City metropolitan area.





Competition





We face substantial competition for
both deposits and loans.  Most of our competitors have been in
business for a number of years and therefore, have an established client
base.  Our principal competitors for deposits are other commercial
banks, savings and loan associations, savings banks and credit unions, as well
as money market mutual funds, insurance companies, brokerage firms, many which
are substantially larger than us.  Our competition for loans comes
principally from savings banks, savings and loan associations, commercial banks,
mortgage bankers, mortgage brokers, finance companies and other institutional
lenders.





Lending
Activities





General.We offer a variety of
loan products, including commercial real estate, commercial business loans,
construction or development loans, home equity loans and lines of credit,
multi-family real estate loans, mortgage loans secured by one- to four-family
residences, and to a lesser extent consumer loans.  Generally, we
engage in secondary market sales of our fixed-rate and adjustable rate
residential mortgage originations.





The Board believes that by emphasizing
loans other than residential loans, our loan portfolio may carry a more
favorable yield and/or a shorter term to repricing than the portfolios of
institutions that emphasize residential lending.  However,
non-residential loans are generally believed to carry a higher level of credit
risk than residential loans.  Such risks may be magnified by current
economic conditions making the slow economy and flat to declining real estate
prices.





























4


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





At
      December 31, 2007
            
            
            At
      December 31, 2006Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(Dollars
      in thousands)Loans
      held-for-sale:One-to
      four-family
            
            $
            350
            
            
            
            0.4%
            
            
            $
            215
            
            
            
            0.3%Real estate
      loans:One-to
      four-family
            
            
            1,913
            
            
            
            2.7
            
            
            
            1,591
            
            
            
            2.6Commercial
            
            
            32,426
            
            
            
            45.0
            
            
            
            27,503
            
            
            
            44.8Multi-family
            
            
            6,997
            
            
            
            9.7
            
            
            
            6,057
            
            
            
            9.8Construction
      or development
            
            
            7,319
            
            
            
            10.2
            
            
            
            9,128
            
            
            
            14.9Home
      equity (1)
            
            
            7,256
            
            
            
            10.1
            
            
            
            5,383
            
            
            
            8.8Total
      real estate loans
            
            
            55,911
            
            
            
            77.7
            
            
            
            49,662
            
            
            
            80.9Other
      loans:Commercial
      business (1)
            
            
            14,335
            
            
            
            19.9
            
            
            
            10,903
            
            
            
            17.7Consumer
            
            
            1,459
            
            
            
            2.0
            
            
            
            663
            
            
            
            1.1Total
      other loans
            
            
            15,794
            
            
            
            21.9
            
            
            
            11,566
            
            
            
            18.8Total
      loans
            
            
            72,055
            
            
            
            100.0%
            
            
            
            61,443
            
            
            
            100.0%Less:Deferred
      loan costs (fees) net
            
            
            364
            
            
            
            
            
            
            
            344Allowance
      for loan losses
            
            
            (624
            )
            
            
            
            
            
            
            (581
            )Total
      loans receivable,
      net
            
            $
            71,795
            
            
            
            
            
            
            $
            61,206





(1)
Includes lines of credit.








5


Loan Maturity
Schedule.The following table shows the remaining contractual
maturity of our loans at December 31, 2007.  Loans are shown as due
based on their contractual terms to maturity.  Adjustable rate loans
are shown as maturing in the period during which the contract is
due.  The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.





Amounts
      (in thousands) due in:
            
            One-
      to Four-Family Home Equity Loans
            
            
            Multi
      Family & Commercial Real Estate
            
            
            Commercial
      Business
            
            
            Construction
      or Development
            
            
            Consumer
            
            
            Total(In
      Thousands)One
      year or less
            
            $
            —
            
            
            $
            1,695
            
            
            $
            7,771
            
            
            $
            4,599
            
            
            $
            918
            
            
            $
            14,983After
      one year through five years
            
            
            105
            
            
            
            1,837
            
            
            
            2,678
            
            
            
            2,294
            
            
            
            333
            
            
            
            7,247After
      five years
            
            
            9,414
            
            
            
            35,891
            
            
            
            3,886
            
            
            
            426
            
            
            
            208
            
            
            
            49,825Total
      loans
            
            $
            9,519
            
            
            $
            39,423
            
            
            $
            14,335
            
            
            $
            7,319
            
            
            $
            1,459
            
            
            $
            72,055








The
following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at December 31, 2007 that are contractually due after one
year.




Due
      After One YearFixed
            
            
            Adjustable
            
            
            Total(In
      thousands)One-
      to Four-Family & Home Equity Loans
            
            $
            2,196
            
            
            $
            7,323
            
            
            $
            9,519Multi-family
      & Commercial Real Estate
            
            
            8,958
            
            
            
            28,770
            
            
            
            37,728Commercial
      Business
            
            
            3,925
            
            
            
            2,639
            
            
            
            6,564Construction
      or Development
            
            
            0
            
            
            
            2,721
            
            
            
            2,721Consumer
            
            
            33
            
            
            
            508
            
            
            
            541Total
      loans
            
            $
            15,112
            
            
            $
            41,961
            
            
            $
            57,073








6


The total
amount of loans due after December 31, 2008 which have predetermined interest
rates is $15.1 million, while the total amount of loans due after such dates
which have floating or adjustable interest rates is $42.0 million.





We are
subject to limits on the amount we may lend to one borrower.  At
December 31, 2007, our regulatory limit on loans to one borrower was
approximately $2.6 million.  At that date, our largest credit facility
to one borrower was $1.5 million.  This is comprised of a real estate
secured line of credit in the committed amount of $750,000, along with three
mortgage loans on three different income producing mixed-use properties whose
combined balances were approximately $800,000 at this date.  As of
December 31, 2007, these obligations were current in their terms.





Our
lending is subject to our written underwriting standards and to loan origination
procedures.  Decisions on loan applications are made on the basis of
detailed applications submitted by the prospective borrower and property
valuations (consistent with our appraisal policy) prepared by independent
appraisers.  The loan applications are designed primarily to determine
the borrower’s ability to repay, and the more significant items on the
application are verified through use of credit reports, financial statements,
tax returns and/or confirmations.





Under our
lending policy, the individual processing an application is responsible for
ensuring that all 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 our underwriting guidelines
described below.  Also, each application file is reviewed to assure
its accuracy and completeness.  Our quality control process includes
reviews by an independent third partyof underwriting
decisions, appraisals anddocumentation.





Generally,
we require 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. We also require flood insurance to protect the property
securing its interest when the property is located in a flood
plain.





Commercial Real
Estate and Multi-family Lending.Office buildings, mixed-use
properties, strip shopping centers and 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 (including walk-up apartments).  Management anticipates
that most of our commercial real estate or multi-family loans over the next
several years will have balances of $1.0 million or less.





Commercial
real estate and multi-family loans generally carry a maximum term of 25 years
and have adjustable rates 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 designated by us at the time the loan is made performs
appraisals on properties securing commercial real estate and multi-family loans.
Our management reviews all appraisals on multi-family or commercial real estate
loans.  In addition, our underwriting procedures require verification
of the borrower’s credit history, income and financial statements, banking
relationships, references and income projections for the property. Where
feasible, we seek to obtain personal guarantees on these loans.  For
loans in excess of $250,000, an environmental studymay be
performed.





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 concentration of principal in a limited
number of loans and borrowers, the effects of general economic




7


conditions
on income producing properties, and the increased difficulty of evaluating and
monitoring these types of loans.  Furthermore, the repayment of loans
secured by commercial real estate and multi-family real estate is typically
dependent upon the successful operation of the related real estate
project.  If the cash flow from the project is reduced (for example,
if leases are not obtained or renewed), the borrower’s ability to repay the loan
may be impaired.  For this reason, such loans may be subject to
changes in the economy, including today’s slowing of economic
activity.  There can be no assurance that we will not experience
credit problems as a result of our investment in commercial real estate and
multi-family loans.





Set forth
below is information regarding the types of commercial real estate and
multi-family loans in our loan portfolio at December 31, 2007 and
2006.





At
      December 31,2007
            
            
            2006Commercial
      and Multi-Family Mortgage
      Types
            
            Number
      of Loans
            
            
            (Dollars
      in thousands) Balances
            
            
            Number
      of Loans
            
            
            BalancesApartments
            
            
            16
            
            
            $
            7,490
            
            
            
            14
            
            
            $
            6,057Offices
            
            
            5
            
            
            
            2,291
            
            
            
            7
            
            
            
            3,138Warehouses
            
            
            7
            
            
            
            4,347
            
            
            
            6
            
            
            
            4,377Restaurants
            
            
            7
            
            
            
            5,157
            
            
            
            7
            
            
            
            5,364Land
            
            
            0
            
            
            
            0
            
            
            
            1
            
            
            
            420Mixed
      use
            
            
            25
            
            
            
            11,019
            
            
            
            18
            
            
            
            7,765Other
            
            
            19
            
            
            
            9,119
            
            
            
            13
            
            
            
            6,439Total
            
            
            79
            
            
            $
            39,423
            
            
            
            66
            
            
            $
            33,560





Commercial
Business Lending.We offer loans and lines of credit to local
businesses for working capital, machinery and equipment purchases, expansion and
other business purposes.  The terms of these loans generally do not
exceed seven years while commercial lines of credit are generallyreviewed
annually.  The interest rates on such loans are generally variable and
indexed to the highest prime rate published in The Wall Street Journal plus
or minus a margin or in some cases, fixed.  At December 31, 2007 we
had $14.3 million of commercial business loans outstanding, representing 19.9%
of the total loan portfolio and an additional $6.0 million of funds committed,
but undrawn, under commercial lines of credit.





Our
commercial business lending policy includes 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 our current credit analysis.





Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower’s ability to make repayment from the cash
flow of the borrower’s business.  As a result, the availability of
funds for the repayment of 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 subject to changes in the economy, including today’s slowing of economic
activity and today’s flat or declining real estate prices.  Further,
the collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the
business.





8


Set forth
below is information regarding the types of commercial business loans in our
loan portfolio at December 31, 2007 and 2006.





At
      December 31,2007
            
            
            2006Number
      of
            
            
            (Dollars
      in thousands)
            
            
            Number
      ofCommercial Business Loans
            
            Loans
            
            
            Balances
            
            
            Loans
            
            
            BalancesBuilder
      lines of credit
            
            
            16
            
            
            $
            4,489
            
            
            
            17
            
            
            $
            4,701Working
      capital
            
            
            24
            
            
            
            2,449
            
            
            
            21
            
            
            
            1,675Real
      estate acquisition & Investment
            
            
            15
            
            
            
            3,581
            
            
            
            10
            
            
            
            1,646Business
      acquisition
            
            
            2
            
            
            
            180
            
            
            
            6
            
            
            
            603Equipment
      purchase
            
            
            6
            
            
            
            431
            
            
            
            6
            
            
            
            367Attorney
      lines of credit
            
            
            2
            
            
            
            1,500
            
            
            
            2
            
            
            
            1,408Other
            
            
            16
            
            
            
            1,705
            
            
            
            5
            
            
            
            503Total
            
            
            81
            
            
            $
            14,335
            
            
            
            67
            
            
            $
            10,903





One- to
Four-Family and Home Equity Residential Real Estate Lending.  At December 31,
2007, we had $9.5 million, or 13.2% of our total loan portfolio, in loans
secured by one- to four-family residential properties (including $350,000 of
loans held for sale, $5.4 million in advances under home equity lines of credit,
and $1.8 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 are generally sold in
the secondary market, servicing released, in order to minimize interest rate
risk exposure.  The interest rates on such loans are generally based
on competitive factors.  Adjustable rate one- to four-family loans are
based on a specific index plus a margin and may be retained for portfolio
purposes.





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.  We currently
originate residential mortgage loans for our own portfoliowith loan-to-value
ratios of up to 80% for owner-occupied homes (97% with private mortgage
insurance to reduce our exposure to 80% or less) and up to 70% for non-owner
occupied homes.  Originated residential mortgage loans that are
immediately sold to the secondary market can have loan-to-value ratios of up to
103% for owner-occupied homes and up to 100% for non-owner occupied
homes.





We also originate home equity lines of
credit and home equity loans secured by a lien on the borrower’s
residence.  Our home equity lines and loans are generally limited to
$200,000.  We use the same underwriting standards for home equity
lines and loans as we use for one- to four-family residential first mortgage
loans for our own portfolio.  The interest rates for home equity lines
of credit float at a stated margin below the highest prime rate published in
The Wall Street Journal
and may not exceed 18.0% over the life of the loan.  We currently
offer home equity lines for terms of up to 30 years with interest only paid for
the first ten years of the loan term.  At December 31 2007, we had $
5.4 million of outstanding advances under home equity lines and an additional
$4.8 million of funds committed, but undrawn, under home equity lines of
credit.  Home equity 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
80%, although in exceptional cases we will consider exceeding such
ratio.  At December 31, 2007, our home equity loans totaled $1.8million.





9


We also
originate loans secured by co-ops and condominiums located in our market
area.  Condominium and co-op loans are made on substantially the same
terms as one- to four-family loans.  At December 31, 2007, we had no
condominium or co-op loans.





Our
residential mortgage loans customarily include due-on-sale clauses giving us 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.





Construction and
Land Lending.  We originate construction loans to individuals
and builders for the construction of residential real estate and commercial real
estate properties.  At December 31, 2007, our construction loan
portfolio totaled $5.8 million, or 8.1% of the total loan portfolio and an
additional $6.2 million of funds committed but undrawn.  At December
31, 2007 $150,000 of our construction loans were for residential real estate
purposes.  We also originate a limited number of land loans primarily
for the purpose of developing residential subdivisions.  At December
31, 2007, our land loan portfolio totaled $1.5 million, or 2.1% of the total
loan portfolio. At December 31, 2007, $183,000 of our land loans were made for
the purpose of developing residential lots.





Construction
loans to builders of one- to four-family residences generally carry terms of up
to two years and require the payment of interest only for the loan
term.  The maximum loan-to-value ratio on loans to builders for the
construction of residential real estate is 80%.  When practical, we
seek 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, 2007, we had $2.3 million of
construction loans outstanding to builders of one- to four-family
residences.





We also
originate commercial real estate construction loans to experienced local
developers.  We will make these loans only when there is a written
take-out commitment from an acceptable financial institution or government
agency, or when we have made 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, 2007, we had $3.4 million of
construction loans outstanding to builders of commercial real estate
properties.





Construction
loans to individuals for the construction of their residences are structured to
convert to permanent loans at the end of the construction phase, which typically
runs up to one year.  These construction loans have rates and terms
comparable to one- to four-family loans then offered by us, except during the
construction phase where 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%.  Residential
construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent residential loans. At December 31, 2007, there
were $150,000 in construction loans outstanding to persons intending to occupy
the premises upon the completion of the construction.





Our
construction loan agreements generally provide that loan proceeds are disbursed
in increments as construction progresses.  We review the progress of
the construction of the dwelling before disbursements are made.





We also
make loans to builders and developers for the development of one- to four-family
lots in our market area.  All of our land loans have been originated
with adjustable rates of interest tied to the prime rate of interest and have
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. When feasible, we
obtain personal guarantees for our land loans.





10


Construction
and land loans are obtained principally through referrals from the Bank and
management’s contacts in the business community as well as existing and walk-in
customers.  The application process includes a submission of accurate
plans, specifications and costs of the project to be constructed/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 appraised value
and/or the cost of construction (land plus building).





Construction
and land lending generally affords us 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 recent economic slowdown and apparent decline
in real estate values) on development properties and on real estate developers
and managers.  In addition, the nature of these loans is such that
they are more difficult to evaluate and monitor.  Finally, the risk of
loss on construction and land loans is dependent largely upon the accuracy of
the initial estimate of the individual property’s value upon completion and the
estimated cost (including interest) of construction.  If the cost
estimate proves to be inaccurate, we may be required to advance funds beyond the
amount originally committed to permit completion of the property.





Consumer
Lending.  We originate a variety of consumer loans, including
automobile, home improvement, deposit account and other loans for household and
personal purposes.  At December 31, 2007, consumer loans totaled $1.5
million, or 2.0% 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 by us for consumer loans include a determination
of the applicant’s payment history on other debts and the ability to meet
existing obligations and payments on the proposed loan.  Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.





Consumer
loans may entail greater credit risk than residential mortgage loans,
particularly in the case of consumer loans, which are unsecured or are secured
by rapidly depreciable assets, such as automobiles.  In such cases,
any repossessed 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 (which may in turn be affected by today’s adverse economic
climate.)  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 to




11


assist in
the process of obtaining loans.  Total loan originations amounted to
$48.7 million for the year ended December 31, 2007.





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.  The local economy and the interest rate environment affect
demand.





In order
to reduce our vulnerability to changes in interest rates, we generally sell in
the secondary market our fixed-rate residential mortgage originations in
addition to certain current year originations of adjustable-rate
loans.  Residential mortgage sales amounted to $14.2 million for the
year ended December 31, 2007.





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





Fiscal
      Years Ended December 31,2007
            
            
            2006(In
      thousands)Beginning
      unpaid principal balance
            
            $
            61,443
            
            
            $
            33,869Loans
      Originated:Real
      estate loansOne-to
      four-family
            
            
            14,898
            
            
            
            13,364Commercial
      real estate
            
            
            8,078
            
            
            
            14,161Construction
            
            
            8,379
            
            
            
            5,288Land
            
            
            —
            
            
            
            3,291Home
      equity line of credit
            
            
            3,902
            
            
            
            4,297Commercial
      line of credit
            
            
            8,511
            
            
            
            8,451Commercial
      business loans
            
            
            2,234
            
            
            
            5,549Consumer
      loans
            
            
            2,674
            
            
            
            2,371Total
      loans originated
            
            
            48,676
            
            
            
            56,772Loans
      Sold:One-to
      four-family real estate loans
            
            
            (14,174
            )
            
            
            (13,253
            )Participated
      to others
            
            
            (2,862
            )
            
            
            (579
            )Principal
      repayments and paydowns:Total
      principal repayments
            
            
            (21,028
            )
            
            
            (15,366
            )Charge-offs
            
            
            —
            
            
            
            —Transfer
      to real estate owned
            
            
            —
            
            
            
            —Unpaid
      principal balance atend
      of period
            
            
            72,055
            
            
            
            61,443Less:Allowance
      for loan leases
            
            
            (624
            )
            
            
            (581
            )Net
      deferred loan costs
            
            
            364
            
            
            
            344Net
      loans at end of period
            
            $
            71,795
            
            
            $
            61,206






12


Asset
Quality





Delinquency
Procedures.  When a borrower
fails to make a required payment on a loan, we attempt to cure the delinquency
by contacting the borrower.  Late notices will be sent when a payment
is more than 16 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 30 and 90 days after the due date.  If the loan
is contractually delinquent 60 days, we will send a 30-day demand letter to the
borrower and, after the loan is contractually delinquent 91 days, institute
appropriate action to foreclose on the property.  If foreclosed, the
property will be sold at auction and may be purchased by
us.  Delinquent consumer loans are generally handled in a similar
manner. Our procedures for repossession and sale of consumer collateral are
subject to various requirements under New York consumer protection
laws.





Real
estate that we may acquire as a result of foreclosure or by deed in lieu of
foreclosure will be classified as 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.





We had
one loan delinquent 60 days or more as of December 31, 2007. This loan is a
residential land loan secured by two building lots most recently appraised at
$225,000.  The loan’s outstanding balance as of December 31, 2007 was
$183,000.  We are proceeding with foreclosure against the property
with a foreclosure sale schedule date of July, 2008.





Classification of
Assets.  OCC regulations
require that we classify our own assets on a regular basis and establish prudent
valuation allowances based on such classifications.  In addition, in
connection with examinations, OCC examiners have the authority to identify
problem assets, and if appropriate, require that they be
classified.  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 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 us to
establish prudent general allowances for loan losses.  If an asset or
portion thereof is classified as loss, we 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.  If a Bank does not agree
with an examiner’s classification of an asset, it may appeal this determination
to the District Deputy Comptroller of the OCC.









13


In
connection with the filing of our periodic reports with the OCC and in
accordance with our classification of assets policy, we regularly review the
problem loans in our portfolio to determine whether any loans require
classification in accordance with applicable regulations.   On
the basis of this review of our assets, at December 31, 2007, we had classified
the following assets:





One-
      to
                Four-Family
            
            
            Multi-Family
            
            
            Commercial
      Real Estate
            
            
            Land
            
            
            Consumer
            
            
            Commercial
      Business
            
            
            Total(In
      thousands)Sub-Standard
            
            
            —
            
            
            
            —
            
            
            $
            272
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            272Doubtful
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            
            —
            
            
            
            —
            
            
            
            272
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            272





Our
classified assets consist of (i) non-performing loans and (ii) loans and other
assets of concern discussed herein.  As of the date hereof, these
asset classifications are believed to be consistent with those of the
OCC.





Non-Performing
Assets.  Loans are
reviewed monthly and any loan whose collectibility is doubtful is placed on
non-accrual status.  Loans are placed on non-accrual 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 non-accrual status is charged against interest income.  Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan.  At December 31, 2007 we had one non-accrual loan in the
amount of $183,000 and no troubled debt restructurings (which involved forgiving
a portion of interest or principal on any loans or making loans at a rate
materially less than that of market rates) and no foreclosed assets acquired in
settlement of loans.  At December 31, 2006 we had no non-accruals or
troubled debt restructurings or foreclosed assets.












































14


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





At
      December 31,2007
            
            
            2006(Dollars
      in thousands)Non-accrual
      loans:Real
      estate loans:One-
      to four-family
            
            
            —
            
            
            
            —Commercial
            
            
            —
            
            
            
            —Multi-family
            
            
            —
            
            
            
            —Construction
      or development
            
            
            183
            
            
            
            —Home
      equity
            
            
            —
            
            
            
            —Total
      real estate loans
            
            
            183
            
            
            
            —Other
      loans:Commercial
      business
            
            
            —
            
            
            
            —Consumer
            
            
            —
            
            
            
            —Total
      other loans
            
            
            —
            
            
            
            —Foreclosed
      assets, net
            
            
            —
            
            
            
            —Total
      non-performing assets
            
            
            183
            
            
            
            —Ratios:Non-performing
      loans to total loans
            
            
            0.25
            %
            
            
            —Non-performing
      loans to total assets
            
            
            0.19
            %
            
            
            —Non-performing
      assets to total assets
            
            
            0.19
            %
            
            
            —







At
December 31, 2007, there were no other loans or other assets, that are not
discussed above, where known information about the possible credit problems of
borrowers caused us to have serious doubts as to the ability of the borrowers to
comply with present loan repayment terms and which may result in disclosure of
such loans in the future.





Allowance for
Loan Losses.  The allowance for loan losses is established
through a provision for loan losses based on management’s evaluation of the
risks inherent in our loan portfolio and charged to operations.  The
allowance is established as an amount that management believes will be adequate
to absorb probable incurred losses on existing loans.  The allowance
for loan losses consists of amounts specifically allocated to non-performing
loans and potential problem loans (if any) as well as allowances determined for
each major loan category.  Loan categories such as single-family
residential mortgages and consumer loans are generally evaluated on an aggregate
or “pool” basis by applying loss factors to the current balances of the various
loan categories.  The loss factors are determined by management based
on an evaluation of historical loss experience, delinquency trends, volume and
type of lending conducted, and the impact of current economic conditions in our
market area.  Finally, management evaluates and considers the
allowance ratios and coverage percentages of both peer group and regulatory
agency data.





Management’s
evaluation of the adequacy of the allowance, which is subject to periodic review
by the OCC, 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




15


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.





Fiscal
      Years Ended December 31,2007
            
            
            2006(In
      thousands)Balance
      at beginning of year
            
            $
            581
            
            
            $
            106Provision
      for
      losses
            
            
            43
            
            
            
            476Charge-offs
            
            
            —
            
            
            
            (1
            )Recoveries
            
            
            —
            
            
            
            —Balance
      at end of
      year
            
            $
            624
            
            
            $
            581Balance
      as a percentage of total loans
            
            
            0.87
            %
            
            
            0.95
            %Ratio
      of net charge-offs to average total loans
            
            
            —
            %
            
            
            —
            %





The
following table sets forth the breakdown of the allowance for loan losses by
loan category at December 31, 2007 and December 31, 2006, excluding $350,000 and
$215,000, respectively, of one- to four-family loans held for
sale.  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 31,2007
            
            
            2006Loan
      Loss Allowance
            
            
            Loan
      Balances by Category
            
            
            Percent
      of Loans to Total Loans
            
            
            Loan
      Loss Allowance
            
            
            Loan
      Balances by Category
            
            
            Percent
      of Loans to Total Loans(Dollars
      in thousands)Allowance
      allocated to:Residential
      and commercial mortgages
            
            $
            313
            
            
            $
            41,336
            
            
            
            57.7
            %
            
            $
            360
            
            
            $
            35,151
            
            
            
            57.4
            %Commercial
      business loans
            
            
            185
            
            
            
            14,335
            
            
            
            20.0
            
            
            
            115
            
            
            
            10,903
            
            
            
            17.8Home
      equity line of credit loans
            
            
            34
            
            
            
            7,256
            
            
            
            10.1
            
            
            
            26
            
            
            
            5,383
            
            
            
            8.8Other
      loans
            
            
            13
            
            
            
            8,778
            
            
            
            12.2
            
            
            
            7
            
            
            
            9,791
            
            
            
            16.0Unallocated
            
            
            79
            
            
            
            —
            
            
            
            —
            
            
            
            73
            
            
            
            —
            
            
            
            —Total
      allowance
            
            $
            624
            
            
            $
            71,705
            
            
            
            100.0
            %
            
            $
            581
            
            
            $
            61,228
            
            
            
            100.0
            %





16


Environmental
Issues





We
encounter certain environmental risks in our lending
activities.  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.





We
believe our procedures regarding the assessment of environmental risk are
adequate.  As of December 31, 2007, we were unaware of any
environmental issues with respect to any of our mortgage loans that would
subject it 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.
Our investment policy is to invest funds among categories of investments and
maturities based upon our asset/liability management policies, investment
quality, loan and deposit volume, liquidity needs and performance
objectives.





SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, requires
that securities be classified into three categories:  trading, held to
maturity, and available for sale. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and are reported at fair value with unrealized gains and
losses included in earnings.  Debt securities for which we have the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost.  All other securities not
classified as trading or held to maturity are classified as available for
sale.  Available for sale securities are reported at fair value with
unrealized gains and losses included in a separate component of stockholders’
equity.  At December 31, 2007, we had $7.0 million or 100% of our
securities classified as available for sale.  There were no securities
classified as trading or held to maturity.  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.





We invest
in mortgage-backed securities in order to supplement loan production and achieve
our asset/liability management goals.  Substantially all of the
mortgage-backed securities we own are issued, insured or guaranteed either
directly or indirectly by a federal agency.  At December 31, 2007, the
amortized cost of mortgage-backed securities, all of which are classified
available for sale, totaled nearly $1.7 million, and the market value of all
mortgage-backed securities totaled nearly $1.7 million.  At December
31, 2007, all of our mortgage-backed securities have an original fixed-rate term
for three years and then convert to a one-year adjustable rate security in year
four.









17


The fair
value of our mortgage-backed securities would decline significantly in the event
of an increase in interest rates.  In addition, a decrease in interest
rates could result in an increase in prepayments leading to reinvestment at a
lower yield.  Similarly, a decline in interest rates would result in
the downward adjustment of the rates earned on our adjustable-rate,
mortgage-backed securities portfolio resulting in lower yields and interest
income in future periods.





For
additional information regarding our mortgage-backed securities portfolio, see
Note 2 of the Notes to Financial Statements.





In
addition to mortgage-backed securities, we also invest in high-quality
securities (primarily U.S. government and agency obligations) with various
maturities.  At December 31, 2007, we had $5.4 million in U.S.
government agency securities classified as available for sale.  See
Note 2 of the Notes to Financial Statements for additional information regarding
our securities portfolio.





All
national banks are required to be members of the Federal Reserve System and to
purchase stock in the Federal Reserve Bank within the Federal Reserve district
in which the national bank is located.  In accordance with this
requirement, at December 31, 2007, we owned 6,480 shares totaling $324,000 in
common stock of the Federal Reserve Bank of New York.





During
the year ended December 31, 2007 we became a member of the Federal Home Loan
Bank of New York.  One condition of membership is the purchase of the
Federal Home Loan Bank of New York’s capital stock.  Pursuant with
that requirement, at December 31, 2007, we owned 886 shares totaling $89,000 in
capital stock of the Federal Home Loan Bank of New York.





The
following table sets forth the amortized cost and fair value of our securities,
by accounting classification category and by type of security, at the dates
indicated.





At
      December 31,2007
            
            
            2006Amortized
      Cost
            
            
            Fair
      Value
            
            
            Amortized
      Cost
            
            
            Fair
      Value(In
      thousands)Investment
      securities available for sale:U.S.
      Government agencies
            
            $
            5,358
            
            
            $
            5,377
            
            
            $
            5,396
            
            
            $
            5,383Mortgage-backed
      securities
            
            
            1,672
            
            
            
            1,660
            
            
            
            4,146
            
            
            
            4,060Subtotal
            
            
            7,030
            
            
            
            7,037
            
            
            
            9,542
            
            
            
            9,443FRB
      stock
            
            
            324
            
            
            
            324
            
            
            
            335
            
            
            
            335FHLB
      stock
            
            
            89
            
            
            
            89
            
            
            
            —
            
            
            
            —Total
      investment securities and FRB stock
            
            $
            7,443
            
            
            $
            7,450
            
            
            $
            9,877
            
            
            $
            9,778






18


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





Available
      for SaleAt
      December 31,2007
            
            
            2006Amortized
      Cost
            
            
            Fair
      Value
            
            
            Weighted
      Average Yield
            
            
            Amortized
      Cost
            
            
            Fair
      Value
            
            
            Weighted
      Average Yield(Dollars
      in thousands)U.S.
      Government Agencies:Due
      less than one year
            
            $
            —
            
            
            $
            —
            
            
            
            
            
            $
            1,000
            
            
            $
            1,000
            
            
            
            4.75
            %One
      year to less than three years
            
            
            499
            
            
            
            502
            
            
            
            5.16
            
            
            
            1,997
            
            
            
            1,993
            
            
            
            5.28Three
      years to less than five years
            
            
            1,000
            
            
            
            997
            
            
            
            5.00
            
            
            
            700
            
            
            
            700
            
            
            
            6.15Five
      years to ten years
            
            
            1,700
            
            
            
            1,708
            
            
            
            6.00
            
            
            
            1,200
            
            
            
            1,196
            
            
            
            6.00More
      than ten years
            
            
            2,159
            
            
            
            2,170
            
            
            
            6.01
            
            
            
            499
            
            
            
            494
            
            
            
            6.03Total
            
            
            5,358
            
            
            
            5,377
            
            
            
            5.74
            %
            
            
            5,396
            
            
            
            5,383
            
            
            
            5.52
            %Mortgage-backed
      securities:Due
      less than one year
            
            $
            —
            
            
            $
            —
            
            
            
            —
            %
            
            $
            —
            
            
            $
            —
            
            
            
            —
            %Due
      After 10 years
            
            
            1,672
            
            
            
            1,660
            
            
            
            4.04
            
            
            
            4,146
            
            
            
            4,060
            
            
            
            3.95Total
            
            
            1,672
            
            
            
            1,660
            
            
            
            4.04
            %
            
            
            4,146
            
            
            
            4,060
            
            
            
            3.95
            %Total
      investment securities
            
            $
            7,030
            
            
            $
            7,037
            
            
            
            5.34
            %
            
            $
            9,542
            
            
            $
            9,443
            
            
            
            4.84
            %





Sources
of Funds





General.  Our
primary sources of funds are deposits.  We also derive funds from
payments (including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities and other funds provided from
operations.





Deposits.  We
offer a variety of deposit accounts having a wide range of interest rates and
terms.  Deposit account terms 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, advertising and customer service to attract and retain these
deposits.





The
variety of deposit accounts we offer has allowed us to be competitive in
obtaining funds and to respond with flexibility to changes in consumer demand.
We manage the pricing of our deposits in keeping with our asset/liability
management, profitability and growth objectives.





During
the last several years, in order to fund our growing loan portfolio, we
increased our level of money market account deposits significantly by offering
competitive rates rather than relying predominantly on savings
certificates.  Although savings certificate deposits can be used to
more closely align the terms and maturities of commercial mortgage loans, we
believe non-certificate deposits have a lower cost over time, and enable us to
advertise to, attract, and acquire more new customers with needs for multiple
services.





19


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





At
      December 31,2007
            
            
            2006Amount
            
            
            Percent
      of Total Deposits
            
            
            Weighted
      Average Rate
            
            
            Amount
            
            
            Percent
      of Total Deposits
            
            
            Weighted
      Average Rate(Dollars
      in thousands)Demand
      deposit accounts
            
            $
            7,249
            
            
            
            8.8
            %
            
            
            —
            %
            
            $
            8,156
            
            
            
            10.0
            %
            
            
            —
            %NOW
      accounts
            
            
            1,711
            
            
            
            2.1
            
            
            
            2.09
            
            
            
            1,403
            
            
            
            1.7
            
            
            
            0.30Money
      market accounts
            
            
            39,776
            
            
            
            48.3
            
            
            
            4.20
            
            
            
            48,032
            
            
            
            59.0
            
            
            
            4.99Regular
      savings accounts
            
            
            10,132
            
            
            
            12.3
            
            
            
            3.49
            
            
            
            4,601
            
            
            
            5.6
            
            
            
            3.16Savings
      certificate accounts
            
            
            23,474
            
            
            
            28.5
            
            
            
            5.01
            
            
            
            19,283
            
            
            
            23.7
            
            
            
            5.07Total
            
            $
            82,342
            
            
            
            100.0
            %
            
            
            3.93
            %
            
            $
            81,475
            
            
            
            100.0
            %
            
            
            4.33
            %





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 savings certificate accounts outstanding at December 31, 2006 and
December 31, 2007.




Period
      to MaturityAt
      December 31, 2006Less
      than
              
              
              One
      to
              
              
              More
      than
              
              
              
              
              
              PercentOne
      Year
              
              
              Three
      Years
              
              
              Three
      Years
              
              
              Total
              
              
              of
      Total(Dollars
      in Thousands)3.00%
      and below
              
              $
              5
              
              
              $
              —
              
              
              $
              —
              
              
              $
              5
              
              
              
              0.1
              %3.01%
      to 4.00%
              
              
              663
              
              
              
              1,534
              
              
              
              5
              
              
              
              2,202
              
              
              
              11.44.01%
      to 5.00%
              
              
              3,550
              
              
              
              2,371
              
              
              
              255
              
              
              
              6,176
              
              
              
              32.05.01%
      and above
              
              
              5,866
              
              
              
              3,081
              
              
              
              1,953
              
              
              
              10,900
              
              
              
              56.5Total
              
              $
              10,084
              
              
              $
              6,986
              
              
              $
              2,213
              
              
              $
              19,283
              
              
              
              100.0
              %At
      December 31, 20074.00%
      and below
              
              $
              1,011
              
              
              $
              5
              
              
              $
              —
              
              
              $
              1,016
              
              
              
              4.3
              %4.01%
      to 5.00%
              
              
              6,374
              
              
              
              608
              
              
              
              438
              
              
              
              7,420
              
              
              
              31.65.01%
      and above
              
              
              9,924
              
              
              
              2,751
              
              
              
              2,363
              
              
              
              15,038
              
              
              
              64.1Total
              
              $
              17,309
              
              
              $
              3,364
              
              
              $
              2,801
              
              
              $
              23,474
              
              
              
              100.0
              %




20


The
following table sets forth the maturity distribution and related weighted
average interest rates for savings certificate accounts with balances less than
$100,000, accounts of $100,000 or more, and total savings certificates at
December 31, 2007.




At
      December 31, 2007Less
      than $100,000
              
              
              $100,000
      or more
              
              
              TotalWeighted
              
              
              
              
              Weighted
              
              
              
              
              
              WeightedAverage
              
              
              
              
              
              Average
              
              
              
              
              
              AverageAmount
              
              
              Rate
              
              
              Amount
              
              
              Rate
              
              
              Amount
              
              
              Rate(Dollars
      in Thousands)Within
      three months
              
              $
              4,504
              
              
              
              5.02
              %
              
              $
              3,315
              
              
              
              5.09
              %
              
              $
              7,819
              
              
              
              5.05
              %After
      three but within six months
              
              
              3,527
              
              
              
              4.88
              
              
              
              637
              
              
              
              4.19
              
              
              
              4,164
              
              
              
              4.78After
      six but within 12 months
              
              
              4,719
              
              
              
              4.96
              
              
              
              607
              
              
              
              5.00
              
              
              
              5,326
              
              
              
              4.97Total
      within one year
              
              
              12,750
              
              
              
              4.96
              
              
              
              4,559
              
              
              
              4.95
              
              
              
              17,309
              
              
              
              4.96After
      one but within two years
              
              
              2,120
              
              
              
              5.05
              
              
              
              —
              
              
              
              —
              
              
              
              2,120
              
              
              
              5.05After
      two but within three years
              
              
              1,244
              
              
              
              5.06
              
              
              
              —
              
              
              
              —
              
              
              
              1,244
              
              
              
              5.06After
      three but within five years
              
              
              1,701
              
              
              
              5.22
              
              
              
              1,100
              
              
              
              5.34
              
              
              
              2,801
              
              
              
              5.27Total
              
              $
              17,815
              
              
              
              5.00
              %
              
              $
              5,659
              
              
              
              5.03
              %
              
              $
              23,474
              
              
              
              5.01
              %






Borrowings.  The
Company had $89,000 and $53,000 outstanding against its committed $200,000
credit facility with our correspondent bank, Atlantic Central Bankers Bank at
December 31, 2007 and 2006, respectively.  Separately, we have
additional unused credit lines of $5.0 million, also with our correspondent
bank, Atlantic Central Bankers Bank.





Employees





At
December 31, 2007, we had a total of 35 full-time and six part-time
employees.  None of our employees are represented by any collective
bargaining agreement.  Management considers our employee relations to
be good.





Regulation





General.  The
Bank is a national bank subject to regulation, examination, and supervision by
the OCC, as the primary regulator, and by the FDIC, as the deposit
insurer.  As part of this supervision, we are required to file
periodic reports with the OCC concerning our activities and financial
condition.  We must also obtain regulatory approval before commencing
certain activities or engaging in transactions such as mergers and other
business combinations or the establishment, closing, purchase or sale of branch
offices.  The Bank is subject to a semi-annual assessment, based upon
total assets, which is used to fund the operations of the OCC.  Any
change in these laws or regulations, whether by the FDIC, the OCC or Congress,
could have a material adverse impact on The Company and The Bank and their
operations.





The Bank
has filed an Application for Conversion to a State Bank with the New York State
Banking Department and intends to file an application to become a member of the
Federal Reserve Bank of New York.  If these applications are approved,
the New York State Banking Department will serve as the Bank’s primary state
regulator and the Federal Reserve Board, rather than the OCC, will serve as the
Bank’s primary federal regulator.





21


Insurance of
Accounts and Regulation by the FDIC.  Our deposits are
insured by the FDIC.  The FDIC insures deposits up to a maximum of
$100,000 per separately insured depositor and up to a maximum of $250,000 for
self-directed retirement accounts.  As insurer, the FDIC imposes
deposit insurance assessments and is authorized to conduct examinations of, and
to require reporting by, FDIC-insured institutions.  The FDIC may
prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the deposit
insurance funds.  The FDIC also has the authority to initiate
enforcement actions against banks, after giving the OCC an opportunity to take
such action, and may terminate our deposit insurance if it determines that we
has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.





The FDIC
regulations assess insurance premiums based on an institution’s
risk.  Under this assessment system, the FDIC evaluates the risk of
each financial institution based on its supervisory rating, financial ratios,
and long-term debt issuer rating.  The rates for nearly all of the
financial institutions industry vary between five and seven cents for every $100
of domestic deposits.  Federal law requires the FDIC to establish a
deposit reserve ratio for the deposit insurance fund of between 1.15% and 1.50%
of estimated deposits. The FDIC has designated the reserve ratio for the deposit
insurance fund through the first quarter of 2008 at 1.25% of estimated insured
deposits.





Loans to One
Borrower.Federal law and regulation limit the amount that the
Bank may lend to any one borrower to 15% of the Bank’s capital and surplus plus
an additional 10% of the Bank’s capital and surplus if such additional amount is
fully secured by readily marketable collateral.  At December 31, 2007,
the Bank’s regulatory limit on loans to one borrower was $2.6
million.  At that date, we were in compliance with our legal lending
limit.





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


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





To be
considered “adequately capitalized,” a bank must generally have a leverage ratio
of at least 4 percent, a Tier 1 capital to risk-weighted assets ratio of a least
4 percent and total Tier 1 and Tier 2




22


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, 2007,
we met the definition of “well capitalized” under the regulatory framework for
prompt corrective action.





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





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





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





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





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





23


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




Federal
Reserve Bank





As a
member of the Federal Reserve Bank (“FRB”) system, the Bank is required to
maintain a minimum investment in FRB stock.  Any excess may be
redeemed by the Bank or called by the FRB at par.  At its discretion,
the FRB may declare dividends on this stock.  The Bank had $324,000
and $335,000 invested in FRB stock at December 31, 2007 and December 31, 2006,
respectively, which is carried at cost due to the fact that it is a restricted
security.





Federal Reserve
System.  The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time accounts.  Since these
reserves are maintained as vault cash or other non-interest bearing accounts,
they have the effect of reducing a bank’s earnings.  At December 31,
2007, we were in compliance with these reserve requirements.





USA PATRIOT
Act.The USA PATRIOT Act was signed into law on October 26,
2001.  The USA PATRIOT Act 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 (the “Act”), implemented
legislative reforms intended to address corporate and accounting
fraud.  In addition to the establishment of a new accounting oversight
board that is responsible for enforcing auditing, quality control and
independence standards and is funded by fees from all publicly traded companies,
the Act places certain restrictions on the scope of services that may be
provided by accounting firms to their public company audit
clients.  Any non-audit services being provided to a public company
audit client requires preapproval by the company’s audit
committee.  In addition, the Act makes certain changes to the
requirements for partner rotation after a period of time.  The Act
requires chief executive officers and chief financial officers, or their
equivalent, to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission, subject to civil and criminal penalties if
they knowingly or willingly violate this certification
requirement.  In addition, under the Act, counsel is required to
report evidence of a material violation of the securities laws or a breach of
fiduciary duty by a company to its




24


chief
executive officer or its chief legal officer, and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the Board of Directors or the board itself.





Under the
Act, longer prison terms now apply to corporate executives who violate federal
securities laws; the period during which certain types of suits can be brought
against a company or its officers extended; and bonuses issued to top executives
prior to restatement of a company’s financial statements are now subject to
disgorgement if such restatement was due to corporate
misconduct.  Executives are also prohibited from insider trading
during retirement plan “blackout” periods, and loans to company executives
(other than loans by financial institutions permitted by federal rules and
regulations) are restricted.  In addition, a provision directs that
civil penalties levied by the Securities and Exchange Commission as a result of
any judicial or administrative action under the Act be deposited to a fund for
the benefit of harmed investors.  The Federal Accounts for Investor
Restitution provision also requires the Securities and Exchange Commission to
develop methods of improving collection rates.  The legislation
accelerates the time frame for disclosures by public companies, as they must
immediately disclose any material changes in their financial condition or
operations.  Directors and executive officers must also provide
information for most changes in ownership in a company’s securities within two
business days of the change.





The Act
also increases the oversight of, and codifies certain requirements relating to
audit committees of public companies and how they interact with the company’s
“registered public accounting firm.”  Audit Committee members must be
independent and are absolutely barred from accepting consulting, advisory or
other compensatory fees from the issuer.  In addition, companies must
disclose whether at least one member of the committee is a “financial expert”
(as such term is defined by the Securities and Exchange Commission) and if not,
why not.  Under the Act, a company’s registered public accounting firm
is prohibited from performing statutorily mandated audit services for a company
if such company’s chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date.  The Act also
prohibits any officer or director of a company or any other person acting under
their direction from taking any action to fraudulently influence, coerce,
manipulate or mislead any independent accountant engaged in the audit of the
company’s financial statements for the purpose of rendering the financial
statements materially misleading.  The Act also requires the
Securities and Exchange Commission to prescribe rules requiring inclusion of any
internal control report and assessment by management in the annual report to
shareholders.  The Act requires the company’s independent registered
public accounting firm that issues the audit report to attest to and report on
management’s assessment of the company’s internal controls.




The
Company was deemed a non-accelerated filer based on criteria established by the
SEC, and accordingly, beginning in fiscal year end 2007, is required to provide
an assessment of the effectiveness of its internal control over financial
reporting, which is included at page 58.  Further, as a
non-accelerated filer, the company’s independent registered public accounting
firm is not required to issue its audit opinion on the Company’s internal
controls over financial reporting in 2008.  The SEC  delayed
the auditors report until 2009.




We incurred additional expense in 2007
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.






25


Item
      2.
            Properties





The
following table sets forth information concerning our properties at December 31,
2007.  Our premises had an aggregate net book value of approximately
$479,000 at that date.





Location
            
            Year
                Acquired/Leased
            
            Owned
      or Leased
            
            Net
      Book Value at December 31, 2007(Dollars
      in thousands)Corporate
      Headquarters
              And
      Main Office:68
      North Plank Road
              Newburgh,
      New York 12550
            
            2004
            
            Leased
            
            $
      337Branch
      Offices:257
      Main Street
              New
      Paltz, New York 12561
            
            2004
            
            Leased
            
            $  99284
      New Dorp Lane
              Staten
      Island, NY 10306
            
            2007
            
            Leased
            
            $
      43Lending
      Offices:44
      Atlantic Avenue
              Lynbrook,
      New York 11563
            
            2006
            
            Leased
            
            —







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, 2007, we
were not involved in any legal proceedings, the outcome of which would be
material to our financial condition or results of operations.





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





No matter
was submitted to a vote of security holders, through the solicitation of proxies
or otherwise, during the quarter ended December 31, 2007.




26


PART
II





Item
      5.
            Market for Registrant’s Common Equity and Related Stockholder
      Matters





The
Common Stock of ES Bancshares, Inc., is traded on the OTCBB market under the
symbol “ESBS.” At December 31, 2007, the common stock was held by approximately
700 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, 2007
            
            High
            
            
            Low
            
            
            Cash
      Dividends DeclaredFourth
      quarter
            
            $
            8.25
            
            
            $
            6.50
            
            
            $
            —Third
      quarter
            
            
            9.00
            
            
            
            7.25
            
            
            
            —Second
      quarter
            
            
            9.25
            
            
            
            7.85
            
            
            
            —First
      quarter
            
            
            9.50
            
            
            
            8.00
            
            
            
            —Year
      ended
                December
      31, 2006
            
            High
            
            
            Low
            
            
            Cash
      Dividends DeclaredFourth
      quarter
            
            $
            9.75
            
            
            $
            8.00
            
            
            $
            —Third
      quarter
            
            
            9.75
            
            
            
            8.75
            
            
            
            —Second
      quarter
            
            
            9.90
            
            
            
            8.55
            
            
            
            —First
      quarter
            
            
            10.50
            
            
            
            7.95
            
            
            
            —







Item
      6.
            Management’s
      Discussion and Analysis and Results of
  Operations





General





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





Analysis
of Net Interest Income





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




27


The
following table sets forth average balance sheets, average yields and costs, and
certain other information for the years ended December 31, 2007 and 2006,
respectively.  The table reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
(derived by dividing interest income or expense by the monthly average balance
of interest-earning assets or interest-bearing liabilities, respectively), as
well as the net yield on interest-earning assets.  No tax-equivalent
adjustments were made.  The yields set forth below include the effect
of deferred loan origination fees and costs, and purchase discounts and premiums
that are amortized or accreted to interest income.





Year
      Ended December 31,
            
            
            Year
      Ended December 31,2007
            
            
            2006Average
      Balance
            
            
            Interest
            
            
            Average
      Yield/Cost
            
            
            Average
      Balance
            
            
            Interest
            
            
            Average
      Yield/CostAssetsInterest-earning
      assets:Loans
      receivable (1)
            
            $
            69,470
            
            
            $
            5,078
            
            
            
            7.31%
            
            
            $
            50,156
            
            
            $
            3,575
            
            
            
            7.13%Fed
      funds sold
            
            
            8,585
            
            
            
            444
            
            
            
            5.17%
            
            
            
            9,710
            
            
            
            484
            
            
            
            4.99%Certificates
      of deposit
            
            
            5,951
            
            
            
            320
            
            
            
            5.39%
            
            
            
            3,156
            
            
            
            165
            
            
            
            5.22%FRB
      & FHLB stock
            
            
            446
            
            
            
            24
            
            
            
            5.38%
            
            
            
            362
            
            
            
            22
            
            
            
            6.00%Securities
      available for sale (2)
            
            
            7,970
            
            
            
            398
            
            
            
            5.00%
            
            
            
            8,899
            
            
            
            406
            
            
            
            4.56%Total
      interest-earning assets
            
            
            92,422
            
            
            
            6,264
            
            
            
            6.78%
            
            
            
            72,283
            
            
            
            4,652
            
            
            
            6.44%Allowance
      for loan losses
            
            
            (604
            )
            
            
            
            
            
            
            
            
            
            
            (240
            )Non-interest-earning
      assets
            
            
            3,982
            
            
            
            
            
            
            
            
            
            
            
            3,902Total
      assets
            
            $
            95,800
            
            
            
            
            
            
            
            
            
            
            $
            75,945Liabilities
      and Stockholders’ EquityInterest-bearing
      liabilities:NOW
      accounts
            
            $
            1,337
            
            
            
            17
            
            
            
            1.25%
            
            
            $
            912
            
            
            
            3
            
            
            
            0.30%Money
      market accounts
            
            
            46,446
            
            
            
            2,245
            
            
            
            4.83%
            
            
            
            33,196
            
            
            
            1,578
            
            
            
            4.75%Regular
      savings accounts (3)
            
            
            7,799
            
            
            
            276
            
            
            
            3.55%
            
            
            
            3,829
            
            
            
            110
            
            
            
            2.89%Certificates
      of deposit
            
            
            20,445
            
            
            
            1,024
            
            
            
            5.01%
            
            
            
            17,177
            
            
            
            816
            
            
            
            4.75%Total
      interest-bearing deposits
            
            
            76,027
            
            
            
            3,562
            
            
            
            4.69%
            
            
            
            55,114
            
            
            
            2,507
            
            
            
            4.55%Borrowings
            
            
            72
            
            
            
            6
            
            
            
            8.13%
            
            
            
            19
            
            
            
            1
            
            
            
            8.25%Total
      interest-bearing liabilities
            
            
            76,099
            
            
            
            3,568
            
            
            
            4.69%
            
            
            
            55,133
            
            
            
            2,508
            
            
            
            4.55%Non-interest-bearing
      liabilities
            
            
            8,680
            
            
            
            
            
            
            
            
            
            
            
            9,228Total
      liabilities
            
            
            84,779
            
            
            
            
            
            
            
            
            
            
            
            64,361Stockholders’
      equity
            
            
            11,021
            
            
            
            
            
            
            
            
            
            
            
            11,584Total
      liabilities and stockholders’ equity
            
            
            95,800
            
            
            
            
            
            
            
            
            
            
            
            75,945Net
      interest income
            
            
            
            
            
            $
            2,696
            
            
            
            
            
            
            
            
            
            
            $
            2,144Average
      interest rate spread (4)
            
            
            
            
            
            
            
            
            
            
            2.09%
            
            
            
            
            
            
            
            
            
            
            
            1.89%Net
      interest margin (5)
            
            
            
            
            
            
            
            
            
            
            2.92%
            
            
            
            
            
            
            
            
            
            
            
            2.97%Net
      interest-earning assets (6)
            
            $
            16,323
            
            
            
            
            
            
            
            
            
            
            $
            17,150Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
            
            
            
            
            
            
            
            
            
            
            121.45%
            
            
            
            
            
            
            
            
            
            
            
            131.11%







(1)
            Balances
      are net of deferred loan costs and include loans held for
      sale.


(2)
            Average
      balances represent amortized cost.


(3)
            Includes
      mortgage escrow accounts


(4)
            Average
      interest rate spread represents the difference between the yield on
      average interest-earning assets and the cost of average interest-bearing
      liabilities


(5)
            Net
      interest margin represents net interest income divided by average total
      interest-earning assets.


(6)
            Net
      interest-earning assets represents total interest-earning assets less
      total interest-bearing liabilities.




28


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




Years
      Ended December 31,2007
      vs. 2006Increase
      (Decrease) Due to
            
            
            NetRate
            
            
            Volume(In
      thousands)Interest-earning
      assets:Loans
      receivable
            
            $
            126
            
            
            $
            1,377
            
            
            $
            1,503Fed
      funds sold
            
            
            16
            
            
            
            (56
            )
            
            
            (40
            )Certificates
      of deposit
            
            
            9
            
            
            
            146
            
            
            
            155FRB
      & FHLB stock
            
            
            —
            
            
            
            2
            
            
            
            2Securities
      available for sale
            
            
            34
            
            
            
            (42
            )
            
            
            (8
            )Total
      interest-earning assets
            
            
            185
            
            
            
            1,427
            
            
            
            1,612Interest-bearing
      liabilities:NOW
      accounts
            
            
            13
            
            
            
            1
            
            
            
            14Money
      market accounts
            
            
            38
            
            
            
            629
            
            
            
            667Regular
      savings accounts
            
            
            52
            
            
            
            114
            
            
            
            166Certificates
      of deposit
            
            
            53
            
            
            
            155
            
            
            
            208Total
      interest-bearing deposits
            
            
            156
            
            
            
            899
            
            
            
            1,055Borrowings
            
            
            —
            
            
            
            5
            
            
            
            5Total
      interest-bearing liabilities
            
            
            156
            
            
            
            904
            
            
            
            1,060Net
      change in interest income
            
            
            29
            
            
            
            523
            
            
            
            552













29


Forward-Looking
Statements





This
Report on Form 10-KSB 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
we.  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 our 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 our
management, are intended to identify forward-looking
statements.  Although we believe 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 risks and uncertainties such as changes in economic
conditions nationally and in our market area (including today’s apparently
slowing economy), changes in local real estate values (including the current
softening and possible decline of real estate prices within our local market
area), changes in regulatory policies, fluctuations in interest rates, local
loan demand levels, competition, our ability to control expenses and other
factors.  We do not intend to update these forward-looking
statements.  All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by applicable cautionary statements.





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





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





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





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







30


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





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





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





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





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





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







31


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





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





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





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







32


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





Liquidity
and Capital Resources





Our primary sources of funds are
deposits and borrowings, principal and interest payments on loans and
securities, and proceeds from the sale of loans.  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.





Our
primary investing activities are the origination of loans and the purchase of
investment securities.  For the years December 31, 2007 and 2006, we
originated loans of approximately $48.7 million and $56.8 million, respectively,
including real estate mortgage loans held for sale.  At December 31,
2007 and 2006, we had outstanding loan origination commitments of $12.2 million
and $11.7 million and undisbursed lines of credit and construction loans in
process of $11.1 million and $10.2 million, respectively.  We
anticipate that we will have sufficient funds available to meet our current loan
originations and other commitments.





At
December 31, 2007 and 2006 total deposits were approximately $82.3 million and
$81.5 million, of which approximately $23.5 million and $19.3 million were in
certificates of deposit, respectively.  Certificates of deposit
scheduled to mature in one year or less from December 31, 2007 and 2006 totaled
$17.3 million and $10.1 million, respectively.  Management anticipates
that a substantial portion of our maturing certificate of deposit accounts will
be renewed





During
2006, the Bank completed its reorganization into the holding company
structure.  In order to pay the various costs associated with its
formation, as well as other subsequent expenses as incurred, the Company secured
a credit facility of $200,000 from its wholesale correspondent bank, Atlantic
Central Bankers Bank, of which $89,000 has been
exercised.  Separately, the Bank has an unused credit line of $5.0
million with the same correspondent bank.  While we have never used
these additional credit lines, we may do so in the future based upon our need
for funds and the cost of deposits as an alternative source of
funds.  In general we manage our liquidity by maintaining sufficient
levels of overnight federal funds sold and other short-term investments so that
funds are available for investment in loans when needed.





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.




33


Item
7.                       
 Financial Statements





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.





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 tthat permit the Company to provide only
management’s report in this annual report.








/s/
      Anthony P. Costa
              Anthony
      P. Costa,
              Chairman
      and Chief Executive Officer
              
              
              /s/
      Arthur W. Budich
              Arthur
      W. Budich,
              Executive
      Vice President and Chief Financial
Officer










34





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, 2007 and 2006, 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, 2007 and 2006, and the results of its operations and its cash flows for each
of the two years then ended in conformity with U.S. generally accepted
accounting principles.





/s/ Crowe Chizek and Company
LLC





Crowe
Chizek and Company LLC








Livingston,
New Jersey


March 26,
2008












35
 ES
Banshares, Inc.
 Consolidated
Statements of Financial Condition
 (Dollars
in thousands)


December
      31,ASSETS
              
              2007
              
              
              2006Cash
      and cash equivalents:Cash
      and due from banks
              
              $
              2,021
              
              
              $
              2,734Federal
      funds sold
              
              
              4,731
              
              
              
              11,609Total
      cash and cash equivalents
              
              
              6,752
              
              
              
              14,343Certificates
      of deposit at other financial institutions
              
              
              5,794
              
              
              
              5,746Securities:Available
      for sale, at fair value
              
              
              7,037
              
              
              
              9,443Real
      estate mortgage loans held for sale at lower of cost or market
      value
              
              
              350
              
              
              
              215Loans
      receivable
              
              
              71,705
              
              
              
              61,228Deferred
      cost
              
              
              364
              
              
              
              344Allowance
      for loan losses
              
              
              (624
              )
              
              
              (581
              )Loans
      receivable, net
              
              
              71,445
              
              
              
              60,991Accrued
      interest receivable
              
              
              515
              
              
              
              515Federal
      Reserve Bank stock
              
              
              324
              
              
              
              335Federal
      Home Loan Bank stock
              
              
              89
              
              
              
              —Goodwill
              
              
              581
              
              
              
              581Office
      properties and equipment, net
              
              
              838
              
              
              
              741Prepaid
      expenses
              
              
              136
              
              
              
              74Other
      assets
              
              
              55
              
              
              
              55Total
      assets
              
              $
              93,916
              
              
              $
              93,039LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities:Deposits:Non-interest
      bearing
              
              $
              7,249
              
              
              $
              8,156Interest
      bearing
              
              
              75,093
              
              
              
              73,318Borrowed
      funds
              
              
              89
              
              
              
              53Accounts
      payable
              
              
              103
              
              
              
              130Other
      liabilities
              
              
              1,000
              
              
              
              440Total
      liabilities
              
              
              83,534
              
              
              
              82,097Commitments
      and contingenciesStockholders'
      equityCapital
      stock (par value $0.01: 5,000,000 shares authorized1,721,437
      shares issued at December 31, 20071,719,227
      shares at December 31, 2006)
              
              
              17
              
              
              
              17Additional
      paid-in-capital
              
              
              16,911
              
              
              
              16,869Accumulated
      deficit
              
              
              (6,553
              )
              
              
              (5,845
              )Accumulated
      other comprehensive gain or (loss)
              
              
              7
              
              
              
              (99
              )Total
      stockholders' equity
              
              
              10,382
              
              
              
              10,942Total
      liabilities and stockholders' equity
              
              $
              93,916
              
              
              $
              93,039




See
accompanying notes to financial statements


36
 
 ES
Bancshares, Inc.
 Consolidated
Statements of Operations
 Years
Ended December 31, 2007 and 2006
 (In
thousands, except per share data)


2007
              
              
              2006Interest
      and dividend income:Loans
              
              $
              5,078
              
              
              $
              3,575Securities
              
              
              398
              
              
              
              406Certificates
      of deposit
              
              
              320
              
              
              
              165Other
      earning assets
              
              
              468
              
              
              
              506Total
      interest and dividend income
              
              
              6,264
              
              
              
              4,652Interest
      expense:Deposits
              
              
              3,562
              
              
              
              2,507Borrowed
      funds
              
              
              6
              
              
              
              1Total
      interest expense
              
              
              3,568
              
              
              
              2,508Net
      interest income
              
              
              2,696
              
              
              
              2,144Provision
      for loan losses
              
              
              43
              
              
              
              476Net
      interest income after provision for loan losses
              
              
              2,653
              
              
              
              1,668Non-interest
      income:Service
      charges and fees
              
              
              303
              
              
              
              207Net
      gain on sales of real estate mortgage loans held for
      sale
              
              
              199
              
              
              
              169Net
      (loss) on sales of securities available for sale
              
              
              (12
              )
              
              
              —Other
              
              
              101
              
              
              
              32Total
      non-interest income
              
              
              591
              
              
              
              408Non-interest
      expense:Compensation
      and benefits
              
              
              2,040
              
              
              
              1,810Occupancy
      and equipment
              
              
              656
              
              
              
              644Data
      processing service fees
              
              
              190
              
              
              
              143Other
              
              
              1,066
              
              
              
              906Total
      non-interest expense
              
              
              3,952
              
              
              
              3,503(Loss)
      before income taxes
              
              
              (708
              )
              
              
              (1,427
              )Income
      tax expense
              
              
              —
              
              
              
              —Net
      loss
              
              $
              (708
              )
              
              $
              (1,427
              )(Loss)
      per common share:Basic
              
              $
              (0.41
              )
              
              $
              (0.83
              )Diluted
              
              $
              (0.41
              )
              
              $
              (0.83
              )Weighted
      average common shares
              
              
              1,720,449
              
              
              
              1,719,205Weighted
      average dilutive shares
              
              
              —
              
              
              
              —Weighted
      average diluted common shares
              
              
              1,720,449
              
              
              
              1,719,205


See
accompanying notes to financial statements
 37
 ES
BANCSHARES, INC.
 CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2007
 (In
dollars, except share data)
 AccumulatedAdditional
              
              
              
              
              
              OtherCapital
      Stock
              
              
              
              
              
              Paid-In
              
              
              Accumulated
              
              
              ComprehensiveShares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              Gain
      or (Loss)
              
              
              TotalBalance
      at January 1, 2006
              
              
              1,719,177
              
              
              $
              8,596
              
              
              $
              8,276
              
              
              $
              (4,418
              )
              
              $
              (122
              )
              
              $
              12,332Exchange
      of 1,719,227 shares ofEmpire State Bank, NA, $5.00 par value, for
      1,719,227 shares of ES Bancshares, Inc., $0.01 par
      value.
              
              
              
              
              
              
              (8,579
              )
              
              
              8,579
              
              
              
              
              
              
              
              
              
              
              
              —Exercise
      of stock warrants
              
              
              50
              
              
              
              —
              
              
              
              1
              
              
              
              —
              
              
              
              —
              
              
              
              1Stock
      based compensation
              
              
              —
              
              
              
              —
              
              
              
              13
              
              
              
              —
              
              
              
              —
              
              
              
              13Comprehensive
      loss:Net
      loss for the period
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (1,427
              )
              
              
              —
              
              
              
              (1,427
              )Net
      unrealized gain on available-for-sale securities
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              23
              
              
              
              23Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,404
              )Balance
      at December 31, 2006
              
              
              1,719,227
              
              
              
              17
              
              
              
              16,869
              
              
              
              (5,845
              )
              
              
              (99
              )
              
              
              10,942Exercise
      of stock warrants
              
              
              2,210
              
              
              
              —
              
              
              
              22
              
              
              
              —
              
              
              
              —
              
              
              
              22Stock
      based compensation
              
              
              —
              
              
              
              —
              
              
              
              20
              
              
              
              —
              
              
              
              —
              
              
              
              20Comprehensive
      loss:Net
      loss for the period
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (708
              )
              
              
              —
              
              
              
              (708
              )Net
      unrealized gain on available-for-sale securities
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              106
              
              
              
              106Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (602
              )Balance
      at December 31, 2007
              
              
              1,721,437
              
              
              $
              17
              
              
              $
              16,911
              
              
              $
              (6,553
              )
              
              $
              7
              
              
              $
              10,382





See
accompanying notes to financial statements


38
 
 ES
BANCSHARES, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
 (In
thousands)
 2007
                
                
                2006Cash
      flows from operating activities:Net
      loss for period
                
                $
                (708
                )
                
                $
                (1,427
                )Adjustments
      to reconcile net losses to net cash provided by operating
      activities:Provision
      for loan losses
                
                
                43
                
                
                
                476Depreciation
      expense
                
                
                228
                
                
                
                199Amortization
      of deferred fees, discounts and premiums, net
                
                
                3
                
                
                
                (4
                )Net
      originations on loans held for sale
                
                
                63
                
                
                
                633Net
      loss on sales of securities available for sale
                
                
                12
                
                
                
                —Net
      gain on sale of real estate mortgage loans held for sale
                
                
                (199
                )
                
                
                (169
                )Stock
      compensation expense
                
                
                20
                
                
                
                13Changes
      in assets and liabilitiesIncrease
      in other assets
                
                
                (62
                )
                
                
                (325
                )Increase
      in accrued expenses and other liabilities
                
                
                534
                
                
                
                225Net
      cash used in operating activities
                
                
                (66
                )
                
                
                (379
                )Cash
      flows from investing activities:Maturity
      of certificates of deposit at other financial institutions
                
                
                8,592
                
                
                
                5,499Purchase
      of certificates of deposit at other financial institutions
                
                
                (8,640
                )
                
                
                (8,496
                )Purchase
      of available-for-sale securities
                
                
                (6,160
                )
                
                
                (5,897
                )Proceeds
      on sales of securities available for sale
                
                
                2,061
                
                
                
                —Proceeds
      from principal payments and maturities of securities
                
                
                6,596
                
                
                
                2,861Net
      disbursements for loan originations
                
                
                (10,497
                )
                
                
                (28,142
                )Purchase
      of Federal Home Loan Bank stock
                
                
                (89
                )
                
                
                —Redemption
      of Federal Reserve Bank stock
                
                
                11
                
                
                
                43Leasehold
      improvements and acquisitions of capital assets
                
                
                (325
                )
                
                
                (98
                )Net
      cash used in investing activities
                
                
                (8,451
                )
                
                
                (34,230
                )Cash
      flows from financing activities:Net
      increase in deposits
                
                
                868
                
                
                
                38,097Proceeds
      of advance from line of credit
                
                
                36
                
                
                
                53Proceeds
      from stock issuance
                
                
                22
                
                
                
                1Net
      cash provided by financing activities
                
                
                926
                
                
                
                38,151Net
      increase (decrease) in cash and cash equivalents
                
                
                (7,591
                )
                
                
                3,542Cash
      and cash equivalents at beginning of period
                
                
                14,343
                
                
                
                10,801Cash
      and cash equivalents at end of period
                
                $
                6,752
                
                
                $
                14,343Supplemental
      cash flow informationInterest
      paid
                
                $
                3,595
                
                
                $
                2,422Income
      taxes paid
                
                $
                —
                
                
                $
                —
   See
accompanying notes to financial statements
 39


NOTES
TO FINANCIAL STATEMENTS





NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Nature
of Operations





Empire
State Bank, NA (the “Bank”) was organized under federal law as a national bank
to primarily service the communities in and around Orange County and Ulster
County, New York.  The Bank’s organizers filed an application with the
Office of the Comptroller of the Currency (“OCC”), the primary regulator of
national banks, as of July 2, 2003, seeking preliminary approval to organize the
Bank.  The OCC granted such preliminary approval in November 18, 2003
and granted final approval on June 24, 2004.  On or about the same
date as the Bank’s application was filed with the OCC, the Bank’s organizers
filed an application for federal deposit insurance with the Federal Deposit
Insurance Corporation (the “FDIC”), with respect to which conditional approval
was granted on April 6, 2004, and final approval was granted on June 24,
2004.  On December 8, 2003, the Bank’s organizers pursuant to OCC
preliminary approval adopted the Bank’s Articles of Association and Organization
Certificate, thereby establishing the Bank’s corporate
existence.  There are no legal predecessors to the
Bank.  Upon receipt of final approvals from the OCC and FDIC, the Bank
commenced operations on June 28, 2004.





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.  Effective April 15, 2007, the Company modified the terms of
the warrants to purchase common stock of the Company by reducing the exercise
price of $12.50 to $10.00 and extended the expiration date from June 28, 2007 to
June 28, 2008.  There was no additional expense recognized as a result
of the modification.





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





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





The
consolidated financial statements include the accounts of ES Bancshares, Inc.
and its wholly owned subsidiary Empire State Bank, NA.  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




40


such
deposits to originate commercial loans, revolving lines of credit, commercial
real estate, mortgage loans secured by one-to four-family residences, home
equity lines, and to a lesser extent construction, land, and consumer
installment loans.  The Bank also invests in mortgage-backed and other
securities permissible for a federally chartered commercial bank.  The
Bank also operated two loan production offices, one in Staten Island, New York,
and another in Lynbrook, New York.  However, in November of 2007 the
Staten Island loan production office was closed in conjunction with the opening
of the Bank’s new full service branch in that borough.  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, Nassau County, and portions of Dutchess,
Rockland, Putnam and Westchester Counties.





Deposits
are insured up to applicable limits of the FDIC.  As a federally
chartered commercial bank, the Bank’s primary regulator is the OCC.





Use
of Estimates





To prepare financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions based on available
information.  These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and actual
results could differ.  The allowance for loan losses and goodwill
impairment is particularly subject to change.





Cash
Flows





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.  The Bank currently classifies all securities as
available-for-sale.





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





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




41


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, 2007 and December 31, 2006.





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 non-accrual 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. There was one non-accrual loan in the
amount of $183,000 at December 31, 2007, but none at December 31,
2006.  There were no impaired loans at December 31, 2007 or December
31, 2006.





Allowance
for Loan Losses





The allowance for loan losses is a
valuation allowance for probable incurred credit losses that
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
Company, due to its period of operations, previously determined its provision
for loan losses primarily from peer group information.  During the
past year the Company completed an analysis of its methodology to establish
provisions for the allowance for loan losses.  Based upon the ongoing
growth in the loan portfolio, the composition of loans and the development of a
historical record of loan repayments, management believed it appropriate to
change its method for establishing provisions.  Management now
considers the known inherent risks in the loan portfolio, which includes the
overall




42


rapid
growth of the portfolio, concentrations of credit, adverse situations that may
affect the borrowers’ ability to repay, the estimated value of any underlying
collateral, and current economic conditions to determine its provision for loan
losses.  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.  Goodwill is assessed at least annually for impairment and any
such impairment will be recognized in the period identified.





Income
Taxes





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. A valuation allowance is recorded for deferred
tax assets if the Company cannot determine that the benefits will more likely
than not be realized.  No deferred income tax effect has been given to
net operating losses due to the uncertainty of ultimate utilization of such net
operating losses, resulting in a valuation allowance.





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





The
Company recognizes interest and/or penalties related to income tax matters in
income tax expense.  The Company and its subsidiaries are subject to
U.S. federal income tax as well as income tax of the state of New York. The
Company is no longer subject to examination by taxing authorities for years
before 2004.





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 $324,000
and




43


$335,000
invested in FRB stock at December 31, 2007 and December 31, 2006, respectively,
which is carried at cost due to the fact that it is a restricted
security.





Federal
Home Loan Bank of New York





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





Lines
of Credit





The Company has a line of credit with a
commercial bank for an amount of up to $200,000.  This credit facility
is on an unsecured basis for a period of one year.  The Company
utilized this credit facility primarily to fund various organizational
costs





The Company has a line of credit with a
commercial 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 2007 or 2006.





Comprehensive
Income (Loss)





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





Stock
Options





The Company has a stock-based
compensation plan as more fully described in Note 9.  For accounting
purposes, the Bank recognizes expense for shares of common stock awarded under
the Bank’s Stock Option Plan over the vesting period at the fair market value of
the shares on the date they are awarded.  Total expense incurred
during the years ending December 31, 2007 and 2006 relating to the options was
$19,000 and $14,000, 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 327,690 stockholder warrants, or 190,000
organizer warrants, or 157,750 stock options were considered in computing
diluted EPS because to do so would have been antidilutive.





44


Adoption
of new accounting standards





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





Effect
of Newly Issued But Not Yet Effective Accounting Standards





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





In
September 2006, the FASB issued Statement No. 157, Fair Value
Measurements.  This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset.  The
standard is effective for fiscal years beginning after November 15,
2007.  In February 2008, the FASB issued Staff Position (FSP) 157-2,
Effective Date of FASB Statement No. 157.  This FSP delays the
effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years.The
Company does not expect the impact of this standard to be material.





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





45


NOTE
2 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE





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, 2007 and
December 31, 2006.






December
      31, 2007(in
      thousands)Amortized
            
            
            Gross
      Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            ValueMortgaged-backed
      securities
            
            $
            1,672
            
            
            $
            —
            
            
            $
            (12
            )
            
            $
            1,660U.S.
      Government Agencies
            
            
            5,358
            
            
            
            22
            
            
            
            (3
            )
            
            
            5,377Total
            
            $
            7,030
            
            
            $
            22
            
            
            $
            (15
            )
            
            $
            7,037








December
      31, 2006(in
      thousands)Amortized
              
              
              Gross
      Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              ValueMortgaged-backed
      securities
              
              $
              4,146
              
              
              $
              —
              
              
              $
              (86
              )
              
              $
              4,060U.S.
      Government Agencies
              
              
              5,396
              
              
              
              —
              
              
              
              (13
              )
              
              
              5,383Total
              
              $
              9,542
              
              
              $
              —
              
              
              $
              (99
              )
              
              $
              9,443






The
following is a summary of the amortized cost and estimated fair market value of
investment securities available-for-sale at December 31, 2007, with amounts
shown by remaining term to contractual maturity.  Securities not due
at a single maturity date, primarily mortgaged-backed securities, are shown
separately.









46


December
      31, 2007(in
      thousands)Amortized
              
              
              FairCost
              
              
              ValueMortgaged-backed
      securities
              
              $
              1,672
              
              
              $
              1,660U.S.
      Government AgenciesDue
      less than one year
              
              
              —
              
              
              
              —One
      year to less than three years
              
              
              499
              
              
              
              502Three
      years to less than five years
              
              
              1,000
              
              
              
              997Five
      years to ten years
              
              
              1,700
              
              
              
              1,708More
      than ten years
              
              
              2,159
              
              
              
              2,170Total
              
              $
              7,030
              
              
              $
              7,037






The
following tables summarize, for all securities in an unrealized loss position at
December 31, 2007 and December 31, 2006, the aggregate fair values and gross
unrealized losses by the length of time those securities had been in a
continuous loss position.





December
      31, 2007Less
      Than 12 Months
            
            
            12
      Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Loss
            
            
            Value
            
            
            Loss
            
            
            Value
            
            
            Loss(In
      thousands)Mortgaged-backed
      securities
            
            $
            —
            
            
            $
            —
            
            
            $
            1,660
            
            
            $
            (12
            )
            
            $
            1,660
            
            
            $
            (12
            )U.S.
      Government Agencies
            
            
            2,077
            
            
            
            (3
            )
            
            
            —
            
            
            
            —
            
            
            
            2,077
            
            
            
            (3
            )Total
      temporarily impaired
            
            $
            2,077
            
            
            $
            (3
            )
            
            $
            1,660
            
            
            $
            (12
            )
            
            $
            3,737
            
            
            $
            (15
            )






December
      31, 2006Less
      Than 12 Months
              
              
              12
      Months or More
              
              
              TotalFair
              
              
              Unrealized
              
              
              Fair
              
              
              Unrealized
              
              Fair
              
              
              UnrealizedValue
              
              
              Loss
              
              
              Value
              
              
              Loss
              
              
              Value
              
              
              Loss(In
      thousands)Mortgaged-backed
      securities
              
              $
              —
              
              
              $
              —
              
              
              $
              4,060
              
              
              $
              (86
              )
              
              $
              4,060
              
              
              $
              (86
              )U.S.
      Government Agencies
              
              
              4,184
              
              
              
              (13
              )
              
              
              —
              
              
              
              —
              
              
              
              4,184
              
              
              
              (13
              )Total
      temporarily impaired
              
              $
              4,184
              
              
              $
              (13
              )
              
              $
              4,060
              
              
              $
              (86
              )
              
              $
              8,244
              
              
              $
              (99
              )











The Bank
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.  Consideration is given to the length of time and the
extent to which the fair value has been less than cost, the financial condition
and near term prospects of the issuer, and the intent and ability of the Bank to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value.  In analyzing an


47


issuer’s
financial condition, the Bank may consider whether the securities are issued by
the federal government or its agencies, whether downgrades by bond rating
agencies have occurred, and the results of reviews of the issuer’s financial
condition.





At
December 31, 2007, three debt securities have unrealized losses of approximately
$12,000, and two others have unrealized losses of approximately $3,000, that
have existed for less than thirty months, and less than twelve months,
respectively, from the Bank’s cost basis, and are largely due to changes in
interest rates.  The fair value is expected to recover as the
securities approach their maturity date or reset date.





At
December 31, 2006, four debt securities have unrealized losses of approximately
$86,000, and seven others have unrealized losses of approximately $13,000, that
have existed for less than thirty months, and less than twelve months,
respectively, from the Bank’s cost basis, and are largely due to changes in
interest rates.  The fair value is expected to recover as the
securities approach their maturity date or reset date.





Sales of
available for sale securities were as follows:


2007
              
              
              2006(In
      thousands)Proceeds
              
              $
              2,061
              
              
              $
              —Gross
      gains
              
              
              —
              
              
              
              —Gross
      losses
              
              
              12
              
              
              
              —
























48


NOTE
3 – LOANS





The
following is a summary of loans receivable at December 31, 2007 and December 31,
2006.




December
      31,2007
              
              
              2006(In
      thousands)Real estate
      loans:One-to
      four-family
              
              $
              1,913
              
              
              $
              1,591Commercial
              
              
              32,426
              
              
              
              27,503Multi-family
              
              
              6,997
              
              
              
              6,057Construction
      or development
              
              
              7,319
              
              
              
              9,128Home
      equity
              
              
              7,256
              
              
              
              5,383Total
      real estate loans
              
              
              55,911
              
              
              
              49,662Other
      loans:Commercial
      business
              
              
              14,335
              
              
              
              10,903Consumer
              
              
              1,459
              
              
              
              663Total
      other loans
              
              
              15,794
              
              
              
              11,566Total
      loans
              
              
              71,705
              
              
              
              61,228Less:Deferred
      loan costs (fees) net
              
              
              364
              
              
              
              344Allowance
      for loan losses
              
              
              (624
              )
              
              
              (581
              )Total
      loans receivable, net
              
              $
              71,445
              
              
              $
              60,991





There was
one non-accruing loan in the amount of $183,000 classified as non-performing as
of December 31, 2007.  Gross supplemental interest income that would
have been recorded if the non-accruing loan had remained current in accordance
with its contractual terms was $5,000.  There were no non-performing
loans as of December 31, 2006.  At year-end 2007 and 2006, the Company
had no interest only loans, and no loans with potential for negative
amortization.





In the
ordinary course of business the Bank has extended credit to various directors,
senior officers and their affiliates.  Loans to related parties during
2007 were as follows:




Beginning
      balance at December 31, 2006
              
              $
              3,560New
      loans
              
              
              350Repayment
              
              
              (370)Ending
      balance at December 31, 2007
              
              $
              3,540





The
balance at December 31, 2007 includes unused commitments totaling
$687.





49


NOTE
4 – ALLOWANCE FOR LOAN LOSSES





Activity in the allowance for loan
losses is summarized as follows for the years ended December 31, 2007 and
December 31, 2006.




December
      31,2007
              
              
              2006(In
      thousands)Balance
      at beginning of year
              
              $
              581
              
              
              $
              106Provision
      for losses
              
              
              43
              
              
              
              476Charge-offs
              
              
              —
              
              
              
              (1
              )Recoveries
              
              
              —
              
              
              
              —Balance
      at end of year
              
              $
              624
              
              
              $
              581






NOTE
5 – PREMISES AND EQUIPMENT





The following is a summary of premises
and equipment at December 31, 2007 and December 31, 2006.




December
      31,2007
              
              
              2006(In
      thousands)Furniture,
      fixtures and equipment
              
              $
              851
              
              
              $
              611Leasehold
      improvements
              
              
              669
              
              
              
              6121,520
              
              
              
              1,223Less
      accumulated depreciation and amortization
              
              
              (682
              )
              
              
              (482
              )Total
      premises and equipment, net
              
              $
              838
              
              
              $
              741




Depreciation
expense was $228,000 and $199,000 for 2007 and 2006, respectively.







NOTE
6 – DEPOSITS





The
following is a summary of deposit balances at December 31, 2007 and December 31,
2006.





December
      31,2007
              
              
              2006(in
      thousands)Demand
      deposit accounts
              
              $
              7,249
              
              
              $
              8,156NOW
      accounts
              
              
              1,711
              
              
              
              1,403Money
      market accounts
              
              
              39,776
              
              
              
              48,032Regular
      savings accounts
              
              
              10,132
              
              
              
              4,600Certificates
      of deposit
              
              
              23,474
              
              
              
              19,283Total
              
              $
              82,342
              
              
              $
              81,474





50


The
following summarizes certificates of deposit by remaining term to contractual
maturity at December 31, 2007.




AccountBalances(In
      thousands)Under
      one year
              
              $
              17,309One
      year to under two years
              
              
              2,120Two
      years to under three years
              
              
              1,244Three
      years to under four years
              
              
              1,938Four
      years to under five years
              
              
              863Total
      certificates of deposit
              
              $
              23,474






Certificates
of deposit of $100,000 or more totaled $5.7 million and $4.3 million at December
31, 2007 and December 31, 2006, respectively.  Deposits from
directors, senior officers and their affiliates were approximately $2.6 million
and $4.5 million at December 31, 2007 and December 31, 2006, respectively.







NOTE
7 – INCOME TAXES





The following summarizes components of
income tax expense for the years ended December 31, 2007 and December 31,
2006.





December
      31,2007
              
              
              2006(In
      thousands)Current:Federal
      expense (benefit)
              
              $
              —
              
              
              $
              —State
      expense (benefit)
              
              
              —
              
              
              
              ——
              
              
              
              —Deferred:Federal
      expense (benefit)
              
              
              (241
              )
              
              
              (483
              )State
      expense (benefit)
              
              
              (64
              )
              
              
              (128
              )Tax
      expense (benefit) before valuation allowance
              
              
              (305
              )
              
              
              (611
              )Valuation
      allowance
              
              
              305
              
              
              
              611Tax
      expense
              
              $
              —
              
              
              $
              —




51


The
following is a reconciliation of the Bank’s statutory federal income tax rate to
its effective tax rate at December 31, 2007 and December 31, 2006.





December
      31,2007
              
              
              2006(In
      thousands)Federal
      tax expense (benefit) at statutory rate
              
              $
              (241
              )
              
              $
              (485
              )State
      and local income taxes, net of federal income tax
      benefit
              
              
              (74
              )
              
              
              (133
              )Other
              
              
              10
              
              
              
              7Tax
      benefit before valuation allowance
              
              
              (305
              )
              
              
              (611
              )Valuation
      allowance
              
              
              305
              
              
              
              611Net
      tax benefit
              
              $
              —
              
              
              $
              —








The
following summarizes the components of the Bank’s deferred tax assets and
deferred tax liabilities at December 31, 2007 and December 31,
2006.





December
      31,2007
              
              
              2006(In
      thousands)Deferred
      tax assets:Net
      operating loss carry forwards
              
              $
              2,219
              
              
              $
              1,839Stock
      option compensation
              
              
              33
              
              
              
              39Charitable
      contributions carry forward
              
              
              105
              
              
              
              103Depreciation
              
              
              57
              
              
              
              58Mark-to-market
      loans
              
              
              2
              
              
              
              1Reserve
      for loan losses
              
              
              250
              
              
              
              2332,666
              
              
              
              2,273Less:
      Valuation allowance
              
              
              (2,266
              )
              
              
              (1,940
              )Net
      deferred tax assets
              
              
              400
              
              
              
              333Deferred
      tax liabilities:Accrual
      to cash adjustment
              
              
              (177
              )
              
              
              (133
              )Accretion
      of bond discount
              
              
              (23
              )
              
              
              (23
              )Intangible
      asset amortization
              
              
              (54
              )
              
              
              (39
              )Deferred
      loan fees
              
              
              (146
              )
              
              
              (138
              )Deferred
      tax liabilities
              
              
              (400
              )
              
              
              (333
              )Net
      deferred tax asset (liability)
              
              $
              —
              
              
              $
              —








52


The net
operating losses are available to reduce future taxable income and can be
carried forward until 2025.  The charitable contribution carried
forward is also available to reduce future taxable income and will begin
expiring in 2009.





Realization of deferred tax assets is
dependent upon the generation of future taxable income.  A valuation
allowance is provided when it more likely than not that some portion of the
deferred tax asset will not be realized.  Because the Bank has no
earnings history, management believes it is prudent to record a valuation
allowance against the deferred tax assets.





For the years ended December 31, 2007
and 2006, the Bank was subject to a minimum tax on assets for New York State
purposes in the amount of $14,000 and $6,000, respectively, which is included in
other expense.







NOTE
8 – COMMITMENTS AND CONTINGENCIES





Legal
Proceedings





In the normal course of its business,
the Bank 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.  As of December 31, 2007, the
Bank was not party to any legal proceedings that may have a material affect on
the Bank’s results of operations and financial condition.





Operating Lease
Commitments





The Bank is obligated under
non-cancelable operating leases for its main office location in Newburgh, New
York and its branch offices located in New Paltz, New York and Staten Island,
New York.  Rent expense under the three respective operating leases
was $146,000, $139,000, and $13,500 for the year ended December 31,
2007.  For the year ended December 31, 2006 rent expense for the
Newburgh and New Paltz locations was $162,000 and $141,000,
respectively.  There was no expense in 2006 for the Staten Island
location because the lease did not commence until August 2007.  Total
rent expense for 2007 and 2006 was $298,500 and $303,000, respectively. The
leases are for initial terms of 10 years, 15 years, and 1 year respectively, and
have various renewal options.



























53


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:






2008
              
              $
              234,0002009
              
              
              219,0002010
              
              
              226,0002011
              
              
              229,0002012
              
              
              232,000Later
              
              
              915,075Total
              
              $
              2,055,075






The
Bank’s lease obligation for its Lynbrook, New York lending offices is on a
month-to-month basis at $800 per month.  The Bank decided not to renew
the lease as of March 31, 2008.





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.





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




December
      31, 2007
              
              December
      31, 2006Fixed
              
              
              Variable
              
              
              Fixed
              
              
              VariableRate
              
              
              Rate
              
              
              Rate
              
              
              Rate(Dollars
      in thousands)Commitments
      to make loans
              
              $
              3,297
              
              
              $
              8,915
              
              
              $
              1,923
              
              
              $
              9,765Unused
      lines of credit
              
              
              0
              
              
              
              11,143
              
              
              
              92
              
              
              
              10,156Standby
      letters of credit
              
              
              354
              
              
              
              0
              
              
              
              267
              
              
              
              0






Loan
origination commitments consisted of adjustable and fixed rate commitments with
interest rates ranging from 5.875% to 13.25% and terms generally not exceeding
90 days.





54


NOTE
9 – EMPLOYEE BENEFIT AND STOCK-BASED COMPENSATION PLANS





Stock
Options





On October 19, 2004 the Board of
Directors approved the adoption of the Bank’s Stock Option Plan.  A
total of 180,000 shares of authorized but unissued common stock was reserved for
issuance under the Stock Option Plan, although option exercises may also be
funded using treasury shares or shares acquired in open market
purchases.




At December 31, 2007 and 2006,
respectively, there were 22,250 and 32,250 shares available for future grant.
The fair value of each option award is estimated on the date of grant using a
closed form option valuation (Black-Scholes) model that uses the assumptions
noted in the table below.  Expected volatilities are based on
historical volatilities of the Company’s common stock.  The Company
uses historical data to estimate option exercise and post-vesting termination
behavior.  The expected term of options granted is based on historical
data and represents the period of time that options granted are expected to be
outstanding, which takes into account that the options are not
transferable.  The risk-free interest rate for the expected term of
the option is based on the U.S. Treasury yield curve in effect at the time of
the grant.




At
December 31, 2007 the outstanding options had an average unrecognized
compensation cost of $39,000 with a corresponding average remaining period of
27.2 months for that cost to be expensed.





The fair
values of options granted are computed using the Black-Scholes option-pricing
model, using the following weighted-average assumptions as of the grant
dates.





2007
              
              
              2006Risk
      free interest rate
              
              
              4.81%
              
              
              
              4.35%Expected
      option life
              
              
              5.0
              
              
              
              5.0Expected
      stock price volatility
              
              
              0.10%
              
              
              
              0.10%Dividend
      yield
              
              
              0.00%
              
              
              
              0.00%Weighted
      average fair value of options granted during the
      year
              
              $
              —
              
              
              $
              2.20


























55


A summary
of the activity in the plan is as follows:





2007WeightedWeighted
              
              
              AverageAverage
              
              
              RemainingExercise
              
              
              ContractualShares
              
              
              Price
              
              
              Life
      in YearsOutstanding
      at beginning
      of year
              
              
              147,750
              
              
              $
              10.47Granted
              
              
              15,000
              
              
              
              10.50Exercised
              
              
              —Forfieited
      or expired
              
              
              (5,000
              )
              
              
              10.50Outstanding
      at end
      of year
              
              
              157,750
              
              
              $
              10.47
              
              
              
              8.1Intrinsic
      value (,000's)
              
              $
              —Vested
      and expected to vest
              
              
              157,750
              
              
              $
              10.47
              
              
              
              8.1Options
      exerciseable at
      year-end
              
              
              109,000
              
              
              $
              10.48Intrinsic
      value (,000's)
              
              $
              —





Warrants





At December 31, 2007 the Bank had
327,690 total shareholder warrants issued and
outstanding.   Warrants are convertible into common shares at an
exercise price of $10.00 exercisable through June 27, 2008. Additionally, there
were 190,000 organizer warrants issued as of December 31, 2004. The organizer
warrants are convertible into common shares at an exercise price of $10.00
exercisable through June 27, 2009. The organizer warrants are valued at
$323,000. The fair value was determined using the minimum value method using the
following assumptions: Grant date of June 28, 2004, $10.00 strike price, $10.00
fair value of a share of capital stock at grant date, risk-free rate of 3.8%, no
dividends, five (5) year life and no volatility.  During the year
ended December 31, 2007 2,210 shareholder warrants were exercised for which the
Company received $22,100.





401(k)
Plan





A 401(k) benefit plan allows employee
contributions up to 15% of their compensation.  The Bank does not make
any matching contributions.







NOTE
10 – REGULATORY CAPITAL REQUIREMENTS





OCC regulations require Banks to
maintain a minimum leverage ratio of core (Tier 1) capital to total adjusted
tangible assets of 3.0%, and a minimum ratio of total capital (core capital and
supplementary capital) to risk-weighted assets of 8.0%, of which 4.0% must be
core (Tier 1) capital.





56


Under its prompt corrective action
regulations, the OCC is required to take certain supervisory actions with
respect to an undercapitalized institution.  The regulations establish
a framework for the classification of depository institutions into five
categories: (1) well-capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized, and (5) critically
undercapitalized.  Generally an institution is considered well
capitalized if it has a core (Tier 1) capital ratio of at least 5.0%, a core
(Tier 1) risk-based capital ratio of at least 6.0%, and a total risk-based
capital ratio of a least 10.0%.  At year-end 2007, the most recent
regulatory notifications categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action.  There are no
conditions or events since that notification that management believes have
changed the institution’s category.





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





Management believes that, as of
December 31, 2007 and December 31, 2006, the Bank met all capital adequacy
requirements to which it was subject.





The
following is a summary of the Bank’s actual capital amounts and ratios, compared
to the OCC requirements for minimum capital adequacy and for classification as a
well-capitalized institution at December 31, 2007 and December 31,
2006.  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
              
              
              Ratio(Dollars
      in thousands)December 31,
      2007Tier
      I (core)capital
              
              $
              9,886
              
              
              
              11.5
              %
              
              $
              2,818
              
              
              
              3.0
              %
              
              $
              4,696
              
              
              
              5.0
              %Risk-based
      capital:Tier
      I
              
              
              9,886
              
              
              
              12.5
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              3,865
              
              
              
              6.0Total
              
              
              10,510
              
              
              
              13.3
              
              
              
              5,153
              
              
              
              8.0
              
              
              
              6,441
              
              
              
              10.0







Minimum
      Capital
              
              
              Classification
      asBank
      Actual
              
              
              Adequacy
              
              
              Well
      CapitalizedAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio(Dollars
      in thousands)December 31,
      2006Tier
      I (core)capital
              
              $
              10,522
              
              
              
              11.3
              %
              
              $
              2,791
              
              
              
              3.0
              %
              
              $
              4,652
              
              
              
              5.0
              %Risk-based
      capital:Tier
      I
              
              
              10,522
              
              
              
              15.2
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              4,145
              
              
              
              6.0Total
              
              
              11,103
              
              
              
              16.1
              
              
              
              5,527
              
              
              
              8.0
              
              
              
              6,908
              
              
              
              10.0







The OCC
regulates the amount of dividends and other capital distributions that the Bank
may pay to the Company.  All dividends must be paid out of undivided
profits and cannot be paid out from capital.  In general, if the Bank
satisfies all OCC capital requirements both before and after a dividend payment,
the Bank may pay a dividend to the Company, in any year, equal to the current
year’s net income plus retained net income for the preceding two years that is
still available for dividend.





57





Item
      8.
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure





None.






Item
      8A. (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, 2007 and found them to be adequate.




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




The
Report of Management on Internal Control over Financial Reporting is on page 34
of the Form 10-KSB.  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.








58


PART
III






Item
      9.
            Directors,
      Executive Officers, Promoters and Control Persons; Compliance With Section
      16(a) of the Exchange Act





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 from our definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 1, 2008, a copy of which will be filed not
later than 120 days after the close of the fiscal year covered by this
report.






Item
      10.
            Executive
      Compensation





Information
concerning executive compensation is incorporated herein by reference from our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 1, 2008, a copy of which will be filed not later than 120 days after the
close of the fiscal year.






Item
      11.
            Security
      Ownership of Certain Beneficial Owners and
  Management





Information
concerning security ownership of certain beneficial owners and management is
incorporated herein by reference from our definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 1, 2008, a copy of which will
be filed not later than 120 days after the close of the fiscal
year.





Set forth
below is information, as of December 31, 2007 regarding equity compensation
plans categorized by those plans that have been approved by stockholders and
those plans that have not been approved by stockholders.








59




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
            
            
            157,750
            
            
            $
            10.47
            
            
            
            22,250Equity
      compensation plans not approved by stockholders
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            
            157,750
            
            
            $
            10.47
            
            
            
            22,250




(1)
            Consists
      of options to purchase 157,750 shares of common stock under the Empire
      State Bank 2004 Stock Option
Agreement.


(2)
            The
      weighted average exercise price reflects the weighted average exercise
      price of stock options awarded from the Empire State Bank 2004 Stock
      Option Agreement.


(3)
            Consists
      of stock options for 22,250 shares of common stock available to be granted
      from the Empire State Bank 2004 Stock Option
  Agreement.








Item
      12.
            Certain
      Relationships and Related
Transactions





Information
concerning certain relationships and related transactions is incorporated herein
by reference from our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 1, 2008, a copy of which will be filed not later
than 120 days after the close of the fiscal year.






Item
      13.
            Exhibits





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 dated September 23, 2005 Between Empire State Bank and Anthony
      P. Costa
            
            **10.2
            
            Employment
      Agreement dated September 23, 2005 Between Empire State Bank and Philip
      Guarnieri
            
            **10.3
            
            Employment
      Agreement dated October 20, 2006 between Empire State Bank and Arthur W.
      Budich
            
            **






60




10.4
            
            Empire
      State Bank, N.A. 2004 Stock Option Plan
            
            **10.5
            
            Empire
      State Bank, N.A. 2004 Stock Option Plan Stock Option Agreement-
      Employee10.6
            
            Empire
      State Bank, N.A. 2004 Stock Option Plan Stock Option Agreement- Outside
      Directors23
            
            Consent
      of Crowe Chizek and Company LLC31.2
            
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232
            
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002





*
            Previously
      filed with the SEC as an exhibit to the Company’s Quarterly Report of Form
      10-QSB for the period ended September 30, 2006.


**
            Previously
      filed with the SEC as an exhibit 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.








Item
14.                      Principal
Accountant Fees and Services





Information concerning Independent
Auditors’ Fees is incorporated herein by reference from our definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 1, 2008, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.








































61


SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized.




ES BANCSHARES,
      INC.Date:      
      March 31, 2008
              By:
              /s/ Anthony
      P. CostaAnthony
      P. Costa, Chairman
                and
      Chief Executive Officer, Director(Duly Authorized
      Representative)


In
accordance with the Exchange Act this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Date:      
      March 31, 2008
                
                /s/ Philip
      GuarnieriPhilip
      Guarnieri, President and
                  Chief Operating Officer, Director
 Date:      
      March 31, 2008
                    
                    /s/ Arthur
      W. BudichArthur W. Budich, Executive Vice President
                      and Chief Financial Officer
 Date:      
      March 31, 2008
                        
                        /s/ William
      DavenportWilliam Davenport, Director
 Date:      
      March 31, 2008
                            
                            /s/ Peter
      FerrantePeter
      Ferrante, Director
 Date:      
      March 31, 2008
                                
                                /s/ Andrew
      FinklesteinAndrew Finklestein Esq., Director


Date:      
      March 31, 2008
                  
                  /s/ Gale
      FosterGale Foster Esq., Director
 Date:      
      March 31, 2008
                      
                      /s/ David
      Freer, Jr.David Freer, Jr., Director
 Date:      
      March 31, 2008
                          
                          /s/ Harold
      KahnHarold Kahn, Director
 Date:      
      March 31, 2008
                              
                              /s/ David
      MeschesDavid Mesches, Director
 Date:      
      March 31, 2008
                                  
                                  /s/ Michael
      OstrowMichael Ostrow, Director
 Date:      
      March 31, 2008
                                      
                                      /s/ Albert
      PaganoAlbert Pagano, Director
 Date:      
      March 31, 2008
                                          
                                          /s/ Peter
      SavagoPeter Savago, Director
 Date:      
      March 31, 2008
                                              
                                              /s/ Thomas
      D. WeddellThomas D. Weddell, Director


62