UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549


_______________________________________





FORM
10-Q





QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended September 30, 2009








ES BANCSHARES,
INC.


(Exact
name of small business issuer 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)





(866)
646-0003


Issuer’s
telephone number, including area code:





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


YES [X].
NO [ ].





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


YES [ ].
NO [ ].





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





Large
      accelerated filer [ ]
                Accelerated
      filer [ ]Non-accelerated
      filer [ ] (Do not check if a smaller reporting company)
                Smaller
      reporting company [X]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. YES [ ]. NO [X].




As of
November 9, 2009 there were 1,996,070 issued and outstanding shares of the
Registrant’s Common Stock.







ES
BANCSHARES, INC.


FORM
10-Q


FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009








PART
I – FINANCIAL INFORMATION




Page


Item
      1.
                                    Financial
      Statements (Unaudited)Consolidated
      Balance Sheets at September 30, 2009 and December 31, 2008
                                    2Consolidated
      Statements of Income for the Three and Nine Months Ended September
      30, 2009, and 2008
                                    3Consolidated
      Statement of Changes in Stockholders’ Equity For
      the Nine Months Ended September 30, 2009 and 2008
                                    4Consolidated
      Statements of Cash Flows for the Nine Months Ended September
      30, 2009 and 2008
                                    5Notes
      to Unaudited Consolidated Financial Statements
                                    6Item
      2.
                                    Management’s
      Discussion and Analysis of Financial Condition and Results
      of Operations
                                    12Item
      3.
                                    Quantitative
      and Qualitative Disclosures About Market Risk
                                    17Item
      4T.
                                    Controls
      and Procedures
                                    17PART
      II – OTHER INFORMATIONItem
      1.
                                    Legal
      Procedures
                                    18Item
      1A
                                    Risk
      Factors
                                    18Item
      2.
                                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                                    18Item
      3
                                    Defaults
      Upon Senior Securities
                                    18Item
      4.
                                    Submission
      of Matters to a Vote of Security Holders
                                    18Item
      5.
                                    Other
      Information
                                    18Item
      6.
                                    Exhibits
                                    18Signatures
                                    20












Part
1. Item 1.


ES
BANCSHARES, INC.


CONSOLIDATED
BALANCE SHEETS


(Unaudited)


(In
thousands, except per share data)





September
      30,
                                              
                                              
                                              December
      31,2009
                                              
                                              
                                              2008ASSETSCash
      and cash equivalents:Cash
      and due from banks
                                              
                                              $
                                              10,061
                                              
                                              
                                              $
                                              12,454Federal
      funds sold
                                              
                                              
                                              -
                                              
                                              
                                              
                                              5Total
      cash and cash equivalents
                                              
                                              
                                              10,061
                                              
                                              
                                              
                                              12,459Certificates
      of deposit at other financial institutions
                                              
                                              
                                              4,504
                                              
                                              
                                              
                                              6,628Securities:Available
      for sale, at fair value
                                              
                                              
                                              3,760
                                              
                                              
                                              
                                              4,974Held
      to maturity, at amortized cost (fair value of $32,915at
      September 30, 2009, and $24,166 at December 31, 2008)
                                              
                                              
                                              31,972
                                              
                                              
                                              
                                              23,529Total
      securities
                                              
                                              
                                              35,732
                                              
                                              
                                              
                                              28,503Real
      estate mortgage loans held for sale
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Loans
      receivable
                                              
                                              
                                              105,695
                                              
                                              
                                              
                                              94,978Deferred
      costs
                                              
                                              
                                              581
                                              
                                              
                                              
                                              512Allowance
      for loan losses
                                              
                                              
                                              (1,130
                                              )
                                              
                                              
                                              (862
                                              )Total
      loans receivable, net
                                              
                                              
                                              105,146
                                              
                                              
                                              
                                              94,628Accrued
      interest receivable
                                              
                                              
                                              651
                                              
                                              
                                              
                                              603Federal
      Reserve Bank stock
                                              
                                              
                                              308
                                              
                                              
                                              
                                              299Federal
      Home Loan Bank stock
                                              
                                              
                                              584
                                              
                                              
                                              
                                              528Goodwill
                                              
                                              
                                              581
                                              
                                              
                                              
                                              581Office
      properties and equipment, net
                                              
                                              
                                              669
                                              
                                              
                                              
                                              757Other
      assets
                                              
                                              
                                              419
                                              
                                              
                                              
                                              280Total
      assets
                                              
                                              $
                                              158,655
                                              
                                              
                                              $
                                              145,266LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Deposits:Non-interest
      bearing
                                              
                                              $
                                              15,357
                                              
                                              
                                              $
                                              12,840Interest
      bearing
                                              
                                              
                                              121,803
                                              
                                              
                                              
                                              111,922Borrowed
      funds
                                              
                                              
                                              10,364
                                              
                                              
                                              
                                              10,074Accrued
      interest payable
                                              
                                              
                                              168
                                              
                                              
                                              
                                              205Other
      liabilities
                                              
                                              
                                              1,232
                                              
                                              
                                              
                                              994Total
      liabilities
                                              
                                              
                                              148,924
                                              
                                              
                                              
                                              136,035Commitments
      and contingenciesStockholders’
      equityPreferred
      Stock (par value $0.01; 5,000,000 shares authorized;0
      shares issued at September 30, 2009 and December 31, 2008,respectively)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Capital
      stock (par value $0.01; 5,000,000 shares authorized;1,996,070
      shares issued at September 30, 2009,1,868,505
      at December 31, 2008)
                                              
                                              
                                              20
                                              
                                              
                                              
                                              19Additional
      paid-in-capital
                                              
                                              
                                              18,605
                                              
                                              
                                              
                                              17,911Accumulated
      deficit
                                              
                                              
                                              (8,884
                                              )
                                              
                                              
                                              (8,484
                                              )Accumulated
      other comprehensive loss
                                              
                                              
                                              (10
                                              )
                                              
                                              
                                              (215
                                              )Total
      stockholders’ equity
                                              
                                              
                                              9,731
                                              
                                              
                                              
                                              9,231Total
      liabilities and stockholders’ equity
                                              
                                              $
                                              158,655
                                              
                                              
                                              $
                                              145,266




See
accompanying notes to financial statements.




1


ES
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)


(In
thousands, except per share data)




For
      the Three Months
                              
                              
                              For
      the Nine MonthsEnded
      September 30,
                              
                              
                              Ended
      September 30,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Interest
      and dividend income:Loans
                              
                              $
                              1,481
                              
                              
                              $
                              1,354
                              
                              
                              $
                              4,243
                              
                              
                              $
                              3,786Securities
                              
                              
                              371
                              
                              
                              
                              335
                              
                              
                              
                              1,161
                              
                              
                              
                              714Certificates
      of deposit
                              
                              
                              20
                              
                              
                              
                              36
                              
                              
                              
                              60
                              
                              
                              
                              172Fed
      Funds and other earning assets
                              
                              
                              25
                              
                              
                              
                              46
                              
                              
                              
                              61
                              
                              
                              
                              149Total
      interest and dividend income
                              
                              
                              1,897
                              
                              
                              
                              1,771
                              
                              
                              
                              5,525
                              
                              
                              
                              4,821Interest
      expense:Deposits
                              
                              
                              724
                              
                              
                              
                              771
                              
                              
                              
                              2,329
                              
                              
                              
                              2,138Borrowed
      funds
                              
                              
                              84
                              
                              
                              
                              80
                              
                              
                              
                              256
                              
                              
                              
                              150Total
      interest expense
                              
                              
                              808
                              
                              
                              
                              851
                              
                              
                              
                              2,585
                              
                              
                              
                              2,288Net
      interest income
                              
                              
                              1,089
                              
                              
                              
                              920
                              
                              
                              
                              2,940
                              
                              
                              
                              2,533Provision
      for loan losses
                              
                              
                              103
                              
                              
                              
                              46
                              
                              
                              
                              283
                              
                              
                              
                              129Net
      interest income after provision for loan losses
                              
                              
                              986
                              
                              
                              
                              874
                              
                              
                              
                              2,657
                              
                              
                              
                              2,404Non-interest
      income:Service
      charges and fees
                              
                              
                              102
                              
                              
                              
                              132
                              
                              
                              
                              326
                              
                              
                              
                              339Net
      gain on sales of real estate mortgage
                              
                              
                              -loans
      held for sale
                              
                              
                              54
                              
                              
                              
                              13
                              
                              
                              
                              208
                              
                              
                              
                              51Net
      gain on sales of securities available for sale
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              7Other
                              
                              
                              64
                              
                              
                              
                              69
                              
                              
                              
                              271
                              
                              
                              
                              111Total
      non-interest income
                              
                              
                              220
                              
                              
                              
                              214
                              
                              
                              
                              805
                              
                              
                              
                              508Non-interest
      expense:Compensation
      and benefits
                              
                              
                              599
                              
                              
                              
                              605
                              
                              
                              
                              1,745
                              
                              
                              
                              1,756Occupancy
      and equipment
                              
                              
                              195
                              
                              
                              
                              192
                              
                              
                              
                              581
                              
                              
                              
                              597Data
      processing service fees
                              
                              
                              89
                              
                              
                              
                              66
                              
                              
                              
                              231
                              
                              
                              
                              196Loss
      on CD
                              
                              
                              -
                              
                              
                              
                              900
                              
                              
                              
                              -
                              
                              
                              
                              900Other
                              
                              
                              417
                              
                              
                              
                              354
                              
                              
                              
                              1,304
                              
                              
                              
                              1,002Total
      non-interest expense
                              
                              
                              1,300
                              
                              
                              
                              2,117
                              
                              
                              
                              3,861
                              
                              
                              
                              4,451Net
      (loss) before income taxes
                              
                              
                              (94
                              )
                              
                              
                              (1,029
                              )
                              
                              
                              (399
                              )
                              
                              
                              (1,539
                              )Income
      tax expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Net
      (loss)
                              
                              $
                              (94
                              )
                              
                              $
                              (1,029
                              )
                              
                              $
                              (399
                              )
                              
                              $
                              (1,539
                              )Other
      comprehensive income (loss):Net
      unrealized gain/(loss) on available-for-sale securities
                              
                              
                              97
                              
                              
                              
                              (248
                              )
                              
                              
                              205
                              
                              
                              
                              (284
                              )Comprehensive
      income (loss)
                              
                              $
                              3
                              
                              
                              $
                              (1,277
                              )
                              
                              $
                              (194
                              )
                              
                              $
                              (1,823
                              )Weighted
      average:Common
      shares
                              
                              
                              1,996,070
                              
                              
                              
                              1,767,333
                              
                              
                              
                              1,912,121
                              
                              
                              
                              1,736,847Dilutive
      warrants & stock options
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -1,996,070
                              
                              
                              
                              1,767,333
                              
                              
                              
                              1,912,121
                              
                              
                              
                              1,736,847(Loss)
      per common share:Basic
                              
                              $
                              (0.05
                              )
                              
                              $
                              (0.58
                              )
                              
                              $
                              (0.21
                              )
                              
                              $
                              (0.89
                              )Basic
      & diluted
                              
                              $
                              (0.05
                              )
                              
                              $
                              (0.58
                              )
                              
                              $
                              (0.21
                              )
                              
                              $
                              (0.89
                              )





See
accompanying notes to financial statements.




2




















ES
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(Unaudited)


(In
thousands, except per share data)





AccumulatedAdditional
                                            
                                            
                                            
                                            
                                            
                                            OtherCapital Stock
                                            
                                            
                                            Paid-In
                                            
                                            
                                            Accumulated
                                            
                                            
                                            ComprehensiveShares
                                            
                                            
                                            Amount
                                            
                                            
                                            Capital
                                            
                                            
                                            Deficit
                                            
                                            
                                            Gain
                                            
                                            
                                            TotalBalance
      at January 1, 2008
                                            
                                            
                                            1,721,437
                                            
                                            
                                            $
                                            17
                                            
                                            
                                            $
                                            16,911
                                            
                                            
                                            $
                                            (6,553
                                            )
                                            
                                            $
                                            7
                                            
                                            
                                            $
                                            10,382Exercise
      of stock warrants
                                            
                                            
                                            102,038
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            688
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            689Stock
      based compensation
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            7
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            7Comprehensive
      loss:Net
      loss for the period
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,539
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,539
                                            )Net
      unrealized gain onavailable-for-sale
      securities
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (284
                                            )
                                            
                                            
                                            (284
                                            )Total
      comprehensive loss
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (1,823
                                            )Balance
      at September 30, 2008
                                            
                                            
                                            1,823,475
                                            
                                            
                                            $
                                            18
                                            
                                            
                                            $
                                            17,606
                                            
                                            
                                            $
                                            (8,092
                                            )
                                            
                                            $
                                            (277
                                            )
                                            
                                            $
                                            9,255Balance
      at January 1, 2009
                                            
                                            
                                            1,868,505
                                            
                                            
                                            $
                                            19
                                            
                                            
                                            $
                                            17,911
                                            
                                            
                                            $
                                            (8,484
                                            )
                                            
                                            $
                                            (215
                                            )
                                            
                                            $
                                            9,231Stock
      based compensation
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            8
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            8Comprehensive
      loss:Net
      loss for the period
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (399
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (399
                                            )Net
      unrealized gain onavailable-for-sale
      securities
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            205
                                            
                                            
                                            
                                            205Total
      comprehensive loss
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (194
                                            )Net
      proceeds from issuance­­­­­
      of common stock
                                            
                                            
                                            127,565
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            685
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            686Balance
      at September 30, 2009
                                            
                                            
                                            1,996,070
                                            
                                            
                                            $
                                            20
                                            
                                            
                                            $
                                            18,604
                                            
                                            
                                            $
                                            (8,883
                                            )
                                            
                                            $
                                            (10
                                            )
                                            
                                            $
                                            9,731




See
accompanying notes to financial statements.


3





ES
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(In
thousands, except per share data)





For the Nine
      MonthsEnded September
      30,2009
                                                  
                                                  
                                                  2008Cash
      flows from operating activities:Net
      loss for period
                                                  
                                                  $
                                                  (399
                                                  )
                                                  
                                                  $
                                                  (1,539
                                                  )Adjustments
      to reconcile net losses to net cash provided byoperating
      activitiesProvision
      for loan losses
                                                  
                                                  
                                                  283
                                                  
                                                  
                                                  
                                                  129Depreciation
      expense
                                                  
                                                  
                                                  191
                                                  
                                                  
                                                  
                                                  251Amortization
      of deferred fees, discounts and premiums, net
                                                  
                                                  
                                                  (104
                                                  )
                                                  
                                                  
                                                  (9
                                                  )Net
      proceeds (originations) on loans held for sale
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  402Net
      gain on sale of real estate mortgage loans held for sale
                                                  
                                                  
                                                  (208
                                                  )
                                                  
                                                  
                                                  (51
                                                  )Net
      gain on sale of securities available for sale
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (7
                                                  )Gain
      on sale of fixed assets
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (9
                                                  )Stock
      compensation expense
                                                  
                                                  
                                                  8
                                                  
                                                  
                                                  
                                                  7Loss
      of uninsured deposit at failed institution
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  900Changes
      in assets and liabilitiesIncrease
      in other assets
                                                  
                                                  
                                                  (180
                                                  )
                                                  
                                                  
                                                  (276
                                                  )Increase
      in accrued expenses and other liabilities
                                                  
                                                  
                                                  202
                                                  
                                                  
                                                  
                                                  278Net
      cash used in operating activities
                                                  
                                                  
                                                  (207
                                                  )
                                                  
                                                  
                                                  76Cash
      flows from investing activities:Maturity
      of certificates of deposit at other financial institutions
                                                  
                                                  
                                                  6,529
                                                  
                                                  
                                                  
                                                  8,009Purchase
      of certificates of deposit at other financial institutions
                                                  
                                                  
                                                  (4,405
                                                  )
                                                  
                                                  
                                                  (7,102
                                                  )Purchase
      of available-for-sale securities
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (2,929
                                                  )Purchase
      of held-to-maturity securities
                                                  
                                                  
                                                  (16,044
                                                  )
                                                  
                                                  
                                                  (23,250
                                                  )Proceeds
      on sale of securities available for sale
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  506Proceeds
      from principal payments and maturities of securities
                                                  
                                                  
                                                  8,985
                                                  
                                                  
                                                  
                                                  4,823Proceeds
      on sale of fixed assets
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  9Net
      disbursements for loan originations
                                                  
                                                  
                                                  (10,462
                                                  )
                                                  
                                                  
                                                  (17,742
                                                  )Purchase
      of Federal Home Loan Bank stock
                                                  
                                                  
                                                  (56
                                                  )
                                                  
                                                  
                                                  (463
                                                  )Redemption
      of Federal Home Loan Bank stock
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  14Purchase
      of Federal Reserve Bank stock
                                                  
                                                  
                                                  (9
                                                  )
                                                  
                                                  
                                                  26Leasehold
      improvements and acquisitions of capital assets
                                                  
                                                  
                                                  (103
                                                  )
                                                  
                                                  
                                                  (85
                                                  )Net
      cash used in investing activities
                                                  
                                                  
                                                  (15,566
                                                  )
                                                  
                                                  
                                                  (38,184
                                                  )Cash
      flows from financing activities:Net
      increase in deposits
                                                  
                                                  
                                                  12,398
                                                  
                                                  
                                                  
                                                  30,098Proceeds
      of advance from correspondent
                                                  
                                                  
                                                  1,000
                                                  
                                                  
                                                  
                                                  10,525Repayment
      of borrowings
                                                  
                                                  
                                                  (711
                                                  )
                                                  
                                                  
                                                  (307
                                                  )Net
      proceeds from common stock issuance
                                                  
                                                  
                                                  687
                                                  
                                                  
                                                  
                                                  689Net
      cash provided by financing activities
                                                  
                                                  
                                                  13,374
                                                  
                                                  
                                                  
                                                  41,005Net
      increase in cash and cash equivalents
                                                  
                                                  
                                                  (2,398
                                                  )
                                                  
                                                  
                                                  2,897Cash
      and cash equivalents at beginning of period
                                                  
                                                  
                                                  12,459
                                                  
                                                  
                                                  
                                                  6,752Cash
      and cash equivalents at end of period
                                                  
                                                  $
                                                  10,061
                                                  
                                                  
                                                  $
                                                  9,649Supplemental
      cash flow informationInterest
      paid
                                                  
                                                  $
                                                  2,622
                                                  
                                                  
                                                  $
                                                  2,705Income
      taxes paid
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -




See
accompanying notes to financial statements.


4


ES
BANCSHARES, INC.


NOTES
TO UNAUDITED FINANCIAL STATEMENTS








Note
1. Nature of Operations





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





On April
28, 2004, the Bank sold 1,650,000 shares of its common stock at a price of
$10.00 per share, for an aggregate consideration of $16,500,000 (the
“Offering”). In addition, for every five (5) shares of common stock purchased by
a subscriber in the offering, such subscriber received a warrant to purchase,
within a three-year period, one (1) share of common stock at an exercise price
of $12.50 per share. As discussed in Note 4, these warrants were subsequently
modified.





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





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





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





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





5




Note
2. Basis of Presentation





The
consolidated financial statements included herein include the accounts of the
Company and the Bank, subsequent to the elimination of all significant
intercompany balances and transactions, and have been prepared by the Company
without audit. In the opinion of management, the unaudited financial statements
include all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the financial position and results of operations for the
periods presented. Certain information and footnote disclosures normally
included in accordance with generally accepted accounting principles of the
United States have been condensed or omitted pursuant to the rules and
regulations of the SEC, however, the Company believes that the disclosures are
adequate to make the information presented not misleading. The operating results
for the periods presented are not necessarily indicative of results to be
expected for any other interim period or for the entire year ending December 31,
2009. The unaudited interim financial statements presented herein should be read
in conjunction with the annual financial statements of the Company as of and for
the year ended December 31, 2008, included in the Company’s Annual Report on
Form 10-K filed with the SEC on March 31, 2009.





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





Stock
Options





The
Company has a stock-based compensation plan as more fully described in Note 4.
For accounting purposes, the Company recognizes expense for shares of common
stock awarded under the Company’s Stock Option Plan over the vesting period at
the fair market value of the shares on the date they are awarded. Total expense
incurred during the nine months ended September 30, 2009 and 2008, relating to
the options was $8 thousand and $7 thousand, respectively.





Earnings
(Loss) Per Share





Basic
earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted
earnings (loss) per share 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
earnings (loss) per share is computed by dividing net income (loss) by the
weighted-average number of shares outstanding for the period plus
common-equivalent shares computed using the treasury stock method. None of the
warrants or stock options were considered in computing diluted earnings (loss)
per share because to do so would have been anti-dilutive.





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. The tax benefit on net operating
losses, included in deferred tax assets, was approximately $2.6 million at
September 30, 2009. The net operating losses are being carried forward and will
be available to reduce future taxable income. Realization of deferred tax assets
is dependent upon the generation of future taxable income. A valuation allowance
is provided when it is more likely than not that some portion of the deferred
tax asset will not be realized. Because the Bank has limited operating
experience, management recorded a valuation allowance against the total amount
of deferred tax assets.





6


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.





Premiums
and discounts on investments in debt and equity securities are amortized to
expense or accreted to income over the estimated life of the respective
securities using methods approximating the effective interest method. Gains and
losses on the sales of securities are recognized upon realization based on the
specific identification method.





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 with
servicing released and without recourse. Gains and losses on the disposition of
loans held for sale are determined on the specific identification basis. Net
unrealized losses on loans held for sale are recognized through a valuation
allowance by charges to income. There were no valuation allowances as of
September 30, 2009.





Loans





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.





Allowance
for Loan Losses





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





7


Subsequent
Events





Events occurring subsequent to
September 30, 2009 have been evaluated as to their potential impact to the
financial statements through the date of filing this Form 10-Q, November 13,
2009.





Cash
Flows





Cash and
cash equivalents include cash, deposits with other financial institutions, 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.





Adoption
of New Accounting Standards





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No.157, Fair Value Measurements which is now included under FASB ASC
820. 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 impact of
adoption was not material.





In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities now under FASB ASC 825. 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 April
2009, the FASB issued FSP No. 115-2 and No.124-2, Recognition and Presentation
of Other-Than-Temporary Impairments which is now under FASB ASC 320, which
amends existing guidance for determining whether impairment is
other-than-temporary for debt securities. The FSP requires an entity to assess
whether it intends to sell, or it is more likely than not that it will be
required to sell, a security in an unrealized loss position before recovery of
its amortized cost basis. If either of these criteria is met, the entire
difference between amortized cost and fair value is recognized in earnings. For
securities that do not meet the aforementioned criteria, the amount of
impairment recognized in earnings is limited to the amount related to credit
losses, while impairment related to other factors is recognized in other
comprehensive income. Additionally, the FSP expands and increases the frequency
of existing disclosures about other-than-temporary impairments for debt and
equity securities. This FSP is effective for interim and annual reporting
periods ending after June 15, 2009. The impact of adoption was not
material.





8


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





In April
2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments which is now under FASB ASC 825. This FSP amends
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
to require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies that were previously only
required in annual financial statements. This FSP is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. The Company adopted this FSP in the second
quarter of 2009. The impact of the adoption was not material.





In May
2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
165, Subsequent Events which is now under FASB ASC 855, which establishes
principles and requirements for subsequent events. In particular, this Statement
defines (i) the period after the balance sheet date during which management of a
reporting entity shall evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (ii) the
circumstances under which an entity shall recognize events or transactions
occurring after the balance sheet date in its financial statements, and (iii)
the disclosures that an entity shall make about events or transactions that
occurred after the balance sheet date. SFAS No. 165 is effective for interim or
annual financial periods ending after June 15, 2009, and shall be applied
prospectively. The adoption of SFAS No. 165 did not have a material effect on
the Company’s financial condition, results of operations or cash
flows.




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





9


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





In
August, 2009, the FASB issued Accounting Standards Update (ASU) 2009-05,
Measuring Liabilities at Fair Value”, as subset of Topic 820 Fair Value
Measurements and Disclosure. Among other clarifying points, ASU 2009-05 provides
clarification that in circumstance in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following techniques: (1) The quoted
price of the identical liability when traded as an asset, (2) Quoted prices for
similar liabilities or similar liabilities when traded as assets, or (3) Another
valuation technique that is consistent with the principles of Topic 820 such as
an income approach or market approach. The ASU is effective as of September 30,
2009. The adoption of the ASU did not have a material impact on the Company's
consolidated financial statements.








NOTE
3 – INVESTMENT SECURITIES





The following is a summary of the
amortized cost, gross unrealized gains and losses, and estimated fair market
value of investment securities available-for-sale at September 30, 2009 and
December 31, 2008.





September
      30, 2009(in
      thousands)Amortized
                    
                    
                    Gross
      Unrealized
                    
                    
                    FairCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    ValueMortgage-backed
      securities
                    
                    $
                    1,470
                    
                    
                    $
                    7
                    
                    
                    $
                    (11
                    )
                    
                    $
                    1,466U.S.
      Government Agencies
                    
                    
                    1,000
                    
                    
                    
                    6
                    
                    
                    
                    --
                    
                    
                    
                    1,006Trust
      Preferred Securities
                    
                    
                    1,300
                    
                    
                    
                    13
                    
                    
                    
                    (25
                    )
                    
                    
                    1,288Total
                    
                    $
                    3,770
                    
                    
                    $
                    26
                    
                    
                    $
                    (36
                    )
                    
                    $
                    3,760








December
      31, 2008(in
      thousands)Amortized
                  
                  
                  Gross
      Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueMortgage-backed
      securities
                  
                  $
                  1,807
                  
                  
                  $
                  -
                  
                  
                  $
                  (47
                  )
                  
                  $
                  1,760U.S.
      Government Agencies
                  
                  
                  2,080
                  
                  
                  
                  15
                  
                  
                  
                  --
                  
                  
                  
                  2,095Trust
      Preferred Securities
                  
                  
                  1,302
                  
                  
                  
                  --
                  
                  
                  
                  (183
                  )
                  
                  
                  1,119Total
                  
                  $
                  5,189
                  
                  
                  $
                  15
                  
                  
                  $
                  (230
                  )
                  
                  $
                  4,974




10




The
following is a summary of the amortized cost, gross unrealized gains and losses,
and estimated fair market value of investment securities held-to-maturity at
September 30, 2009 and December 31, 2008.





September
      30, 2009(in
      thousands)Amortized
                  
                  
                  Gross
      Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueMortgage-backed
      securities
                  
                  $
                  31,372
                  
                  
                  $
                  925
                  
                  
                  $
                  (8
                  )
                  
                  $
                  32,289U.S.
      Government Agencies
                  
                  
                  600
                  
                  
                  
                  26
                  
                  
                  
                  --
                  
                  
                  
                  626Total
                  
                  $
                  31,972
                  
                  
                  $
                  951
                  
                  
                  $
                  (8
                  )
                  
                  $
                  32,915











December
      31, 2008(in
      thousands)Amortized
                  
                  
                  Gross
      Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueMortgage-backed
      securities
                  
                  $
                  19,459
                  
                  
                  $
                  596
                  
                  
                  $
                  -
                  
                  
                  $
                  20,055U.S.
      Government Agencies
                  
                  
                  4,070
                  
                  
                  
                  41
                  
                  
                  
                  --
                  
                  
                  
                  4,111Total
                  
                  $
                  23,529
                  
                  
                  $
                  637
                  
                  
                  $
                  -
                  
                  
                  $
                  24,166





11


The
following is a summary of the amortized cost and estimated fair market value of
investment securities available-for-sale and held-to-maturity at September 30,
2009, with amounts shown by remaining term to contractual maturity. Securities
not due at a single maturity date, primarily mortgaged-backed securities, are
shown separately.





September
      30, 2009(in
      thousands)Amortized
                    
                    
                    FairCost
                    
                    
                    ValueAvailable-for-Sale:Mortgaged-backed
      securities
                    
                    $
                    1,470
                    
                    
                    $
                    1,466U.S.
      Government AgenciesDue
      less than one year
                    
                    
                    --
                    
                    
                    
                    --One
      year to less than three years
                    
                    
                    --
                    
                    
                    
                    --Three
      years to less than five years
                    
                    
                    --
                    
                    
                    
                    --Five
      years to ten years
                    
                    
                    --
                    
                    
                    
                    --More
      than ten years
                    
                    
                    1,000
                    
                    
                    
                    1,006Trust
      Preferred Securities
                    
                    
                    1,300
                    
                    
                    
                    1,288Total
                    
                    $
                    3,770
                    
                    
                    $
                    3,760














September
      30, 2009(in
      thousands)Amortized
                      
                      
                      FairCost
                      
                      
                      ValueHeld-to-Maturity:Mortgaged-backed
      securities
                      
                      $
                      31,372
                      
                      
                      $
                      32,289U.S.
      Government AgenciesDue
      less than one year
                      
                      
                      --
                      
                      
                      
                      --One
      year to less than three years
                      
                      
                      600
                      
                      
                      
                      626Three
      years to less than five years
                      
                      
                      --
                      
                      
                      
                      --Five
      years to ten years
                      
                      
                      --
                      
                      
                      
                      --More
      than ten years
                      
                      
                      --
                      
                      
                      
                      --Trust
      Preferred Securities
                      
                      
                      --
                      
                      
                      
                      --Total
                      
                      $
                      31,972
                      
                      
                      $
                      32,915








12





The
following tables summarize, for all securities in an unrealized loss position at
September 30, 2009 and December 31, 2008, the aggregate fair values and gross
unrealized losses by the length of time those securities had been in a
continuous loss position.





September
      30, 2009Less
      Than 12 Months
                    
                    
                    12
      Months or More
                    
                    
                    TotalFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    Loss(In
      thousands)Mortgage-backed
      securities
                    
                    $
                    3,010
                    
                    
                    $
                    19
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    3,010
                    
                    
                    $
                    19U.S.
      Government Agencies
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Trust
      Preferred Securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    924
                    
                    
                    
                    25
                    
                    
                    
                    924
                    
                    
                    
                    25Total
      temporarily impaired
                    
                    $
                    3,010
                    
                    
                    $
                    19
                    
                    
                    $
                    924
                    
                    
                    $
                    25
                    
                    
                    $
                    3,934
                    
                    
                    $
                    44








December
      31, 2008Less
      Than 12 Months
                    
                    
                    12
      Months or More
                    
                    
                    TotalFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    Loss(In
      thousands)Mortgage-backed
      securities
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,178
                    
                    
                    $
                    47
                    
                    
                    $
                    1,178
                    
                    
                    $
                    47U.S.
      Government Agencies
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Trust
      Preferred Securities
                    
                    
                    1,119
                    
                    
                    
                    183
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    1,119
                    
                    
                    
                    183Total
      temporarily impaired
                    
                    $
                    1,119
                    
                    
                    $
                    183
                    
                    
                    $
                    1,178
                    
                    
                    $
                    47
                    
                    
                    $
                    2,297
                    
                    
                    $
                    230








The Bank
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to the length of time and the extent to which
the fair value has been less than cost, the financial condition and near term
prospects of the issuer, and the intent and ability of the Bank to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. In analyzing an issuer’s financial
condition, the Bank may consider whether the securities are issued by the
federal government or its agencies, whether downgrades by bond rating agencies
have occurred, and the results of reviews of the issuer’s financial
condition.





At
September 30, 2009, five debt securities had unrealized losses of approximately
$20 thousand, and three others had unrealized losses of approximately $26
thousand, that have existed for less than twelve months, and more 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.





Note
4. Stock-Based Compensation Plans





Warrants





At
January 1, 2008, the Bank had 327,690 total common stock shareholder warrants
issued and outstanding. These warrants were convertible into common shares at an
exercise price of $10.00 exercisable through June 27, 2008. Additionally, there
were 190,000 organizer warrants granted to the Bank’s nineteen organizers in
connection with the opening of the Bank as of December 31, 2004. The organizer
warrants were convertible into common shares at an exercise price of $10.00
exercisable through June 27, 2009. The organizer warrants, valued at $323,000,
were expensed at the time of issuance.





13


Effective
June 30, 2008, the Company modified the terms of the common stock shareholder
warrants to purchase common stock of the Company attached to the 2004 Offering
by reducing the exercise price of $10.00 to $6.75, and extended the expiration
date from June 28, 2008 to October 31, 2008. Previously, on April 15, 2007, the
Company modified the original expiration term of the warrants from June 28, 2007
to June 28, 2008, and reduced the original exercise price from $12.50 to
$10.00.





Also
effective June 30, 2008, the Company reduced the exercise price of its 190,000
issued and outstanding organizer warrants from $10.00 to $6.75 for a period
ending on October 31, 2008, after which the exercise price reverted back to
$10.00 per share. There was no additional expense recognized as a result of any
of the modifications.





During
2008, there were 147,068 warrants exercised at $6.75. As of November 1, 2008,
all common stock warrants expired. As of December 31, 2008 there were 92,952
organizer warrants still outstanding. At September 30, 2009, all organizer
warrants were expired. There were no warrants exercised during the first nine
months of 2009 and there were 102,038 exercised during the first nine months of
2008.





Stock
Options





On
October 19, 2004, the Board of Directors approved the adoption of the Company’s
Stock Option Plan which allows for a total of 180,000 shares of authorized but
unissued common stock reserved for issuance under the Stock Option Plan,
although option exercises may also be funded using treasury shares or shares
acquired in open market purchases. These options have a 10-year term and may be
either non-qualified stock options or incentive stock options. These options
were not deemed granted until shareholder approval occurred on May 3, 2005. The
options vest at a rate of 20% on each of five annual vesting dates except for
65,000 options granted to Directors, which vested immediately. Each option
entitles the holder to purchase one share of common stock at an exercise price
equal to the fair market value of the stock on the grant date.





The
Company accounts for stock options using the modified prospective transition
method. For accounting purposes, the Company recognizes expense for shares of
common stock awarded under the Company’s Stock Option Plan over the vesting
period at the fair market value of the shares on the date they are
awarded.





A summary
of options outstanding under the Company’s Stock Option Plan as of September 30,
2009, and changes during the year then ended is presented below.




WeightedWeighted
                                
                                
                                AverageAverage
                                
                                
                                RemainingExercise
                                
                                
                                Contractual
                                
                                
                                IntrinsicShares
                                
                                
                                Price
                                
                                
                                Term (years)
                                
                                
                                ValueOutstanding
      at January 1, 2009
                                
                                
                                157,750
                                
                                
                                $
                                10.42Granted
                                
                                
                                -
                                
                                
                                
                                -Exercised
                                
                                
                                -
                                
                                
                                
                                -Forfeited
      or expired
                                
                                
                                (5,500
                                )
                                
                                
                                10.45Outstanding
      at September 30, 2009
                                
                                
                                152,250
                                
                                
                                $
                                10.42
                                
                                
                                
                                5.5
                                
                                
                                
                                -Options
      exerciseable at September 30, 2009
                                
                                
                                122,850
                                
                                
                                $
                                10.46
                                
                                
                                
                                5.0
                                
                                
                                
                                -Vested
      and expected to vest
                                
                                
                                152,250
                                
                                
                                $
                                10.42
                                
                                
                                
                                5.5






As of
September 30, 2009, there was $6 thousand of total unrecognized compensation
cost related to non-vested stock options granted under the Stock Option Plan.
The cost is expected to be recognized over a period of approximately 14
months.





At
September 30, 2009, there were 27,750 shares available for future grant under
the Stock Option Plan.







14




Note
5. Fair Value






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






Level
      1 – Quoted prices (unadjusted) for identical assets or liabilities in
      active markets that the entity has the ability to access as of the
      measurement date.




Level
      2 – Quoted prices (unadjusted) for identical assets or liabilities in
      active markets that the entity has the ability to access as of the
      measurement date.




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






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




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




Impaired
Loans: The fair value of impaired loans with specific allocations of the
allowance for loan losses is generally based on recent real estate appraisals.
These appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments are
routinely made in the appraisal process by the appraisers to adjust for
differences between the comparable sales and income data available. Such
adjustments are typically significant and result in a Level 3 classification of
the inputs for determining fair value.







Assets and
liabilities measured at fair value under SFAS No.157 on a recurring basis,
including financial assets and liabilities for which the Company has elected the
fair value option, are summarized below:








Fair
      Value Measurements atSeptember
      30, 2009 Using:SignificantQuoted
      Prices in
                                                        
                                                        Other
                                                        
                                                        SignificantActive
      Markets for
                                                        
                                                        Observable
                                                        
                                                        UnobservableCarrying
                                                        
                                                        Identical
      Assets
                                                        
                                                        Inputs
                                                        
                                                        InputsValue
                                                        
                                                        (Level
      1)
                                                        
                                                        (Level
      2)
                                                        
                                                        (Level
      3)(Dollars
      in thousands)Financial
      AssetsInvestment
      securities available-for saleMortgage-backed
      securities – residential
                                                        
                                                        $
                                                        1,466
                                                        
                                                        
                                                        
                                                        $
                                                        1,466U.S.
      government agencies
                                                        
                                                        
                                                        1,006
                                                        
                                                        
                                                        
                                                        
                                                        1,006Other
      securities
                                                        
                                                        
                                                        1,288
                                                        
                                                        
                                                        
                                                        
                                                        1,288Total
      available- for-sale
                                                        
                                                        
                                                        3,760
                                                        
                                                        
                                                        
                                                        
                                                        3,760




15





Fair
      Value Measurements atDecember
      31, 2008 Using:SignificantQuoted
      Prices in
                  
                  Other
                  
                  SignificantActive
      Markets for
                  
                  Observable
                  
                  UnobservableCarrying
                  
                  Identical
      Assets
                  
                  Inputs
                  
                  InputsValue
                  
                  (Level
      1)
                  
                  (Level
      2)
                  
                  (Level
      3)(Dollars
      in thousands)Financial
      AssetsInvestment
      securities available-for saleMortgage-backed
      securities – residential
                  
                  $
                  1,760
                  
                  
                  
                  $
                  1,760U.S.
      government agencies
                  
                  
                  2,095
                  
                  
                  
                  
                  2,095Other
      securities
                  
                  
                  1,119
                  
                  
                  
                  
                  1,119Total
      available- for-sale
                  
                  
                  4,974
                  
                  
                  
                  
                  4,974


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




Fair
      Value Measurements atSeptember
      30, 2009 Using:SignificantQuoted
      Prices in
                          
                          Other
                          
                          SignificantActive
      Markets for
                          
                          Observable
                          
                          UnobservableCarrying
                          
                          Identical
      Assets
                          
                          Inputs
                          
                          InputsValue
                          
                          (Level
      1)
                          
                          (Level
      2)
                          
                          (Level
      3)(Dollars
      in thousands)Impaired
      loans
                          $
                          244
                          
                          $
                          
                          
                          $
                          
                          $
                          244





During
the period an impairment charge of $5 thousand was recorded with respect to the
above referenced impaired loan balance. Total non-accrual loans were $2.8
million and $749 thousand at September 30, 2009 and December 31, 2008,
respectively.





Carrying
amounts and estimated fair values of financial instruments at September 30, 2009
and December 31, 2008 were as follows:





September
      30,
                
                
                December
      31,2009
                
                
                2008Carrying
                
                
                Fair
                
                
                Carrying
                
                
                FairAmount
                
                
                Value
                
                
                Amount
                
                
                ValueFinancial
      assetsCash
      and due from banks
                
                $
                10,061
                
                
                $
                10,061
                
                
                $
                12,454
                
                
                $
                12,454Federal
      Funds Sold
                
                
                -
                
                
                
                -
                
                
                
                5
                
                
                
                5Securities
      available for sale
                
                
                3,760
                
                
                
                3,760
                
                
                
                4,974
                
                
                
                4,974Securities
      held to maturity
                
                
                31,972
                
                
                
                32,915
                
                
                
                23,529
                
                
                
                24,166Loans,
      net
                
                
                105,146
                
                
                
                106,239
                
                
                
                94,628
                
                
                
                96,610Federal
      Home Loan Bank stock
                
                
                584
                
                
                
                N/A
                
                
                
                528
                
                
                
                N/AFederal
      Reserve Bank stock
                
                
                308
                
                
                
                N/A
                
                
                
                299
                
                
                
                N/AAccrued
      interest receivable
                
                
                651
                
                
                
                651
                
                
                
                603
                
                
                
                603Financial
      LiabilitiesDeposits
                
                
                137,160
                
                
                
                138,784
                
                
                
                124,762
                
                
                
                125,747Federal
      Home Loan Bank advances
                
                
                8,749
                
                
                
                8,930
                
                
                
                9,459
                
                
                
                9,682Other
      borrowings
                
                
                1,615
                
                
                
                1,641
                
                
                
                615
                
                
                
                547Accrued
      interest payable
                
                
                168
                
                
                
                168
                
                
                
                205
                
                
                
                205





16




The
methods and assumptions used to estimate fair value are described as
follows:






Carrying
amount is the estimated fair value for cash and cash equivalents, interest
bearing deposits, accrued interest receivable and payable, demand deposits,
short-term debt, and variable rate loans or deposits that reprice frequently and
fully. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current market rates applied to the estimated life and credit
risk. Fair value of debt is based on current rates for similar financing. It was
not practicable to determine the fair value of FHLB or FRB stock due to
restrictions placed on its transferability. The fair value of off-balance-sheet
items is not considered material.








Note
6. Commitments and Contingencies





Legal
Proceedings





The
Company has not been a party to any legal proceedings that may have a material
effect on the Company’s results of operations and financial condition. However,
in the normal course of its business, the Company may become involved as
plaintiff or defendant in proceedings such as judicial mortgage foreclosures and
proceedings to collect on loan obligations and to enforce contractual
obligations.





Operating
Lease Commitments





The
Company is obligated under non-cancelable operating leases for its main office
location in Newburgh, New York and its branch office locations in New Paltz, New
York, and Staten Island, New York. The leases are for initial terms of 10 years,
15 years, and 10 years, respectively and have various renewal options. Rent
expense under operating leases was $90 thousand for the three months ended
September 30, 2009. At September 30, 2009, the future minimum rental payments
under operating lease agreements for the fiscal years ending December 31 are $68
thousand in 2009, $273 thousand in 2010, $276 thousand in 2011, $262 thousand in
2012; $183 thousand in 2013; and a total of $826 thousand
thereafter.





Off-Balance
Sheet Financial Instruments





The
Company’s off-balance sheet financial instruments at September 30, 2009, were
limited to loan origination commitments of $5.25 million (including one-to-four
family loans held for sale of $959 thousand) and unused lines of credit
(principally commercial and home equity lines) extended to customers of $13.25
million. Substantially all of these commitments and lines of credit have been
provided to customers within the Bank’s primary lending area. Loan origination
commitments at September 30, 2009 consisted of adjustable and fixed rate
commitments of $2.30 million and $2.95 million respectively, with interest rates
ranging from 4.00% to 7.00%.





17




Item
2.





Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Forward-Looking
Statements





This
Report on Form 10-Q of the Company includes “forward-looking statements” within
the meaning of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, that are based on the current beliefs of, as
well as assumptions made by and information currently available to, the
management of the Company. All statements other than statements of historical
facts included in this Report, including, without limitation, statements
contained under the caption “Management’s Discussion and Analysis” regarding the
Company’s business strategy and plans and objectives of the management of the
Company for future operations, are forward-looking statements. When used in this
Report, the words “anticipate,” “believe,” “estimate,” “project,” “predict,”
“expect,” “intend” or words or phrases of similar import, as they relate to the
Company or the Company’s management, are intended to identify forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, such expectations may not prove
to be correct. All forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
anticipated, believed, estimated, projected, predicted, expected or intended
including risks and uncertainties including changes in economic conditions in
our market area, changes in local real estate values, changes in regulatory
policies, fluctuations in interest rates, local loan and deposit demand levels,
competition, our ability to control expenses, our ability to increase our lower
cost deposits, the level of deposit insurance premiums, our ability to execute
our plan to attain profitability, our ability to expand operations in our new
Staten Island office and other factors. The Company does not intend to update
these forward-looking statements. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by applicable cautionary
statements.





Comparison
of Financial Condition at September 30, 2009 and December 31, 2008





Total
assets at September 30, 2009, amounted to $158.7 million, representing an
increase of $13.4 million, or 9.2%, from $145.3 million at December 31, 2008.
The increase in assets was primarily attributable to a $7.2 million increase in
total securities and a $10.5 million increase in total loans receivable, net.
These increases were partially offset by a $2.1 million decrease in certificates
of deposit at other financial institutions, and a $2.4 million decrease in cash
and cash equivalents.





Overall,
net loans receivable increased $10.5 million, or 11.1%, to $105.1 million at
September 30, 2009, from $94.6 million at December 31, 2008. Commercial real
estate mortgage loans increased $6.4 million, or 14.8%, from $43.3 million to
$49.7 million. Residential real estate mortgage loans, excluding mortgage loans
held for sale, increased $5.1 million, or 23.8%, from $21.4 million to $26.5
million. Commercial loans and commercial lines of credit increased $900
thousand, or 5.3%, from $17.1 million to $18.0 million, and home equity and
consumer loans decreased $300 thousand or 3.4%, from $9.2 million to $8.9
million, over the same nine-month period. Management continues to emphasize the
origination of high quality loans to the loan portfolio. Non-performing loans,
which constitute non-accrual loans, at September 30, 2009 totaled $2.8 million
compared to $749 thousand at December 31, 2008.





Total
cash and cash equivalents at September 30, 2009, decreased $2.4 million, or
19.2%, from $12.5 million to $10.1 million, while certificates of deposit at
other financial institutions decreased $2.1 million, or 32%, to $4.5 million
from $6.6 million during the same period. Total securities at September 30,
2009, increased $7.2 million, or 25.4%, to $35.7 million from $28.5 million at
December 31, 2008 in an effort to deploy excess cash flows in a prudent
manner.





18


Interest
bearing deposits increased by $9.9 million to $121.8 million at September 30,
2009, from $111.9 million at December 31, 2008. The net growth over the period
consisted of a $5.7 million increase in savings and money market accounts and a
$4.5 million increase in NOW accounts partially offset by a $265 thousand
decrease in certificates of deposit. Over the same nine-month period
non-interest bearing accounts increased $2.5 million, or 19.6% from $12.8
million to $15.4 million





Stockholders’
equity increased by $500 thousand to $9.7 million at September 30, 2009, from
$9.2 million at December 31, 2008. The increase was primarily attributable to an
increase in additional paid in capital resulting from $685 thousand in
additional capital raised through a private placement offering of the Company’s
common stock partially offset by a net loss for the period of $399 thousand.
Also contributing to the increase was a $205 thousand decrease in net unrealized
loss in market value of securities available-for-sale. Book value per share
decreased to $4.89 at September 30, 2009, from $4.96 at December 31, 2008. See
“Liquidity and Capital Resources” for information regarding the Bank’s
regulatory capital amounts and ratios.








Non-Performing
Assets





The following table summarizes the
Company’s non-performing assets for the periods September 30, 2009 and December
31, 2008:





At
      September 30,
                  
                  
                  At
      December 30,2009
                  
                  
                  2008(Dollars
      in thousands)Non-accrual
      loans:Real
      estate loans:One-to-four
      family
                  
                  $
                  -
                  
                  
                  $
                  -Commercial
                  
                  
                  695
                  
                  
                  
                  250Multi-family
                  
                  
                  -
                  
                  
                  
                  -Construction
      or development
                  
                  
                  1,184
                  
                  
                  
                  499Home
      equity
                  
                  
                  -
                  
                  
                  
                  -Total
      real estate loans
                  
                  
                  1,879
                  
                  
                  
                  749Other
      Loans:Commercial
      business
                  
                  
                  955
                  
                  
                  
                  -Consumer
                  
                  
                  -
                  
                  
                  
                  -Total
      non-performing loans
                  
                  $
                  2,834
                  
                  
                  $
                  749REO,
      net
                  
                  
                  -
                  
                  
                  
                  -Total
      non-performing assets
                  
                  $
                  2,834
                  
                  
                  $
                  749Ratios:Non-performing
      loans to total loans
                  
                  
                  2.68
                  %
                  
                  
                  0.79
                  %Non-performing
      loans to total assets
                  
                  
                  1.79
                  %
                  
                  
                  0.52
                  %Non-performing
      assets to total assets
                  
                  
                  1.79
                  %
                  
                  
                  0.52
                  %





19


Allowance
for Loan Losses





The following table summarizes the
activity in the Company’s allowance for loan losses for the nine month periods
ended September 30, 2009 and September 30, 2008:











Nine
      Months EndedSeptember
      30,2009
                
                
                2008(Dollars
      in thousands)Balance
      at beginning of year
                
                
                862
                
                
                
                624Charge-offsReal
      Estate mortgage loansCommercial
      loans and lines of credit
                
                
                (4
                )
                
                
                (4
                )Home
      Equity and consumer loans
                
                
                (10
                )Construction
      loansTotal
      charge-offs
                
                
                (14
                )
                
                
                (4
                )RecoveriesReal
      Estate mortgage loansCommercial
      loans and lines of creditHome
      Equity and consumer loans
                
                
                (1
                )
                
                
                (1
                )Construction
      loansTotal
      recoveries
                
                
                (1
                )
                
                
                (1
                )Provision
      for losses
                
                
                283
                
                
                
                129Balance
      at end of period
                
                
                1,130
                
                
                
                748





Analysis
of Net Interest Income





The
following tables summarize the Company’s average balance sheets for interest
earning assets and interest bearing liabilities, average yields and costs (on an
annualized basis), and certain other information for the three and nine-month
periods ended September 30, 2009, as compared to the comparable three and
nine-month periods ended September 30, 2008. The yields and costs were derived
by dividing interest income or expense by the average balance of assets and
liabilities for the period shown. Substantially all average balances were
computed based on daily balances. The yields include deferred fees and
discounts, which are considered yield adjustments.





20







For
      the Three Months Ended September 30,2009
                                                      
                                                      
                                                      2008Average
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      AverageAverage
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Yield
      /
                                                      
                                                      
                                                      Average
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Yield
      /Balance
                                                      
                                                      
                                                      Interest
                                                      
                                                      
                                                      Cost
                                                      
                                                      
                                                      Balance
                                                      
                                                      
                                                      Interest
                                                      
                                                      
                                                      Cost(Dollars
      in thousands)AssetsInterest-earning
      assets:Loans
                                                      
                                                      $
                                                      101,683
                                                      
                                                      
                                                      $
                                                      1,481
                                                      
                                                      
                                                      
                                                      5.78%
                                                      
                                                      
                                                      $
                                                      86,219
                                                      
                                                      
                                                      $
                                                      1,354
                                                      
                                                      
                                                      
                                                      6.28%Fed
      Funds Sold
                                                      
                                                      
                                                      13,764
                                                      
                                                      
                                                      
                                                      10
                                                      
                                                      
                                                      
                                                      0.28%
                                                      
                                                      
                                                      
                                                      5,458
                                                      
                                                      
                                                      
                                                      28
                                                      
                                                      
                                                      
                                                      2.04%Certificates
      of deposit
                                                      
                                                      
                                                      3,955
                                                      
                                                      
                                                      
                                                      20
                                                      
                                                      
                                                      
                                                      2.03%
                                                      
                                                      
                                                      
                                                      6,899
                                                      
                                                      
                                                      
                                                      36
                                                      
                                                      
                                                      
                                                      2.07%FRB
      & FHLB Stock
                                                      
                                                      
                                                      875
                                                      
                                                      
                                                      
                                                      15
                                                      
                                                      
                                                      
                                                      6.80%
                                                      
                                                      
                                                      
                                                      2,391
                                                      
                                                      
                                                      
                                                      18
                                                      
                                                      
                                                      
                                                      3.01%Investment
      securities
                                                      
                                                      
                                                      33,064
                                                      
                                                      
                                                      
                                                      371
                                                      
                                                      
                                                      
                                                      4.45%
                                                      
                                                      
                                                      
                                                      26,964
                                                      
                                                      
                                                      
                                                      335
                                                      
                                                      
                                                      
                                                      4.97%Total
      interest-earning assets
                                                      
                                                      
                                                      153,341
                                                      
                                                      
                                                      $
                                                      1,897
                                                      
                                                      
                                                      
                                                      4.91%
                                                      
                                                      
                                                      
                                                      127,931
                                                      
                                                      
                                                      $
                                                      1,771
                                                      
                                                      
                                                      
                                                      5.54%Allowance
      for loan losses
                                                      
                                                      
                                                      (1,060)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (708)Cash
      & Due from banks
                                                      
                                                      
                                                      1,642
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2,757Other
      Non-interest earning assets
                                                      
                                                      
                                                      2,299
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2,161Total
      assets
                                                      
                                                      $
                                                      156,222
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      132,141Liabilities
      andStockholders’ EquityInterest-bearing
      liabilities:NOW
      accounts
                                                      
                                                      $
                                                      5,318
                                                      
                                                      
                                                      $
                                                      5
                                                      
                                                      
                                                      
                                                      0.37%
                                                      
                                                      
                                                      $
                                                      2,820
                                                      
                                                      
                                                      $
                                                      8
                                                      
                                                      
                                                      
                                                      1.13%Money
      Market accounts
                                                      
                                                      
                                                      36,097
                                                      
                                                      
                                                      
                                                      125
                                                      
                                                      
                                                      
                                                      1.37%
                                                      
                                                      
                                                      
                                                      26,320
                                                      
                                                      
                                                      
                                                      140
                                                      
                                                      
                                                      
                                                      2.11%Regular
      savings accounts
                                                      
                                                      
                                                      10,328
                                                      
                                                      
                                                      
                                                      29
                                                      
                                                      
                                                      
                                                      1.11%
                                                      
                                                      
                                                      
                                                      13,732
                                                      
                                                      
                                                      
                                                      79
                                                      
                                                      
                                                      
                                                      2.28%Certificates
      of Deposit
                                                      
                                                      
                                                      69,954
                                                      
                                                      
                                                      
                                                      565
                                                      
                                                      
                                                      
                                                      3.20%
                                                      
                                                      
                                                      
                                                      56,322
                                                      
                                                      
                                                      
                                                      544
                                                      
                                                      
                                                      
                                                      3.83%Total
      interest-bearing deposits
                                                      
                                                      
                                                      121,697
                                                      
                                                      
                                                      
                                                      724
                                                      
                                                      
                                                      
                                                      2.36%
                                                      
                                                      
                                                      
                                                      99,194
                                                      
                                                      
                                                      
                                                      771
                                                      
                                                      
                                                      
                                                      3.08%Borrowings
                                                      
                                                      
                                                      9,487
                                                      
                                                      
                                                      
                                                      84
                                                      
                                                      
                                                      
                                                      3.51%
                                                      
                                                      
                                                      
                                                      9,951
                                                      
                                                      
                                                      
                                                      80
                                                      
                                                      
                                                      
                                                      3.19%Total
      interest-bearing liabilities
                                                      
                                                      $
                                                      131,184
                                                      
                                                      
                                                      $
                                                      808
                                                      
                                                      
                                                      
                                                      2.44%
                                                      
                                                      
                                                      $
                                                      109,145
                                                      
                                                      
                                                      $
                                                      851
                                                      
                                                      
                                                      
                                                      3.09%Non-interest-bearing
      liabilities
                                                      
                                                      
                                                      15,400
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      13,330Total
      liabilities
                                                      
                                                      
                                                      146,584
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      122,475Stockholders’
      equity
                                                      
                                                      
                                                      9,638
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      9,666Total
      liabilities and stockholders’ equity
                                                      
                                                      $
                                                      156,222
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      132,141Net
      interest income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      1,089
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      920Average
      interest rate spread (1)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2.46%
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2.44%Net
      interest margin (2)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2.84%
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2.88%Net
      interest-earning assets (3)
                                                      
                                                      $
                                                      22,157
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      18,786Ratio
      of average interest-earning assets toaverage interest-bearing
      liabilities
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      116.89%
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      117.21%




21


For
      the Nine Months Ended September 30,2009
                                                                          
                                                                          
                                                                          2008Average
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          AverageAverage
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          Yield
      /
                                                                          
                                                                          
                                                                          Average
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          Yield
      /Balance
                                                                          
                                                                          
                                                                          Interest
                                                                          
                                                                          
                                                                          Cost
                                                                          
                                                                          
                                                                          Balance
                                                                          
                                                                          
                                                                          Interest
                                                                          
                                                                          
                                                                          Cost(Dollars
      in thousands)AssetsInterest-earning
      assets:Loans
                                                                          
                                                                          $
                                                                          98,589
                                                                          
                                                                          
                                                                          $
                                                                          4,244
                                                                          
                                                                          
                                                                          
                                                                          5.75%
                                                                          
                                                                          
                                                                          $
                                                                          78,926
                                                                          
                                                                          
                                                                          $
                                                                          3,786
                                                                          
                                                                          
                                                                          
                                                                          6.40%Fed
      Funds Sold
                                                                          
                                                                          
                                                                          13,002
                                                                          
                                                                          
                                                                          
                                                                          25
                                                                          
                                                                          
                                                                          
                                                                          0.25%
                                                                          
                                                                          
                                                                          
                                                                          6,337
                                                                          
                                                                          
                                                                          
                                                                          115
                                                                          
                                                                          
                                                                          
                                                                          2.39%Certificates
      of deposit
                                                                          
                                                                          
                                                                          3,095
                                                                          
                                                                          
                                                                          
                                                                          60
                                                                          
                                                                          
                                                                          
                                                                          2.59%
                                                                          
                                                                          
                                                                          
                                                                          6,274
                                                                          
                                                                          
                                                                          
                                                                          172
                                                                          
                                                                          
                                                                          
                                                                          3.67%FRB
      & FHLB Stock
                                                                          
                                                                          
                                                                          862
                                                                          
                                                                          
                                                                          
                                                                          36
                                                                          
                                                                          
                                                                          
                                                                          5.58%
                                                                          
                                                                          
                                                                          
                                                                          1,326
                                                                          
                                                                          
                                                                          
                                                                          34
                                                                          
                                                                          
                                                                          
                                                                          3.42%Investment
      securities
                                                                          
                                                                          
                                                                          32,140
                                                                          
                                                                          
                                                                          
                                                                          1,161
                                                                          
                                                                          
                                                                          
                                                                          4.83%
                                                                          
                                                                          
                                                                          
                                                                          19,042
                                                                          
                                                                          
                                                                          
                                                                          714
                                                                          
                                                                          
                                                                          
                                                                          5.00%Total
      interest-earning assets
                                                                          
                                                                          
                                                                          147,689
                                                                          
                                                                          
                                                                          $
                                                                          5,525
                                                                          
                                                                          
                                                                          
                                                                          5.00%
                                                                          
                                                                          
                                                                          
                                                                          111,905
                                                                          
                                                                          
                                                                          $
                                                                          4,821
                                                                          
                                                                          
                                                                          
                                                                          5.76%Allowance
      for loan losses
                                                                          
                                                                          
                                                                          (967)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (651)Cash
      & Due from banks
                                                                          
                                                                          
                                                                          1,786
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2,450Other
      Non-interest earning assets
                                                                          
                                                                          
                                                                          2,288
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2,147Total
      assets
                                                                          
                                                                          $
                                                                          150,795
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          115,851Liabilities
      andStockholders’ EquityInterest-bearing
      liabilities:NOW
      accounts
                                                                          
                                                                          $
                                                                          3,853
                                                                          
                                                                          
                                                                          $
                                                                          12
                                                                          
                                                                          
                                                                          
                                                                          0.42%
                                                                          
                                                                          
                                                                          $
                                                                          2,355
                                                                          
                                                                          
                                                                          $
                                                                          23
                                                                          
                                                                          
                                                                          
                                                                          1.31%Money
      Market accounts
                                                                          
                                                                          
                                                                          33,936
                                                                          
                                                                          
                                                                          
                                                                          444
                                                                          
                                                                          
                                                                          
                                                                          1.75%
                                                                          
                                                                          
                                                                          
                                                                          31,289
                                                                          
                                                                          
                                                                          
                                                                          597
                                                                          
                                                                          
                                                                          
                                                                          2.55%Regular
      savings accounts
                                                                          
                                                                          
                                                                          11,392
                                                                          
                                                                          
                                                                          
                                                                          124
                                                                          
                                                                          
                                                                          
                                                                          1.46%
                                                                          
                                                                          
                                                                          
                                                                          13,086
                                                                          
                                                                          
                                                                          
                                                                          250
                                                                          
                                                                          
                                                                          
                                                                          2.55%Certificates
      of Deposit
                                                                          
                                                                          
                                                                          68,022
                                                                          
                                                                          
                                                                          
                                                                          1,749
                                                                          
                                                                          
                                                                          
                                                                          3.44%
                                                                          
                                                                          
                                                                          
                                                                          41,533
                                                                          
                                                                          
                                                                          
                                                                          1,268
                                                                          
                                                                          
                                                                          
                                                                          4.08%Total
      interest-bearing deposits
                                                                          
                                                                          
                                                                          117,203
                                                                          
                                                                          
                                                                          
                                                                          2,329
                                                                          
                                                                          
                                                                          
                                                                          2.66%
                                                                          
                                                                          
                                                                          
                                                                          88,263
                                                                          
                                                                          
                                                                          
                                                                          2,138
                                                                          
                                                                          
                                                                          
                                                                          3.24%Borrowings
                                                                          
                                                                          
                                                                          9,697
                                                                          
                                                                          
                                                                          
                                                                          256
                                                                          
                                                                          
                                                                          
                                                                          3.53%
                                                                          
                                                                          
                                                                          
                                                                          6,206
                                                                          
                                                                          
                                                                          
                                                                          150
                                                                          
                                                                          
                                                                          
                                                                          3.23%Total
      interest-bearing liabilities
                                                                          
                                                                          $
                                                                          126,900
                                                                          
                                                                          
                                                                          $
                                                                          2,585
                                                                          
                                                                          
                                                                          
                                                                          2.72%
                                                                          
                                                                          
                                                                          $
                                                                          94,469
                                                                          
                                                                          
                                                                          $
                                                                          2,288
                                                                          
                                                                          
                                                                          
                                                                          3.24%Non-interest-bearing
      liabilities
                                                                          
                                                                          
                                                                          14,658
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          11,313Total
      liabilities
                                                                          
                                                                          
                                                                          141,558
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          105,782Stockholders’
      equity
                                                                          
                                                                          
                                                                          9,237
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          10,069Total
      liabilities and stockholders’ equity
                                                                          
                                                                          $
                                                                          150,795
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          11,5851Net
      interest income
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          2,940
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          2,533Average
      interest rate spread (1)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2.28%
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2.52%Net
      interest margin (2)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2.66%
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          3.03%Net
      interest-earning assets (3)
                                                                          
                                                                          $
                                                                          20,790
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          16,755Ratio
      of average interest-earning assets toaverage interest-bearing
      liabilities
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          116.38%
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          118.46%




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


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


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




22





Results
of Operations for the Quarters Ended September 30, 2009 and September 30,
2008





General.For the quarter ended September 30, 2009, the Company recognized a net
loss of $94 thousand, or ($0.05) per basic share, as compared to a net loss of
$1.0 million, or ($0.58) per basic share, for the quarter ended September 30,
2008.





Interest and
Dividend Income.Interest and dividend income amounted to $1.9 million
for the quarter ended September 30, 2009, as compared to $1.8 million for the
quarter ended September 30, 2008. The increase of $126 thousand was primarily
attributable to the $25.4 million increase in average interest-earning assets
from $127.9 million for the quarter ended September 30, 2008 to $153.3 million
for the quarter ended September 30, 2009, offset by a decrease in the average
yield of interest earning assets of 63 basis points from 5.54% for the quarter
ended September 30, 2008, to 4.91% for the same respective period in
2009.





Average
loan balances increased by $15.5 million, from $86.2 million for the quarter
ended September 30, 2008, to $101.7 million for the quarter ended September 30,
2009, while the average yield decreased from 6.28% to 5.78%, over the same
respective periods. The average balances of the Bank’s Fed Funds increased by
$8.3 million, over the quarter ended September 30, 2009 as compared to the
quarter ended September 30, 2008 while the yield decreased to 0.28% from 2.04%
over the same comparable period. The average balance and yield of the Bank’s
investment securities for the quarter ended September 30, 2009 was $33.1 million
and 4.45%, respectively, as compared to an average balance of $27.0 million and
a yield of 4.97% for the comparable quarter ended one-year earlier. The average
balance on certificates of deposit at other financial institutions decreased
from $6.9 million for the quarter ended September 30, 2008, to $4.0 million in
the respective period in 2009. The average yield declined to 2.03% for the
quarter ended September 30, 2009, as compared to 2.07% at the quarter ended
September 30, 2008, or 4 basis points.





Interest Expense.Total interest expense for the quarter ended September 30, 2009 decreased
by $43 thousand, from $851 thousand for the quarter ended September 30, 2008 to
$808 thousand for the quarter ended September 30, 2009. The average balances of
total interest-bearing liabilities increased $22.1 million to $131.2 million for
the quarter ended September 30, 2009 from $109.1 million for the quarter ended
September 30, 2008, but the average costs for those liabilities decreased to
2.44% from 3.09% for the year earlier period.





The
average balances of the Bank’s certificates of deposit portfolio increased to
$70.0 million at an average cost of 3.20% for the quarter ended September 30,
2009, from $56.3 million at an average cost of 3.83% for the quarter ended
September 30, 2008. The $13.6 million increase was primarily attributable to the
increase in the number of customers that followed the opening of the Bank’s
third full service branch in Staten Island, New York in November 2007. The
average balance of regular savings accounts decreased by $3.4 million from $13.7
million at an average cost of 2.28% for the quarter ended September 30, 2008 to
$10.3 million at an average cost of 1.11% for the quarter ended September 30,
2009.





Average
money market account balances increased $9.8 million, or 37.26% to $36.1 million
at an average cost of 1.37% for the quarter ended September 30, 2009, from $26.3
million at an average cost of 2.11% for the quarter ended September 30, 2008.
The increased balances were primarily attributable to reduced demand for other
investment alternatives such as the US stock market and local real estate,
causing an increased demand for more secure investment vehicles such as insured
bank deposits.





For the
quarter ended September 30, 2009, the average balance of the Company’s borrowed
funds was $9.5 million and its average cost was 3.51%, as compared to $10.0
million and an average cost of 3.19% for the quarter ended September 30, 2008.
These borrowed funds were used by the Company to fund its formation costs and
subsequent expenses.





23


Net Interest
Income. Net interest income was approximately $1.1 million for the
quarter ended September 30, 2009 as compared to $920 thousand for the same
quarter in the prior year. The Company’s average interest rate spread increased
to 2.46% for the quarter ended September 30, 2009 from 2.44% for the quarter
ended September 30, 2008, while the net interest margin decreased to 2.84% from
2.88%, over the same respective periods. The ability to maintain interest rate
margins and spreads in a sustained low interest rate environment is a result of
re-pricing deposit liabilities at a rate consistent with the decrease in yield
earned on new assets. Also, management has been selective in underwriting in an
effort to maintain yield without compromising assets quality.





Provision for
Loan Losses. For
the three months ended September 30, 2009 management increased the provision for
loan losses to $103 thousand. The Company is still too new to have developed
enough internal historical loan loss experience. As a result, management decided
it was prudent to increase several loan loss reserve components to more
adequately reflect the national and local economic downturn. Comparatively, the
provision was $46 thousand for the quarter ended September 30,
2008.





Non-interest
Income.Non-interest income for the quarter ended September 30, 2009
increased $6 thousand to approximately $220 thousand as compared to $214
thousand for the quarter ended September 30, 2008. Service charges and fees
decreased by $30 thousand, from $132 thousand for the quarter ended September
30, 2008 to $102 thousand for the quarter ended September 30, 2009 due to
decreased prepayment of portfolio loans with prepayment penalties. The net gain
on the sales of real estate mortgage loans increased $41 thousand to $54
thousand for the quarter ended September 30, 2009, as compared to $13 thousand
for the quarter ended September 30, 2008, primarily because of the increase in
refinancing activities. Other non-interest income categories decreased to $64
thousand for the quarter ended September 30, 2009 from $69 thousand for the same
quarter in 2008, a decrease of $5 thousand.





Non-interest
Expense.Non-interest expense for the quarter ended September 30, 2009
decreased $817 thousand to $1.3 million for the quarter ended September 30, 2009
from $2.12 million for the same quarter in 2008. The 2008 quarter included a
$900 thousand loss on a certificate of deposit we held at another financial
institution. Excluding this $900 thousand loss non-interest expense for the
quarter ended September 30, 2008 would have been $1.22 million. Compensation and
benefits decreased $6 thousand. Other non-interest expense increased to $417
thousand for the quarter ended September 30, 2009, from $354 thousand for the
quarter ended September 30, 2008. The $63 thousand increase was primarily due to
increases in professional and consulting fees, advertising, FDIC assessments and
other operating expenses related to the expansion of the Bank’s business
activities.





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





Results
of Operations for the Nine Months Ended September 30, 2009 and September 30,
2008





General.For the nine months ended September 30, 2009, the Company recognized a
net loss of $399 thousand, or ($.21) per basic share, as compared to a net loss
of $1.5 million, or ($0.89) per basic share, for the nine months ended September
30, 2008. The $1.1 million decrease in net loss was primarily the result of
increased net interest income and non-interest income as well as a decrease in
non-interest expense.





24


Interest Income.Compared to the first nine months of 2008, interest income for the
nine-month period ended September 30, 2009 increased by $704 thousand, or 14.6%,
to $5.5 million from $4.8 million for the comparable nine month period one year
earlier. The increase in interest income resulted from an increase in average
interest-earning assets to $147.7 million for the nine-month period ended
September 30, 2009 from $111.9 million for the comparable nine-month period
ended one year earlier, partially offset by a 76 basis point decrease in yield
associated with those assets from 5.76% to 5.00%. Over the comparable period
average loan balances increased from $79 million to $98.5 million, while their
average yield decreased from 6.40% to 5.75%. The average balances of the
investment securities portfolio increased by $13.1 million, from $19 million to
$32.1 million, while the average balances of fed funds sold also increased by
nearly $6.6 million, from $6.3 million to $13 million, over the nine-month
period ended September 30, 2009 as compared to the same nine-month period in the
previous year. The average yield on investment securities decreased to 4.83% for
the nine months ended September 30, 2009 from 5.00% for the nine-month period
ended September 30, 2008. The yield on fed funds sold decreased to 0.25% from
2.39% over the same respective periods, as a result of the decrease in
short-term interest rates.





During
the nine-month period ended September 30, 2009 the Company decreased by
approximately $3.2 million from $6.3 million to $3.1 million the average balance
invested in a variety of certificates of deposit at other financial institutions
with maturities ranging from three to twelve months. Due to the decrease in
short-term interest rates available in the marketplace, the average yield of
this asset segment decreased from 3.67% for the nine-month period ended June 30,
2008 to 2.59% for the comparable nine-month period in 2009.





Interest Expense.Total interest expense increased $297 thousand from $2.3 million for the
nine months ended September 30, 2008 to $2.6 million for the nine months ended
September 30, 2009. The increase resulted from an increase in the average
balances of the Bank’s interest-bearing deposits and borrowings partially offset
by a decrease in the cost of deposits. The average balances of the Bank’s
certificates of deposit portfolio increased to $68 million at an average cost of
3.44% over the nine-month period ended September 30, 2009, from $41.5 million at
an average cost of 4.08% over the same nine-month period ended one-year earlier.
Average money market account balances increased $2.6 million; from $31.3 million
for the nine-month period ended September 30, 2008 to $33.9 million for the
nine-month period ended September 30, 2009. Over those respective periods the
average costs for those balances decreased 80 basis points, from 2.55% to 1.75%.
Average regular savings account balances decreased $1.7 million to $11.4 million
for the nine-month period ended September 30, 2009, from $13.1 million for the
nine-month period ended September 30, 2008, while the average costs decreased
109 basis points, to 1.46% from 2.55%, over the same respective periods. For the
nine-month period ended September 30, 2009, the average balance of the Company’s
borrowed funds was $9.7 million at an average cost of 3.53% as compared to an
average balance of $6.2 million at an average cost of 3.23% one year-earlier.
The increase in borrowed funds was primarily used to help fund the increase in
the loan and investment portfolios.





Provision for
Loan Losses. Provisions for loan losses were $283 thousand and $129
thousand for the nine months ended September 30, 2009 and 2008, respectively.
The increase was primarily due to the portfolio’s net loan growth. As discussed
previously, following management’s analysis of the adequacy of the allowance for
loan losses, the Company determined that an increased provision was warranted
because of an increase in the loan portfolio’s overall risk profile under
current market conditions at September 30, 2009, and from economic weakness in
its market areas.





Net Interest
Income.Net interest income was approximately $2.9 million for the
nine-month period ended September 30, 2009 as compared to $2.5 million for the
nine-month period ended September 30, 2008. The average interest rate spread
decreased to 2.28% from 2.52% due to the decrease in yield on the commercial
loan portfolio as well as other short term investments whose yield depends on
the overall short-term interest rate environment. Also contributing to the
decrease are significant prepayments on the mortgage-back securities portfolio
which leads to accelerated premium amortization and lower yields. The net
interest margin decreased to 2.66% from 3.03% over the same comparable
periods.





25


Non-Interest
Income.Non-interest income for the nine-month period ended September 30,
2009 totaled $805 thousand, which represented an increase of $297 thousand from
$508 thousand earned over the nine-month period ended September 30, 2008. The
increase was primarily attributable to a $157 thousand increase in the net gain
on the sale of real estate mortgage loans held for sale resulting from an
increase in real estate mortgage loan refinance activity. There was also a $160
thousand increase in other non-interest income, attributable, primarily, to a
recovery of $117 thousand in prior investment in CD amounts written
off.





Non-Interest
Expense.Non-interest expense for the nine-month period ended September
30, 2009 decreased $590 thousand to $3.8 million from $4.4 million for the
nine-month period ended September 30, 2008. Compensation and benefits decreased
by $11 thousand, or 0.6%, despite the increase in personnel needed to staff the
previously mentioned new full-service branch in Staten Island, New York that
opened in November 2007. Occupancy and equipment expense also decreased by $16
thousand, or 2.7%, due to the consolidation of loan origination offices into the
new Staten Island location. Data processing expense increased by $35 thousand,
or 17.9%, due to the increased number of deposit and loan relationships. Other
non-interest expense increased to $1.3 million for the nine-month period ended
September 30, 2009 from $1.0 million for the comparable nine-month period ended
September 30, 2008. The $302 thousand increase was primarily due to increases in
professional and consulting fees, advertising, FDIC assessments of $213
thousand, and other operating expenses related to the expansion of the Bank’s
business activities.








Liquidity
and Capital Resources





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





The
primary investing activities of the Company are the origination of loans and the
purchase of investment securities. For the nine months ended September 30, 2009,
the Company originated loans of approximately $31.8 million including real
estate mortgage loans held for sale. At September 30, 2009, the Company had
outstanding loan origination commitments of $5.25 million (including
one-to-four-family real estate mortgage loans held for sale of $959 thousand)
and undisbursed lines of credit and construction loans in process of $13.25
million. The Company anticipates that it will have sufficient funds available to
meet its current loan originations and other commitments.





At
September 30, 2009, total deposits were approximately $137.2 million of which
approximately $68.9 million was in certificates of deposit. Certificates of
deposit scheduled to mature in one year or less from September 30, 2009 totaled
$32.7 million. Based on past experience the Company anticipates that most such
certificates of deposit can be renewed upon their expiration.





The
Company has a line of credit with a correspondent bank for an amount of up to
$3.2 million.This credit facility is secured by 100% of the outstanding shares
of the Bank for a period of two years with an additional one year renewal, at
the Company’s option. As of September 30, 2009, the outstanding balance was $1.6
million. The Company utilized this credit facility primarily to provide funds to
the Company to downstream to the Bank to enable it to maintain strong capital
ratios and leverage the balance sheet by increasing assets. The line of credit
also repaid the amounts due to the same correspondent bank on its previously
drawn line of credit, to fund operating expenses and to provide funds for an
interest reserve to be applied toward monthly interest payments. Under the debt
covenants on this line of credit, the Bank is required to remain well
capitalized under the regulatory definition.





The Bank
does borrow based upon its need for funds and the cost of deposits as an
alternative source of funds. In general the Bank manages its liquidity by
maintaining sufficient levels of short-term investments so that funds are
available for investment in loans when needed. The Bank monitors its liquidity
on a regular basis. Excess liquidity is invested in overnight federal funds sold
and other short-term investments. The Bank has a line of credit with the same
correspondent bank for an amount of up to $5.0 million. This credit facility is
on a secured basis for $2.5 million for a period of one hundred eighty (180)
calendar days and an unsecured basis of $2.5 million for a period of fourteen
(14) calendar days. The Bank did not utilize this credit facility at any time
during the quarter ending September 30, 2009.





26


The Bank
is subject to the risk based capital guidelines administered by bank regulatory
agencies. The guidelines require the Bank 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. As of
September 30, 2009, the Bank’s risk weighted capital to risk weighted assets was
11.76%; its Tier 1 capital to risk weighted assets was 10.64% and its Tier 1
capital to average assets capital ratio was 6.89%. As of December 31, 2008, the
Bank’s risk weighted capital to risk weighted assets, Tier 1 capital to risk
weighted assets, and Tier 1 capital to average assets capital ratios were 11.0%,
10.1% and 6.8%, respectively.








Item
3. Quantitative and Qualitative Disclosures About Market Risk





This item is not applicable to a
Smaller Reporting Company.





Item
4T. Controls and Procedures





The
Company has adopted interim disclosure controls and procedures designed to
facilitate the Company’s financial reporting. The interim disclosure controls
currently consist of communications among the Co-Chief Executive Officers, the
Chief Financial Officer and each department head to identify any transactions,
events, trends, risks or contingencies which may be material to the Company’s
operations. In addition, the Co-Chief Executive Officers, Chief Financial
Officer and the Audit Committee meet on a quarterly basis and discuss the
Company’s material accounting policies. The Company’s Co-Chief Executive
Officers and Chief Financial Officer have evaluated the effectiveness of these
interim disclosure controls as of September 30, 2009, and found them to be
adequate.





The Company maintains internal control
over financial reporting. There have not been any significant changes in such
internal control over financial reporting that have materially been affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.





PART
II





Item
1. Legal Proceedings





The Company is not involved in any
pending legal proceedings other than routine legal proceedings occurring in the
ordinary course of business. At September 30, 2009, we were not involved in any
legal proceedings, the outcome of which would be material to our financial
condition or results of operations.





Item
1A. Risk Factors





In addition to the other information
contained this Quarterly Report on Form 10-Q, the following risk factors
represent material updates and additions to the risk factors previously
disclosed in the Company’s Annual Report on Form 10-K for the Year Ended
December 31, 2008 and Quarterly Report on Form 10-Q for the quarters ended March
31, 2009 and June 30, 2009, as filed with the Securities and Exchange
Commission. Additional risks not presently known to us, or that we currently
deem immaterial, may also adversely affect our business, financial condition or
results of operations. Further, to the extent that any of the information
contained in this Quarterly Report on Form 10-Q constitutes forward-looking
statements, the risk factors set forth below alsoare cautionary statements
identifying important factors that could cause our actual results to differ
materially from those expressed in any forward-looking statements made by or on
behalf of us.





27


The
FDIC Has Proposed a Rule That Would Require Us To Prepay Insurance
Premiums





On
September 29, 2009, the Federal Deposit Insurance Corporation issued a proposed
rule pursuant to which all insured depository institutions would be required to
prepay their estimated assessments for the fourth quarter of 2009, and for all
of 2010, 2011 and 2012. Under the proposed rule, this pre-payment would be due
on December 30, 2009. Under the proposed rule, the assessment rate for the
fourth quarter of 2009 and for 2010 would be based on each institution’s total
base assessment rate for the third quarter of 2009, modified to assume that the
assessment rate in effect on September 30, 2009 had been in effect for the
entire third quarter, and the assessment rate for 2011 and 2012 would be equal
to the modified third quarter assessment rate plus an additional 3 basis points.
In addition, each institution’s base assessment rate for each period would be
calculated using its third quarter assessment base, adjusted quarterly for an
estimated 5% annual growth rate in the assessment base through the end of 2012.
Based on our deposits and assessment rate at September 30, 2009, we estimate
that our prepayment amount will be approximately $ 843 thousand. We expect that
we will be able to make the prepayment from available cash on hand.




Item
2. Unregistered Sales of Securities and Use of Proceeds





(a)
              Not
      applicable(b)
              Not
      applicable(c)
              Not
      applicable




Item
3. Defaults Upon Senior Securities





None





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





Not Applicable





Item
5. Other Information





None




28




Item
6. Exhibits




Exhibit Number
              Document
              Reference to Previous
      FilingIf Applicable3.1
              Articles
      of Incorporation
              *3.2
              Amended
      Bylaws
              *4
              Form
      of Stock Certificate
              **10.1
              Employment
      Agreement dated September 23, 2004
                Between
      the Bank and Anthony P. Costa.
              **10.2
              Employment
      Agreement dated September 23, 2004
                Between
      the Bank and Philip Guarnieri
              **10.4
              Empire
      State Bank, N.A. 2004 Stock Option Plan
              **31.1
              Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
              Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
              Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200232.2
              Certification
      of Chief Financial Officer 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 on
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 and May 23, 2006 and a post-effective amendment filed on
June 9, 2006. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.





29


SIGNATURES





In accordance with the requirements of
the Securities Exchange Act of 1934 (the “Exchange Act”), the registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized, as of November 13, 2009.




ES
      Bancshares, Inc.Date:
      November 13, 2009
              By:
              /s/Anthony
      P. CostaAnthony
      P. CostaChairman
      and Co-Chief Executive Officer





Date:
      November 13, 2009
                  By:
                  /s/Thomas
      P. SperzelThomas P.
      SperzelChief
      Financial Officer





30