**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMISSION**


**WASHINGTON,
      DC 20549**


_______________________________________





**FORM
      10-QSB**





QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended September 30, 2006








**ES
      BANCSHARES, INC.**


(Exact
      name of registrant as specified in its charter)





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








68
      North Plank Road, Newburgh, New York 12550


(Address
      of principal executive offices)








1
      (866) 646-0003


Issuer’s
      telephone number, including area code











Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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 o.





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity as
      of the latest practicable date.





As
      of
      November 13, 2006 there were 1,719,227 issued and outstanding shares of the
      Registrant’s Common Stock





Transitional
      Small Business Disclosure Format (Check One) YES o. NO x.











**ES
      BANCSHARES, INC.**


**FORM
      10-QSB**


**FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006**





**PART
      I - FINANCIAL INFORMATION**


**Page**Item
                  1.
              Financial
                  Statements (Unaudited)Consolidated
                  Balance Sheets at September 30, 2006 and December 31, 2005
              3Consolidated
                    Statements of Operations for the Three and Nine Months EndedSeptember
                    30, 2006, and 2005
              4Consolidated
                  Statement of Changes in Stockholders’ Equity For
                  the Nine Months Ended September 30, 2006 and 2005
              5Consolidated
                  Statements of Cash Flows for the Nine Months Ended September
                  30, 2006 and 2005.
              6Notes
                  to Unaudited Consolidated Financial Statements
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results
                  of Operations
              12Item
                  3.
              Controls
                  and Procedures
              20
 **PART
          11 - OTHER INFORMATION**
  Item
                  1.
              Legal
                  Procedures
              20Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              20Item
                  3
              Defaults
                  on Senior Securities
              20Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              21Item
                  5.
              Other
                  Information
              22Item
                  6.
              Exhibits
              22Signatures
              23




2


**Part
      1. Item 1.**


**ES
          BANCSHARES, INC.**  **CONSOLIDATED
            BALANCE SHEET**
 **(Unaudited)**
 **(In
                thousands, except share data)**
 September
                    30,
                
                December
                    31,2006
                
                2005ASSETSCash
                    and cash equivalents:Cash
                    and due from banks
                
                $
                2,231
                
                $
                2,972Federal
                    funds sold
                
                
                9,874
                
                
                7,829Total
                    cash and cash equivalents
                
                
                12,105
                
                
                10,801Certificates
                    of deposit at other financial institutions
                
                
                3,598
                
                
                2,749Securities:Available
                    for sale, at fair value
                
                
                9,718
                
                
                6,380Real
                    estate mortgage loans held for sale
                
                
                304
                
                
                679Loans
                    receivable, netReal
                    estate mortgage loans
                
                
                37,733
                
                
                22,863Commercial
                    and lines of credit
                
                
                11,027
                
                
                5,071Home
                    equity and consumer loans
                
                
                5,361
                
                
                3,577Construction
                    loans
                
                
                4,882
                
                
                1,679Deferred
                    cost
                
                
                325
                
                
                241Allowance
                    for loan losses
                
                
                (500
                )
                
                (106
                )Total
                    loans receivable, net
                
                
                58,828
                
                
                33,325Accrued
                    interest receivable
                
                
                410
                
                
                180Federal
                    Reserve Bank stock
                
                
                348
                
                
                378Goodwill
                
                
                581
                
                
                581Office
                    properties and equipment, net
                
                
                713
                
                
                842Prepaid
                    expenses
                
                
                126
                
                
                75Other
                    assets
                
                
                75
                
                
                63Total
                    assets
                
                $
                86,806
                
                $
                56,053LIABILITIES
                    AND STOCKHOLDERS’
                    EQUITYLiabilities:Deposits:Non-interest
                    bearing
                
                $
                7,738
                
                $
                10,073Interest
                    bearing
                
                
                67,132
                
                
                33,304Borrowed
                    funds
                
                
                50
                
                
                —Accrued
                    interest payable
                
                
                124
                
                
                43Other
                    liabilities
                
                
                644
                
                
                301Total
                    liabilities
                
                
                75,688
                
                
                43,721Commitments
                    and contingenciesStockholders’
                    equityCommon
                    stock (par value $0.01; 5,000,000 shares authorized;1,719,227
                    shares of ES Bancshares, Inc.issued
                    at September 30, 20061,719,177
                    shares of Empire State Bank, $5.00 parissued
                    at December 31, 2005)
                
                
                17
                
                
                8,596Additional
                    paid-in-capital
                
                
                16,865
                
                
                8,276Accumulated
                    deficit
                
                
                (5,662
                )
                
                (4,418
                )Accumulated
                    other comprehensive loss
                
                
                (102
                )
                
                (122
                )Total
                    stockholders’ equity
                
                
                11,118
                
                
                12,332Total
                    liabilities and stockholders’ equity
                
                $
                86,806
                
                $
                56,053
 See
        accompanying notes to financial statements
 
 3
 
 **ES
          BANCSHARES, INC. CONSOLIDATED STATEMENTS OF
          OPERATIONS**
 **FOR
            THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
            2005**
 **(Unaudited)**
 **(In
          thousands, except per share data)**
  **For
                    the Three Months**
                
                **For
                    the Nine Months****Ended
                    September 30,**
                
                **Ended
                    September 30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Interest
                    and dividend income:Loans
                
                $
                1,032
                
                $
                388
                
                $
                2,442
                
                $
                745Securities
                
                
                107
                
                
                65
                
                
                289
                
                
                223Certificates
                    of deposit
                
                
                42
                
                
                7
                
                
                103
                
                
                7Fed
                    Funds and other earning assets
                
                
                141
                
                
                93
                
                
                367
                
                
                256Total
                    interest and dividend income
                
                
                1,322
                
                
                553
                
                
                3,201
                
                
                1,231Interest
                    expense:Deposits
                
                
                747
                
                
                185
                
                
                1,653
                
                
                387Borrowed
                    funds
                
                
                1
                
                
                0
                
                
                1
                
                
                0Total
                    interest expense
                
                
                748
                
                
                185
                
                
                1,654
                
                
                387Net
                    interest income
                
                
                574
                
                
                368
                
                
                1,547
                
                
                844Provision
                    for loan losses
                
                
                344
                
                
                21
                
                
                394
                
                
                56Net
                    interest income after provision for loan losses
                
                
                230
                
                
                347
                
                
                1,153
                
                
                788Non-interest
                    income:Service
                    charges and fees
                
                
                58
                
                
                54
                
                
                99
                
                
                115Net
                    gain on sales of real estate mortgageloans
                    held for sale
                
                
                30
                
                
                74
                
                
                144
                
                
                187Other
                
                
                17
                
                
                1
                
                
                21
                
                
                10Total
                    non-interest income
                
                
                105
                
                
                129
                
                
                264
                
                
                312Non-interest
                    expense:Compensation
                    and benefits
                
                
                472
                
                
                436
                
                
                1,394
                
                
                1,208Occupancy
                    and equipment
                
                
                153
                
                
                133
                
                
                473
                
                
                406Data
                    processing service fees
                
                
                37
                
                
                32
                
                
                104
                
                
                82Other
                
                
                254
                
                
                237
                
                
                690
                
                
                686Total
                    non-interest expense
                
                
                916
                
                
                838
                
                
                2,661
                
                
                2,382Net
                    (loss) before income taxes
                
                
                (581
                )
                
                (362
                )
                
                (1,244
                )
                
                (1,282
                )Income
                    tax expense
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    (loss)
                
                $
                (581
                )
                $
                (362
                )
                $
                (1,244
                )
                $
                (1,282
                )Other
                    comprehensive income (loss):Net
                    unrealized gain/(loss) on available-for-sale securities
                
                
                (70
                )
                
                (4
                )
                
                (43
                )
                
                (28
                )Comprehensive
                    income (loss)
                
                $
                (651
                )
                $
                (366
                )
                $
                (1,287
                )
                $
                (1,310
                )Weighted
                    average:Common
                    shares
                
                
                1,719,227
                
                
                1,719,177
                
                
                1,719,198
                
                
                1,719,155(Loss)
                    per common share:Basic
                
                $
                (0.34
                )
                $
                (0.21
                )
                $
                (0.72
                )
                $
                (0.75
                )Basic
                    & diluted
                
                $
                (0.34
                )
                $
                (0.21
                )
                $
                (0.72
                )
                $
                (0.75
                )
  See
            accompanying notes to financial statements
  4
 **ES
          BANCSHARES, INC.**
 **CONSOLIDATED
          STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**
 **FOR
          THE NINE MONTHS ENDED SEPTEMBER 30, 2006 and SEPTEMBER 30,
          2005**
 **(Unaudited)**
 **(In
          dollars except, share data)**
  **Accumulated****Additional**
                
                
                
                **Other****Capital
                    Stock**
                
                
                
                **Paid-In**
                
                **Accumulated**
                
                **Comprehensive****Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **(Loss)**
                
                **Total**Balance
                    at December 31, 2004
                
                
                1,719,127
                
                $
                8,596
                
                $
                8,192
                
                $
                (2,880
                )
                $
                (54
                )
                $
                13,854Exercise
                    of 50 stock warrants
                
                
                50
                
                
                —
                
                
                1
                
                
                —
                
                
                —
                
                
                1Issuance
                    of stock options
                
                
                —
                
                
                —
                
                
                73
                
                
                —
                
                
                —
                
                
                73Comprehensive
                    loss:Net
                    loss for the period
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,282
                )
                
                —
                
                
                (1,282
                )Net
                    unrealized (loss) on available-for-sale
                    securities
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (28
                )
                
                (28
                )Total
                    comprehensive loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,310
                )Balance
                    at September 30, 2005
                
                
                1,719,177
                
                $
                8,596
                
                $
                8,266
                
                $
                (4,162
                )
                $
                (82
                )
                $
                12,618Balance
                    at December 31, 2005
                
                
                1,719,177
                
                $
                8,596
                
                $
                8,276
                
                $
                (4,418
                )
                $
                (122
                )
                $
                12,332Exchange
                    of 1,719,227 shares ofEmpire
                    State Bank, NA $5.00par
                    value for 1,719,227 shares ofES
                    Bancshares, Inc. $0.01 par value
                
                
                
                
                $
                (8,579
                )
                $
                8,579
                
                
                
                
                
                
                
                
                —Exercise
                    of 50 stock warrants
                
                
                50
                
                
                —
                
                
                1
                
                
                —
                
                
                —
                
                
                1Vested
                    stock options, net
                
                
                —
                
                
                —
                
                
                9
                
                
                —
                
                
                —
                
                
                9Comprehensive
                    loss:Net
                    loss for the period
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,244
                )
                
                —
                
                
                (1,244
                )Net
                    unrealized gain on available-for-sale
                    securities
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                20
                
                
                20Total
                    comprehensive loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,224
                )Balance
                    at September 30, 2006
                
                
                1,719,227
                
                $
                17
                
                $
                16,865
                
                $
                (5,662
                )
                $
                (102
                )
                $
                11,118
 See
            accompanying notes to financial statements
 5
 
 **ES
          BANCSHARES, INC.**


**CONSOLIDATED
        STATEMENT OF CASH FLOWS**


**(Unaudited)**




For
                  the Nine MonthsEnded
                  September 30,2006
              
              2005(In
                  thousands)Cash
                  flows from operating activities:Net
                  loss for period
              
              $
              (1,244
              )
              $
              (1,282
              )Adjustments
                  to reconcile net losses to net cashprovided
                  by operating activities:Provision
                  for loan losses
              
              
              394
              
              
              56Depreciation
                  expense
              
              
              147
              
              
              145Amortization
                  of deferred fees, discounts and premiums, net
              
              
              (5
              )
              
              4Net
                  originations on loans held for sale
              
              
              519
              
              
              (1,617
              )Net
                  gain on sale of real estate mortgage loans held for sale
              
              
              (144
              )
              
              (187
              )Changes
                  in assets and liabilitiesIncrease
                  in other assets
              
              
              (293
              )
              
              (74
              )Increase
                  in accrued expenses and other liabilities
              
              
              423
              
              
              751Net
                  cash used in operating activities
              
              
              (203
              )
              
              (2,204
              )Cash
                  flows from investing activities:Maturity
                  of certificates of deposit at other financial institutions
              
              
              3,249
              
              
              —Purchase
                  of certificates of deposit at other financial institutions
              
              
              (4,098
              )
              
              (1,999
              )Purchase
                  of available-for-sale securities
              
              
              (5,397
              )
              
              (1,095
              )Proceeds
                  from principal payments and maturities of securities
              
              
              2,084
              
              
              6,807Net
                  disbursements for loan originations
              
              
              (25,898
              )
              
              (22,306
              )Redemption
                  of Federal Reserve Bank stock
              
              
              30
              
              
              44Leasehold
                  improvements and acquisitions of capital assets
              
              
              (17
              )
              
              (40
              )Net
                  cash used in investing activities
              
              
              (30,047
              )
              
              (18,589
              )Cash
                  flows from financing activities:Net
                  increase in deposits
              
              
              31,494
              
              
              20,697Proceeds
                  of advance from line of credit
              
              
              50
              
              
              —Proceeds
                  from stock issuance
              
              
              1
              
              
              1Issuance
                  of capital stock warrants
              
              
              —
              
              
              1Issuance
                  of stock options
              
              
              9
              
              
              73Net
                  cash provided by financing activities
              
              
              31,554
              
              
              20,772Net
                  increase in cash and cash equivalents
              
              
              1,304
              
              
              (21
              )Cash
                  and cash equivalents at beginning of period
              
              
              10,801
              
              
              11,103Cash
                  and cash equivalents at end of period
              
              $
              12,105
              
              $
              11,082Supplemental
                  cash flow informationInterest
                  paid
              
              $
              1,574
              
              $
              387Income
                  taxes paid
              
              $
              —
              
              $
              —
  See
        accompanying notes to financial statements
  6
  ES
        BANCSHARES, INC.
 **NOTES
        TO UNAUDITED FINANCIAL STATEMENTS**
  **Note
        1.**  **Commencement of Operations**




On
      April
      28, 2004, Empire State Bank, NA (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. Upon receipt of final approvals from
      the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit
      Insurance Company (“FDIC”), the Bank commenced operations on June 28,
      2004.





**Note
      2. Holding Company Formation**





The
      Board
      of Directors of the Bank 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 the
      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 which the Securities and
      Exchange Commission (the “SEC”) declared effective on May 25, 2006. The Bank’s
      shareholders approved the Reorganization at its Annual Meeting of Shareholders
      on July 6, 2006. The Reorganization was completed closed on August 15,
      2006 .





**Note** **3.**  **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 fiscal year ending
      December 31, 2006. The unaudited interim financial statements presented herein
      should be read in conjunction with the annual financial statements of the Bank
      as of and for the fiscal year ended December 31, 2005, included in Form 10-KSB
      filed with the OCC.





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.





7


**Note** **4.
      Summary of Significant Accounting Policies**





**Warrants**





The
      Bank
      issued one stockholder warrant for every five shares of common stock purchased
      in its offering on June 28, 2004. The stockholder warrants are convertible
      into
      common shares at an exercise price of $12.50 exercisable through June 27, 2007.
      At September 30, 2006 the Company had 329,900 stockholder warrants issued and
      outstanding. Additionally, there were 190,000 issuable organizer warrants as
      of
      June 30, 2006. The organizer warrants are convertible into common shares at
      an
      exercise price of $10.00 and exercisable through June 27, 2009. The organizer
      warrants were valued at $323,000 and were expensed at the time of issuance
      in
      accordance with FAS 123. The fair value was determined using the minimum value
      method using the following assumptions: Grant date of June 28, 2004, $10.00
      strike price, $10.00 fair value of a share of capital stock at grant date,
      risk-free rate of 3.8%, no dividends, five (5) year life and no
      volatility.




**Stock
      Options**







The
      Company has a Stock Option Plan covering 180,000 shares. Stock Option grants
      were made for 153,250 shares at an exercise price of $10.50 per share as of
      October 19, 2004. These options have a 10-year term and may be either
      non-qualified stock options or incentive stock options. Subsequently, incentive
      options on 3,500 shares at an exercise price of $10.50 per share, 10,000 shares
      at an exercise price of $10.00 per share, 6,250 shares at an exercise price
      of
      $10.50 per share, and 5,000 shares at an exercise price of $10.00 per share
      were
      awarded on January 18, 2005, November 15, 2005, December 20, 2005, and January
      12, 2006, respectively. The options vest at a rate of 20% on each of five annual
      vesting dates except for 60,000 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.





Shares
      of
      common stock issuable pursuant to outstanding options under the Bank’s Stock
      Option Plan are considered outstanding for purposes of calculating earnings
      per
      share on a diluted basis. For accounting purposes, the Bank adopted FAS 123
      in
      conjunction with the approval of the Stock Option Plan by the Bank’s
      shareholders at the May 3, 2005 annual meeting. Consequently, in accordance
      with
      FAS 123, the Bank commenced to recognize expense for shares of common stock
      awarded under the Bank’s Stock Option Plan over the vesting period at the fair
      market value of the shares on the date they were awarded.





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





8


Option
                  Award DatesMay
                  3,
              
              Nov.
                  15,
              
              Dec.
                  20,
              
              Jan.
                  12,
              
              Weighted2005
              
              2005
              
              2005
              
              2006
              
              AverageRisk
                  free interest rate
              
              
              3.90
              %
              
              4.51
              %
              
              4.40
              %
              
              4.35
              %
              
              4.00
              %Expected
                  option life
              
              
              5.0
              
              
              5.0
              
              
              5.0
              
              
              5.0
              
              
              5.0Expected
                  stock price volatility
              
              
              0.10
              %
              
              0.10
              %
              
              0.10
              %
              
              0.10
              %
              
              0.10
              %Dividend
                  yield
              
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %Weighted
                  average fair value of optionsgranted
              
              $
              1.00
              
              $
              1.57
              
              $
              1.57
              
              $
              2.20
              
              $
              1.13





A
      summary
      of options outstanding under the Bank’s Stock Option Plan as of September 30,
      2006, and changes during the nine-month period then ended is presented
      below.


WeightedWeighted
              
              Average
              
              AggregateAverage
              
              Remaining
              
              IntrinsicExercise
              
              Contractual
              
              ValueShares
              
              Price
              
              Term
                  (yrs.)
              
              ($,000)Outstanding
                atJanuary
                  1, 2006
              
              
              173,000
              
              $
              10.47
              
              
              9.1
              
              
              5Granted
              
              
              5,000
              
              
              10.00
              
              
              10.0
              
              
              —Exercised
              
              
              —
              
              
              —
              
              
              —
              
              
              —Forfieted
                or expired
              
              
              26,250
              
              
              10.40
              
              
              9.0
              
              
              —Outstanding
                atSeptember
                  30, 2006
              
              
              151,750
              
              $
              10.47
              
              
              9.2
              
              
              —Options
                exercisable atSeptember
                  30, 2006
              
              
              75,100
              
              $
              10.47
              
              
              9.0
              
              
              —


As
      of
      September 30, 2006, there was $67,336 of total unrecognized compensation cost
      related to nonvested stock options granted under the Stock Option Plan. The
      cost
      is expected to be recognized over a period of approximately 41
      months.





**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 329,900 stockholder warrants, or 190,000
      organizer warrants, or 156,750 stock options were considered in computing
      diluted earnings (loss) per share because to do so would have been
      antidilutive.





9


**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 $1.9 million at
      September 30, 2006. 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 no operating history,
      management recorded a valuation allowance against the total amount of deferred
      tax assets.





**Securities**





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





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, 2006.





**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.





**Classification
      of Assets.**





Regulations
      require that the Company classify its own assets on a regular basis and
      establish prudent valuation allowances based on such classifications. In
      addition, in connection with examinations, OCC examiners have the authority
      to
      identify problem assets, and if appropriate, require that they be classified.
      There are three classifications for problem assets: substandard, doubtful,
      and
      loss. Substandard




10


assets
      have one or more defined weaknesses and are characterized by the distinct
      possibility that the institution will sustain some loss if the deficiencies
      are
      not corrected. Doubtful assets have the weaknesses of substandard assets, with
      the additional characteristics that the weaknesses make collection or
      liquidation in full on the basis of currently existing facts, conditions and
      values questionable, and there is a high possibility of loss. An asset
      classified loss is considered uncollectible and of such little value that
      continuance as an asset on the balance sheet of the institution is not
      warranted. Assets classified as substandard or doubtful require the Company
      to
      establish general allowances for loan losses. If an asset or portion thereof
      is
      classified as loss, the Company must either establish specific allowances for
      loan losses in the amount of 100% of the portion of the asset classified loss,
      or charge off such amount. If a Company does not agree with an examiner’s
      classification of an asset, it may appeal this determination to the Regional
      Director of the OCC. On the basis of management’s review, at September 30, 2006,
      the Bank had $281,938 of assets classified as substandard. There were no assets
      classified as doubtful or loss.





**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
      Company, due to its period of operations, previously determined its provision
      for loan losses primarily from peer group information. During the past quarter
      the Company completed an analysis of its methodology to establish provisions
      for
      the allowance for loan losses. Based upon the ongoing growth in the loan
      portfolio, the composition of loans and the development of a historical record
      of loan repayments, management believed it appropriate to change its method
      for
      establishing provisions. Management now considers the known inherent risks
      in
      the loan portfolio, which includes the overall rapid growth of the portfolio,
      concentrations of credit, adverse situations that may affect the borrowers’
ability to repay, the estimated value of any underlying collateral, and current
      economic conditions to determine its provision for loan losses. Allocations
      of
      the allowance may be made for specific loans, but the entire allowance is
      available for any loan that in management’s judgment should be charged off.





**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.





**Note
      5. Commitments and Contingencies**





**Legal
      Proceedings**





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





**Operating
      Lease Commitments**





The
      Company is obligated under non-cancelable operating leases for its main office
      location in Newburgh, New York and its branch office location in New Paltz,
      New
      York. The leases are for initial terms of 10 years and 15 years, respectively
      and have various renewal options. Rent expense under operating leases was
      $226,000 for the nine months ended September 30, 2006. At September 30, 2006,
      the future minimum rental payments under operating lease agreements for the
      fiscal years ending




11


December
      31 are $52,000 in 2006, $212,000 in 2007, $215,000 in 2008, $219,000 in 2009,
      $226,000 in 2010 and a total of $1.4 million for 2011 and
      thereafter.





The
      Bank’s lease obligation for its Staten Island, New York and Lynbrook, New York
      lending offices is on a month-to-month basis at $800 per month.





**Off-Balance
      Sheet Financial Instruments**





The
      Company’s off-balance sheet financial instruments at September 30, 2006 were
      limited to loan origination commitments of $7.2 million (including one-to-four
      family loans held for sale of $2.4 million) and unused lines of credit
      (principally commercial and home equity lines) extended to customers of $9.0
      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, 2006 consisted of adjustable and fixed rate
      commitments of $4.4 million and $2.8 million respectively, with interest rates
      ranging from 5.875% to 9.25%.








**Item
      2.**





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





**Forward-Looking
      Statements**





This
      Report on Form 10-QSB 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, our ability to execute our plan to attain profitability, 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, 2006 and December 31,
      2005**





Total
      assets at September 30, 2006 amounted to $86.8 million, representing an increase
      of $30.7 million, or 54.7%, from $56.1 million at December 31, 2005. Asset
      growth during the period primarily reflected increases in total loans and
      securities available for sale funded by deposit growth.





Overall,
      total loans (loans receivable, net and mortgage loans held for sale) increased
      $25.1 million, or 73.8%, to $59.1 million at September 30, 2006 from $34.0
      million at December 31, 2005. During the nine-month period commercial loans
      and
      commercial lines of credit increased $5.9 million, from $5.1 million to $11.0
      million, home equity and consumer loans increased $1.8 million from $3.6




12


million
      to $5.4 million, and construction loans increased $3.2 million, from $1.7
      million to $4.9 million. Commercial real estate mortgage loans increased $13.9
      million, or 62.3%, from $22.3 million at December 31, 2005 to $36.1 million
      at
      September 30, 2006, while residential mortgage loans, excluding mortgage loans
      held for sale, increased $1.0 million from $568,000 to $1.6 million over the
      same nine- month period. Management may consider slowing loan growth in the
      future depending on economic, regulatory, deposit growth and capital
      considerations.





Total
      cash and cash equivalents at September 30, 2006 increased $1.3 million to $12.1
      million from $10.8 million at December 31, 2005, while certificates of deposit
      at other financial institutions increased to $3.6 million from $2.7 million
      during the same period. Total securities at September 30, 2006 increased $3.3
      million to $9.7 million from $6.4 million at December 31, 2005.





Interest
      earning deposits grew $33.8 million, or 102.0%, to $67.1 million at September
      30, 2006 from $33.3 million at December 31, 2005. The growth over the nine-month
      period consisted of increases of $42.3 million in money market accounts, $3.6
      million in savings accounts, $1.8 million in NOW accounts, and $19.4 million
      in
      certificates of deposit. Conversely, over the same nine-month period
      non-interest bearing accounts decreased from $10.1 million to $7.7 million
      as
      depositors transferred portions of these funds into the Bank’s advertised money
      market account product.





Stockholders’
      equity decreased by $1.2 million to $11.1 million at September 30, 2006 from
      $12.3 million at December 31, 2005. The decrease is primarily attributable
      to a
      net loss for the nine-month period of $1.2 million partially mitigated by a
      decrease of $20,000 in the net unrealized loss in the market value of securities
      available-for-sale. The ratio of stockholders’ equity to total assets decreased
      to 12.8% at September 30, 2006 from 22.0% at December 31, 2005. Book value
      per
      share decreased to $6.47 at September 30, 2006 from $7.17 at December 31, 2005.
      See “Liquidity and Capital Resources” for information regarding the Bank’s
      regulatory capital amounts and ratios.





13


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, 2006 as compared to the comparable three and
      nine-month periods ended September 30, 2005. 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.


**For
                    the Three Months Ended September 30,****2006**
                
                **2005******
                
                **Average**
                
                
                
                ****
                
                **Average****Average**
                
                
                
                **Yield
                    /**
                
                **Average**
                
                
                
                **Yield
                    /****Balance**
                
                **Interest**
                
                **Cost**
                
                **Balance**
                
                **Interest**
                
                **Cost****(Dollars
                    in thousands)****Assets**Interest-earning
                    assets:Loans
                
                $
                56,599
                
                $
                1,032
                
                
                7.29
                %
                $
                24,227
                
                $
                388
                
                
                6.35
                %Fed
                    Funds
                
                
                10,362
                
                
                136
                
                
                5.21
                %
                
                10,356
                
                
                87
                
                
                3.33
                %Certificates
                    of deposit
                
                
                3,059
                
                
                42
                
                
                5.45
                %
                
                221
                
                
                7
                
                
                4.03
                %FRB
                    Stock
                
                
                356
                
                
                5
                
                
                6.07
                %
                
                400
                
                
                6
                
                
                5.96
                %Securities-available
                    for sale
                
                
                9,232
                
                
                107
                
                
                4.62
                %
                
                7,466
                
                
                65
                
                
                3.45
                %Total
                    interest-earning assets
                
                
                79,608
                
                $
                1,322
                
                
                6.59
                %
                
                42,670
                
                $
                553
                
                
                5.14
                %Allowance
                    for loan losses
                
                
                (180
                )
                
                
                
                
                
                
                
                (76
                )Cash
                    & Due from banks
                
                
                1,840
                
                
                
                
                
                
                
                
                1,531Other
                    Non-interest earning assets
                
                
                2,086
                
                
                
                
                
                
                
                
                1,822Total
                    assets
                
                $
                83,354
                
                
                
                
                
                
                
                $
                45,947**Liabilities
                    and Stockholders’ Equity**Interest-bearing
                    liabilities:NOW
                    accounts
                
                $
                1,080
                
                $
                1
                
                
                0.37
                %
                $
                838
                
                $
                1
                
                
                0.47
                %Money
                    Market accounts
                
                
                39,940
                
                
                494
                
                
                4.91
                %
                
                13,165
                
                
                84
                
                
                2.53
                %Regular
                    savings accounts
                
                
                3,596
                
                
                25
                
                
                2.76
                %
                
                3,901
                
                
                22
                
                
                2.24
                %Certficates
                    of Deposit
                
                
                18,590
                
                
                227
                
                
                4.84
                %
                
                8,213
                
                
                78
                
                
                3.77
                %Total
                    interest-bearing deposits
                
                
                63,206
                
                
                747
                
                
                4.69
                %
                
                26,117
                
                
                185
                
                
                2.81
                %Borrowings
                
                
                41
                
                
                1
                
                
                8.75
                %
                
                —
                
                
                —
                
                
                —Total
                    interest-bearing liabilities
                
                $
                63,247
                
                $
                748
                
                
                4.69
                %
                $
                26,117
                
                $
                185
                
                
                2.81
                %Non-interest-bearing
                    liabilities
                
                
                8,626
                
                
                
                
                
                
                
                
                7,002Total
                    liabilities
                
                
                71,873
                
                
                
                
                
                
                
                
                33,119Stockholders’
                    equity
                
                
                11,481
                
                
                
                
                
                
                
                
                12,828Total
                    liabilities and stockholders’ equity
                
                $
                83,354
                
                
                
                
                
                
                
                $
                45,947Net
                    interest income
                
                
                
                
                $
                575
                
                
                
                
                
                
                
                $
                368Average
                    interest rate spread(1)
                
                
                
                
                
                
                
                
                1.90
                %
                
                
                
                
                
                
                
                2.33
                %Net
                    interest margin (2)
                
                
                
                
                
                
                
                
                2.89
                %
                
                
                
                
                
                
                
                3.42
                %Net
                    interest-earning assets(3)
                
                $
                16,361
                
                
                
                
                
                
                
                $
                16,553Ratio
                    of average interest-earning assets toaverage
                    interest-bearing liabilities
                
                
                
                
                
                
                
                
                125.87
                %
                
                
                
                
                
                
                
                163.38
                %
 (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.
  14
 **For
                      the Nine Months Ended September 30,****2006**
                  
                  **2005******
                  
                  **Average**
                  
                  
                  
                  ****
                  
                  **Average****Average**
                  
                  
                  
                  **Yield
                      /**
                  
                  **Average**
                  
                  
                  
                  **Yield
                      /****Balance**
                  
                  **Interest**
                  
                  **Cost**
                  
                  **Balance**
                  
                  **Interest**
                  
                  **Cost****(Dollars
                      in
                      thousands)****Assets**Interest-earning
                      assets:Loans
                  
                  $
                  46,183
                  
                  $
                  2,443
                  
                  
                  7.05
                  %
                  $
                  15,987
                  
                  $
                  745
                  
                  
                  6.23
                  %Fed
                      Funds & other investments
                  
                  
                  9,550
                  
                  
                  350
                  
                  
                  4.90
                  %
                  
                  10,878
                  
                  
                  237
                  
                  
                  2.91
                  %Certificates
                      of deposit
                  
                  
                  2,714
                  
                  
                  104
                  
                  
                  5.12
                  %
                  
                  221
                  
                  
                  7
                  
                  
                  4.03
                  %FRB
                      Stock
                  
                  
                  367
                  
                  
                  16
                  
                  
                  5.99
                  %
                  
                  415
                  
                  
                  19
                  
                  
                  6.13
                  %Securities-available
                      for sale
                  
                  
                  8,632
                  
                  
                  289
                  
                  
                  4.46
                  %
                  
                  8,580
                  
                  
                  223
                  
                  
                  3.47
                  %Total
                      interest-earning assets
                  
                  
                  67,446
                  
                  $
                  3,202
                  
                  
                  6.35
                  %
                  
                  36,081
                  
                  $
                  1,231
                  
                  
                  4.56
                  %Allowance
                      for loan losses
                  
                  
                  (144
                  )
                  
                  
                  
                  
                  
                  
                  
                  (56
                  )Cash
                      & Due from banks
                  
                  
                  1,884
                  
                  
                  
                  
                  
                  
                  
                  
                  1,525Other
                      Non-interest earning assets
                  
                  
                  1,990
                  
                  
                  
                  
                  
                  
                  
                  
                  1,778Total
                      assets
                  
                  $
                  71,176
                  
                  
                  
                  
                  
                  
                  
                  $
                  39,328**Liabilities
                      and Stockholders’ Equity**Interest-bearing
                      liabilities:NOW
                      accounts
                  
                  $
                  789
                  
                  $
                  1
                  
                  
                  0.31
                  %
                  $
                  760
                  
                  $
                  2
                  
                  
                  0.35
                  %Money
                      Market accounts
                  
                  
                  29,304
                  
                  
                  1,015
                  
                  
                  4.63
                  %
                  
                  13,119
                  
                  
                  245
                  
                  
                  2.50
                  %Regular
                      savings accounts
                  
                  
                  3,623
                  
                  
                  75
                  
                  
                  2.77
                  %
                  
                  2,062
                  
                  
                  27
                  
                  
                  1.75
                  %Certficates
                      of Deposit
                  
                  
                  16,242
                  
                  
                  562
                  
                  
                  4.63
                  %
                  
                  4,389
                  
                  
                  113
                  
                  
                  3.44
                  %Total
                      interest-bearing deposits
                  
                  
                  49,958
                  
                  
                  1,653
                  
                  
                  4.42
                  %
                  
                  20,330
                  
                  
                  387
                  
                  
                  2.55
                  %Borrowings
                  
                  
                  41
                  
                  
                  1
                  
                  
                  8.75
                  %
                  
                  -
                  
                  
                  -
                  
                  
                  -Total
                      interest-bearing liabilities
                  
                  $
                  49,999
                  
                  $
                  1,654
                  
                  
                  4.42
                  %
                  $
                  20,330
                  
                  $
                  387
                  
                  
                  2.55
                  %Non-interest-bearing
                      liabilities
                  
                  
                  9,376
                  
                  
                  
                  
                  
                  
                  
                  
                  5,797Total
                      liabilities
                  
                  
                  59,375
                  
                  
                  
                  
                  
                  
                  
                  
                  26,127Stockholders’
                      equity
                  
                  
                  11,801
                  
                  
                  
                  
                  
                  
                  
                  
                  13,201Total
                      liabilities and stockholders’ equity
                  
                  $
                  71,176
                  
                  
                  
                  
                  
                  
                  
                  $
                  39,328Net
                      interest income
                  
                  
                  
                  
                  $
                  1,548
                  
                  
                  
                  
                  
                  
                  
                  $
                  844Average
                      interest rate spread(1)
                  
                  
                  
                  
                  
                  
                  
                  
                  1.93
                  %
                  
                  
                  
                  
                  
                  
                  
                  2.01
                  %Net
                      interest margin (2)
                  
                  
                  
                  
                  
                  
                  
                  
                  3.07
                  %
                  
                  
                  
                  
                  
                  
                  
                  3.13
                  %Net
                      interest-earning assets(3)
                  
                  $
                  17,447
                  
                  
                  
                  
                  
                  
                  
                  $
                  15,751Ratio
                      of average interest-earning assets toaverage
                      interest-bearing liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  134.89
                  %
                  
                  
                  
                  
                  
                  
                  
                  177.48
                  %
 (1)
                  Average
                      interest rate spread represents the difference between the
                      yield on
                      average interest-earning assets andand
                      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.
  15


**Results
      of Operations for the Quarters Ended** **September
      30, 2006 and September 30, 2005**





***General.*** For
      the
      quarter ended September 30, 2006, the Company recognized a net loss of $651,000,
      or ($0.34) per diluted share, as compared to a net loss of $366,000, or ($0.21)
      per diluted share, for the quarter ended September 30, 2005. The increased
      loss
      is primarily the result of a significant increase to the provision for loan
      losses in accordance with a more stringent analysis of the Bank’s allowance for
      loan losses. Losses from operations are expected to continue until the Bank
      achieves a higher sustainable level of loans and core deposits, or the interest
      rate environment changes.





***Interest
      Income.*** Interest
      income amounted to $1.3 million for the quarter ended September 30, 2006, as
      compared to $553,000 for the quarter ended September 30, 2005. The increase
      of
      $769,000 was primarily attributable to the increase in average interest-earning
      assets, which increased to $79.6 million for the quarter ended September 30,
      2006 from $42.7 million for the comparable quarter ended one year earlier,
      and
      to the higher yields that were realized in 2006 as compared to 2005 that
      resulted from the series of well-publicized increases in short-term interest
      rates by the Federal Reserve Bank. The average yield on interest-earning assets
      for the quarter ended September 30, 2006 was 6.59%, which was 145 basis points
      higher than the 5.14% yield on the Bank’s interest-earning assets for the
      quarter ended September 30, 2005.





Average
      loan balances increased by $32.4 million, from $24.2 million for the quarter
      ended September 30, 2005 to $56.6 million for the quarter ended September 30,
      2006, while the average yield increased from 6.35% to 7.29% over the same
      respective periods. The average balances of the Bank’s securities available for
      sale and its fed funds increased by $1.8 million and $6,000, respectively,
      over
      the quarter ended September 30, 2006 as compared to the quarter ended September
      30, 2005. The average yields on those respective interest-earning assets
      increased to 4.62% from 3.45%, and to 5.21% from 3.33%, over the same comparable
      periods primarily as a result of higher interest rates that were available
      to
      these short-term assets during the latter period. The average balance and yield
      of the Bank’s certificates of deposit at other financial institutions for the
      quarter ended September 30, 2006 was $3.1 million and 5.45%, respectively,
      as
      compared to an average balance of $221,000 and a yield of 4.03% for the
      comparable quarter ended one-year earlier.





***Interest
      Expense.*** Total
      interest expense for the quarter ended September 30, 2006 increased by $563,000
      when compared to the same three-month period one year earlier. The increase
      was
      primarily due to the above-mentioned increases in short-term interest rates,
      and
      to the increase in the average balances of the Bank’s interest-bearing deposits.
      Average money market account balances increased $26.7 million, from $13.2
      million for the quarter ended September 30, 2005 to $39.9 million for the
      quarter ended September 30, 2006. Over those respective quarters the average
      costs for those balances increased 238 basis points, from 2.53% to 4.91%. The
      average balances and costs of the Bank’s certificates of deposit portfolio
      increased to $18.6 million at an average cost of 4.84% over the quarter ended
      September 30, 2006, from $8.2 million at an average cost of 3.77% over the
      same
      quarter ended one-year earlier. For the quarter ended September 30, 2006, the
      average balance of the Company’s borrowed funds was $41,000 and its average cost
      was 8.75%. These borrowed funds were used by the Company to fund its formation
      costs and subsequent expenses. Since the Company was formed during the quarter
      ended September 30, 2006, there were no borrowed funds during the quarter ended
      September 30, 2005.





***Net
      Interest Income.*** Net
      interest income was approximately $574,000 for the quarter ended September
      30,
      2006 as compared to $368,000 for the same quarter in the prior year. The Bank’s
      average interest rate spread decreased to 1.90% for the quarter ended September
      30, 2006 from 2.33% for the quarter ended September 30, 2005, while the net
      interest margin decreased to 2.89% from 3.42%, over the same respective
      periods.





16


***Provision
      for Loan Losses*** **.** For the
      three months ended September 30, 2006 the provision for loan losses increased
      $323,000 as compared to the three months ended September 30, 2005. The increased
      provision reflected the Company’s changed methodology for establishing
      provisions for the allowance for loan losses. Upon commencing operations the
      provision for loan losses was determined after reviewing peer group information
      as discussed below. In response to the ongoing growth in the loan portfolio,
      the
      composition of loans and the development of a historical record of loan
      repayments management believed it appropriate to change its methods for
      establishing provisions. See Note 4 to Notes to Unaudited Financial Statements.





As
      a de
      novo institution the Company did not have any historical loan losses to enable
      management to estimate the probable credit losses currently imbedded within
      the
      portfolio. Alternatively, along with other criteria, the Company previously
      considered peer group credit loss data each period in providing the provision,
      which, based on the moderate growth exhibited by the loan portfolio, was deemed
      appropriate. However, in light of the significant increase in commercial real
      estate loan, commercial business loan, and construction loan balances, the
      Company expanded its current risk analysis methodologies. Management bifurcated
      the loan portfolio segments into various pools in order to better evaluate
      the
      risks to credits associated by distinct geographic and business type
      concentrations. Additional risk was associated to portions of the increase
      in
      commercial real estate loan balances that resulted from participations because
      of potential different lead-bank underwriting standards, and to the absence
      of a
      direct relationship between the Company and those borrowers. Moreover,
      management determined that the weakening local economy probably had a
      detrimental impact on the Company’s business borrowers, most of which have had
      only a short-term relationship with the Company. Based on this quantitative
      and
      qualitative overall assessment, the Company concluded that a more significant
      provision was appropriate given the relatively unseasoned nature of the loan
      portfolio. Given the magnitude of the increased provision management discussed
      its current assessment with the OCC, who concurred with management’s
      determination.





***Non-interest
      Income.*** Non-interest
      income for the quarter ended September 30, 2006 was approximately $105,000.
      This
      income primarily reflects $30,000 from the net gain on sale of real estate
      mortgages held for sale, $58,000 from service charges and fee income from the
      Bank’s deposit and loan operations and $17,000 from other non-interest income
      categories, principally income earned from the sale of annuities. For the
      quarter ended September 30, 2005 non-interest income amounted to $129,000,
      which
      exceeded the quarter ended September 30, 2006 primarily because of a larger
      volume of loan sales. Loan sales during the quarter ended September 30, 2006
      decreased in comparison to the quarter ended September 30, 2005 primarily
      because of a general softening in the overall housing market evident this year
      relative to last. ****





***Non-interest
      Expense.*** Non-interest
      expense for the quarter ended September 30, 2006 increased $78,000 when compared
      to the same quarter in 2005. Compensation and benefits increased $36,000
      primarily as a result of the hiring of business development officers and staff
      necessary to attract and service an increased number of loan and deposit
      customer relationships. The $20,000 increase in occupancy and equipment expense
      was primarily attributable to increases in rent, utilities and maintenance
      costs, and to costs related to the increases in personnel. Other non-interest
      expense increased to $254,000 for the quarter ended September 30, 2006, from
      $237,000 for the quarter ended September 30, 2005. The $17,000 increase was
      primarily due to increases in professional and consulting fees, shareholder
      communications, 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 they are being carried
      forward and will be available to reduce future taxable income.





17


**Results
      of Operations for the Nine Months Ended September 30, 2006 and September 30,
      2005**





***General.*** For
      the
      nine months ended September 30, 2006, the Bank recognized a net loss of $1.2
      million, or ($0.72) per diluted share, as compared to a net loss of almost
      $1.3
      million, or ($0.75) per diluted share, for the comparable nine-month period
      ended one year earlier. The $38,000 improvement is primarily the result of
      increased net interest **** income
      attributable to the Bank’s larger asset size, and the investment of cash into
      higher yielding assets, that was partially mitigated by higher funding costs,
      an
      increase to the provision for loan losses, and increased operating
      expenses.





***Interest
      Income.*** Compared
      to the first nine months of 2005, interest income for the nine-month period
      ended September 30, 2006 increased $2.0 million, or 160.0%, to $3.2 million.
      The
      increase was primarily attributable to the increase in average interest-earning
      assets to $67.4 million for the nine-month period ended September 30, 2006
      from
      $36.1 million for the comparable nine-month period ended one year earlier,
      and
      to the higher yields associated with those assets. Over the comparable periods
      average loan balances increased from $16.0 million to $46.2 million, while
      their
      average yield increased from 6.23% to 7.05%. The average balances of the
      securities available for sale increased by $52,000 while the average balances
      of
      its fed funds and other investments decreased by $1.3 million over the
      nine-month period ended September 30, 2006 as compared to the same nine-month
      period in the previous year. As a result of higher yields, the interest earned
      by both asset categories increased $66,000 and $111,000, respectively, over
      the
      comparable nine-month periods. Additionally, during the nine-month period ended
      September 30, 2006 the funds were invested in a variety of certificates of
      deposit at other financial institutions with maturities ranging from three
      to
      twelve months. The average balance and average yield of this asset segment
      was
      $2.7 million and 5.12%, respectively. By comparison, the average balance and
      average yield of the Bank’s certificates of deposit was $221,000 and 4.03%,
      respectively, for the nine-month period ended September 30, 2005. The increase
      to this segment’s average balance was because investing in this interest-earning
      category did not commence until the latter part of that period.





***Interest
      Expense.*** Total
      interest expense for the nine-month period ended September 30, 2006 increased
      by
      $1.3 million when compared to the nine-month period ended September 30, 2005.
      The increase was primarily due to an increase in the average balances of
      interest-bearing deposits, which increased from $20.3 million over the
      nine-month period ended September 30, 2005 to nearly $50.0 million over the
      nine-month period ended September 30, 2006, and an increase in the average
      costs
      from 2.55% to 4.42% associated with those deposits over the same respective
      periods. Average money market account balances increased $16.2 million, from
      $13.1 million for the nine-month period ended September 30, 2005 to $29.3
      million for the same nine-month period ended one year later. Over those
      respective periods, the average costs for those balances increased 213 basis
      points, from 2.50% to 4.63%. The average balances of the Bank’s certificates of
      deposit increased to $16.2 million over the nine-month period ended September
      30, 2006 from $4.4 million over the nine-month period ended September 30, 2005.
      The average cost of those deposits increased to 4.63% from 3.44% over the same
      respective periods.





***Provision
      for Loan Losses*** .
      The
      provision for loan losses for the nine months ended September 30, 2006 increased
      $338,000 compared to the nine months ended September 30, 2005. As discussed
      previously, the increase in the provision was a result of management’s
      assessment of the loan portfolio and its assessment of the local economy and
      market conditions, and the adequacy of the allowance for loan
      losses.





***Net
      Interest Income.*** Net
      interest income was approximately $1.5 million for the nine-month period ended
      September 30, 2006 as compared to $844,000 for the nine-month period ended
      September 30, 2005. The average interest rate spread decreased to 1.93% from
      2.01%, while the net interest margin decreased to 3.07% from 3.13%, over the
      same comparable periods





***Non-Interest
      Income.*** Non-interest
      income for the nine-month period ended September 30, 2006 decreased $48,000
      in
      comparison to the nine-month period ended September 30, 2005. Most of the change
      resulted from a $43,000 decrease in net gains on the sale of real estate
      mortgage loans held for




18


sale
      attributable to the decreased real estate mortgage loan sale activity mentioned
      previously. There was also a $16,000 decrease in service charges and fees that
      resulted primarily from a reduction in loan origination fees attributable to
      the
      general softening in the overall housing market in 2006 as compared to 2005.
      The
      decrease was partially offset by an $11,000 increase in other categories of
      non-interest income, attributable, primarily, to increased earnings from the
      sale of annuities.





***Non-Interest
      Expense.*** Non-interest
      expense for the nine-month period ended September 30, 2006 increased $279,000
      to
      $2.7 million from $2.4 million for the nine-month period ended September 30,
      2005. Compensation and benefits increased $186,000 primarily as a result of
      the
      hiring of business development officers and staff necessary to attract and
      service an increased number of loan and deposit customer relationships. The
      increases in occupancy and equipment expense and data processing service fees
      were primarily attributable to increases in rent, utilities and maintenance
      costs, and to costs related to the increase in personnel.





**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 Bank are the origination of loans and the
      purchase of investment securities. For the three months ended September 30,
      2006, the Bank originated loans of approximately $13.1 million including real
      estate mortgage loans held for sale. At September 30, 2006, the Bank had
      outstanding loan origination commitments of $7.2 million (including one-to-four
      family real estate mortgage loans held for sale of $2.4 million) and undisbursed
      lines of credit and construction loans in process of $9.0 million. The Bank
      anticipates that it will have sufficient funds available to meet its current
      loan originations and other commitments.





At
      September 30, 2006, total deposits were approximately $74.9 million of which
      approximately $19.4 million was in certificates of deposit. Certificates of
      deposit scheduled to mature in one year or less from September 30, 2006 totaled
      $8.8 million. Based on past experience **** the
      Bank
      anticipates that most such certificates of deposit will be renewed upon their
      expiration.





As
      stated
      earlier, the Company completed its formation during the quarter ended September
      30, 2006. In order to pay the various costs associated with the formation,
      as
      well as other subsequent expenses as incurred, the Company secured a credit
      facility of $200,000 from its wholesale correspondent bank, Atlantic Central
      Bankers Bank, of which the Company exercised $50,000.





While
      the
      Bank has not borrowed funds since it commenced operations, it may do so in
      the
      future 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 unused credit lines of $5.0 million with
      its correspondent bank, Atlantic Central Bankers Bank, which is separate from
      the Company’s credit facility mentioned above.





**Recent
      Accounting Standards**





In
      July
      2006, the Financial Accounting Standards Board released Interpretation No.
      48,
“Accounting for Uncertainty in Income Taxes.” This Interpretation No. 48 revises
      the recognition tests for tax positions taken in tax returns such that a tax
      benefit is recorded only when it is more likely than not that the tax position
      will be allowed upon examination by taxing authorities. The amount of such
      a tax
      benefit to record is the largest amount that is more likely than not to be
      allowed. Any reduction in




19


deferred
      tax assets or increase in tax liabilities upon adoption will correspondingly
      reduce retained earnings. The Bank has not yet determined the effect of adopting
      this Interpretation, which is effective for it on January 1, 2007.





Staff
      Accounting Bulletin No. 108 (“SAB 108”) provides guidance on the consideration
      of the effects of prior year misstatements in quantifying current year
      misstatements for the purpose of a materiality assessment. SAB 108 is effective
      for financial statements issued for fiscal years ending after November 15,
      2006.
      Management is currently evaluating the impact of SAB 108 on the Company’s
      consolidated financial statements.





In
      February 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 155 “Accounting for Certain
      Hybrid Financial Instruments” (“SFAS No. 155”), which amends FASB Statements No.
      133, “Accounting For Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities”. SFAS No. 155 is effective for all financial
      instruments acquired or issued in fiscal years beginning after September 15,
      2006. Management is currently evaluating the impact of SFAS No. 155 on the
      Company’s consolidated financial statements.








**Item
      3. 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 Chief Executive Officer, the
      Chief
      Operations Officer, 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 Chief Executive Officer,
      Chief Operating Officer, Chief Financial Officer and the Audit Committee meet
      on
      a quarterly basis and discuss the Company’s material accounting policies. The
      Company’s Chief Executive Officer and Chief Financial Officer have evaluated the
      effectiveness of these interim disclosure controls as of September 30, 2006
      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,
      2006, we were not involved in any legal proceedings, the outcome of which would
      be material to our financial condition or results of operations.





**Item
      2. Unregistered Sales of Securities and Use of Proceeds**





None





**Item
      3. Defaults on Senior Securities**




None





20


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





The
      annual meeting of stockholders was held on July 6, 2006. The matters considered
      and voted on at the annual meeting and the vote of the stockholders were as
      follows:





**Proposal
      No. 1**





The
      election of directors, each for a three-year term.


**For**
              
              **Withheld**Harold
                  L. Kahn
              1,469,350
              
              11,450Dr.
                  David N. Mesches
              1,470,100
              
              10,700Michael
                  P. Ostrow
              1,469,850
              
              10,950Albert
                  J. Pagano
              1,471,350
              
              9,450Peter
                  J. Savago
              1,458,600
              
              22,200


**Proposal
      No. 2**





The
      approval of a proposal to adopt a holding company structure with the result
      that
      the Bank will become a wholly owned subsidiary of the Company as provided in
      the
      Agreement and Plan of Share Exchange.




**For**
              
              **Against**
              
              **Abstain**Number
                  of Votes
              
              1,278,857
              
              8,40
              
              15,755Percentage
                  of 1,719,177 shares
              
              74.39%
              
              0.49%
              
              0.92%





**Proposal
      No. 3**




The
      approval of a proposal to amend the Company’s Articles of Incorporation to
      eliminate cumulative voting for directors.


**For**
              
              **Against**
              
              **Abstain**Number
                  of Votes
              
              1,229,953
              
              57,253
              
              15,806Percentage
                  of 1,719,177 shares
              
              71.54%
              
              3.33%
              
              0.92%
  21




**Proposal
      No. 4**





The
      ratification of the appointment of Crowe Chizek and Company LLC as auditors
      for
      the Bank for the year ending December 31, 2006.


**For**
              
              **Against**
              
              **Abstain**Number
                  of Votes
              
              1,472,000
              
              0
              
              8,800Percentage
                  of shares voted
              
              99.41%
              
              0%
              
              0.59%


**Item
      5. Other Information**





None





**Item
      6. Exhibits**


**Reference
                  to Previous Filing****Exhibit
                  Number**
              **Document**
              **If
                  Applicable**3.1
              Articles
                  of Incorporation3.2
              Amended
                  Bylaws4
              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
              *10.3
              Employment
                  Agreement dated October 20, 2005 Between
                  the Bank and Arthur Budich
              *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 OCC as an exhibit to the Bank’s Registration Statement
      on Form S-4 filed on April 6, 2004. All of such previously filed documents
      are
      hereby incorporated herein by reference in accordance with Item 601 of
      Regulation S-B.





22








**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, 2006.




Empire
                State Bank, National AssociationDate:
                November 14, 2006
            By:
            /s/ Anthony
              P. CostaAnthony
                P. Costa, Chairman, Chief Executive Officer


Date:
                November 14, 2006
            By:
            /s/ Arthur
              W. BudichArthur
                W. Budich, Chief Financial Officer










23