UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549


_______________________________________





FORM
10-Q





QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended September 30, 2008









ES
BANCSHARES, INC.


(Exact
name of small business issuer as specified in its charter)








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






68 North Plank Road,
Newburgh, New York 12550


(Address
of principal executive offices)





(866)
646-0003


Issuer’s
telephone number, including area code:




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.   YES x     
NO o.





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




Large accelerated
      filer o
            
            Accelerated filer
      oNon-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
            
            Smaller reporting
      company x





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





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





As of
October 22, 2008 there were 1,825,075 issued and outstanding shares of the
Registrant’s Common Stock.










ES
BANCSHARES, INC.


FORM
10-Q


FOR
THE QUARTERLY PERIOD SEPTEMBER 30, 2008










PART
I – FINANCIAL INFORMATION




PAGEItem
      1.
              Financial
      Statements (Unaudited)Consolidated
      Balance Sheets at September 30, 2008 and December 31, 2007
              2Consolidated
      Statements of Income for the Three and Nine Months Ended September 30,
      2008, and 2007
              3Consolidated
      Statement of Changes in Stockholders’ Equity for the Nine Months Ended
      September 30, 2008 and 2007
              4Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2008 and
      2007
              5Notes
      to Unaudited Consolidated Financial Statements
              6Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              11Item
      3.
              Quantitative
      and Qualitative Disclosure About Market Risk
              22Item
      4T.
              Controls
      and Procedures
              23PART
      11 – OTHER INFORMATIONItem
      1.
              Legal
      Procedures
              23Item
      1A.
              Risk
      Factors
              23Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              24Item
      3.
              Defaults
      Upon Senior Securities
              24Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              24Item
      5.
              Other
      Information
              24Item
      6.
              Exhibits
              24Signatures
              25









- 1
-


Part
1. Item 1.   ES
BANCSHARES, INC
 CONSOLIDATED
BALANCE SHEET
 (Unaudited)


September
      30, 2008
              
              
              December
      31, 2007(Dollars
      in thousands)ASSETSCash
      and cash equivalents:Cash
      and due from banks
              
              $
              2,296
              
              
              $
              2,016Due
      from Federal Home Loan Bank of New York
              
              
              7,343
              
              
              
              5Federal
      funds sold
              
              
              10
              
              
              
              4,731Total
      cash and cash equivalents
              
              
              9,649
              
              
              
              6,752Certificates
      of deposit at other financial institutions
              
              
              3,985
              
              
              
              5,794Securities:Available
      for sale, at fair value
              
              
              5,020
              
              
              
              7,037Held
      to maturity, at amortized cost(fair
      value of $22,268 at September 30, 2008)
              
              
              22,598
              
              
              
              —Total
      securities
              
              
              27,618
              
              
              
              7,037Real
      estate mortgage loans held for sale
              
              
              —
              
              
              
              350Loans
      receivable, netReal
      estate mortgage loans
              
              
              59,263
              
              
              
              41,519Commercial
      and lines of credit
              
              
              16,647
              
              
              
              14,335Home
      equity and consumer loans
              
              
              8,826
              
              
              
              8,714Construction
      loans
              
              
              4,580
              
              
              
              7,137Deferred
      cost
              
              
              491
              
              
              
              364Allowance
      for loan losses
              
              
              (748
              )
              
              
              (624
              )Total
      loans receivable, net
              
              
              89,059
              
              
              
              71,445Accrued
      interest receivable
              
              
              592
              
              
              
              515Federal
      Reserve Bank stock
              
              
              299
              
              
              
              324Federal
      Home Loan Bank stock
              
              
              538
              
              
              
              89Goodwill
              
              
              581
              
              
              
              581Office
      properties and equipment, net
              
              
              672
              
              
              
              838Other
      assets
              
              
              390
              
              
              
              191Total
      assets
              
              $
              133,383
              
              
              $
              93,916LIABILITIES
      AND STOCKHOLDERS’
      EQUITYLiabilities:Deposits:Non-interest
      bearing
              
              $
              11,903
              
              
              $
              7,249Interest
      bearing
              
              
              100,537
              
              
              
              75,093Borrowed
      funds
              
              
              10,307
              
              
              
              89Accrued
      interest payable
              
              
              175
              
              
              
              103Other
      liabilities
              
              
              1,206
              
              
              
              1,000Total
      liabilities
              
              
              124,128
              
              
              
              83,534Commitments
      and contingenciesStockholders’
      equityCapital
      stock (par value $0.01; 5,000,000 shares authorized;1,823,475
      shares issued at September 30, 2008 and1,721,437
      shares issued at December 31, 2007)
              
              
              18
              
              
              
              17Additional
      paid-in-capital
              
              
              17,606
              
              
              
              16,911Accumulated
      deficit
              
              
              (8,092
              )
              
              
              (6,553
              )Accumulated
      other comprehensive income / (loss)
              
              
              (277
              )
              
              
              7Total
      stockholders’ equity
              
              
              9,255
              
              
              
              10,382Total
      liabilities and stockholders’ equity
              
              $
              133,383
              
              
              $
              93,916
  See
accompanying notes to financial statements
   - 2
-
 ES
BANCSHARES, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (Unaudited)
 (In
thousands, except per share data)
  For
      the Three Months
              
              
              For
      the Nine MonthsEnded
      September 30,
              
              
              Ended
      September 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Interest
      and dividend income:Loans
              
              $
              1,354
              
              
              $
              1,317
              
              
              $
              3,786
              
              
              $
              3,738Securities
              
              
              335
              
              
              
              105
              
              
              
              714
              
              
              
              296Certificates
      of deposit
              
              
              36
              
              
              
              81
              
              
              
              172
              
              
              
              243Fed
      Funds and other earning assets
              
              
              46
              
              
              
              121
              
              
              
              149
              
              
              
              400Total
      interest and dividend income
              
              
              1,771
              
              
              
              1,624
              
              
              
              4,821
              
              
              
              4,677Interest
      expense:Deposits
              
              
              771
              
              
              
              933
              
              
              
              2,138
              
              
              
              2,701Borrowed
      funds
              
              
              80
              
              
              
              2
              
              
              
              150
              
              
              
              4Total
      interest expense
              
              
              851
              
              
              
              935
              
              
              
              2,288
              
              
              
              2,705Net
      interest income
              
              
              920
              
              
              
              689
              
              
              
              2,533
              
              
              
              1,972Provision
      for loan losses
              
              
              46
              
              
              
              27
              
              
              
              129
              
              
              
              36Net
      interest income after provision for loan losses
              
              
              874
              
              
              
              662
              
              
              
              2,404
              
              
              
              1,936Non-interest
      income:Service
      charges and fees
              
              
              132
              
              
              
              71
              
              
              
              339
              
              
              
              225Net
      gain on sales of real estate mortgageloans
      held for sale
              
              
              13
              
              
              
              69
              
              
              
              51
              
              
              
              135Net
      gain on securities available for sale
              
              
              —
              
              
              
              —
              
              
              
              7
              
              
              
              —Other
              
              
              69
              
              
              
              33
              
              
              
              111
              
              
              
              57Total
      non-interest income
              
              
              214
              
              
              
              173
              
              
              
              508
              
              
              
              417Non-interest
      expense:Compensation
      and benefits
              
              
              605
              
              
              
              520
              
              
              
              1,756
              
              
              
              1,455Occupancy
      and equipment
              
              
              192
              
              
              
              156
              
              
              
              597
              
              
              
              472Data
      processing service fees
              
              
              66
              
              
              
              52
              
              
              
              196
              
              
              
              136Loss
      on CD
              
              
              900
              
              
              
              —
              
              
              
              900
              
              
              
              —Other
              
              
              354
              
              
              
              245
              
              
              
              1,002
              
              
              
              755Total
      non-interest expense
              
              
              2,117
              
              
              
              973
              
              
              
              4,451
              
              
              
              2,818Net
      (loss) before income taxes
              
              
              (1,029
              )
              
              
              (138
              )
              
              
              (1,539
              )
              
              
              (465
              )Income
      tax expense
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Net
      (loss)
              
              $
              (1,029
              )
              
              $
              (138
              )
              
              $
              (1,539
              )
              
              $
              (465
              )Other
      comprehensive income (loss):Net
      unrealized gain/(loss) on available-for-sale securities
              
              
              (248
              )
              
              
              45
              
              
              
              (284
              )
              
              
              74Comprehensive
      income (loss)
              
              $
              (1,277
              )
              
              $
              (93
              )
              
              $
              (1,823
              )
              
              $
              (391
              )Weighted
      average:Common
      shares
              
              
              1,767,333
              
              
              
              1,721,336
              
              
              
              1,736,847
              
              
              
              1,720,115(Loss)
      per common share:Basic
      & diluted
              
              $
              (0.58
              )
              
              $
              (0.08
              )
              
              $
              (0.89
              )
              
              $
              (0.27
              )
  See
accompanying notes to financial statements
 - 3
-
 ES
BANCSHARES, INC.
 CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (Unaudited)
 (In
thousands of dollars except, share data)
  Capital
                  Stock
                  Shares
              
              
              Amount
              
              
              Additional
                    Paid-In
                    Capital
              
              
              Accumulated
                  Deficit
              
              
              Accumulated
                      Other
                      Comprehensive
                      (Loss)
              
              
              TotalBalance
      at January 1, 2007
              
              
              1,719,227
              
              
              $
              17
              
              
              $
              16,869
              
              
              $
              (5,845
              )
              
              $
              (99
              )
              
              $
              10,942Exercise
      of stock warrants
              
              
              2,210
              
              
              
              —
              
              
              
              22
              
              
              
              —
              
              
              
              —
              
              
              
              22Stock
      based compensation, net
              
              
              —
              
              
              
              —
              
              
              
              15
              
              
              
              —
              
              
              
              —
              
              
              
              15Comprehensive
      loss:Net
      loss for the period
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (465
              )
              
              
              —
              
              
              
              (465
              )Net
      unrealized gain on available-for-sale
    securities
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              74
              
              
              
              74Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (391
              )Balance
      at September 30, 2007
              
              
              1,721,437
              
              
              $
              17
              
              
              $
              16,906
              
              
              $
              (6,310
              )
              
              $
              (25
              )
              
              $
              10,588Balance
      at January 1, 2008
              
              
              1,721,437
              
              
              $
              17
              
              
              $
              16,911
              
              
              $
              (6,553
              )
              
              $
              7
              
              
              $
              10,382Exercise
      of stock warrants
              
              
              102,038
              
              
              
              1
              
              
              
              688
              
              
              
              —
              
              
              
              —
              
              
              
              689Stock
      based compensation, net
              
              
              —
              
              
              
              —
              
              
              
              7
              
              
              
              —
              
              
              
              —
              
              
              
              7Comprehensive
      loss:Net
      loss for the period
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (1,539
              )
              
              
              —
              
              
              
              (1,539
              )Net
      unrealized (loss) on available-for-sale
      securities
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (284
              )
              
              
              (284
              )Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,823
              )Balance
      at September 30, 2008
              
              
              1,823,475
              
              
              $
              18
              
              
              $
              17,606
              
              
              $
              (8,092
              )
              
              $
              (277
              )
              
              $
              9,255
  See
accompanying notes to financial statements


- 4
-


ES
Bancshares, Inc.


CONSOLIDATED
STATEMENT OF CASH FLOWS


(Unaudited)




For
      the Nine MonthsEnded
      September 30,2008
            
            
            2007(In
      thousands)Cash
      flows from operating activities:Net
      loss for period
            
            $
            (1,539
            )
            
            $
            (465
            )Adjustments
      to reconcile net losses to net cashprovided by operating
      activities:Provision
      for loan losses
            
            
            129
            
            
            
            36Depreciation
      expense
            
            
            251
            
            
            
            130Amortization
      of deferred fees, discounts and premiums, net
            
            
            (9
            )
            
            
            2Net
      originations on loans held for sale
            
            
            402
            
            
            
            (4
            )Net
      gain on sale of real estate mortgage loans held for sale
            
            
            (51
            )
            
            
            (135
            )Net
      (gain) on sale of securities available for sale
            
            
            (7
            )
            
            
            —Gain
      on sale of fixed assets
            
            
            (9
            )
            
            
            —Stock
      compensation expense
            
            
            7
            
            
            
            15Loss
      of uninsured deposit at failed financial institution
            
            
            900
            
            
            
            —Changes
      in assets and liabilitiesIncrease
      in other assets
            
            
            (276
            )
            
            
            (152
            )Increase
      in accrued expenses and other liabilities
            
            
            278
            
            
            
            449Net
      cash used in operating activities
            
            
            76
            
            
            
            (124
            )Cash
      flows from investing activities:Maturity
      and redemption of CDs at other financial institutions
            
            
            8,009
            
            
            
            6,645Purchase
      of cerfificates of deposit at other financial institutions
            
            
            (7,102
            )
            
            
            (6,694
            )Purchase
      of available-for-sale securities
            
            
            (2,929
            )
            
            
            (3,500
            )Purchase
      of held-to-maturity securities
            
            
            (23,250
            )
            
            
            —Proceeds
      on sale of securities available for sale
            
            
            506
            
            
            
            —Proceeds
      from principal payments and maturities/calls of securities
            
            
            4,823
            
            
            
            2,947Proceeds
      on sale of fixed assets
            
            
            9
            
            
            
            —Net
      disbursements for loan originations
            
            
            (17,742
            )
            
            
            (10,248
            )Purchase
      of Federal Home Loan Bank stock
            
            
            (463
            )
            
            
            (89
            )Redemption
      of Federal Home Loan Bank stock
            
            
            14
            
            
            
            —Redemption
      of Federal Reserve Bank stock
            
            
            26
            
            
            
            11Leasehold
      improvements and acquisitions of capital assets
            
            
            (85
            )
            
            
            (107
            )Net
      cash used in investing activities
            
            
            (38,184
            )
            
            
            (11,035
            )Cash
      flows from financing activities:Net
      increase in deposits
            
            
            30,098
            
            
            
            4,495Proceeds
      of advance from line of credit & FHLB
            
            
            10,525
            
            
            
            31Repayment
      of advances
            
            
            (307
            )
            
            
            —Proceeds
      from stock issuance
            
            
            689
            
            
            
            22Net
      cash provided by financing activities
            
            
            41,005
            
            
            
            4,548Net
      increase (decrease) in cash and cash equivalents
            
            
            2,897
            
            
            
            (6,611
            )Cash
      and cash equivalents at beginning of period
            
            
            6,752
            
            
            
            14,343Cash
      and cash equivalents at end of period
            
            $
            9,649
            
            
            $
            7,732Supplemental
      cash flow informationInterest
      paid
            
            $
            2,705
            
            
            $
            2,705Income
      taxes paid
            
            $
            —
            
            
            $
            —




See
accompanying notes to financial statements




- 5
-


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.  The Bank
commenced operations on June 28, 2004.





Note
2.   Holding Company Formation





On August 15, 2006, 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.





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 (i) so that such statements
are not misleading and (ii) for a fair presentation of the financial position
and results of operations, for the periods presented.  Certain
information and footnote disclosures normally included in accordance with
generally accepted accounting principles of the United States have been
condensed or omitted pursuant to the rules and regulations of the SEC, however,
the Company believes that the disclosures are adequate to make the information
presented not misleading.  The 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,
2008.  The unaudited interim financial statements presented herein
should be read in conjunction with the annual financial statements of the
Company as of and for the fiscal year ended December 31, 2007, included in Form
10-KSB filed with the SEC.





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.





Note
4.   Stock Based Compensation





Warrants





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




- 6
-


September
30, 2008 there were 29,890 stockholder warrants exercised at $6.75, which left
297,800 stockholder warrants still outstanding at September 30,
2008.





Also effective June 30, 2008, the
Company reduced the exercise price of its 190,000 issued and outstanding
organizer warrants from $10.00 to $6.75 for a period ending on October 31, 2008
after which the exercise price will revert back to $10.00 per
share.  The organizer warrants, which had an original exercise price
of $10.00 per share and expiration date of June 28, 2009, were granted to the
Bank’s organizers in connection with the opening of the Bank.  The
organizer warrants were valued at $323,000 and were expensed at the time of
issuance in accordance with FAS 123.   There was no additional
expense recognized as a result of any of the modifications.  During
the three-month period ending on September 30, 2008 there were 72,148 organizer
warrants exercised at $6.75, which left 117,852 organizer warrants still
outstanding at September 30, 2008.




Stock
Options




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





The Company accounts for stock options
under Statement of Financial Accounting Standards No. 123 (revised 2004)
“Share-based Payment” (“SFAS 123(R)”), using the modified prospective transition
method.  For accounting purposes, the Company recognizes expense for
shares of common stock awarded under the Company’s Stock Option Plan over the
vesting period at the fair market value of the shares on the date they are
awarded.





Provided below are the assumptions used
for grants in 2008, 2007, and 2006.




2008
              
              
              2007
              
              
              2006Risk
      free interest rate
              
              
              3.02%
              
              
              
              4.74%
              
              
              
              4.35%Expected
      option life
              
              
              5.0
              
              
              
              5.0
              
              
              
              5.0Expected
      stock price volatility
              
              
              0.10%
              
              
              
              0.10%
              
              
              
              0.10%Dividend
      yield
              
              
              0.00%
              
              
              
              0.00%
              
              
              
              0.00%Weighted
      average fair value of optionsgranted
              
              $
              —
              
              
              $
              —
              
              
              $
              2.20
  - 7
-


A summary
of options outstanding under the Bank’s Stock Option Plan as of September 30,
2008, and changes during the nine-month period then ended is presented
below.




WeightedWeighted
              
              
              AverageAverage
              
              
              RemainingExercise
              
              
              Contractual
              
              
              IntrinsicShares
              
              
              Price
              
              
              Term
      (yrs.)
              
              
              ValueOutstanding
      atJanuary
      1, 2008
              
              
              157,750
              
              
              $
              10.47
              
              
              
              6.4
              
              
              
              —Granted
              
              
              5,000
              
              
              
              9.00
              
              
              
              9.6
              
              
              
              —Exercised
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Forfieited
      or expired
              
              
              (5,000
              )
              
              
              10.50
              
              
              
              —
              
              
              
              —Outstanding
      atSeptember
      30, 2008
              
              
              157,750
              
              
              $
              10.42
              
              
              
              6.5
              
              
              
              —Options
      exerciseable atSeptember
      30, 2008
              
              
              106,700
              
              
              $
              10.48
              
              
              
              6.3
              
              
              
              —Vested
      and expectedto vest
              
              
              157,750
              
              
              $
              10.42
              
              
              
              6.5
              
              
              
              —





As of September 30, 2008, there was
$24,804 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 20 months.





Note
5.   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
297,800 stockholder warrants, or 117,852 organizer warrants, or 157,750 stock
options were considered in computing diluted earnings (loss) per share because
to do so would have been antidilutive.





Note
6.   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 $3.4 million at September 30, 2008.  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.





- 8
-


Note
7.   Non-Performing Assets





Loans are
reviewed monthly and any loan whose collectability is doubtful is placed on
non-accrual status.  Loans are placed on non-accrual status when
either principal or interest is 90 days or more past due, unless, in the
judgment of management, the loan is well collateralized and in the process of
collection.  Interest accrued and unpaid at the time a loan is placed
on non-accrual status is reversed from interest income related to current year
income and charged to the allowance for loan losses with respect to income that
was recorded in the prior fiscal year.  Subsequent payments are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectability of the
loan.  We did not have any non-accrual loans nor did we have any
troubled debt restructurings (which involved forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than that of
market rates) or foreclosed assets acquired in settlement of loans, at and for
the nine-month periods ending September 30, 2008.  At and for the
nine-month period ending September 30, 2007, we had one non-accrual loan in the
amount of $10,000.





Note
8.   Allowance for Loan Losses





The
allowance for loan losses is increased by provisions for loan losses charged to
income.  Losses are charged to the allowance when all or a portion of
a loan is deemed to be uncollectible.  Subsequent recoveries of loans
previously charged off are credited to the allowance for loan losses when
realized.





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





Note
9.   Adoption of New Accounting Standards





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





- 9
-


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





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





Note
10.   Fair Value





Statement 157 establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value.  The standard describes three levels of inputs that may be used
to measure fair value:





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





Level
2:  Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities, quoted prices in markets
that are not active, or other inputs that are observable or can be corroborated
by observable market data.





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





The fair values of securities available
for sale are determined by obtaining quoted prices on nationally recognized
securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical
technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying
on the securities’ relationship to other benchmark quoted securities (Level 2
inputs).





Assets and liabilities measured at fair
value on a recurring basis are summarized below.


September
      30
              
              
              Identical
      Assets
              
              
              Inputs
              
              
              Inputs2008
              
              
              (Level
      1)
              
              
              (Level
      2)
              
              
              (Level
      3)AssetsAvailable
      for sale securities
              
              $
              5,020
              
              
              $
              —
              
              
              $
              5,020
              
              
              $
              —


- 10
-


Note
11.   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 locations in New Paltz, New
York and Staten Island, New York.  The leases are for initial terms of
10 years, 15 years, and 10 years, respectively and have various renewal
options.  Rent expense under operating leases was $74,000 for the
three months ended September 30, 2008.  At September 30, 2008, the
future minimum rental payments under operating lease agreements for the fiscal
years ending December 31 are $67,000 in 2008, $266,000 in 2009, $273,000 in
2010, $276,000 in 2011, $279,000 in 2012 and a total of $1,213,000 for 2013 and
thereafter.





Off-Balance
Sheet Financial Instruments





The Company’s off-balance sheet
financial instruments at September 30, 2008 were limited to loan origination
commitments of $12.2 million (including one-to-four family loans held for sale
of $2.6 million) and unused lines of credit (principally commercial and home
equity lines) extended to customers of $11.9 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, 2008 consisted of adjustable and fixed rate commitments of
$10.9 million and $1.3 million respectively, with interest rates ranging from
5.80% to 7.00%.





Item
2.





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





Forward-Looking
Statements





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




- 11
-


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, 2008 and December 31, 2007





Total
assets.  Total assets at September 30, 2008 amounted to $133.4
million, representing an increase of $39.5 million, or 42.1%, from $93.9 million
at December 31, 2007.  The increase in assets was primarily
attributable to a $20.6 million increase in total securities, a $17.6 million
increase in total loans receivable, net, and a $2.9 million increase in total
cash and cash equivalents, mitigated by a $1.8 million decrease in certificates
of deposit at other financial institutions.  We have recently decided
to accelerate our growth of assets and liabilities.  This is based on
several factors.  First, we believe that, over time, we can achieve
better operating results with a larger asset and liability
base.  Moreover, we believe that the recent changes in the yield curve
provides us with an opportunity to grow at a higher interest rate
spread.  Additionally, the recent cutbacks in lending by our
competitors provides us with selected opportunities to expand our lending
activities, provided that we do so while maintaining high underwriting
standards.  Finally, the opening of our full service Staten Island
office in November 2007 has provided us with an improved platform to conduct
banking operations in that attractive market.





Net
loans.Overall,
net loans, increased $17.6 million, or 24.7%, to $89.1 million at September 30,
2008 from $71.4 million at December 31, 2007.  The increase in net
loans was primarily attributable to the $17.7 million, or 42.7% increase in
commercial and residential real estate mortgage loans, which increased from
$41.5 million to $59.3 million.  The $17.7 million net increase
included $16.3 million in primarily fixed rate one-to-four family residential
real estate loans and $1.5 million in commercial real estate
loans.  Commercial loans and commercial lines of credit increased $2.3
million, or 16.1%, from $14.3 million to $16.6 million, and home equity and
consumer loans increased $112,000, or 1.3%, from $8.7 million to $8.8
million.  Management believes that the significant increase in loans
has increased the Company’s interest rate risk but that the added risk is
reasonable as it will result in improved earnings due to the wider spreads now
available, and is manageable, as management believes the Company’s balance sheet
has the capacity for such added risk.  Over the same nine-month period
the above increases were partially offset by a decrease in construction or
development loans of $2.5 million, or 35.2%, from $7.1 million to $4.6
million.  We did not have any non-accrual loans, nor any accruing
loans contractually past due 90 days or more, nor did we have any troubled debt
restructurings (which involved forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates)
or foreclosed assets acquired in settlement of loans, at and for the nine-month
period ending September 30, 2008.





Total
securities.Total securities
at September 30, 2008 increased $20.6 million, or 294.3%, to $27.6 million from
$7.0 million at December 31, 2007.  Securities available for sale
decreased by $2.0 million, or 28.7%, primarily as the result of prepayments on
its Ginnie Mae mortgage-backed securities portfolio coupled with calls of
relatively higher-yielding government sponsored agency notes that were called as
a result of the recent decline in interest rates.  Securities held to
maturity increased by $23.0 million, net, as the Bank invested approximately
$18.3 million of its excess deposits and borrowed funds from the Federal Home
Loan Bank of New York into Fannie Mae and Freddie Mac pass through
mortgage-backed securities and $4.7 million into government sponsored agency
notes,which
included $1.0 million in Fannie Mae notes and $3.7 million in Federal Home Loan
Bank notes.  The expected weighted average lives and yields of the new
mortgage backed securities were approximately 6.2 years and 5.09%, respectively,
on the date of purchase, while the yield on the government sponsored agency
notes was approximately 3.42%, and mature in less than five years.





Certificates of
deposit at other financial institutions.  Certificates of
deposit at other financial institutions decreased $1.8 million, or 31.0%, to
$4.0 million at September 30, 2008 from $5.8 million at December 31,
2007.  All certificates have termsof twelve months or
less.  In addition, all of our certificates at September 30, 2008 were
in amounts of $100,000 or less.





- 12
-


Cash and cash
equivalents.Total cash and
cash equivalents at September 30, 2008 increased $2.8 million, or 41.2%, to $9.6
million from $6.8 million at December 31, 2007, to ensure that sufficient
liquidity was readily available to meet the Company’s immediate funding
needs.





Federal Home Loan
Bank stock.  As a result of
its utilization of secured advances from the Federal Home Loan Bank of New York,
the Bank increased its investment in Federal Home Loan Bank of New York capital
stock from $89,000 at December 31, 2007 to $538,000 at September 30,
2008.





Deposits.Interest bearing
deposits grew $25.4 million, or 33.8%, to $100.5 million at September 30, 2008
from $75.1 million at December 31, 2007.  The net growth over the
nine-month period consisted of a $36.4 million increase in certificates of
deposit, a $2.8 million increase in savings accounts and an $780,000 increase in
NOW accounts that was partially offset by an $14.6 million decrease in money
market accounts. Over the same nine-month period non-interest bearing accounts
increased $4.6 million, or 63.0%, from $7.3 million to $11.9
million.  The increases in our various deposit categories reflect our
ability to attract and service new deposit relationships in order to support the
increases to our total assets.  The decline in money market accounts
followed decreases in the interest rate offered on that type of deposit, and
depositors elected to transfer balances into higher-yielding certificates of
deposit.  A significant contributing factor to the increase in total
deposits was the opening of the Bank’s third full service branch office in
Staten Island, New York in November 2007.  As of September 30, 2008,
23.7% of the Bank’s total deposits were attributable to this new
branch.





Borrowings.  Our
borrowings increased from $89,000 at December 31, 2007 to $10.3 million at
September 30, 2008 primarily as a result of our borrowing $10.0 million from the
Federal Home Loan Bank of New York in five-year amortizing and structured
advances to purchase mortgage-backed securities.  At September 30,
2008, the weighted average term to maturity of our borrowings was approximately
3.8 years.





Stockholders’
equity.Stockholders’
equity decreased by $1.1 million to $9.3 million at September 30, 2008 from
$10.4 million at December 31, 2007.  The decrease is primarily
attributable to a net loss for the nine-month period of $1.5 million and a
$284,000 increase in net unrealized loss in market value of securities
available-for-sale, that was mitigated by a combined $689,000 in capital stock
and  additional paid in capital from warrant holders who exercised
their warrants.  The ratio of stockholders’ equity to total assets
decreased to 6.9% at September 30, 2008 from 11.1% at December 31,
2007.  Book value per share decreased to $5.08 at September 30, 2008
from $6.03 at December 31, 2007.  See “Liquidity and Capital
Resources” for information regarding the Bank’s regulatory capital amounts and
ratios.





We recently reduced the exercise price
of our two classes of warrants in an effort of raising a modest amount of
additional capital to support our operations and growth plans.  See
Note 4 of the Notes to our Consolidated Financial Statements.  In
addition, we are considering applying to the United State Treasury (“UST”) to
participate in its Capital Purchase Program through the issuance of preferred
stock and warrants to the UST.  We would use any capital we receive
from the UST to support our plan to grow our assets and
liabilities.  While we will focus our growth efforts on loans and
deposits, we will also invest in securities and fund our operations through
borrowings where justified on an asset/liability management basis.


- 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, 2008 as compared to the comparable three and nine-month periods ended
September 30, 2007.  The yields and costs were derived by dividing
interest income or expense by the average balance of assets and liabilitiesfor 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 30,2008
              
              
              2007AverageBalance
              
              
              Interest
              
              
              Average

                  Yield
      /Cost
              
              
              AverageBalance
              
              
              Interest
              
              
              AverageYield
      /Cost(Dollars
      in thousands)AssetsInterest-earning
      assets:Loans
              
              $
              86,219
              
              
              $
              1,354
              
              
              
              6.28%
              
              
              $
              71,504
              
              
              $
              1,317
              
              
              
              7.37%Fed
      Funds
              
              
              5,458
              
              
              
              28
              
              
              
              2.04%
              
              
              
              8,772
              
              
              
              114
              
              
              
              5.16%Certificates
      of deposit
              
              
              6,899
              
              
              
              36
              
              
              
              2.07%
              
              
              
              5,917
              
              
              
              81
              
              
              
              5.43%Securities
              
              
              26,964
              
              
              
              335
              
              
              
              4.97%
              
              
              
              8,297
              
              
              
              105
              
              
              
              5.06%Other
      earning assets
              
              
              2,391
              
              
              
              18
              
              
              
              3.01%
              
              
              
              468
              
              
              
              7
              
              
              
              5.98%Total
      interest-earning assets
              
              
              127,931
              
              
              $
              1,771
              
              
              
              5.54%
              
              
              
              94,958
              
              
              $
              1,624
              
              
              
              6.84%Allowance
      for loan losses
              
              
              (708
              )
              
              
              
              
              
              
              
              
              
              
              (607
              )Cash
      & Due from banks
              
              
              2,757
              
              
              
              
              
              
              
              
              
              
              
              1,983Other
      Non-interest earning assets
              
              
              2,161
              
              
              
              
              
              
              
              
              
              
              
              1,915Total
      assets
              
              $
              132,141
              
              
              
              
              
              
              
              
              
              
              $
              98,249Liabilities
      and  Stockholders’ EquityInterest-bearing
      liabilities:NOW
      accounts
              
              $
              2,820
              
              
              $
              8
              
              
              
              1.13%
              
              
              $
              1,657
              
              
              $
              5
              
              
              
              1.20%Money
      Market accounts
              
              
              26,320
              
              
              
              140
              
              
              
              2.11%
              
              
              
              46,958
              
              
              
              583
              
              
              
              4.93%Regular
      savings accounts
              
              
              13,732
              
              
              
              79
              
              
              
              2.28%
              
              
              
              8,399
              
              
              
              76
              
              
              
              3.59%Certficates
      of Deposit
              
              
              56,322
              
              
              
              544
              
              
              
              3.83%
              
              
              
              21,294
              
              
              
              269
              
              
              
              5.01%Total
      interest-bearing deposits
              
              
              99,194
              
              
              
              771
              
              
              
              3.08%
              
              
              
              78,308
              
              
              
              933
              
              
              
              4.73%Borrowings
              
              
              9,951
              
              
              
              80
              
              
              
              3.19%
              
              
              
              84
              
              
              
              2
              
              
              
              8.25%Total
      interest-bearing liabilities
              
              $
              109,145
              
              
              $
              851
              
              
              
              3.09%
              
              
              $
              78,392
              
              
              $
              935
              
              
              
              4.73%Non-interest-bearing
      liabilities
              
              
              13,330
              
              
              
              
              
              
              
              
              
              
              
              9,003Total
      liabilities
              
              
              122,475
              
              
              
              
              
              
              
              
              
              
              
              87,395Stockholders’
      equity
              
              
              9,666
              
              
              
              
              
              
              
              
              
              
              
              10,854Total
      liabilities and stockholders’ equity
              
              $
              132,141
              
              
              
              
              
              
              
              
              
              
              $
              98,249Net
      interest income
              
              
              
              
              
              $
              920
              
              
              
              
              
              
              
              
              
              
              $
              689Average interest rate spread(1)
              
              
              
              
              
              
              
              
              
              
              2.44%
              
              
              
              
              
              
              
              
              
              
              
              2.11%Net interest margin(2)
              
              
              
              
              
              
              
              
              
              
              2.88%
              
              
              
              
              
              
              
              
              
              
              
              2.90%Net interest-earning assets(3)
              
              $
              18,786
              
              
              
              
              
              
              
              
              
              
              $
              16,566Ratio
      of average interest-earning assets toaverage interest-bearing
      liabilities
              
              
              
              
              
              
              
              
              
              
              117.21%
              
              
              
              
              
              
              
              
              
              
              
              121.13%
  (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.


- 14
-




For
      the Nine Months Ended September 30,2008
            
            
            2007AverageBalance
            
            
            Interest
            
            
            AverageYield
      /
              Cost
            
            
            AverageBalance
            
            
            Interest
            
            
            Average
              Yield
      /
              Cost(Dollars
      in thousands)AssetsInterest-earning
      assets:Loans
            
            $
            78,926
            
            
            $
            3,786
            
            
            
            6.40%
            
            
            $
            67,737
            
            
            $
            3,738
            
            
            
            7.36%Fed
      Funds
            
            
            6,337
            
            
            
            115
            
            
            
            2.39%
            
            
            
            9,734
            
            
            
            383
            
            
            
            5.19%Certificates
      of deposit
            
            
            6,274
            
            
            
            172
            
            
            
            3.67%
            
            
            
            5,985
            
            
            
            243
            
            
            
            5.43%Securities
            
            
            19,042
            
            
            
            714
            
            
            
            5.00%
            
            
            
            8,034
            
            
            
            296
            
            
            
            4.91%Other
      Earning Assets
            
            
            1,326
            
            
            
            34
            
            
            
            3.42%
            
            
            
            418
            
            
            
            17
            
            
            
            5.42%Total
      interest-earning assets
            
            
            111,905
            
            
            $
            4,821
            
            
            
            5.76%
            
            
            
            91,908
            
            
            $
            4,677
            
            
            
            6.80%Allowance
      for loan losses
            
            
            (651
            )
            
            
            
            
            
            
            
            
            
            
            (592
            )Cash
      & Due from banks
            
            
            2,450
            
            
            
            
            
            
            
            
            
            
            
            2,018Other
      Non-interest earning assets
            
            
            2,147
            
            
            
            
            
            
            
            
            
            
            
            1,898Total
      assets
            
            $
            115,851
            
            
            
            
            
            
            
            
            
            
            $
            95,232Liabilities
      and  Stockholders’ EquityInterest-bearing
      liabilities:NOW
      accounts
            
            $
            2,355
            
            
            $
            23
            
            
            
            1.31%
            
            
            $
            1,232
            
            
            $
            8
            
            
            
            0.87%Money
      Market accounts
            
            
            31,289
            
            
            
            597
            
            
            
            2.55%
            
            
            
            47,888
            
            
            
            1,785
            
            
            
            4.98%Regular
      savings accounts
            
            
            13,086
            
            
            
            250
            
            
            
            2.55%
            
            
            
            6,997
            
            
            
            185
            
            
            
            3.54%Certficates
      of Deposit
            
            
            41,533
            
            
            
            1,268
            
            
            
            4.08%
            
            
            
            19,267
            
            
            
            723
            
            
            
            5.02%Total
      interest-bearing deposits
            
            
            88,263
            
            
            
            2,138
            
            
            
            3.24%
            
            
            
            75,384
            
            
            
            2,701
            
            
            
            4.79%Borrowings
            
            
            6,206
            
            
            
            150
            
            
            
            3.23%
            
            
            
            67
            
            
            
            4
            
            
            
            8.75%Total
      interest-bearing liabilities
            
            $
            94,469
            
            
            $
            2,288
            
            
            
            3.24%
            
            
            $
            75,451
            
            
            $
            2,705
            
            
            
            4.79%Non-interest-bearing
      liabilities
            
            
            11,313
            
            
            
            
            
            
            
            
            
            
            
            8,660Total
      liabilities
            
            
            105,782
            
            
            
            
            
            
            
            
            
            
            
            84,111Stockholders’
      equity
            
            
            10,069
            
            
            
            
            
            
            
            
            
            
            
            11,121Total
      liabilities and stockholders’ equity
            
            $
            115,851
            
            
            
            
            
            
            
            
            
            
            $
            95,232Net
      interest income
            
            
            
            
            
            $
            2,533
            
            
            
            
            
            
            
            
            
            
            $
            1,972Average interest rate spread(1)
            
            
            
            
            
            
            
            
            
            
            2.52%
            
            
            
            
            
            
            
            
            
            
            
            2.01%Net interest margin
      (2)
            
            
            
            
            
            
            
            
            
            
            3.03%
            
            
            
            
            
            
            
            
            
            
            
            2.87%Net interest-earning assets(3)
            
            $
            17,436
            
            
            
            
            
            
            
            
            
            
            $
            16,457Ratio
      of average interest-earning assets toaverage interest-bearing
      liabilities
            
            
            
            
            
            
            
            
            
            
            118.46%
            
            
            
            
            
            
            
            
            
            
            
            121.81%




(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
-
 
 Comparison
of Operating Results for the Quarters Ended September 30, 2008 and September 30,
2007





General.  For
the quarter ended September 30, 2008, the Company recognized a net loss of $1.0
million, or ($0.58) per diluted share, as compared to a net loss of $138,000, or
($0.08) per diluted share, for the comparable quarter ended one year
earlier.  The $891,000 increase in net loss was primarily attributable
to a $900,000 loss of the uninsured principal of a certificate of deposit at
Silver State Bank in Henderson, Nevada that failed and was closed by the Nevada
Financial Institutions Division and placed into receivership of the Federal
Deposit Insurance Corporation on September 5, 2008.  The increased net
loss also resulted from increased non-interest operating expense that was mainly
related to the opening of a new full service branch during the fourth quarter of
2007, and an increased provision for loan loss that resulted from management’s
assessment of the adequacy of the allowance for loan and lease
loss.  The increases in expense were partially mitigated by increases
in net interest income and non-interest income related to the Company’s larger
asset size.





Interest
Income.Interest income increased to $1.8 million for the
quarter ended September 30, 2008, an increase of $147,000, or 9.1%, compared to
the quarter ended September 30, 2007.  Average interest earning assets
increased $32.9 million, or 34.6% to $127.9 million for the quarter ended
September 30, 2008 from $95.0 million for the quarter ended September 30,
2007.  However, primarily due to the overall lower interest rate
environment in 2008 as compared to 2007, the average yields on interest earning
assets fell by 130 basis points to 5.54% for the quarter ended September 30,
2008 from 6.84% for the comparable period in 2007, as incremental earning assets
were added at lower yields, and floating rate assets repriced at lower market
interest rates.





Average
loan balances increased by $14.7 million from $71.5 million for the quarter
ended September 30, 2007 to $86.2 million for the quarter ended September 30,
2008, while the average yield decreased from 7.37% to 6.28% over the same
respective periods in part due to the percentage of our portfolio consisting of
residential mortgage loans.Over the same comparable
periods, the average balances of the Company’s investment securities portfolio
increased $18.7 million, from $8.3 million to $27.0 million primarily as the
result of our large mortgage backed securities purchase in 2008.  Part
of the increase in average balances was funded with secured advances obtained
from the Federal Home Loan Bank of New York in order to enhance net interest
income.  The average yield earned by the securities portfolio
decreased to 4.97% for the quarter ended September 30, 2008, from 5.06% for the
same quarter ended one year earlier.  The average balance and yield of
the Bank’s certificates of deposit at other financial institutions for the
quarter ended September 30, 2008 was $6.9 million and 2.07%, respectively, as
compared to an average balance of $5.9 million and a yield of 5.43% for the
quarter ended September 30, 2007, while the average yield earned on Fed Funds
sold during the quarter ended September 30, 2008 decreased to 2.04% as compared
to 5.16% earned over the same quarter ended one year earlier.





Interest
Expense.Total interest expense for the quarter ended
September 30, 2008 decreased by $84,000 from $935,000 to $851,000 for the same
three-month period one year earlier.  The decrease was primarily due
to decreases in short-term interest rates, notwithstanding the increase in the
average balances of the Company’s interest-bearing deposits and
borrowings.  Average money market account balances decreased $20.7
million, from $47.0 million for the quarter ended September 30, 2007 to $26.3
million for the quarter ended September 30, 2008, as management chose to
emphasize other funding sources that were deemed more attractive from a
cost/duration standpoint.  Over those respective quarters the average
costs for those balances decreased 282 basis points, from 4.93% to
2.11%.  The average balances of the Company’s certificates of deposit
portfolio increased to $56.3 million at an average cost of 3.83% over the
quarter ended September 30, 2008, from $21.3 million at an average cost of 5.01%
over the same quarter ended one-year earlier.  Average regular savings
account balances increased $5.3 million to $13.7 million for the quarter ended
September 30, 2008, from $8.4 million for the quarter ended September 30, 2007,
while the average costs decreased 131 basis points, to 2.28% from 3.59%, over
the same respective periods.  For the quarter ended September 30,
2008, the average balance of the Company’s borrowed funds was $10.0 million at
an average cost of 3.19% as compared to an average




- 16
-


balance
of $84,000 at an average cost of 8.25% one year-earlier.  The increase
in borrowed funds was primarily used to help fund the increase in the investment
securities portfolio discussed above.





Net Interest
Income.  Net interest income was approximately $920,000 for the
quarter ended September 30, 2008 as compared to $689,000 for the same quarter in
the prior year, an increase of $231,000.  The Company’s average
interest rate spread increased to 2.44% for the quarter ended September 30, 2008
from 2.11% for the quarter ended September 30, 2007, while the net interest
margin decreased to 2.88% from 2.90%, over the same respective
periods.





Provision for
Loan Losses.  For the three
months ended September 30, 2008 the provision for loan losses was $46,000 as
compared to $27,000 for the three months ended September 30,
2007.  The increase resulted primarily because the portfolio’s net
loan growth was greater in 2008 than in 2007.  In addition, as a
result of management’s analysis of the adequacy of the allowance for loan
losses, the Company determined that an increased provision was further warranted
due to increased credit risk that has likely resulted from economic weakness in
its market area resulting from falling home values, rising unemployment and the
spiraling increases in energy and other commodity prices.





Non-interest
Income.Non-interest income for the quarter ended September
30, 2008 was approximately $214,000 as compared to $173,000 for the quarter
ended September 30, 2007.  Service charges and fees increased $61,000
from $71,000 in 2007 to $132,000 in 2008 primarily as a result of the Company’s
increased number of customer relationships.  The net gain on sale of
real estate mortgages held for sale decreased to $13,000 from $69,000 primarily
because of a general softening in the overall housing market evident this year
relative to last, and because the Company elected to retain more of the real
estate mortgage loans that it originated for its own portfolio instead of
selling them.  Other non-interest income categories increased to
$69,000 from $33,000 primarily from increased annuity sales.





Non-interest
Expense.Non-interest expense for the quarter ended September
30, 2008 increased $1.1 million when compared to the same quarter in
2007.  Compensation and benefits increased $85,000 primarily from the
increase in personnel needed to staff the new full-service branch in Staten
Island, New York that opened in November 2007.  The new branch office
was also primarily responsible for the increase in occupancy and equipment
expense and contributed to the increase in data processing fees.





The
substantive portion of the overall increase in non-interest expense was
attributable to management’s recognition of a $900,000 loss, which was the
uninsured portion of a six-month certificate of deposit scheduled to mature on
September 8, 2008, that had been invested at Silver State Bank in Henderson,
Nevada, that failed on September 5, 2008.  If the Company receives any
recovery of the $900,000 uninsured amount, such amount will be added to income
from operations.  However, there can be no assurance whether, or when,
the Company will receive any recovery of this amount.





Other
non-interest expense increased by $109,000 to $354,000 for the quarter ended
September 30, 2008 from $245,000 for the quarter ended September 30,
2007.  This increase was primarily due to increases in professional
and consulting fees, advertising, FDIC assessments and other operating expenses
related to the expansion of the Bank’s business activities.





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





Results
of Operations for the Nine Months Ended September 30, 2008 and September 30,
2007





General.For
the nine months ended September 30, 2008, the Company recognized a net loss of
$1.5 million, or ($0.89) per diluted share, as compared to a net loss of
$465,000, or ($0.27) per diluted share, for the comparable nine-month period
ended one year earlier.  The $1.1 million increase in net loss was
primarily the result of the $900,000 loss recognized on the loss of uninsured
principal that had been on deposit at the failed Silver State Bank in Henderson,
Nevada, together with the increased operating




- 17
-


expenses
that resulted from the opening of the Company’s third full service branch
banking office in November of 2007.





Interest
Income.Interest income for the nine-month period ended
September 30, 2008 totaled $4.8 million, which was $144,000 higher than the $4.7
million reported for the nine-month period ended September 30,
2007.  The amount of interest income earned resulted from an increase
in average interest-earning assets to $111.9 million for the nine-month period
ended September 30, 2008 from $91.9 million for the comparable nine-month period
ended one year earlier, and to the lower overall yield associated with those
assets.  Over the comparable periods average loan balances increased
from $67.7 million to $78.9 million, while their average yield decreased from
7.36% to 6.40%.  The average balances of the investment securities
portfolio increased by $11.0 million, from $8.0 million to $19.0 million, while
the average balances of its fed funds sold decreased by nearly $3.4 million,
from $9.7 million to $6.3 million, over the nine-month period ended September
30, 2008 as compared to the same nine-month period in the previous
year.  The yield earned by the investments portfolio increased to
5.00% from 4.91% over the nine-month period ended September 30, 2008 as compared
to the nine-month period ended September 30, 2007 primarily from the longer-term
and higher-yielding investments purchased since the end of 2007.  The
yield earned by the fed funds sold average balances decreased to 2.39% from
5.19% over the same respective periods as a result of the decrease in short-term
interest rates commented on earlier.





During
the nine-month period ended September 30, 2008 the Company continued to maintain
an approximate $6.3 million average balance invested in a variety of
certificates of deposit at other financial institutions with maturities ranging
from three to twelve months.  Due to the decrease in short-term
interest rates available in the marketplace, the average yield of this asset
segment decreased from 5.43% during the nine-month period ended September 30,
2007 to 3.67% over the comparable nine-month period in 2008.





Interest
Expense.Total interest expense for the nine-month period
ended September 30, 2008 decreased by $417,000 when compared to the nine-month
period ended September 30, 2007.  The decrease resulted from the
decreases in short-term interest rates, notwithstanding the increase in the
average balances of the Bank’s interest-bearing deposits and
borrowings.  Average money market account balances decreased $16.6
million, from $47.9 million for the nine-month period ended September 30, 2007
to $31.3 million for the nine-month period ended September 30,
2008.  Over those respective periods the average costs for those
balances decreased 243 basis points, from 4.98% to 2.55%.  The average
balances of the Bank’s certificates of deposit portfolio increased to $41.5
million at an average cost of 4.08% over the nine-month period ended September
30, 2008, from $19.3 million at an average cost of 5.02% over the same
nine-month period ended one-year earlier.  Average regular savings
account balances increased $6.1 million to $13.1 million for the nine-month
period ended September 30, 2008, from $7.0 million for the nine-month period
ended September 30, 2007, while the average costs decreased 99 basis points, to
2.55% from 3.54%, over the same respective periods.  For the
nine-month period ended September 30, 2008, the average balance of the Company’s
borrowed funds was $6.2 million at an average cost of 3.23% as compared to an
average balance of $67,000 at an average cost of 8.75% one
year-earlier.  The increase in borrowed funds was primarily used to
help fund the increase in the investment securities portfolio discussed
above.





Provision for
Loan Losses.  The provision for loan losses for the nine months
ended September 30, 2008 increased $93,000 compared to the nine months ended
September 30, 2007 primarily because of  loan growth, the loan
portfolio’s overall risk profile under current market conditions, and from
economic weakness in its market areas.





Net Interest
Income.Net interest income was approximately $2.5 million for
the nine-month period ended September 30, 2008 as compared to $2.0 million for
the nine-month period ended September 30, 2007.  The average interest
rate spread increased to 2.52% from 2.01%, while the net interest margin
increased to 3.03% from 2.87%, over the same comparable periods





- 18
-


Non-Interest
Income.Non-interest income for the nine-month period ended
September 30, 2008 totaled $508,000, which represented an increase of $91,000
from the $417,000 earned over the nine-month period ended September 30,
2007.  Most of the change resulted from a $114,000 increase in service
charges and fees earned from an increased number of deposit and loan customer
relationships that was mitigated by an $3,000 decrease in the net gain on the
sale of real estate mortgage loans held for sale that decreased because of a
decrease in real estate mortgage loan sale activity.  There was also a
$54,000 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, 2008 increased $1.6 million to $4.5 million from $2.8 million for
the nine-month period ended September 30, 2007.  Compensation and
benefits increased $301,000, or 20.7%, from the increase in personnel needed to
staff the previously mentioned new full-service branch in Staten Island, New
York that opened in November 2007.  The new branch office was also
primarily responsible for the increase in occupancy and equipment expense and
contributed to the increase in data processing fees.  As previously
discussed within the quarterly comparison, the substantive portion of the
overall increase in non-interest expense was attributable to management’s
recognition of a $900,000 loss, which was the uninsured portion of a six-month
certificate of deposit scheduled to mature on September 8, 2008, that had been
invested at Silver State Bank in Henderson, Nevada, that failed on September 5,
2008.  If the Company receives any recovery of the $900,000 uninsured
amount, such amount will be added to income from operations.  However,
there can be no assurance whether, or when, the Company will receive any
recovery of this amount.  Other non-interest expense increased by
$247,000 to $1.0 million for the nine-month period ended September 30, 2008 from
$755,000 for the comparable nine-month period ended September 30,
2007.  This increase was primarily due to increases in professional
and consulting fees, advertising, FDIC assessments and other operating expenses
related to the expansion of the Bank’s business activities.





Non-Performing
Assets





Regulations require that the Company
classify its own assets on a regular basis and establish prudent valuation
allowances based on such classifications.  There are three
classifications for problem assets: substandard, doubtful, and
loss.  Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the institution will sustain some
loss if the deficiencies are not corrected.  Doubtful assets have the
weaknesses of substandard assets, with the additional characteristics that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss.  An asset classified loss is considered
uncollectible and of such little value that continuance as an asset on the
balance sheet of the institution is not warranted.  Assets classified
as substandard or doubtful require the Company to establish general allowances
for loan losses.  If an asset or portion thereof is classified as
loss, the Company must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified loss, or charge off
such amount.  On the basis of management’s review, at September 30,
2008, the Bank had $50,000 of assets classified as doubtful.  There
were no assets classified as substandard or loss.









- 19
-


The following table sets forth the
activity in the Company’s allowance for loan losses at and for the periods
indicated.




Nine
      Months Ended
              
              
              Year
      EndedSeptember
      30,
              
              
              December
      31,2008
              
              
              2007
              
              
              2007(dollars
      in thousands)Balance
      at beginning of year
              
              $
              624
              
              
              $
              581
              
              
              $
              581Charge-offsReal
      estate mortgage loans
              
              
              —
              
              
              
              —
              
              
              
              —Commerical
      loans and lines of credit
              
              
              —
              
              
              
              —
              
              
              
              —Home
      equity and consumer loans
              
              
              5
              
              
              
              —
              
              
              
              —Construction
      loans
              
              
              —
              
              
              
              —
              
              
              
              —Total
      charge-offs
              
              
              5
              
              
              
              —
              
              
              
              —RecoveriesReal
      estate mortgage loans
              
              
              —
              
              
              
              —
              
              
              
              —Commerical
      loans and lines of credit
              
              
              —
              
              
              
              —
              
              
              
              —Home
      equity and consumer loans
              
              
              —
              
              
              
              —
              
              
              
              —Construction
      loans
              
              
              —
              
              
              
              —
              
              
              
              —Total recoveries
              
              
              —
              
              
              
              —
              
              
              
              —Provision
      for losses
              
              
              129
              
              
              
              36
              
              
              
              43Balance
      at end of period
              
              $
              748
              
              
              $
              617
              
              
              $
              624Ratio
      of net charge-offs to average total loans
              
              
              0.01
              %
              
              
              0.00
              %
              
              
              0.00
              %Ratio
      of allowance for loan losses to total loans
              
              
              0.83
              %
              
              
              0.85
              %
              
              
              0.86
              %





The
following table sets forth the allocation of the Company’s allowance for loan
losses at September 30, 2008




At
      September 30, 2008Percent
      ofLoans
      inCategory
      toCategory
              
              Balance
              
              
              Total
      LoansCommercial
      real estate loans
              
              $
              277
              
              
              
              46.98
              %Residential
      mortgage loans
              
              
              73
              
              
              
              20.36
              %Commerical
      loans and lines of credit
              
              
              272
              
              
              
              18.64
              %Home
      equity and consumer loans
              
              
              62
              
              
              
              9.88
              %Construction
      loans
              
              
              37
              
              
              
              4.14
              %Unallocated
              
              
              27
              
              
              
              —Total
      allowance for loan loss
              
              $
              748
              
              
              
              100.00
              %


- 20
-


Liquidity
and Capital Resources





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





The
primary investing activities of the Company are the origination of loans and the
purchase of investment securities.  Investing activities are funded
primarily by net deposit inflows, sales of loans, principal repayments on loans
and securities, and borrowed funds.  For the nine months ended
September 30, 2008, the Company originated loans of approximately $43.0 million
including real estate mortgage loans held for sale.  At September 30,
2008, the Company had outstanding loan origination commitments of $12.2 million
(including one-to-four-family real estate mortgage loans held for sale of $2.6
million) and undisbursed lines of credit and construction loans in process of
$11.9 million.  The Company anticipates that it will have sufficient
funds available to meet its current loan originations and other
commitments.





At
September 30, 2008, total deposits were approximately $112.4 million of which
approximately $59.9 million was in certificates of
deposit.  Certificates of deposit scheduled to mature in one year or
less from September 30, 2008 totaled $37.6 million.  Based on past
experience the Company anticipates that most such certificates of deposit can be
renewed upon their expiration.





As stated
earlier, the Company completed the holding company 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 had
exercised $114,000 at June 30, 2008.  During the quarter ended
September 30, 2008, the Company obtained a replacement credit facility with
Atlantic Central Bankers Bank for $3.2 million.  Incremental proceeds
drawn from the credit facility are for the purpose of providing funds as needed
to the Bank to maintain strong capital ratios and enable it to grow at a managed
pace and potentially add new branch locations.  As of September 30,
2008 the refinanced balance of the facility was $615,000.





In
general the Bank monitors and manages its liquidity on a regular basis by
maintaining appropriate levels of liquid assets so that funds are available when
needed.  Excess liquidity is invested in overnight federal funds sold
and other short-term investments.  As a member of the Federal Home
Loan Bank of New York, the Bank has the availability of credit secured by
qualifying collateral.  At September 30, 2008 the Bank had $12.5
million of such unencumbered collateral available.  Additionally, the
Bank has unused credit lines of $5.0 million if the need arises with its
correspondent bank, Atlantic Central Bankers Bank, which is separate from the
Company’s credit facility mentioned above.





Applicable regulations require banks to
maintain a minimum leverage ratio of core (Tier 1) capital to total adjusted
tangible assets of 3.0%, and a minimum ratio of total capital (core capital and
supplementary capital) to risk-weighted assets of 8.0%, of which 4.0% must be
core (Tier 1) capital.  Under prompt corrective action regulations,
our regulator is required to take certain supervisory actions with respect to an
undercapitalized institution.  The regulations establish a framework
for the classification of depository institutions into five categories: (1)
well-capitalized, (2) adequately capitalized, (3) undercapitalized, (4)
significantly undercapitalized, and (5) critically
undercapitalized.  Generally an institution is considered well
capitalized if it has a core (Tier 1) capital ratio of at least 5.0%, a core
(Tier 1) risk-based capital ratio of at least 6.0%, and a total risk-based
capital ratio of a least 10.0%.  As of September 30, 2008, the most
recent regulatory notifications categorized the Bank as well




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capitalized
under the regulatory framework for prompt corrective action.  There
are no conditions or events since that notification that management believes
have changed the institution’s category.





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





Management believes that, as of
September 30, 2008 and December 31, 2007, the Bank met all capital adequacy
requirements to which it was subject.





The
following is a summary of the Bank’s actual capital amounts and ratios, compared
to the requirements for minimum capital adequacy and for classification as a
well-capitalized institution at September 30, 2008 and December 31,
2007.  The capital ratios of the Company are not significantly
different than those shown in the table below for the Bank and exceed the
requirements to be well capitalized.  In accordance with the
applicable regulatory requirements, the Bank’s actual tangible and Tier 1
capital amounts exclude goodwill, while the total risk-based capital amounts
include the allowance for loan losses.


Minimum
      Capital
              
              
              Classification
      asBank
      Actual
              
              
              Adequacy
              
              
              Well
      CapitalizedAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio(Dollars
      in thousands)September 30,
      2008Tier
      I (core)capital
              
              $
              9,528
              
              
              
              7.2
              %
              
              $
              3,947
              
              
              
              3.0
              %
              
              $
              6,579
              
              
              
              5.0Risk-based
      capital:Tier
      I
              
              
              9,528
              
              
              
              9.9
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              5,764
              
              
              
              6.0Total
              
              
              10,276
              
              
              
              10.7
              
              
              
              7,685
              
              
              
              8.0
              
              
              
              9,606
              
              
              
              10.0
  Minimum
      Capital
              
              
              Classification
      asBank
      Actual
              
              
              Adequacy
              
              
              Well
      CapitalizedAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio(Dollars
      in thousands)December 31,
      2007Tier
      I (core)capital
              
              $
              9,886
              
              
              
              11.5
              %
              
              $
              2,818
              
              
              
              3.0
              %
              
              $
              4,696
              
              
              
              5.0Risk-based
      capital:Tier
      I
              
              
              9,886
              
              
              
              12.5
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              3,865
              
              
              
              6.0Total
              
              
              10,510
              
              
              
              13.3
              
              
              
              5,153
              
              
              
              8.0
              
              
              
              6,441
              
              
              
              10.0


Item
3.  Quantitative and Qualitative Disclosure About Market
Risk





Unlike
most industrial companies, nearly all of our assets and liabilities are
financial in nature.  As a result, our net income is directly impacted
by changes in interest rates, which areinfluenced by inflationary
expectations.  We generally do not seek to match the interest
sensitivity of our financial assets to the interest sensitivity of our financial
liabilities as part of our interest rate risk management
program.  However, management believes that by maintaining a
significant portion of our assets in short-term investments, adjustable rate
mortgage-backed securities and adjustable rate loans, we will be able to
redeploy a portion of our assets as rates change.  Whereas the Company
has increased its total assets during this reporting period, particularly in
longer-term loans and mortgage backed security investments,




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it has
also increased its cash and cash equivalents, its level of non-interest bearing
deposits, and funded significant portions of its asset growth with longer-term
interest-bearing liabilities in an effect to manage the vulnerability of its
operating results to change in interest rates.





A
commonly used tool to manage and analyze the interest rate sensitivity of a bank
is a computer simulation model.  To quantify the extent of risks in both
the Company’s current position and in transactions it might make in the future,
the Company uses a model to simulate the impact of different interest rate
scenarios on net interest income.  The hypothetical impact of a 12 month
horizontal and instantaneous interest rate shift (generally, a horizontal change
in interest rates of +2.00% or –1.00%) and smaller incremental interest rate
changes are modeled at least quarterly, representing the primary means the
Company uses for interest rate risk management decisions.




At
September 30, 2008, given a +2.00% or –1.00% shock in interest rates, our model
results in the Company’s net interest income for the next twelve months changing
by $(30,000) and $62,000, respectively.




The
Company measures its economic value of equity at risk on a quarterly basis using
the computer model referred to above.  Economic value of equity at risk
measures the Company’s exposure to equity due to changes in a forecast interest
rate environment.  At September 30, 2008, given a +2.00% or -2.00% shock in
interest rates, our model results in the Company’s economic value of equity at
risk changing by $(4.1 million), or (33.47)%, and $2.6 million, or 20.66%,
respectively.




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




Item
4T.   Controls and Procedures





The
Company has adopted disclosure controls and procedures designed to facilitate
the Company’s financial reporting.  The 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 controls as of
September 30, 2008 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, 2008, we were not
involved in any legal proceedings, the outcome of which would be material to our
financial condition or results of operations.





Item
1A.   Risk Factors





A smaller reporting company is not
required to provide information required of this item.





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-


Item
2.   Unregistered Sales of Securities and Use of Proceeds





None





Item
3.   Defaults Upon Senior Securities





None





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





None





Item
5.   Other Information





None




Item
6.   Exhibits


Exhibit Number
              Document
              Reference to Previous
      Filing
                If
    Applicable3.1
              Articles of
      Incorporation
              *3.2
              Amended
      Bylaws
              *4
              Form of Stock
      Certificate
              **10.1
              Employment Agreement
      dated September 23, 2004 Between the Bank and Anthony P.
      Costa.
              **10.2
              Employment Agreement
      dated September 23, 2004 Between
      the Bank and Philip Guarnieri
              **10.3
              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 SEC as an exhibit to the Company’s Quarterly Report on
Form 10-QSB for the period ended September 30, 2006.





**
Previously filed with the SEC as an exhibit to the Company’s Registration
Statement on Form S-4 filed on April 14, 2006 and subsequently amended on April
18, 2006, May 1, 2006 and May 23, 2006 and a post-effective amendment filed on
June 9, 2006.  All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-B.


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-


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 October 28, 2008.




Date:  October
      28, 2008
            Empire
      State Bank, National Association
              
              By:   /s/ Anthony P
      Costa
                
                Anthony
      P. Costa
                Chairman
      and Chief Executive OfficerDate:  October
      28, 2008
            By:   /s/ Arthur W
      Budich
              
              Arthur W. Budich
              Executive Vice President and Chief Financial
      Officer













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