ES Bancshares, Inc. - Quarter Report: 2010 September (Form 10-Q)

esb_10q-093010.htm

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, 2010

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 [ ].

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

YES [ ]. NO [ ].

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

Large accelerated filer [ ]	Accelerated filer [ ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.

YES [ ]. NO [X].

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

As of November 12, 2010 there were 2,071,070 issued and outstanding shares of the Registrant’s Common Stock

ES BANCSHARES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

PART I – FINANCIAL INFORMATION

		Page
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at September 30, 2010 and December 31, 2009	1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010, and 2009	2
	Consolidated Statements of Changes in Stockholders’ Equity For the Nine Months Ended September 30, 2010 and 2009	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4T.	Controls and Procedures	26

	PART II – OTHER INFORMATION
Item 1.	Legal Procedures	27
Item 1A	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3	Defaults Upon Senior Securities	27
Item 4.	[Reserved]	27
Item 5.	Other Information	27
Item 6.	Exhibits	28
	Signatures	29

ES BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)

	September 30, 2010			December 31, 2009
ASSETS

Cash and cash equivalents:
Cash and due from banks	$	9,863		$	9,785
Money market investments		12			5,000
Total cash and cash equivalents		9,875			14,785
Certificates of deposit at other financial institutions		2,110			3,685

Available for sale securities, at fair value		25,525			28,756

Real estate mortgage loans held for sale		1,514			-
Loans receivable, net
Loans receivable		120,583			106,898
Deferred cost		563			585
Allowance for loan losses		(1,775	)		(1,824	)
Total loans receivable, net		119,371			105,659
Accrued interest receivable		666			627
Federal Reserve Bank stock		372			308
Federal Home Loan Bank stock		569			573
Goodwill		581			581
Office properties and equipment, net		526			648
Prepaid FDIC Assessment		611			815
Real estate owned		356			149
Other assets		493			366
Total assets	$	162,569		$	156,952

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Deposits:
Non-interest bearing	$	16,359		$	14,007
Interest bearing		123,556			121,345
Total deposits		139,915			135,352

Borrowed funds		10,578			10,123
Accrued interest payable		136			151
Other liabilities		1,689			1,845
Total liabilities		152,318			147,471

Commitments and contingencies

Stockholders' equity
Capital stock (par value $0.01; 5,000,000 shares authorized; 2,071,070 shares issued at September 30, 2010 and December 31, 2009)		20			20
Additional paid-in-capital		18,980			18,970
Accumulated deficit		(9,532	)		(9,716	)
Accumulated other comprehensive income		783			207
Total stockholders' equity		10,251			9,481
Total liabilities and stockholders' equity	$	162,569		$	156,952

See accompanying notes to financial statements.

ES BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2010		2009			2010		2009

Interest and dividend income:
Loans	$	1,646	$	1,481		$	4,832	$	4,243
Securities		257		371			905		1,161
Certificates of deposit		13		20			48		60
Fed Funds and other earning assets		21		25			65		61
Total interest and dividend income		1,937		1,897			5,850		5,525

Interest expense:
Deposits		613		724			1,892		2,329
Borrowed funds		109		84			322		256
Total interest expense		722		808			2,214		2,585

Net interest income		1,215		1,089			3,636		2,940

Provision for loan losses		165		103			344		283
Net interest income after provision for loan losses		1,050		986			3,292		2,657

Non-interest income:
Service charges and fees		112		102			291		326
Net gain on sales of real estate mortgage loans held for sale		26		54			83		208
Net gain on sales of securities available for sale		162		-			308		-
Other		47		64			169		271
Total non-interest income		347		220			851		805

Non-interest expense:
Compensation and benefits		634		599			1,830		1,745
Occupancy and equipment		185		195			566		581
Data processing service fees		104		89			262		231
Other		409		417			1,301		1,304
Total non-interest expense		1,332		1,300			3,959		3,861

Net income (loss) before income taxes		65		(94	)		184		(399	)
Income tax expense		-		-			-		-
Net income (loss)	$	65	$	(94	)	$	184	$	(399	)

Other comprehensive income (loss):
Net unrealized gain/(loss) on available-for-sale securities		150		97			576		205
Comprehensive income (loss)	$	215	$	3		$	760	$	(194	)

Weighted average:
Common shares		2,071,070		1,996,070			2,071,070		1,912,121
Dilutive warrants & stock options		-		-			-		-
Income (loss) per common share:
Basic	$	0.03	$	(0.05	)	$	0.09	$	(0.21	)
Basic & diluted	$	0.03	$	(0.05	)	$	0.09	$	(0.21	)

See accompanying notes to financial statements.

ES BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(In thousands, except share data)
(Unaudited)

										Accumulated
					Paid-In					Other
	Capital Stock				Capital		Accumulated			Comprehensive
	Shares		Amount		Additional		Deficit			Gain (Loss)			Total

Balance at January 1, 2009		1,868,505	$	19	$	17,911	$	(8,484	)	$	(215	)	$	9,231

Stock based compensation, net		-		-		8		-			-			8

Comprehensive loss:
Net loss for the period		-		-		-		(399	)		-			(399	)
Net unrealized gain on available- for-sale securities		-		-		-		-			205			205
Total comprehensive loss														(194	)

Net proceeds from issuance of common stock		127,565		1		685		-			-			686


Balance at September 30, 2009		1,996,070	$	20	$	18,604	$	(8,883	)	$	(10	)	$	9,731

Balance at January 1, 2010		2,071,070	$	20	$	18,970	$	(9,716	)	$	207		$	9,481

Stock based compensation, net		-		-		10		-			-			10

Comprehensive income:
Net income for the period		-		-		-		184			-			184
Net unrealized gain on available- for-sale securities		-		-		-		-			576			576
Total comprehensive income														760


Balance at September 30, 2010		2,071,070	$	20	$	18,980	$	(9,532	)	$	783		$	10,251

See accompanying notes to financial statements.

ES BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(In thousands)

	2010			2009

Cash flows from operating activities:
Net income (loss) for period	$	184		$	(399	)
Adjustments to reconcile net income (losses) to net cash
provided by operating activities:
Provision for loan losses		344			283
Depreciation expense		188			191
Amortization (accretion) of deferred fees, discounts and premiums, net		48			(104	)
Net change in loans held for sale		(1,514	)		-
Stock compensation expense		10			8
Net gain on sale of real estate mortgage loans held for sale		(83	)		(208	)
Net gain on sales of investment securities		(308	)		-
Changes in assets and liabilities
Increase (decrease) in other assets		51			(180	)
(Decrease) increase in accrued expenses and other liabilities		(172	)		202
Net cash used in operating activities		(1,253	)		(207	)
Cash flows from investing activities:
Maturity of certificates of deposit at other financial institutions		1,575			6,529
Purchase of certificates of deposit at other financial institutions		-			(4,405	)
Purchase of available-for-sale securities		(5,934	)		-
Purchase of held-to-maturity securities		-			(16,044	)
Proceeds from sales of available-for-sale securities		5,211
Proceeds from principal payments and maturities of securities		4,741			8,985
Net disbursements for loan originations		(10,021	)		(10,462	)
Purchases of loans		(4,120	)		-
Redemption/ (purchase) of Federal Home Loan Bank stock		4			(56	)
Purchase of Federal Reserve Bank stock		(64	)		(9	)
Leasehold improvements and acquisitions of capital assets, net of disposals		(66	)		(103	)
Net cash used in investing activities		(8,674	)		(15,565	)
Cash flows from financing activities:
Net increase in deposits		4,563			12,398
Proceeds of advances from line of credit & FHLB		1,190			1,000
Repayment of advances		(735	)		(711	)
Net proceeds from common stock issuance		-			687
Net cash provided by financing activities		5,017			13,374

Net decrease in cash and cash equivalents		(4,910	)		(2,398	)
Cash and cash equivalents at beginning of period		14,785			12,459

Cash and cash equivalents at end of period	$	9,875		$	10,061

Supplemental cash flow information
Interest paid	$	2,229		$	2,622
Income taxes paid	$	-		$	-
Transfer of loans to REO	$	206		$	-

See accompanying notes to financial statements.

ES BANCSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Operations

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

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

The Bank reorganized into a one-bank holding company structure (the “Reorganization”) in August 2006 and formed ES Bancshares, Inc. (the “Company”) to serve as its holding company.

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

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

Note 2. Basis of Presentation

The consolidated financial statements included herein include the accounts of the Company and the Bank, subsequent to the elimination of all significant intercompany balances and transactions, and have been prepared by the Company without audit. In the opinion of management, the unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the periods presented. Certain information and footnote disclosures normally included in accordance with generally accepted accounting principles of the United States have been condensed or omitted pursuant to the rules and regulations of the SEC, however, the Company believes that the disclosures are adequate to make the information presented not misleading. The operating results for the periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year ending December 31, 2010. The unaudited interim financial statements presented herein should be read in conjunction with the annual financial statements of the Company as of and for the year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2010.

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

Stock Options

The Company has a stock-based compensation plan as more fully described in Note 4. For accounting purposes, the Company recognizes expense for options awarded under the Company’s Stock Option Plan over the vesting period at the fair market value of the options on the date they are awarded. Total expense incurred during the nine months ended September 30, 2010 and 2009, relating to the options was $10 thousand and $8 thousand, respectively.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock warrants and options) were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding for the period plus common-equivalent shares computed using the treasury stock method. None of the warrants or stock options were considered in computing diluted earnings (loss) per share because to do so would have been anti-dilutive.

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2010		2009			2010		2009
(in thousands, except per share data)
Net income (loss) attributable to Common Shareholders		65		(94	)		184		(399	)
Average number of Common Shares Outstanding-basic		2,071		1,996			2,071		1,912

Average number of common shares outstanding-diluted		2,071		1,996			2,071		1,912
Income (loss) per common share attributable
to common shareholders:
Basic		0.03		(0.05	)		0.09		(0.21	)
Diluted		0.03		(0.05	)		0.09		(0.21	)

Income Taxes

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using tax rates. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The tax benefit on net operating losses, included in deferred tax assets, was approximately $2.4 million at September 30, 2010. The net operating losses are being carried forward and will be available to reduce future taxable income. Realization of deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Because the Bank has limited operating experience, management recorded a valuation allowance against the total amount of deferred tax assets.

Securities

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

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

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. All sales are made with servicing released and without recourse. Gains and losses on the disposition of loans held for sale are determined on the specific identification basis. Net unrealized losses on loans held for sale are recognized through a valuation allowance by charges to income. There were no valuation allowances as of September 30, 2010.

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their unpaid principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees and costs on originated loans and any unamortized premiums or discounts on purchased loans. Loan origination and commitment fees and certain direct loan origination costs will be deferred and the net amount amortized as an adjustment of the related loan’s yield using methods that approximate the interest method over the contractual life of the loan. Loan interest income is accrued daily on outstanding balances.

Allowance for Loan Losses

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

Cash Flows

Cash and cash equivalents include cash, deposits with other financial institutions, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other financial institutions, and federal funds purchased.

Adoption of New Accounting Guidance

In June 2009, the Financial Accounting Standards Board (“FASB”) amended existing guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This amended guidance addresses (1) practices that are not consistent with the intent and key requirements of the original guidance and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. The impact of adoption on January 1, 2010 was not material.

In June 2009, the FASB amended guidance for consolidation of variable interest entities by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity. The new approach focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise’s involvement in variable interest entities are also required. The impact of adoption on January 1, 2010 was not material.

In January 2010, the FASB amended existing guidance to improve disclosure requirements related to fair value measurements. New disclosures are required for significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers. In addition, the FASB clarified guidance related to disclosures for each class of assets and liabilities as well as disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The impact of adoption on January 1, 2010 was not material as it required only disclosures, which are included in the Fair Value footnote.

In April 2010, the FASB issued ASU No. 2010-18 – Receivables (Topic 310) - Effect of a Loan Modification When the Loan is part of a Pool that is Accounted for as a Single Asset. This Update clarifies that modifications of loans accounted for as a pool under Subtopic 310-30 do not result in those loans being removed from the pool. The provisions of this ASU are effective for modifications of loans in the first interim or annual period ending on or after July 15, 2010. The impact of adoption on July 1, 2010 was not material.

Newly Issued But Not Yet Effective Accounting Guidance

In July 2010, the FASB issued ASU No. 2010-20 Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires significantly more information about credit quality in a financial institution’s portfolio and the allowance for credit losses. The disclosure requirements as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Management is currently evaluating the impact of ASU 2010-20.

Note 3 – Investment Securities

The following is a summary of the amortized cost, gross unrealized gains and losses, and estimated fair market value of investment securities available-for-sale at September 30, 2010 and December 31, 2009.

	September 30, 2010
			(in thousands)

	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value

Mortgage-backed securities-residential *	$	22,342	$	662	$	--	$	23,004
U.S. Government Agencies		1,100		19		--		1,119
Trust Preferred Securities		1,300		102		--		1,402
Total	$	24,742	$	783	$	--	$	25,525

	December 31, 2009
			(in thousands)

	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value

Mortgage-backed securities-residential *	$	25,649	$	399	$	(202	)	$	25,846
U.S. Government Agencies		1,600		26		--			1,626
Trust Preferred Securities		1,300		4		(20	)		1,284
Total	$	28,549	$	429	$	(222	)	$	28,756

* Consists of government agency securities

There were no securities held to maturity or trading at September 30, 2010 or December 31, 2009.

The following is a summary of the amortized cost and estimated fair market value of investment securities available-for-sale at September 30, 2010, with amounts shown by remaining term to contractual maturity. Securities not due at a single maturity date, primarily mortgaged-backed securities, are shown separately.


	September 30, 2010
	(in thousands)

	Amortized		Fair
	Cost		Value
Available-for-Sale:
Mortgaged-backed securities	$	22,342	$	23,004
U.S. Government Agencies and Trust Preferred Securities
Due less than one year		--		--
One year to less than three years		600		619
Three years to less than five years		500		500
Five years to ten years		--		--
More than ten years		1,300		1,402
Total	$	24,742	$	25,525

The following table summarizes, for all securities in an unrealized loss position at December 31, 2009, the aggregate fair values and gross unrealized losses by the length of time those securities had been in a continuous loss position. There were no securities in an unrealized loss position at September 30, 2010.

			December 31, 2009

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
	(In thousands)
Mortgage-backed securities	$	5,294	$	30	$	6,044	$	172	$	11,338	$	202
U.S. Government Agencies		-		-		-		-		-		-
Trust Preferred Securities		347		3		433		17		780		20
Total temporarily impaired	$	5,641	$	33	$	6,477	$	189	$	12,118	$	222

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

Gains on sales of securities during the nine months ended September 30, 2010 were $308 thousand. There were no losses recognized on sales of securities during the nine months ended September 30, 2010. There were no gains or losses on sales of securities during the nine months ended September 30, 2009.

Note 4. Stock-Based Compensation Plans

Stock Options

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

For accounting purposes, the Company recognizes expense for options to purchase shares of common stock awarded under the Company’s Stock Option Plan over the vesting period at the fair market value of the options on the date they are awarded.

A summary of options outstanding under the Company’s Stock Option Plan as of September 30, 2010, and changes during the nine months then ended is presented below.

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contrctual Term (years)		Intrinsic Value

Outstanding at January 1, 2010		152,250	$	10.42
Granted		16,000		6.00
Exercised		-		-
Forfeited or expired		-		-
Outstanding at September 30, 2010		168,250	$	10.00		4.9		-

Options exercisable at September 30, 2010		141,300	$	10.31		4.4		-

Vested and expected to vest		168,250	$	10.00		4.9

As of September 30, 2010, there was $26 thousand of total unrecognized compensation cost related to non-vested stock options granted under the Stock Option Plan. The cost is expected to be recognized over a period of approximately 54 months.

At September 30, 2010, there were 11,750 shares available for future grant under the Stock Option Plan. The fair value of each option award is estimated on the date of grant using the Black-Scholes model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The weighted average assumptions utilized for all grants during the nine months ended September 30, 2010 are as follows:

	September 30, 2010

Risk-free interest rate		3.70	%
Expected option life		8.0
Expected stock price volatility		0.30
Dividend yield		0.00	%
Weighted average fair value
of options granted during the year	$	2.03

401(k) Plan

A 401(k) benefit plan allows employees to contribute up to 15% of their compensation. The Bank did not make any matching contributions in 2010 or 2009.

Note 5. Fair Value

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

	Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
	Level 2 – 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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

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

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

Real Estate Owned: Nonrecurring adjustments to certain commercial real estate properties classified as real estate owned (REO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

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

Fair Value Measurements at

September 30, 2010 Using:

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Financial Assets

Investment securities available-for sale:

Mortgage-backed securities – residential

23,004

U.S. government agencies

1,119

Other securities

1,402

Total available- for-sale

25,525

Fair Value Measurements at

December 31, 2009 Using:

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Financial Assets

Investment securities available-for sale:

Mortgage-backed securities – residential

25,846

U.S. government agencies

1,626

Other securities

1,284

Total available- for-sale

28,756

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

			Fair Value Measurements
			(in thousands)
			at September 30, 2010 Using
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)

Assets:
Impaired Loans	$	95	$	-	$	-	$	95
REO Property		356		-		-		356

Fair Value Measurements

(in thousands)

at December 31, 2009 Using

Identical

Observable

Unobservable

Carrying

Assets

Inputs

Value

(Level 1)

(Level 2)

(Level 3)

Assets:

REO Property

149

Impaired loans: Impaired loans with specific allocations, measured for impairment using the fair value of the collateral for collateral dependent loans, had a book value of $137 thousand, with a valuation allowance of $42 thousand at September 30, 2010. This specific allowance was allocated during the current quarter. General reserves in this amount were reclassified to specific reserves during the quarter ended September 30, 2010, an amount equal to any collateral shortfall on impaired loans. There were no impaired loans at December 31, 2009.

Real Estate Owned: Real estate owned had a net carrying amount of $356 thousand, which is made up of two properties with a total outstanding balance of $856 thousand, net of a prior direct write-down of $500 thousand, at September 30, 2010 and December 31, 2009. The write-down of $500 thousand was recorded during the year ending December 31, 2009.

Carrying amounts and estimated fair values of financial instruments at September 30, 2010 and December 31, 2009 were as follows:

	September 30,				December 31,
	2010				2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and due from banks	$	9,863	$	9,863	$	9,785	$	9,785
Federal Funds sold and money market investments		12		12		5,000		5,000
Securities available for sale		25,525		25,525		28,756		28,756
Loans, net		119,371		121,185		105,659		106,337
Federal Home Loan Bank stock		569		N/A		573		N/A
Federal Reserve Bank stock		372		N/A		308		N/A
Accrued interest receivable		666		666		627		627

Financial Liabilities
Deposits		139,915		141,034		135,352		136,610
Federal Home Loan Bank advances		7,773		8,049		8,508		8,605
Other borrowings		2,805		2,905		1,615		1,633
Accrued interest payable		136		136		151		151

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

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

Note 6. Commitments and Contingencies

Legal Proceedings

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

Operating Lease Commitments

The Company is obligated under non-cancelable operating leases for its main office location in Newburgh, New York, and its branch office locations in New Paltz, New York, and Staten Island, New York. The leases are for initial terms of 10 years, 15 years, and 10 years, respectively and have various renewal options. Rent expense under operating leases was $256,000 for the nine months ended September 30, 2010. At September 30, 2010, the future minimum rental payments under operating lease agreements for the fiscal years ending December 31 are $69,000 in 2010; $276,000 in 2011; $262,000 in 2012; $183,000 in 2013; $187,000 in 2014; and a total of $640,000 thereafter.

Off-Balance Sheet Financial Instruments

The Company’s off-balance sheet financial instruments at September 30, 2010 were limited to loan origination commitments of $9.5 million (including one-to-four family loans held for sale of $5.3 million) and unused lines of credit (principally commercial and home equity lines) extended to customers of $13.1 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, 2010, consisted of adjustable and fixed rate commitments of $1.6 million and $7.8 million respectively, with interest rates ranging from 3.75% 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: statements of our goals, intentions and expectations; statements regarding our business plans and prospects and growth and operating strategies; statements regarding the asset quality of our loan and investment portfolios and estimates of our risks and future costs and benefits. Among the factors which could cause our actual results of financial condition to differ materially are those set forth in Item 1A of our Form 10-K as well as the following: our ability to manage the risk in our loan portfolio; significantly increased competition among depository and other financial institutions; our ability to execute our plan to grow our assets on a profitable basis; our ability to execute on a favorable basis any plan we may have to acquire other institutions or branches or establish new offices; changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments and inflation; general economic conditions, either nationally or in our market area, future deposit premium levels, adverse changes in the securities and national and local real estate markets (including real estate values); our ability to grow our new Staten Island office; legislative or regulatory changes that adversely affect our business; our ability to enter new markets successfully and take advantage of growth opportunities; changes in consumer spending, borrowing and savings habits; the effect of a dramatically slowing economy on our lending portfolio including our commercial real estate, business, construction, multifamily, and home equity loans; the impact of the U.S. government’s economic stimulus program and its various financial institution rescue plans, changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the authoritative accounting and auditing bodies; and changes in our organization, compensation and benefit plans.

The Company does not intend to update these forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by applicable cautionary statements.

Comparison of Financial Condition at September 30, 2010 and December 31, 2009

Total assets at September 30, 2010, amounted to $162.6 million, representing an increase of $5.6 million, or 3.6%, from $157.0 million at December 31, 2009. The increase in assets consisted primarily of a $13.7 million increase in total loans receivable, net, and a $1.5 million increase in real estate loans for sale. These increases were partially offset by a $4.9 million decrease in cash and cash equivalents and a $1.6 million decrease in certificates of deposit at other financial institutions.

Overall, loans receivable, net, increased $13.7 million, or 13.0%, to $119.4 million at September 30, 2010, from $105.7 million at December 31, 2009. Residential real estate mortgage loans, excluding mortgage loans held for sale, increased $2.7 million, or 10.1%, from $26.8 million to $29.5 million. Commercial and multifamily real estate loans decreased $400 thousand, or 0.82%, from $48.7 million to $48.3 million. Commercial loans and commercial lines of credit increased $10.9 million, or 54.2%, from $20.1 million to $31.0 million, and home equity and consumer loans increased $600 thousand or 7.1%, from $8.5 million to $9.1 million, over the same nine-month period. Management continues to emphasize the origination of high quality loans for retention in the loan portfolio.

Total cash and cash equivalents at September 30, 2010 decreased $4.9 million, or 33.2%, to $9.9 million from $14.8 million at December 31, 2009, while certificates of deposit at other financial institutions decreased $1.6 million, or 42.7%, to $2.1 million from $3.7 million during the same period. Total securities at September 30, 2010, decreased $3.3 million, or 11.2%, to $25.5 million from $28.8 million at December 31, 2009.

Total deposits increased by $4.6 million to $140.0 million at September 30, 2010 from $135.4 million at December 30, 2009. Non-interest bearing deposits increased $2.4 million and interest bearing deposits increased $2.2 million. Over this nine month period the net deposit activity consisted mainly of an increase in transaction accounts of $4.4 million and certificates of deposit of $619 thousand, as well as a $400 thousand decrease in money market and savings accounts.

Stockholders’ equity increased by $770 thousand to $10.3 million at September 30, 2010, from $9.5 million at December 31, 2009. The increase was primarily attributable to net income for the period of $184 thousand and a $576 thousand increase in accumulated other comprehensive income. The ratio of stockholders’ equity to total assets increased to 6.3% at September 30, 2010 compared to 6.0% at December 31, 2009. Book value per share increased to $4.95 at September 30, 2010, from $4.58 at December 31, 2009. See “Liquidity and Capital Resources” for information regarding the Bank’s regulatory capital amounts and ratios.

Loan Composition and Non-Performing Assets

The following is a summary of loans receivable at September 30, 2010 and December 31, 2009.

	At September 30, 2010			At December 31, 2009
	Amount			Amount
	(Dollars in thousands)

Real estate loans:
One-to four-family		29,543			26,831
Commercial		36,654			39,261
Multi-family		11,686			9,416
Construction or development		2,674			2,798
Home equity		8,731			7,964
Total real estate loans		89,288			86,270

Other loans:
Commercial business		30,956			20,080
Consumer		339			548
Total other loans		31,295			20,628

Total loans	$	120,583		$	106,898

Less:
Deferred loan costs net		563			585
Allowance for loan losses		(1,775	)		(1,824	)

Total loans receivable, net	$	119,371		$	105,659

The following table summarizes the Company’s non-performing assets at September 30, 2010 and December 31, 2009:

	At September 30,			At December 31,
	2010			2009
	(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One-to-four family	$	-		$	472
Commercial		1,174			1,108
Multi-family		-			-
Construction or development		994			1,034
Home equity		55			-
Total real estate loans		2,223			2,614

Other Loans:
Commercial business		537			451
Consumer		-			-
Total non-performing loans	$	2,760		$	3,065
REO, net		356			149
Total non-performing assets	$	3,116		$	3,214

Ratios:
Non-performing loans to total loans		2.29	%		2.87	%
Non-performing loans to total assets		1.70	%		1.95	%
Non-performing assets to total assets		1.92	%		2.04	%

At September 30, 2010 total non-performing loans were $2.76 million comprised of 11 loans. The largest of these is a residential construction loan with 4 prepared lots, one of which is complete with a 1-4 family dwelling in Rockland County, New York. This has a balance of $775 thousand and is in the process of foreclosure.

The second is a commercial real estate property in Middlesex County, New Jersey which operates as a restaurant. The balance of this loan is $695 thousand and is in the process of foreclosure.

There were no loans past due greater than 90 days and still on accrual status at either September 30, 2010 or September 30, 2009.

Total impaired loans are $5.4 million and $4.6 million as of September 30, 2010 and December 31, 2009, respectively. Impaired loans with specific allocations, measured for impairment using the fair value of the collateral for collateral dependent loans, had a book value of $137 thousand, with a valuation allowance of $42 thousand at September 30, 2010.

Included in the impaired loan balance but not in the non-performing loan balance are $2.6 and $1.5 million at September 30, 2010 and December 31, 2009, respectively, of troubled debt restructures which are performing in accordance with their modified loan terms.

Allowance for Loan Losses

The following table summarizes the activity in the Company’s allowance for loan losses for the nine month periods ended September 30, 2010 and September 30, 2009:

		Nine Months Ended
		September 30,
		2010			2009
		(Dollars in thousands)

Balance at beginning of year	$	1,824		$	862
Charge-offs
Real estate mortgage loans		(214	)		-
Commercial loans and lines of credit		(118	)		(6	)
Home Equity and consumer loans		(22	)		(10	)
Construction loans		(40	)
Total charge-offs		(394	)		(16	)

Recoveries
Real Estate mortgage loans		-			-
Commercial loans and lines of credit		-			-
Home Equity and consumer loans		1			1
Construction loans		-			-
Total recoveries		1			1

Provision for losses		344			283
Balance at end of period	$	1,775		$	1,130

Ratio of net charge-offs to average total loans		0.35	%		0.02	%
Ratio of allowance for loan losses to total loans		1.48	%		1.15	%

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, 2010, as compared to the comparable periods ended September 30, 2009. The yields and costs were derived by dividing interest income or expense by the average balance of assets and liabilities for the period shown. Substantially all average balances were computed based on daily balances. The yields include deferred fees and discounts, which are considered yield adjustments.

	For the Three Months Ended September
	2010								2009
	Average					Average			Average					Average
	Balance			Interest		Yield/Cost			Balance			Interest		Yield/Cost
Assets
Interest-earning assets:
Loans	$	116,819		$	1,646		5.51	%	$	101,683		$	1,481		5.78	%
Fed Funds & other investments		12,372			8		0.25	%		13,764			10		0.28	%
Certificates of deposit		2,110			13		2.44	%		3,955			20		2.03	%
FRB & FHLB stock		945			13		5.50	%		875			15		6.80	%
Securities		27,277			257		3.77	%		33,064			371		4.45	%
Total interest-earning assets	$	159,523		$	1,937		4.75	%	$	153,341		$	1,897		4.91	%

Allowance for loan losses		(1,766	)							(1,060	)
Cash & Due from banks		1,965								1,642
Other Non-interest earning assets		3,222								2,298
Total assets	$	162,944							$	156,221

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
NOW accounts	$	6,383		$	11		0.68	%	$	5,318		$	5		0.37	%
Money Market accounts		36,759			95		1.03	%		36,097			125		1.37	%
Regular savings accounts		10,636			28		1.04	%		10,328			29		1.11	%
Certficates of Deposit		70,602			479		2.69	%		69,954			565		3.20	%
Total interest-bearing deposits	$	124,380			613		1.96	%	$	121,697			724		2.36	%

Borrowings		10,633			109		4.07	%		9,487			84		3.51	%
Total interest-bearing liabilities	$	135,013		$	722		2.12	%	$	131,184		$	808		2.44	%


Non-interest-bearing liabilities		17,483								13,795					.
Total liabilities		152,496								144,979

Stockholders' equity		10,448								9,638
Total liabilities and stockholders' equity	$	162,944							$	156,221
Net interest income				$	1,215							$	1,089

Average interest rate spread (1)							2.63	%							2.47	%
Net interest margin (2)							3.05	%							2.84	%
Net interest-earning assets (3)	$	24,510							$	22,157
Ratio of average interest-earning assets to average interest-bearing liabilities							118.15	%							116.89	%

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

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

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

	For the Nine Months Ended September
	2010								2009
	Average					Average			Average					Average
	Balance			Interest		Yield/Cost			Balance			Interest		Yield/Cost
Assets
Interest-earning assets:
Loans	$	113,310		$	4,832		5.62	%	$	98,589		$	4,243		5.75	%
Fed Funds & other investments		11,553			27		0.31	%		13,002			25		0.25	%
Certificates of deposit		2,822			48		2.27	%		3,095			60		2.59	%
FRB & FHLB stock		922			38		5.50	%		862			36		5.58	%
Securities		29,861			905		4.04	%		32,140			1,161		4.83	%
Total interest-earning assets	$	158,468		$	5,850		4.87	%	$	147,688		$	5,525		5.00	%

Allowance for loan losses		(1,702	)							(967	)
Cash & Due from banks		1,705								1,786
Other Non-interest earning assets		3,539								2,288
Total assets	$	162,010							$	150,795

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
NOW accounts	$	6,353		$	35		0.74	%	$	3,853		$	12		0.42	%
Money Market accounts		36,862			315		1.14	%		33,936			444		1.75	%
Regular savings accounts		10,650			83		1.04	%		11,392			124		1.46	%
Certficates of Deposit		70,903			1,459		2.75	%		68,022			1,749		3.44	%
Total interest-bearing deposits	$	124,768			1,892		2.03	%	$	117,203			2,329		2.66	%

Borrowings		10,526			322		4.09	%		9,697			256		3.53	%
Total interest-bearing liabilities	$	135,294		$	2,214		2.19	%	$	126,900		$	2,585		2.72	%


Non-interest-bearing liabilities		16,458								14,658					.
Total liabilities		151,752								141,558

Stockholders' equity		10,258								9,237
Total liabilities and stockholders' equity	$	162,010							$	150,795
Net interest income				$	3,636							$	2,940

Average interest rate spread (1)							2.68	%							2.28	%
Net interest margin (2)							3.06	%							2.66	%
Net interest-earning assets (3)	$	23,174							$	20,788
Ratio of average interest-earning assets to average interest-bearing liabilities							117.13	%							116.38	%

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

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

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

Results of Operations for the Quarters Ended September 30, 2010 and September 30, 2009

General. For the quarter ended September 30, 2010, the Company recognized net income of $65 thousand, or $0.03 per basic and diluted share, as compared to a net loss of $94 thousand, or ($0.05) per basic and diluted share, for the quarter ended September 30, 2009.

Interest Income. Interest income remained relatively unchanged at $1.9 million for the quarters ended September 30, 2010 and September 30, 2009. A modest increase of $40 thousand was primarily attributable to a $6.2 million increase in average interest-earning assets from $153.3 million to $159.5 million in the third quarter of 2010, as compared to the same period in 2009. The average yield on interest-earning assets decreased 16 basis points from 4.91% for the quarter ended September 30, 2009, to 4.75% for the same period in 2010.

Average loan balances increased by $15.1 million, from $101.7 million for the quarter ended September 30, 2009, to $116.8 million for the quarter ended September 30, 2010, while the average yield decreased from 5.78% to 5.51%, over the same respective periods. The average balances of the Bank’s federal funds and other investments decreased by $1.4 million, over the quarter ended September 30, 2010, as compared to the quarter ended September 30, 2009. The average yield on these respective interest-earning assets decreased to 0.25% from 0.28% over the same comparable period. The average balance and yield of the Bank’s investment securities for the quarter ended September 30, 2010, was $27.3 million and 3.77%, respectively, as compared to an average balance of $33.1 million and a yield of 4.45% for the comparable quarter ended one-year earlier. The average balance on certificates of deposit at other financial institutions decreased from $3.9 million for the quarter ended September 30, 2009, to $2.1 million in the respective period in 2010. The average yield increased to 2.44% for the quarter ended September 30, 2010, as compared to 2.03% at the quarter ended September 30, 2009, or 41 basis points.

Interest Expense. Total interest expense for the quarter ended September 30, 2010, decreased by $86 thousand, from $808 thousand to $722 thousand, when compared to the same three-month period one year earlier. Although average balances of total interest-bearing liabilities increased $3.8 million to $135.0 million for the quarter ended September 30, 2010, from $131.2 million for the quarter ended September 30, 2009, the average costs for those liabilities decreased to 2.12% from 2.44% for the same respective periods, reflecting lower market interest rates.

The average balances of the Bank’s certificates of deposit portfolio increased to $70.6 million at an average cost of 2.69% over the quarter ended September 30, 2010, from $69.9 million at an average cost of 3.20% over the same quarter ended one-year earlier. The $648 thousand increase was primarily attributable to the general increase in funds deposited due to the increase in FDIC guarantee thresholds, as well as a general increase in marketplace liquidity given a lack of attractive alternative investment vehicles. Regular savings account average balances increased by $308 thousand from $10.3 million at an average cost of 1.11% for the quarter ended September 30, 2009, to $10.6 million at an average cost of 1.04% for the quarter ended September 30, 2010.

Average money market account balances increased $662 thousand to $36.8 million at an average cost of 1.03% for the quarter ended September 30, 2010, from $36.1 million at an average cost of 1.37% for the quarter ended September 30, 2009. The increased balances were primarily attributable to management’s focus on attracting deposits of this type, as well as the increase in FDIC guarantee thresholds.

For the quarter ended September 30, 2010, the average balance of the Company’s borrowed funds was $10.6 million and its average cost was 4.07%, as compared to $9.5 million and an average cost of 3.51% for the quarter ended September 30, 2009. The increase was primarily a result of our drawing down approximately $2.2 million from a line of credit with a correspondent bank, partially offset by pay downs on existing FHLB borrowings. At September 30, 2010, the weighted average term to maturity of our borrowings was approximately 2.0 years.

Net Interest Income. Net interest income was approximately $1.2 million for the quarter ended September 30, 2010, as compared to $1.1 million for the same quarter in the prior year. The Bank’s average interest rate spread increased to 2.63% for the quarter ended September 30, 2010, from 2.47% for the quarter ended September 30, 2009, while the net interest margin increased to 3.05% from 2.84%, over the same respective periods. These increases were primarily attributable to decreased cost of deposits.

Provision for Loan Losses. For the three months ended September 30, 2010, management recorded a $165 thousand provision for loan losses. The Company does not have substantial historical loan loss experience, however, management records loan loss provisions to reflect the overall growth in the portfolio as well as the evaluated risk in the portfolio. Comparatively, the provision was $103 thousand for the quarter ended September 30, 2009.

Non-Interest Income. Non-interest income for the quarter ended September 30, 2010 increased $127 thousand to approximately $347 thousand as compared to $220 thousand for the quarter ended September 30, 2009. Service charges and fees increased by $10 thousand, from $102 thousand for the quarter ended September 30, 2009, to $112 thousand for the quarter ended September 30, 2010, primarily as a result of servicing a greater number of deposit and loan customers. The net gain on the sales of real estate mortgage loans decreased $28 thousand to $26 thousand for the quarter ended September 30, 2010, as compared to $54 thousand for the quarter ended September 30, 2009. This is due to a decrease in the level of refinance activity from the comparable period in 2009. Gain on sales of securities available for sale increased to $162 thousand for the quarter ended September 30, 2010 from $0 for the quarter ended September 30, 2009. Other non-interest income categories decreased to $47 thousand for the quarter ended September 30, 2010, from $64 thousand for the same quarter in 2009, a decrease of $17 thousand.

Non-Interest Expense. Non-interest expense for the quarter ended September 30, 2010 increased $32 thousand when compared to the same quarter in 2009, primarily resulting from an increase in compensation and benefits of $35 thousand.

Income Tax Expense. We had no income tax expense for either of the quarters ended September 30, 2010 and 2009. We have received no tax benefit from our net operating losses to date 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, 2010 and September 30, 2009

General. For the nine months ended September 30, 2010, the Company recognized net income of $184 thousand, or $0.09 per basic and diluted share, as compared to a net loss of $399 thousand, or ($0.21) per basic and diluted share, for the nine months ended September 30, 2009. The $583 thousand increase in net income was primarily the result of increased net interest income of $696 thousand and an increase in non-interest income of $46 thousand, partially offset by an increase in non-interest expense of $98 thousand.

Interest Income. Compared to the first nine months of 2009, interest income for the nine-month period ended September 30, 2010 increased by $325 thousand, or 5.9%, to $5.9 million from $5.5 million for the comparable nine month period one year earlier. The increase in interest income resulted from an increase in average interest-earning assets to $158.5 million for the nine-month period ended September 30, 2010 from $147.7 million for the comparable nine-month period ended one year earlier, partially offset by a lower overall yield associated with those assets. Average loan balances increased from $98.6 million for the nine months ended September 30, 2009 to $113.3 million for the nine months ended September 30, 2010, while their average yield decreased slightly from 5.75% to 5.62%. The average balances of the investment securities portfolio decreased by $2.3 million, from $32.1 million to $29.9 million, while the average balances of fed funds sold and other investments also decreased by nearly $1.5 million, from $13.0 million to $11.6 million, over the nine-month period ended September 30, 2010 as compared to the same nine-month period in the previous year. The average yield on investment securities decreased to 4.04% for the nine months ended September 30, 2010 from 4.83% for the nine-month period ended September 30, 2009, primarily from the addition of new securities to the portfolio during the end of 2009 and the first half of 2010 at generally lower yields as well as increased prepayment speeds on mortgage backed securities which accelerate premium amortization. The yield on fed funds sold increased to 0.31% from 0.25% over the same respective periods as a result of selective placement of money market funds.

During the nine-month period ended September 30, 2010 the average balance invested in a variety of certificates of deposit at other financial institutions with maturities ranging from three to twelve months decreased by approximately $273 thousand. Due to the maturity of higher yielding placements in the portfolio, the average yield of this asset segment decreased from 2.59% for the nine-month period ended September 30, 2009 to 2.27% for the comparable nine-month period in 2010.

Interest Expense. Total interest expense decreased $371 thousand from $2.6 million for the nine months ended September 30, 2009 to $2.2 million for the nine months ended September 30, 2010. The decrease resulted primarily from the decline in rates on interest bearing deposits, partially offset by an increase in rate on borrowed funds as well as an increase in our average balance of interest-bearing liabilities. The average balances of the Bank’s certificates of deposit portfolio increased to $70.9 million at an average cost of 2.75% over the nine-month period ended September 30, 2010, from $68.0 million at an average cost of 3.44% over the same nine-month period ended one-year earlier. Average money market account balances increased $2.9 million, from $33.9 million for the nine-month period ended September 30, 2009 to $36.9 million for the nine-month period ended September 30, 2010. Over those respective periods the average costs for those balances decreased 61 basis points, from 1.75% to 1.14%. Average regular savings account balances decreased $742 thousand to $10.7 million for the nine-month period ended September 30, 2010, from $11.4 million for the nine-month period ended September 30, 2009, while the average costs decreased 42 basis points, to 1.04% from 1.46%, over the same respective periods. For the nine-month period ended September 30, 2010, the average balance of the Company’s borrowed funds was $10.5 million at an average cost of 4.09% as compared to an average balance of $9.7 million at an average cost of 3.53% one year-earlier. The increase in borrowed funds was primarily used to help fund the increase in the loan and investment portfolios and to infuse capital into the Bank.

Provision for Loan Losses. Provisions for loan losses were $344 thousand and $283 thousand for the nine months ended September 30, 2010 and 2009, respectively. The Company does not have substantial historical loan loss experience, however, management records loan loss provisions to reflect the overall growth in the portfolio as well as the evaluated risk in the portfolio.

Net Interest Income. Net interest income was approximately $3.6 million for the nine-month period ended September 30, 2010 as compared to $2.9 million for the nine-month period ended September 30, 2009. The average interest rate spread increased to 2.68% from 2.28% primarily due to the decrease in cost on interest bearing liabilities by 53 basis points, partially offset by a decrease in the average yield on interest earning assets of 13 basis points. The net interest margin increased to 3.06% from 2.66% over the same comparable periods.

Non-Interest Income. Non-interest income for the nine-month period ended September 30, 2010 totaled $851 thousand, which represented an increase of $46 thousand from $805 thousand earned over the nine-month period ended September 30, 2009. The increase was primarily attributable to a $308 thousand increase in gains on sales of investment securities, partially offset by decreases in gains on sales of real estate mortgage loans of $125 thousand, other income of $102 thousand, and service charges and fees of $35 thousand. The decrease in gains on sale of real estate mortgage loans is related to a decrease in refinance activity from the prior period. The decrease in other income is related to recoveries received in the 2009 period on the prior loss on CD placement at Silver State Bank.

Non-Interest Expense. Non-interest expense for the nine-month period ended September 30, 2010 increased $98 thousand to $3.9 million from $3.8 million for the nine-month period ended September 30, 2009. Compensation and benefits increased by $85 thousand, or 4.9%, due to new employee hires. Occupancy and equipment expense decreased by $15 thousand, or 2.6%, and data processing expense increased by $31 thousand, or 13.4%, due to the increased number of deposit and loan relationships.

Income Tax Expense. We had no income tax expense for either of the nine months ended September 30, 2010 and 2009. We have received no tax benefit from our net operating losses to date as they are being carried forward and will be available to reduce future taxable income.

Liquidity and Capital Resources

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

The primary investing activities of the Company are the origination of loans and the purchase of investment securities. For the nine months ended September 30, 2010, the Company originated loans, net of sales and principal payments, of approximately $15.6 million including real estate mortgage loans held for sale. At September 30, 2010, the Company had outstanding loan origination commitments of $9.5 million (including one-to-four-family real estate mortgage loans held for sale of $5.3 million) and undisbursed lines of credit and construction loans in process of $13.1 million. The Company anticipates that it will have sufficient funds available to meet its current loan originations and other commitments.

At September 30, 2010, total deposits were approximately $140.0 million of which approximately $70.1 million were in certificates of deposit. Certificates of deposit scheduled to mature in one year or less from September 30, 2010, totaled $41.3 million. Based on past experience the Company anticipates that most of these certificates of deposit can be renewed upon their expiration.

The Company has a line of credit with a correspondent bank for an amount of up to $3.2 million. This credit facility is secured by 100% of the outstanding shares of the Bank for an original period of two years. During August 2010 the Company exercised its option to renew the facility for an additional year. This facility matures on August 31, 2011. As of September 30, 2010, the outstanding balance is $2.8 million. The Company utilized this credit facility primarily to provide funds to the Company to downstream to the Bank to enable it to maintain strong capital ratios and leverage the balance sheet by increasing assets. The line of credit also repaid the amounts due to the same correspondent bank on its previously drawn line of credit, to fund operating expenses and to provide funds for an interest reserve to be applied toward monthly interest payments. Under the debt covenants on this line of credit, the Bank is required to remain well capitalized under the regulatory definition.

The Bank does borrow based upon its need for funds and the cost of deposits as an alternative source of funds. In general, the Bank manages its liquidity by maintaining sufficient levels of short-term investments so that funds are available for investment in loans when needed. The Bank monitors its liquidity on a regular basis. Excess liquidity is invested in overnight federal funds sold and other short-term investments. The Bank has a line of credit with the same correspondent bank for an amount of up to $5.0 million. This credit facility is on a secured basis for $2.5 million for a period of one hundred eighty (180) calendar days and an unsecured basis of $2.5 million for a period of fourteen (14) calendar days. The Bank did not utilize this credit facility at any time during the quarter ending September 30, 2010.

The Bank is subject to the risk based capital guidelines administered by bank regulatory agencies. The guidelines require the Bank to maintain a minimum leverage ratio of core (Tier 1) capital to total adjusted tangible assets of 3.0%, and a minimum ratio of total capital (core capital and supplementary capital) to risk-weighted assets of 8.0%, of which 4.0% must be core (Tier 1) capital. As of September 30, 2010, the Bank’s risk weighted capital to risk weighted assets was 12.0%; its Tier I capital to risk weighted assets was 10.7% and its Tier I capital to average assets capital ratio was 7.2%. As of December 31, 2009, the Bank’s risk weighted capital to risk weighted assets, Tier I capital to risk weighted assets Tier I capital to average assets capital ratios were 11.3%, 10.1% and 6.5%.

Recent Legislative Developments

In July 2010, President Obama signed into law the financial regulatory reform act entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Act). The Act implements far-reaching changes to the regulation of the financial services industry, including provisions that, among other things will:

·	Centralize responsibility for consumer financial protection by creating a new agency.

·	Apply the same leverage and risk-based capital requirements that currently apply to insured depository institutions to bank holding companies.

·	Require the FDIC to adjust capital timing requirements so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction.

·	Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital.

·	Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions.

Make permanent the $250 thousand limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100 thousand to $250 thousand, and provide unlimited federal deposit insurance until January 1, 2013, for non-interest bearing demand transaction accounts at all insured depository institutions.

·	Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

·	Increase the authority of the Federal Reserve.

Many aspects of the Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable to Smaller Reporting Company.

Item 4T. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Co-Chief Executive Officers and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2010. Based on that evaluation, the Company’s management, including the Co-Chief Executive Officers and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

The Company has adopted interim disclosure controls and procedures designed to facilitate the Company’s financial reporting. The interim disclosure controls currently consist of communications among the Co-Chief Executive Officers, the Chief Financial Officer and each department head to identify any transactions, events, trends, risks or contingencies which may be material to the Company’s operations. In addition, the Co-Chief Executive Officers, Chief Financial Officer and the Audit Committee meet on a quarterly basis and discuss the Company’s material accounting policies. The Company’s Co-Chief Executive Officers and Chief Financial Officer have evaluated the effectiveness of these interim disclosure controls as of September 30, 2010, and found them to be adequate.

The Company maintains internal control over financial reporting. There have not been any 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, 2010, 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 the information required of this item.

Item 2. Unregistered Sales of Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. [Reserved]

Item 5. Other Information

None

Item 6. Exhibits

Exhibit Number	Document	Reference to Previous Filing, If Applicable


31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	*****

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), the registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized, as of November 12, 2010.

	ES Bancshares, Inc.

Date: November 12, 2010	By:	/s/ Philip Guarnieri
		Philip Guarnieri
		President and Co-Chief Executive Officer

Date: November 12, 2010	By:	/s/ Thomas Sperzel
		Thomas Sperzel
		Senior Vice President and Chief Financial Officer