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EX-32.2 - EXHIBIT 32.2 - ES Bancshares, Inc.ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - ES Bancshares, Inc.ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - ES Bancshares, Inc.ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - ES Bancshares, Inc.ex31-2.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 March 31, 2011

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 May 9, 2011 there were 2,269,070 issued and outstanding shares of the Registrant’s Common Stock
 
 
 

 
 
ES BANCSHARES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED March 31, 2011
 
 
PART I – FINANCIAL INFORMATION
    Page
Item 1.
Financial Statements (Unaudited)  
 
Consolidated Balance Sheets at March 31, 2011 and December 31, 2010
1
 
Consolidated Statements of Operations for the Three Months Ended March 31, 2011, and 2010
2
  Consolidated Statements of Changes in Stockholders’ Equity
3
 
For the Three Months Ended March 31, 2011 and 2010 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010
4
 
Notes to Unaudited Consolidated Financial Statements
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
19
Item 4T.
Controls and Procedures
19
     
PART II – OTHER INFORMATION
     
Item 1.
Legal Procedures
19
Item 1A
Risk Factors
19
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
19
Item 3
Defaults Upon Senior Securities
19
Item 4.
[Reserved]
19
Item 5.
Other Information
19
Item 6.
Exhibits
20
 
Signatures
22

 
 
1

 
 
ES BANCSHARES, INC
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars In thousands)
             
   
March 31,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
             
Cash and cash equivalents:
           
     Cash and due from banks
  $ 7,954     $ 13,027  
     Federal funds sold and other money market investments
    4,964       12  
          Total cash and cash equivalents
    12,918       13,039  
Certificates of deposit at other financial institutions
    1,910       2,110  
                 
Securities available for sale, at fair value
    20,820       20,120  
                 
Real estate mortgage loans held for sale
    266       400  
                 
Loans receivable
    121,881       122,683  
     Deferred cost
    537       542  
     Allowance for loan losses
    (1,927 )     (2,017 )
          Total loans receivable, net
    120,491       121,208  
Accrued interest receivable
    631       608  
Federal Reserve Bank stock
    392       392  
Federal Home Loan Bank stock
    547       558  
Goodwill
    581       581  
Premises and equipment, net
    476       485  
Prepaid FDIC Assessment
    464       543  
Real estate owned
    315       325  
Other assets
    1,502       441  
          Total assets
  $ 161,313     $ 160,810  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Liabilities:
               
Deposits:
               
     Non-interest bearing
  $ 19,356     $ 17,896  
     Interest bearing
    119,678       120,321  
Total deposits
    139,034       138,217  
                 
Borrowed funds
    10,149       10,364  
Accrued interest payable
    137       141  
Other liabilities
    1,200       1,310  
          Total liabilities
    150,520       150,032  
                 
Commitments and contingencies (Note 7)
               
                 
Stockholders' equity
               
Capital stock (par value $0.01; 5,000,000 shares authorized;
         
        2,269,070 shares issued at March 31, 2011
    22       22  
        2,269,070 shares issued at December 31, 2010
               
     Additional paid-in-capital
    19,752       19,761  
     Accumulated deficit
    (9,190 )     (9,228 )
     Accumulated other comprehensive income
    209       223  
          Total stockholders' equity
    10,793       10,778  
          Total liabilities and stockholders' equity
  $ 161,313     $ 160,810  
                 
See accompanying notes to financial statements
 
 
2

 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Unaudited)
(In thousands, except per share data)
             
   
For the Three Months
 
   
Ended March 31,
 
   
2011
   
2010
 
             
Interest and dividend income:
           
   Loans
  $ 1,688     $ 1,564  
   Securities
    176       331  
   Certificates of deposit
    12       17  
   Fed Funds and other earning assets
    19       25  
     Total interest and dividend income
    1,895       1,937  
                 
Interest expense:
               
   Deposits
    530       642  
   Borrowed funds
    98       96  
     Total interest expense
    628       738  
                 
       Net interest income
    1,267       1,199  
                 
Provision for loan losses
    10       59  
       Net interest income after provision for loan losses
    1,257       1,140  
                 
Non-interest income:
               
   Service charges and fees
    154       105  
   Net gain on sales of real estate mortgage
               
     loans held for sale
    62       35  
   Other
    21       25  
     Total non-interest income
    237       165  
                 
Non-interest expense:
               
   Compensation and benefits
    665       582  
   Occupancy and equipment
    183       190  
   Data processing service fees
    97       73  
   Other
    501       404  
     Total non-interest expense
    1,446       1,249  
                 
       Net income before income taxes
    48       56  
Income tax expense
    10       -  
       Net income
  $ 38     $ 56  
                 
Other comprehensive income (loss):
               
   Net unrealized gain/(loss) on available-for-sale securities
    (14 )     183  
Comprehensive income
  $ 24     $ 239  
                 
Weighted average:
               
       Common shares
    2,269,070       2,071,070  
Earnings (Loss) per common share:
               
       Basic
  $ 0.02     $ 0.03  
       Basic & diluted
  $ 0.02     $ 0.03  
                 
See accompanying notes to financial statements
 
 
3

 
 
ES BANCSHARES, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
 
(In thousands of dollars except, share data)
 
                                     
                           
Accumulated
       
         
Additional
          Other        
   
Capital Stock
   
Paid-In
   
Accumulated
   
Comprehensive
       
   
Shares
   
Amount
   
Capital
   
Deficit
   
Income
   
Total
 
                                     
Balance at January 1, 2010
    2,071,070     $ 20     $ 18,970     $ (9,716 )   $ 207     $ 9,481  
                                                 
   Comprehensive income:
                                               
     Net loss for the period
    -       -       -       56       -       56  
     Net unrealized gain on available-
                                         
       for-sale securities
    -       -       -       -       183       183  
Total comprehensive income
                                            239  
                                                 
Balance at March 31, 2010
    2,071,070     $ 20     $ 18,970     $ (9,660 )   $ 390     $ 9,720  
                                                 
Balance at January 1, 2011
    2,269,070     $ 22     $ 19,761     $ (9,228 )   $ 223     $ 10,778  
                                                 
   Stock based compensation, net
    -       -       (9 )     -       -       (9 )
                                                 
   Comprehensive income:
                                               
     Net income for the period
    -       -       -       38       -       38  
     Net unrealized gain on available-
                                         
       for-sale securities
    -       -       -       -       (14 )     (14 )
Total comprehensive income
                                            24  
                                                 
Balance at March 31, 2011
    2,269,070     $ 22     $ 19,752     $ (9,190 )   $ 209     $ 10,793  
                                                 
See accompanying notes to financial statements
 
 
4

 
 
ES BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Dollars in thousands)
             
   
2011
   
2010
 
             
Cash flows from operating activities:
           
  Net income for period
  $ 38     $ 56  
  Adjustments to reconcile net income to net cash
               
    provided by operating activities:
               
    Provision for loan losses
    10       59  
    Depreciation expense
    53       68  
    Amortization (accretion) of deferred fees, discounts and premiums, net
    43       (33 )
    Mortgage loans originated for sale
    (4,049 )     (2,176 )
    Proceeds from sale of mortgage loans held for sale
    4,245       1,552  
    Net gain on sales of mortgage loans
    (62 )     (35 )
    Stock based compensation expense
    (9 )     -  
    Net gain on sales of investment securities
    -       -  
    Loss on impairment of foreclosed asset
    10       -  
    Changes in assets and liabilities:
               
      Increase (decrease) in other assets
    (1,005 )     (33 )
      (Decrease) increase in accrued expenses and other liabilities
    (94 )     (204 )
        Net cash used in operating activities
    (820 )     (746 )
Cash flows from investing activities:
               
  Maturity of certificates of deposit at other financial institutions
    200       480  
  Purchase of certificates of deposit at other financial institutions
    -       -  
  Purchase of available-for-sale securities
    (1,997 )     (4,435 )
  Purchase of held-to-maturity securities
    -       -  
  Proceeds from sales of available-for-sale securities
    -       -  
  Proceeds from principal payments and maturities of securities
    1,224       2,160  
  Net disbursements (repayments) for loan originations
    1,243       (5,072 )
  Purchases of loans
    (540 )     -  
  Redemption/ (purchase) of Federal Home Loan Bank stock
    11       11  
  Purchase of Federal Reserve Bank stock
    -       (31 )
  Leasehold improvements and acquisitions of capital assets, net of disposals
    (44 )     (6 )
        Net cash used in investing activities
    97       (6,893 )
Cash flows from financing activities:
               
  Net increase in deposits
    817       5,645  
  Proceeds of advances from line of credit & FHLB
    36       1,100  
  Repayment of advances
    (251 )     (243 )
  Net proceeds from common stock issuance
    -       -  
        Net cash provided by financing activities
    602       6,502  
                 
Net decrease in cash and cash equivalents
    (121 )     (1,137 )
Cash and cash equivalents at beginning of period
    13,039       14,785  
                 
Cash and cash equivalents at end of period
  $ 12,918     $ 13,648  
                 
Supplemental cash flow information
               
  Interest paid
  $ 632     $ 947  
  Income taxes paid
  $ 53     $ -  
                 
See accompanying notes to financial statements.
 
 
5

 
 
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.

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, 2011.  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, 2010, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2011.

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.

 
6

 

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period.  Diluted earnings 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 per share is computed by dividing net income by the weighted-average number of shares outstanding for the period plus common-equivalent shares computed using the treasury stock method. None of the warrants or stock options were considered in computing diluted earnings per share because their exercise price was greater than our share price at March 31, 2011 and therefore to do so would have been anti-dilutive.
 
   
Three Months Ended
 
   
March 31,
 
(in thousands, except per share data)  
2011
   
2010
 
Net income attributable to Common Shareholders
  $ 38     $ 56  
Average number of Common Shares Outstanding-basic
    2,269,070       2,071,070  
                 
Average number of common shares outstanding-diluted
    2,269,070       2,071,070  
Income per common share attributable
               
         to common shareholders:
               
  Basic
  $ 0.02     $ 0.03  
  Diluted
    0.02       0.03  

Income Taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  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. 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.

The Company follows FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles with respect to accounting for income taxes.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense.  The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of New York. The Company is no longer subject to examination by taxing authorities for years before 2007.
 
At March 31, 2011, the Company assessed its earnings history and trend over the past two years, its estimate of future earnings, and the expiration dates of its net operating loss carryforwards. Based on this assessment, the Company determined that it was more likely than not that a portion of its deferred tax assets will be realized before their expiration.
 
 
7

 
 
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.

Adoption of New Accounting Guidance

In April 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2011-2, "A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring" ("ASU 2011-2").  ASU 2011-2 clarifies the guidance for determining whether a loan restructuring constitutes a troubled debt restructuring ("TDR") outlined in Accounting Standards Codification ("ASC") No. 310-40, "Receivables—Troubled Debt Restructurings by Creditors," by providing additional guidance to a creditor in making the following required assessments needed to determine whether a restructuring is a TDR: (i) whether or not a concession has been granted in a debt restructuring; (ii) whether a temporary or permanent increase in the contractual interest rate precludes the restructuring from being a TDR; (iii) whether a restructuring results in an insignificant  delay in payment; (iv) whether a borrower that is not currently in payment default is experiencing financial difficulties; and (v) whether a creditor can use the effective interest rate test outlined in debtor’s guidance on restructuring of payables (ASC Topic No. 470-60-55-10) when evaluating whether or not a restructuring constitutes a TDR.  ASU 2011-2 is effective for interim periods beginning on or after June 15, 2011.  Adoption of ASU 2011-2 is not expected to have a material effect.

In July 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses" ("ASU 2010-20").  ASU 2010-20 requires companies to provide a greater level of disaggregated information regarding: (1) the credit quality of their financing receivables; and (2) their allowance for credit losses.  ASU 2010-20 further requires companies to disclose credit quality indicators, past due information, and modifications of their financing receivables. For public companies, ASU 2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010.  ASU 2010-20 encourages, but does not require, comparative disclosures for earlier reporting periods that ended before initial adoption.  Adoption of ASU 2010-20 did not have a material impact on the Company.

In January 2010, FASB issued Accounting Standards Update No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements" ("ASU 2010-6").  ASU 2010-6 required new disclosures related to transfers in and out of fair value hierarchy Levels 1 and 2, as well as certain activities for assets whose fair value is measured under the Level 3 hierarchy. ASU 2010-6 also provided amendments clarifying the level of disaggregation and disclosures about inputs and valuation techniques along with conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-6 was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of ASU 2010-6 has not had, and is not expected to have, a material impact on the Company.
 
 
8

 

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 March 31, 2011 and December 31, 2010.

   
March 31, 2011
 
         
(in thousands)
       
                         
   
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
                         
Mortgage-backed securities-residential
  $ 18,572     $ 252     $ (2 )   $ 18,822  
U.S. Government Agencies
    600       10       --       610  
Trust Preferred Securities
    1,300       88       --       1,388  
Total
  $ 20,472     $ 350     $ (2 )   $ 20,820  

   
December 31, 2010
 
         
(in thousands)
       
                         
   
Amortized
   
Gross Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
                         
Mortgage-backed securities-residential
  $ 17,838     $ 290     $ --     $ 18,128  
U.S. Government Agencies
    600       14       --       614  
Trust Preferred Securities
    1,300       78       --       1,378  
Total
  $ 19,738     $ 382     $ --     $ 20,120  
 
There were no securities held to maturity or trading at March 31, 2011 or December 31, 2010.

The following is a summary of the amortized cost and estimated fair market value of investment securities available-for-sale at March 31, 2011, with amounts shown by remaining term to contractual maturity.  Securities not due at a single maturity date, primarily mortgaged-backed securities, are shown separately.

 
9

 

       
   
March 31, 2011
 
   
(in thousands)
 
             
   
Amortized
   
Fair
 
   
Cost
   
Value
 
Available-for-Sale:
           
Mortgaged-backed securities
  $ 18,572     $ 18,822  
U.S. Government Agencies and Trust Preferred Securities
               
      Due less than one year
    600       610  
      One year to less than three years
    --       --  
      Three years to less than five years
    --       --  
      Five years to ten years
    --       --  
      More than ten years
    1,300       1,388  
Total
  $ 20,472     $ 20,820  
 
The following table summarizes, for all securities in an unrealized loss position at March 31, 2011 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 December 31, 2010.

         
March 31, 2011
             
                                     
   
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
  $ 1,005     $ 2     $ -     $ -     $ 1,005     $ 2  
U.S. Government Agencies
    -       -       -       -       -       -  
Trust Preferred Securities
    -       -       -       -       -       -  
     Total temporarily impaired
  $ 1,005     $ 2     $ -     $ -     $ 1,005     $ 2  
 
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. At March 31, 2011 we determined that there were no other-than-temporary impairments on securities held in our portfolio.

There were no gains or losses on sales of securities during the three months ended March 31, 2011 and March 31, 2010.

 
10

 

Note 4 – Loans

The following is a summary of loans receivable at March 31, 2011 and December 31, 2010.

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(In thousands)
 
Real estate loans:
           
One-to four family
  $ 28,657     $ 28,037  
Commercial
               
Owner Occupied
    19,838       20,039  
Non Owner Occupied
    15,185       15,552  
Multi-family
    11,617       11,634  
Construction or development
    2,566       2,566  
Home equity
               
Open Ended/Revolving
    7,764       7,468  
Closed Ended
    1,574       1,620  
    Total real estate loans
    87,201       86,916  
                 
Other loans:
               
Commercial business
               
Taxi Medallion
    8,496       9,679  
USDA Guaranteed
    5,566       5,110  
Commercial Lines of Credit and Term Loans
    20,232       20,571  
Consumer
    386       407  
   Total other loans
    34,680       35,767  
                 
Total loans
    121,881       122,683  
                 
Deferred loan costs net
    537       542  
Allowance for loan losses
    (1,927 )     (2,017 )
                 
Total loans receivable, net
  $ 120,491     $ 121,208  

Individually impaired loans were as follows:

 
11

 

    Average of Individually Impaired Loans During Period     Interest Income Recognized During Impairment    
Cash-Basis Interest Income Recognized
 
Real estate loans:
                 
One-to four family
  $ -     $ -     $ -  
Commercial
                       
Owner Occupied
    -       -       -  
Non Owner Occupied
    1,819       -       -  
Multi-family
    1,067       -       -  
Construction or development
    775       -       -  
Home equity
                       
Open Ended/Revolving
    50       -       -  
Closed Ended
    -       -       -  
    Total real estate loans
    3,711       -       -  
Other loans:
                       
Commercial business
                       
Taxi Medallion
    -       -       -  
USDA Guaranteed
    -       -       -  
All Other
    476       -       -  
Consumer
    -       -       -  
   Total other loans
    476       -       -  
                         
Total loans
  $ 4,187     $ -     $ -  
 
   
Quarter End
 
   
March 31,
 
   
2010
 
Average of individually impaired loans during quarter
    4,624  
Interest income recognized during impairment
    1  
Cash-basis interest income recognized
    -  

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2011 and December 31, 2010.

 
12

 
 
March 31, 2011
 
   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance For Loan Losses Allocated
 
   
(In thousands)
 
With no related allowance recorded:
                 
Real estate loans:
                 
One-to four family
  $ -     $ -     $ -  
Commercial
                       
Owner Occupied
    522       522       -  
Non Owner Occupied
    1,131       1,131       -  
Multi-family
    1,067       1,067       -  
Construction or development
    816       775       -  
Home equity
                       
Open Ended/Revolving
    75       41       -  
Closed Ended
    -       -       -  
    Total real estate loans
    3,611       3,536       -  
Other loans:
                       
Commercial business
                       
Taxi Medallion
    -       -       -  
USDA Guaranteed
    -       -       -  
All Other
    664       503       -  
Consumer
    -       -       -  
   Total other loans
    664       503       -  
                         
Total loans
  $ 4,275     $ 4,039     $ -  
                         
With an allowance recorded:
                       
Real estate loans:
                       
One-to four family
  $ -     $ -     $ -  
Commercial
                       
Owner Occupied
    -       -       -  
Non Owner Occupied
    685       685       18  
Multi-family
    -       -       -  
Construction or development
    -       -       -  
Home equity
                       
Open Ended/Revolving
    -       -       -  
Closed Ended
    -       -       -  
    Total real estate loans
    685       685       18  
Other loans:
                       
Commercial business
                       
Taxi Medallion
    -       -       -  
USDA Guaranteed
    -       -       -  
All Other
    -       -       -  
Consumer
    -       -       -  
   Total other loans
    -       -       -  
                         
Total loans
  $ 685     $ 685     $ 18  
 
 
13

 
 
December 31, 2010
 
   
   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance For Loan Losses Allocated
 
   
(In thousands)
 
With no related allowance recorded:
                 
Real estate loans:
                 
One-to four family
  $ -     $ -     $ -  
Commercial
                       
Owner Occupied
    -       -       -  
Non Owner Occupied
    1,826       1,826       -  
Multi-family
    1,068       1,068       -  
Construction or development
    816       775       -  
Home equity
                       
Open Ended/Revolving
    -       -       -  
Closed Ended
    -       -       -  
    Total real estate loans
    3,710       3,669       -  
Other loans:
                       
Commercial business
                       
Taxi Medallion
    -       -       -  
USDA Guaranteed
    -       -       -  
All Other
    668       594       -  
Consumer
    -       -       -  
   Total other loans
    668       594       -  
                         
Total loans
  $ 4,378     $ 4,263     $ -  
                         
With an allowance recorded:
                       
Real estate loans:
                       
One-to four family
  $ -     $ -     $ -  
Commercial
                       
Owner Occupied
    -       -       -  
Non Owner Occupied
    -       -       -  
Multi-family
    -       -       -  
Construction or development
    -       -       -  
Home equity
                       
Open Ended/Revolving
    75       55       3  
Closed Ended
    -       -       -  
    Total real estate loans
    75       55       3  
Other loans:
                       
Commercial business
                       
Taxi Medallion
    -       -       -  
USDA Guaranteed
    -       -       -  
All Other
    138       138       42  
Consumer
    -       -       -  
   Total other loans
    138       138       42  
                         
Total loans
  $ 213     $ 193     $ 45  
 
Included in impaired loans above is $1.7 million in loans whose terms have been modified in troubled debt restructurings as of March 31, 2011. These loans are all performing according to their modified terms at March 31, 2011. As of March 31, 2011, the Company has not committed to lend any additional amounts to customers with outstanding loans that have been modified as troubled debt restructurings.

 
14

 

The following tables present the aging of the recorded investment in past due loans as of March 31, 2011 and December 31, 2010 by class of loans:

At March 31, 2011
 
   
   
30 - 59 Days Past Due
   
60 - 89 Days Past Due
   
Loans Past Due Over 90 Days Still Accruing
   
Non Accrual
   
Total Past Due
   
Loans Not Past Due
   
Total
 
   
(In thousands)
                               
Real estate loans:
                                         
One-to four family
  $ 1,046     $ -     $ -     $ -     $ 1,046     $ 27,611     $ 28,657  
Commercial
                                                       
Owner Occupied
    1,238       -       -       -       1,238       18,600       19,838  
Non Owner Occupied
    -       -       -       1,164       1,164       14,021       15,185  
Multi-family
    -       -       -       -       -       11,617       11,617  
Construction or development
    -       -       -       775       775       1,791       2,566  
Home equity
                                                       
Open Ended/Revolving
    200       -       -       41       241       7,523       7,764  
Closed Ended
    -       -       -       -       -       1,574       1,574  
    Total real estate loans
    2,484       -       -       1,980       4,464       82,737       87,201  
Other loans:
                                                       
Commercial business
                                                       
Taxi Medallion
    -       -       -       -       -       8,496       8,496  
USDA Guaranteed
    -       -       -       -       -       5,566       5,566  
All Other
    272       -       -       418       690       19,542       20,232  
Consumer
    -       -       -       -       -       386       386  
   Total other loans
    272       -       -       418       690       33,990       34,680  
                                                         
Total loans
  $ 2,756     $ -     $ -     $ 2,398     $ 5,154     $ 116,727     $ 121,881  
 
 
15

 
 
At December 31, 2010
 
   
   
30 - 59 Days Past Due
   
60 - 89 Days Past Due
   
Loans Past Due Over 90 Days Still Accruing
   
Non Accrual
   
Total Past Due
   
Loans Not Past Due
   
Total
 
   
(In thousands)
 
Real estate loans:
                                         
One-to four family
  $ 584     $ -     $ -     $ -     $ 584     $ 27,453     $ 28,037  
Commercial
                                                       
Owner Occupied
    817       -       -       -       817       19,222       20,039  
Non Owner Occupied
    -       -       -       1,174       1,174       14,378       15,552  
Multi-family
    -       -       -       -       -       11,634       11,634  
Construction or development
    -       -       -       775       775       1,791       2,566  
Home equity
                                                       
Open Ended/Revolving
    -       -       -       55       55       7,413       7,468  
Closed Ended
    278       -       -       -       278       1,342       1,620  
    Total real estate loans
    1,679       -       -       2,004       3,683       83,233       86,916  
Other loans:
                                                       
Commercial business
                                                       
Taxi Medallion
    -       -       -       -       -       9,679       9,679  
USDA Guaranteed
    -       -       -       -       -       5,110       5,110  
All Other
    276       -       -       505       781       19,790       20,571  
Consumer
    -       -       -       -       -       407       407  
   Total other loans
    276       -       -       505       781       34,986       35,767  
                                                         
Total loans
  $ 1,955     $ -     $ -     $ 2,509     $ 4,464     $ 118,219     $ 122,683  
 
At March 31, 2011, the Company had $5.3 million in interest only loans, excluding lines of credit and construction loans, and no loans with potential for negative amortization.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  This analysis includes all loans, regardless of the outstanding balance, and non-homogenous loans, such as commercial and commercial real estate loans.  This analysis is performed on a monthly basis.  The Company uses the following definitions for risk ratings:

Special Mention.  Loans classified as special mention have a potential weakness that deserves managements close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institutions credit positions at some future date.

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 
16

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.  Loans listed as not rated are either consumer loans or are included in groups of homogeneous loans.  As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
 
At March 31, 2011
 
   
   
Not Classified
   
Special Mention
   
Sub- standard
   
Doubtful
   
Loss
   
Total Loans
 
Real estate loans:
                                   
One-to four family
  $ 28,193     $ -     $ 464     $ -     $ -     $ 28,657  
Commercial
                                               
Owner Occupied
    14,463       4,040       1,335       -       -       19,838  
Non Owner Occupied
    13,369       652       1,164       -       -       15,185  
Multi-family
    10,550       -       1,067       -       -       11,617  
Construction or development
    1,791       -       775       -       -       2,566  
Home equity
                                               
Open Ended/Revolving
    7,172       551       41       -       -       7,764  
Closed Ended
    1,418       -       156       -       -       1,574  
    Total real estate loans
    76,956       5,243       5,002       -       -       87,201  
Other loans:
                                               
Commercial business
                                               
Taxi Medallion
    8,496       -       -       -       -       8,496  
USDA Guaranteed
    5,566       -       -       -       -       5,566  
All Other
    18,626       428       1,178       -       -       20,232  
Consumer
    386       -       -       -       -       386  
   Total other loans
    33,074       428       1,178       -       -       34,680  
                                                 
Total loans
  $ 110,030     $ 5,671     $ 6,180     $ -     $ -     $ 121,881  
 
At December 31, 2010
 
   
   
Not Classified
   
Special Mention
   
Sub- standard
   
Doubtful
   
Loss
   
Total Loans
 
Real estate loans:
                                   
One-to four family
  $ 27,572     $ -     $ 465     $ -     $ -     $ 28,037  
Commercial
                                               
Owner Occupied
    15,039       3,661       1,339       -       -       20,039  
Non Owner Occupied
    13,726       652       1,174       -       -       15,552  
Multi-family
    10,566       -       1,068       -       -       11,634  
Construction or development
    1,791       -       775       -       -       2,566  
Home equity
                                               
Open Ended/Revolving
    6,862       551       55       -       -       7,468  
Closed Ended
    1,463       -       157       -       -       1,620  
    Total real estate loans
    77,019       4,864       5,033       -       -       86,916  
Other loans:
                                               
Commercial business
                                               
Taxi Medallion
    9,679       -       -       -       -       9,679  
USDA Guaranteed
    5,110       -       -       -       -       5,110  
All Other
    18,969       382       1,220       -       -       20,571  
Consumer
    407       -       -       -       -       407  
   Total other loans
    34,165       382       1,220       -       -       35,767  
                                                 
Total loans
  $ 111,184     $ 5,246     $ 6,253     $ -     $ -     $ 122,683  
 
 
17

 

Note 5 – Allowance for Loan Losses

Activity in the allowance for loan losses is summarized as follows for the three months ended March 31, 2011 and 2010.
 
     
Three Months Ended
 
     
March 31,
 
               
     
2011
   
2010
 
     
(Dollars in thousands)
 
Balance at beginning of year
    2,017       1,824  
Charge-offs
                 
   One-to-four family
    -       -  
   Commercial
               
      Owner Occupied
    -       -  
      Non Owner Occupied
    -       -  
   Multi-family
    -       -  
   Construction or development
    -       -  
   Home equity
               
      Open Ended / Revolving
    (14 )     -  
      Closed Ended
    -       -  
   Commercial business
               
      Taxi Medallion
    -       -  
      USDA Guaranteed
    -       -  
      Commercial Business Lines of Credit and Term Loans
    (87 )     -  
   Consumer
      -       -  
 
Total charge-offs
    (101 )     -  
                   
Recoveries
                 
   One-to-four family
    -       -  
   Commercial
               
      Owner Occupied
    -       -  
      Non Owner Occupied
    -       -  
   Multi-family
    -       -  
   Construction or development
    -       -  
   Home equity
               
      Open Ended / Revolving
    -       -  
      Closed Ended
    -       -  
   Commercial business
               
      Taxi Medallion
    -       -  
      USDA Guaranteed
    -       -  
      Commercial Business Lines of Credit and Term Loans
    -       -  
   Consumer
      1       1  
 
Total recoveries
    1       1  
                   
Provision for losses
    10       59  
Balance at end of period
    1,927       1,884  
 
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011 and December 31, 2010.

 
18

 

At March 31, 2011
 
   
   
1-4 Family Residential Real Estate
   
Commercial Real Estate
   
Multifamily Real Estate
   
Construction or Development
   
Home Equity
   
Commercial Business
   
Consumer
   
Unallocated
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                                 
Ending allowance balance attributable to loans:
                                           
Individually evaluated for impairment
    -       18       -       -       -       -       -       -       18  
Collectively evaluated for impairment
    116       605       238       36       142       560       4       208       1,909  
Acquired with deteriorated credit quality
    -       -       -       -       -       -       -       -       -  
                                                                         
Total allowance balance
  $ 116     $ 623     $ 238     $ 36     $ 142     $ 560     $ 4     $ 208     $ 1,927  
                                                                         
Loans:
                                                                       
Loans individually evaluated for impairment
    -       2,338       1,067       775       41       503       -       -       4,724  
Loans collectively evaluated for impairment
    28,657       32,685       10,550       1,791       9,297       33,791       386       -       117,157  
Loans acquired with deteriorated credit quality
    -       -       -       -       -       -       -       -       -  
                                                                         
Total ending loans balance
  $ 28,657     $ 35,023     $ 11,617     $ 2,566     $ 9,338     $ 34,294     $ 386     $ -       121,881
 
 
 
 
19

 
 
At December 31, 2010
 
   
   
1-4 Family Residential Real Estate
   
Commercial Real Estate
   
Multifamily Real Estate
   
Construction or Development
   
Home Equity
   
Commercial Business
   
Consumer
   
Unallocated
   
Total
 
   
(In thousands)
 
Allowance for loan losses:
                                                 
                                                       
Individually evaluated for impairment
    -       -       -       -       3       42       -       -       45  
Collectively evaluated for impairment
    115       591       237       36       140       591       5       257       1,972  
Acquired with deteriorated credit quality
    -       -       -       -       -       -       -       -       -  
                                                                         
Total allowance balance
  $ 115     $ 591     $ 237     $ 36     $ 143     $ 633     $ 5     $ 257     $ 2,017  
                                                                         
Loans:
                                                                       
Loans individually evaluated for impairment
    -       1,826       1,068       775       55       732       -       -       4,456  
Loans collectively evaluated for impairment
    28,037       33,765       10,566       1,791       9,033       34,628       407       -       118,227  
Loans acquired with deteriorated credit quality
    -       -       -       -       -       -       -       -       -  
                                                                         
Total ending loans balance
  $ 28,037     $ 35,591     $ 11,634     $ 2,566     $ 9,088     $ 35,360     $ 407     $ -       122,683  
 
Note 6. 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).
 
 
20

 
 
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
       
March 31, 2011 Using:
           
Significant
   
       
Quoted Prices in
 
Other
 
Significant
       
Active Markets for
 
Observable
 
Unobservable
   
Carrying
 
Identical Assets
 
Inputs
 
Inputs
   
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
(Dollars in thousands)
               
Financial Assets
               
Investment securities available-for sale:
               
   Mortgage-backed securities –  residential
 
$
  18,822
     
$
18,822
   
   U.S. government agencies
   
610
       
610
   
   Other securities
   
1,388
       
1,388
   
Total available- for-sale
   
20,820
       
20,820
   


       
Fair Value Measurements at
       
December 31, 2010 Using:
           
Significant
   
       
Quoted Prices in
 
Other
 
Significant
       
Active Markets for
 
Observable
 
Unobservable
   
Carrying
 
Identical Assets
 
Inputs
 
Inputs
   
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
(Dollars in thousands)
               
Financial Assets
               
Investment securities available-for sale:
               
   Mortgage-backed securities – residential
 
$
  18,128
     
$
18,128
   
   U.S. government agencies
   
614
       
614
   
   Other securities
   
1,378
       
1,378
   
Total available- for-sale
   
20,120
       
20,120
   

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

 
21

 
 
         
Fair Value Measurements
 
         
(in thousands)
 
         
at March 31, 2011 Using
 
         
Identical
   
Observable
   
Unobservable
 
   
Carrying
   
Assets
   
Inputs
   
Inputs
 
   
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Assets:
                       
     Impaired Loans
  $ 667     $ -     $ -     $ 667  
     REO Property
    315       -       -       315  

         
Fair Value Measurements
 
         
(in thousands)
 
         
at December 31, 2010 Using
 
         
Identical
   
Observable
   
Unobservable
 
   
Carrying
   
Assets
   
Inputs
   
Inputs
 
   
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Assets:
                       
     Impaired Loans
  $ 148     $ -     $ -     $ 148  
     REO Property
    325       -       -       325  
 
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 $685 thousand, with a valuation allowance of $18 thousand at March 31, 2011. This specific allowance was allocated during the current quarter. General reserves in this amount were reclassified to specific reserves during the quarter ended March 31, 2011, an amount equal to any collateral shortfall on 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 $193 thousand, with a valuation allowance of $45 thousand at December 31, 2010. This specific allowance was allocated during the current year. General reserves in this amount were reclassified to specific reserves during the year ended December 31, 2010, an amount equal to any collateral shortfall on impaired loans.
 
Real Estate Owned:  Real estate owned had a net carrying amount of $315 thousand, which is made up of two properties with a total outstanding balance of $855 thousand, net of direct write-downs of $540 thousand, at March 31, 2011.
 
Carrying amounts and estimated fair values of financial instruments at March 31, 2011 and December 31, 2010 were as follows:
 
 
22

 
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
   
(In thousands)
 
Financial assets
                       
Cash and due from banks
  $ 7,954     $ 7,954     $ 13,027     $ 13,027  
Federal Funds Sold and money market investments
    4,964       4,964       12       12  
Certificate of deposit placements
    1,910       1,910       2,110       2,110  
Securities available for sale
    20,820       20,820       20,120       20,120  
Loans held for sale
    266       270       400       404  
Loans, net
    120,491       122,238       121,208       124,469  
Federal Home Loan Bank stock
    547       N/A       558       N/A  
Federal Reserve Bank stock
    392       N/A       392       N/A  
Accrued interest receivable
    631       631       608       608  
                                 
Financial Liabilities
                               
Deposits
    139,034       139,993       138,217       139,764  
Federal Home Loan Bank advances
    7,272       7,425       7,523       7,684  
Other borrowings
    2,877       2,938       2,841       2,902  
Accrued interest payable
    137       137       141       141  
 
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 7.  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.

Off-Balance Sheet Financial Instruments

The Company’s off-balance sheet financial instruments at March 31, 2011 were limited to loan origination commitments of $6.7 million (including one-to-four family loans held for sale of $3.3 million) and unused lines of credit (principally commercial and home equity lines) extended to customers of $12.4 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 March 31, 2011, consisted of adjustable and fixed rate commitments of $4.0 million and $2.8 million respectively, with interest rates ranging from 4.25% to 7.13%.
 
 
23

 

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 March 31, 2011 and December 31, 2010

Total assets at March 31, 2011, amounted to $161.3 million, representing an increase of $503 thousand, or 0.3%, from $160.8 million at December 31, 2010.  The increase in assets consisted primarily of a $1.1 million increase in other assets, which resulted from booking a receivable on a loan sale which settled in April 2011, and a $700 thousand increase in securities available for sale.  These increases were partially offset by a $717 thousand decrease in total loans receivable, net and a $200 thousand decrease in certificates of deposit at other financial institutions.
 
 
24

 

Overall, loans receivable, net, decreased $717 thousand, or 0.6%, to $120.5 million at March 31, 2011, from $121.2 million at December 31, 2010. Commercial loans, including taxi medallion and USDA Guaranteed loans, and commercial lines of credit decreased $1.1 million, or 3.0%, from $35.4 million to $34.3 million, and commercial and multifamily real estate loans decreased $585 thousand, or 1.2%, from $47.2 million to $46.6 million.  Home equity and consumer loans increased $229 thousand or 2.4%, from $9.5 million to $9.7 million, over the same three-month period.  Residential real estate mortgage loans, excluding mortgage loans held for sale, increased $620 thousand, or 2.21%, from $28.0 million to $28.7 million. Management continues to emphasize the origination of high quality loans for retention in the loan portfolio.

Total cash and cash equivalents at March 31, 2011 decreased $121 thousand, or 0.9%, to $12.9 million from $13.0 million at December 31, 2010, while certificates of deposit at other financial institutions decreased $200 thousand, or 9.5%, to $1.9 million from $2.1 million during the same period.  Total securities at March 31, 2011 increased $700 thousand, or 3.5%, to $20.8 million from $20.1 million at December 31, 2010.

Total deposits increased by $817 thousand to $139.0 million at March 31, 2011 from $138.2 million at December 30, 2010.  Non-interest bearing deposits increased $1.5 million and interest bearing deposits decreased $643 thousand.  Over this three month period the net deposit activity consisted mainly of an increase in DDA and NOW accounts of $1.9 million, offset by decreases in money market and savings accounts of $1.1 million, and certificates of deposit of $34 thousand.

Stockholders’ equity increased by $15 thousand to $10.8 million at March 31, 2011, from $10.8 million at December 31, 2010.  The increase was primarily attributable to the $38 thousand increase in retained earnings partially offset by a $14 thousand decrease in the unrealized gain on investment securities. The ratio of stockholders’ equity to total assets remained unchanged at 6.7% at March 31, 2011 compared to December 31, 2010.  Book value per share increased to $4.76 at March 31, 2011, from $4.75 at December 31, 2010.  See “Liquidity and Capital Resources” for information regarding the Bank’s regulatory capital amounts and ratios.

Loan Composition

The following is a summary of loans receivable at March 31, 2011 and December 31, 2010.

 
25

 
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(In thousands)
 
Real estate loans:
           
One-to four family
  $ 28,657     $ 28,037  
Commercial
               
Owner Occupied
    19,838       20,039  
Non Owner Occupied
    15,185       15,552  
Multi-family
    11,617       11,634  
Construction or development
    2,566       2,566  
Home equity
               
Open Ended/Revolving
    7,764       7,468  
Closed Ended
    1,574       1,620  
    Total real estate loans
    87,201       86,916  
                 
Other loans:
               
Commercial business
               
Taxi Medallion
    8,496       9,679  
USDA Guaranteed
    5,566       5,110  
Commercial Lines of Credit and Term Loans
    20,232       20,571  
Consumer
    386       407  
   Total other loans
    34,680       35,767  
                 
Total loans
    121,881       122,683  
                 
Deferred loan costs net
    537       542  
Allowance for loan losses
    (1,927 )     (2,017 )
                 
Total loans receivable, net
  $ 120,491     $ 121,208  
 

Asset Quality

Delinquency Procedures.  When a borrower fails to make a required payment on a loan, attempts to cure the delinquency are first made by contacting the borrower.  Late notices will be sent when a payment is more than sixteen days past due, and a late charge will generally be assessed at that time.  Additional written and verbal contacts may be made with the borrower between thirty and ninety days after the due date.  If the loan is contractually delinquent over sixty days, a thirty day demand letter is sent to the borrower and, after the loan is contractually delinquent over ninety days, appropriate action begins to foreclose on the property.  If foreclosed, the property will be sold at auction and may be purchased by the Bank.  Delinquent consumer loans are generally handled in a similar manner. Procedures for repossession and sale of consumer collateral are subject to various requirements under New York consumer protection laws.

Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure will be classified as other real estate owned until it is sold.  When property is acquired or expected to be acquired by foreclosure or deed in lieu of foreclosure, it will be recorded at estimated fair value less the estimated cost of disposition, with the resulting write-down charged to the allowance for loan losses.  After acquisition, all costs incurred in maintaining the property will be expensed.  Costs relating to the development and improvement of the property, however, will be capitalized.

Non-Performing Assets

Regulations require that the Company classify its 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 as loss is considered uncollectible and of such little value that continuance as an asset on the balance sheet of the institution is not warranted.    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 March 31, 2011, the Bank had $6.2 million classified as substandard.  There were no assets classified as doubtful or loss. At December 31, 2010 the Bank had $6.3 million in assets classified as substandard  At such date, there were no assets classified as loss.
 
 
26

 

Loans are reviewed on an ongoing basis and any loan whose collectability is doubtful is placed on nonaccrual status. Loans are placed on nonaccrual 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 nonaccrual 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.  At March 31, 2011 the Bank had two foreclosed assets acquired in settlement of loans. The Bank’s non-performing assets decreased to $2.7 million at March 31, 2011 from $2.8 million at December 31, 2010.

The following table sets forth the amount and categories of our non-performing assets at the dates indicated. At March 31, 2011, we had two loans in the amount of $1.7 million which represented a troubled debt restructuring.

 
27

 

   
At March 31,
   
At December 31,
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
Non-accrual loans:
           
Real estate loans:
           
   One-to-four family
  $ -     $ -  
   Commercial
               
      Owner Occupied
    -       -  
      Non Owner Occupied
    1,164       1,174  
   Multi-family
    -       -  
   Construction or development
    775       775  
   Home equity
               
      Open Ended / Revolving
    41       55  
      Closed Ended
    -       -  
Total real estate loans
    1,980       2,004  
                 
Other Loans:
               
   Commercial business
               
      Taxi Medallion
    -       -  
      USDA Guaranteed
    -       -  
      Commercial Business Lines of Credit and Term Loans
    418       505  
   Consumer
    -       -  
Total non-performing loans
  $ 2,398     $ 2,509  
   REO, net
    315       325  
Total non-performing assets
  $ 2,713     $ 2,834  
                 
Ratios:
               
   Non-performing loans to total loans
    1.97 %     2.05 %
   Non-performing loans to total assets
    1.49 %     1.56 %
   Non-performing assets to total assets
    1.68 %     1.76 %
 
At March 31, 2011 total non-performing loans were $2.40 million and were comprised of 9 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 largest is a commercial real estate property in Middlesex County, New Jersey which operates as a restaurant. The balance of this loan is $685 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 March 31, 2011 or December 31, 2010.
 
Allowance for Loan Losses.  The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses inherent in the Bank’s loan portfolio.  Management evaluates the adequacy of the allowance on a quarterly basis.   If the allowance for loan losses is not sufficient to cover actual loan losses, the Bank’s earnings could decrease.

The allowance for loan losses consists of amounts specifically allocated to impaired loans as well as allowances determined for each major loan category.  Loan categories such as single-family residential mortgages and consumer loans are generally evaluated on an aggregate or “pool” basis by applying loss factors to the current balances of the various loan categories.  The loss factors are determined by management based on an evaluation of historical loss experience, delinquency trends, volume and type of lending conducted, and the impact of current economic conditions in our market area. Finally, management evaluates and considers the allowance ratios and coverage percentages of both peer group and regulatory agency data.
 
 
28

 

Management’s evaluation of the adequacy of the allowance, which is subject to periodic review by the New York State Banking Department and the Federal Reserve Bank of New York, takes into consideration such factors as the historical loan loss experience, peer group ratios, known and inherent risks in the portfolio, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, estimated value of underlying collateral, and current economic conditions that may affect borrowers’ ability to pay. Due to our brief period of operations, peer group information is the primary determinant.  Other factors as discussed above will become more prominent in the methodology as we develop a history of experience.  While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net earnings could be significantly affected, if circumstances differ substantially from the estimates made in making the final determination.

The following table summarizes the activity in the Company’s allowance for loan losses for the three month periods ended March 31, 2011 and March 31, 2010:

 
29

 
 
     
Three Months Ended
 
     
March 31,
 
               
     
2011
   
2010
 
     
(Dollars in thousands)
 
Balance at beginning of year
    2,017       1,824  
Charge-offs
               
   One-to-four family
    -       -  
   Commercial
               
      Owner Occupied
    -       -  
      Non Owner Occupied
    -       -  
   Multi-family
    -       -  
   Construction or development
    -       -  
   Home equity
               
      Open Ended / Revolving
    (14 )     -  
      Closed Ended
    -       -  
   Commercial business
               
      Taxi Medallion
    -       -  
      USDA Guaranteed
    -       -  
      Commercial Business Lines of Credit and Term Loans
    (87 )     -  
   Consumer
      -       -  
 
Total charge-offs
    (101 )     -  
                   
Recoveries
                 
   One-to-four family
    -       -  
   Commercial
               
      Owner Occupied
    -       -  
      Non Owner Occupied
    -       -  
   Multi-family
    -       -  
   Construction or development
    -       -  
   Home equity
               
      Open Ended / Revolving
    -       -  
      Closed Ended
    -       -  
   Commercial business
               
      Taxi Medallion
    -       -  
      USDA Guaranteed
    -       -  
      Commercial Business Lines of Credit and Term Loans
    -       -  
   Consumer
      1       1  
 
Total recoveries
    1       1  
                   
Provision for losses
    10       59  
Balance at end of period
    1,927       1,884  
                   
Ratio of net charge-offs to average total loans
    0.08 %     0.00 %
Ratio of allowance for loan losses to total loans
    1.58 %     1.68 %
 
Analysis of Net Interest Income

The following table summarizes the Company’s average balance sheet for interest earning assets and interest bearing liabilities, average yields and costs (on an annualized basis), and certain other information for the three months ended March 31, 2011, as compared to the comparable period ended March 31, 2010.  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.
 
 
30

 
 
   
For the Quarter Ended March 31
 
   
2011
   
2010
 
   
Average
         
Average
   
Average
         
Average
 
   
Balance
   
Interest
   
Yield/Cost
   
Balance
   
Interest
   
Yield/Cost
 
Assets
                                   
Interest-earning assets:
                                   
    Loans
    122,997     $ 1,688       5.49 %     109,420     $ 1,564       5.72 %
    Fed Funds & other investments
    10,079       7       0.28 %     11,454       11       0.38 %
    Certificates of deposit
    1,919       12       2.54 %     3,411       17       1.99 %
    FRB & FHLB stock
    942       12       5.10 %     898       14       6.24 %
    Securities
    19,635       176       3.59 %     31,274       331       4.23 %
       Total interest-earning assets
  $ 155,572     $ 1,895       4.87 %   $ 156,457     $ 1,937       4.95 %
                                                 
Allowance for loan losses
    (2,021 )                     (1,880 )                
Cash & Due from banks
    1,965                       1,264                  
Other Non-interest earning assets
    3,503                       3,780                  
       Total assets
  $ 159,019                     $ 159,621                  
                                                 
Liabilities and  Stockholders' Equity
                                               
Interest-bearing liabilities:
                                               
    NOW accounts
  $ 7,392     $ 12       0.66 %   $ 6,129     $ 7       0.46 %
    Money Market accounts
    33,783       81       0.97 %     36,971       113       1.22 %
    Regular savings accounts
    9,896       25       1.02 %     9,910       26       1.05 %
    Certficates of Deposit
    67,845       412       2.46 %     71,270       496       2.78 %
       Total interest-bearing deposits
  $ 118,916       530       1.81 %   $ 124,280       642       2.07 %
                                                 
    Borrowings
    10,211       98       3.84 %     10,000       96       3.89 %
       Total interest-bearing liabilities
  $ 129,127     $ 628       1.97 %   $ 134,280     $ 738       2.23 %
                                                 
                                                 
Non-interest-bearing liabilities
    18,990                       15,713                  
       Total liabilities
    148,117                       149,993                  
                                                 
Stockholders' equity
    10,902                       9,628                  
       Total liabilities and stockholders' equity
  $ 159,019                     $ 159,621                  
Net interest income
          $ 1,267                     $ 1,199          
                                                 
Average interest rate spread (1)
                    2.90 %                     2.72 %
Net interest margin (2)
                    3.26 %                     3.07 %
Net interest-earning assets (3)
  $ 26,445                     $ 22,177                  
Ratio of average interest-earning assets
                                               
    to average interest-bearing liabilities
                    120.48 %                     116.52 %
 
(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.

 
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Results of Operations for the Quarters Ended March 31, 2011 and March 31, 2010

General.  For the quarter ended March 31, 2011, the Company recognized net income of $38 thousand, or $0.02 per basic and diluted share, as compared to a net gain of $56 thousand, or $0.03 per basic and diluted share, for the quarter ended March 31, 2010.

Interest Income.  Interest income remained relatively unchanged at $1.9 million for the quarters ended March 31, 2011 and March 31, 2010.  A modest decrease of $42 thousand was primarily attributable to a $155 thousand decrease in interest income from securities and an $11 thousand decrease in interest income from fed funds sold and other certificates of deposit placements.  These decreases were partially offset by a $124 thousand increase in loan interest income.

The average balance of the loan portfolio increased to $123.0 million at March 31, 2011 from $109.4 million at March 31, 2010, while the average yield decreased from 5.72% for the quarter ended March 31, 2010 to 5.49% for the quarter ended March 31, 2011.   The average balance and yield of the Bank’s investment securities for the quarter ended March 31, 2011, was $19.6 million and 3.59%, respectively, as compared to an average balance of $31.3 million and a yield of 4.23% for the comparable quarter ended one-year earlier.  The average balances of the Bank’s federal funds and other investments decreased by $1.4 million, over the quarter ended March 31, 2011, as compared to the quarter ended March 31, 2010. The average yield on these respective interest-earning assets decreased to 0.28% from 0.38% over the same comparable period. The average balance on certificates of deposit at other financial institutions decreased from $3.4 million for the quarter ended March 31, 2010, to $1.9 million in the respective period in 2011. The average yield increased to 2.54% for the quarter ended March 31, 2011, as compared to 1.99% at the quarter ended March 31, 2010, or 55 basis points.

Interest Expense.  Total interest expense for the quarter ended March 31, 2011, decreased by $110 thousand, from $738 thousand to $628 thousand, when compared to the prior year period.  Average balances of total interest-bearing liabilities decreased $5.2 million to $129.1 million for the quarter ended March 31, 2011, from $134.3 million for the quarter ended March 31, 2010. The average cost for those liabilities decreased to 1.97% from 2.23% for the same respective period one year earlier reflecting lower market interest rates.

The average balances of the Bank’s certificates of deposit portfolio decreased to $67.8 million at an average cost of 2.46% over the quarter ended March 31, 2011, from $71.3 million at an average cost of 2.78% over the same quarter ended one-year earlier.  The $3.4 million decrease was primarily attributable to the maturing and renewing of certificate of deposits in a lower interest rate environment.  Regular savings account average balances remained relatively unchanged at $9.9 million, decreasing only $14 thousand. These had an average cost of 1.02% for the quarter ended March 31, 2011 compared to an average cost of 1.05% for the quarter ended March 31, 2010.

Average money market account balances decreased $3.2 million to $33.8 million at an average cost of 0.97% for the quarter ended March 31, 2011, from $37.0 million at an average cost of 1.22% for the quarter ended March 31, 2010.

For the quarter ended March 31, 2011, the average balance of the Company’s borrowed funds was $10.2 million and its average cost was 3.84%, as compared to $10.0 million and an average cost of 3.89% for the quarter ended March 31, 2010.  The increase was primarily a result of funds being drawn on the facility in the amount of $1.1 million in the latter portion of the quarter ended March 31, 2010 and were outstanding for the entire period ended March 31, 2011.  At March 31, 2011, the weighted average term to maturity of our borrowings was approximately 1.6 years.

Net Interest Income.  Net interest income was approximately $1.3 million for the quarter ended March 31, 2011, as compared to $1.2 million for the same quarter in the prior year.  Our average interest rate spread increased to 2.90% for the quarter ended March 31, 2011, from 2.72% for the quarter ended March 31, 2010, while our net interest margin increased to 3.26% from 3.07%, over the same respective periods. These increases were primarily attributable to decreased cost of deposits.
 
 
32

 
 
Provision for Loan Losses.  For the three months ended March 31, 2011, management recorded a $10 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 $59 thousand for the quarter ended March 31, 2010.

Non-Interest Income.  Non-interest income for the quarter ended March 31, 2011 increased $72 thousand to approximately $237 thousand as compared to $165 thousand for the quarter ended March 31, 2010.  Service charges and fees increased by $49 thousand, from $105 thousand for the quarter ended March 31, 2010, to $154 thousand for the quarter ended March 31, 2011, 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 increased $27 thousand to $62 thousand for the quarter ended March 31, 2011, as compared to $35 thousand for the quarter ended March 31, 2010. This increase is due to the sale of a Small Business Administration guaranteed loan into the secondary market during the first quarter of 2011. Other non-interest income categories decreased to $21 thousand for the quarter ended March 31, 2011, from $25 thousand for the same quarter in 2010, a decrease of $4 thousand.
 
Non-Interest Expense.  Non-interest expense for the quarter ended March 31, 2011 increased $197 thousand when compared to the same quarter in 2010, primarily resulting from an increase in compensation and benefits of $83 thousand and other non-interest expense of $97 thousand.  The increase in compensation and benefits is related to the allocation of additional customer service resources to assist in marketing the bank’s existing and newly developed products.  The increase in other expense is related to charges incurred for certain death benefits paid to a former employee and a partial write down of the carrying value of real estate owned.

Income Tax Expense.  Income tax expense was $10 thousand for the quarter ended March 31, 2011 as compared to $0 for the quarter ended March 31, 2010.

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 three months ended March 31, 2011, the net activity of originated loans, sales and principal payments decreased the loan portfolio by $802 thousand.  At March 31, 2011, the Company had outstanding loan origination commitments of $6.7 million (including one-to-four-family real estate mortgage loans held for sale of $3.3 million) and undisbursed lines of credit and construction loans in process of $12.4 million.  The Company anticipates that it will have sufficient funds available to meet its current loan originations and other commitments.

At March 31, 2011, total deposits were approximately $139.0 million of which approximately $66.2 million were in certificates of deposit.  Certificates of deposit scheduled to mature in one year or less from March 31, 2011, totaled $40.2 million.  Based on past experience the Company anticipates that most of these certificates of deposit can be renewed upon their expiration.
 
 
33

 

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 March 31, 2011, the outstanding balance was $2.9       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 March 31, 2011.

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 5.0%, and a minimum ratio of total capital (core capital and supplementary capital) to risk-weighted assets of 6.0%, of which 4.0% must be core (Tier 1) capital.  As of March 31, 2011, the Bank’s risk weighted capital to risk weighted assets was 12.97%; its Tier I capital to risk weighted assets was 11.7% and its Tier I capital to average assets capital ratio was 8.15%.  As of December 31, 2010, the Bank’s risk weighted capital to risk weighted assets, Tier I capital to risk weighted assets and Tier I capital to average assets capital ratios were 13.0%, 11.8% and 8.0%, respectively.

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.
 
 
34

 
 
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 March 31, 2011. 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 March 31, 2011, 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 March 31, 2011, 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
 
 
35

 

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
   

 
36

 

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 May 9, 2011.
 
 
ES Bancshares, Inc.
 
       
Date:  May 9, 2011
By:
/s/ Philip Guarnieri  
    Philip Guarnieri  
    President and Co-Chief Executive Officer  
       
       
Date:  May 9, 2011        By: /s/ Thomas Sperzel  
    Thomas Sperzel  
    Senior Vice President and Chief Financial Officer  
 
 
 
 
37