t71306_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2011
OR
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from _______________ to ______________________
 
Commission File No. 001-52751
 
  FSB Community Bankshares, Inc.  
 (Exact name of registrant as specified in its charter)
 
 
United States
 
74-3164710
 
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
 
incorporation or organization)
 
Identification Number)
 
 
   45 South Main Street, Fairport, New York   14450  
   (Address of Principal Executive Offices)    Zip Code  
 
  (585) 223-9080  
(Registrant’s telephone number)
                                                                               
  N/A  
(Former name or former address, if changed since last report)
 
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 requirements for the past 90 days.
YES x  NO o.
 
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 x  NO o.
 
Indicate by check mark whether the registrant is a large accelerated filer, an 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.  (Check one)
 
 
Large accelerated filer
o
Accelerated filer
o
 
 
Non-accelerated filer
o
Smaller reporting company
x
 
 
(Do not check if smaller reporting company)
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x
 
As of August 12, 2011 there were 1,785,000 shares of the Registrant’s common stock, par value $0.10 per share, outstanding, 946,050 of which were held by FSB Community Bankshares, MHC, the Registrant’s mutual holding company.
 
 
 

 
 
FSB Community Bankshares, Inc.
FORM 10-Q
 
Index
 
     
Page
Part I. Financial Information
   
       
Item 1.
Consolidated Financial Statements (unaudited)
   
       
 
Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010
 
1
       
 
Consolidated Statements of Income for the Three Months Ended June 30, 2011 and 2010
 
2
       
 
Consolidated Statements of Income for the Six Months Ended June 30, 2011 and 2010
 
3
       
 
Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2011 and 2010
 
4
       
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010
 
5
       
 
Notes to Consolidated Financial Statements
 
6
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
20
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
31
       
Item 4.
Controls and Procedures
 
31
       
Part II. Other Information
   
       
Item 1.
Legal Proceedings
 
31
       
Item 1A.
Risk Factors
 
31
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
32
       
Item 3.
Defaults upon Senior Securities
 
32
       
Item 4.
[Removed and Reserved]
 
32
       
Item 5.
Other Information
 
32
       
Item 6.
Exhibits
 
32
       
 
Signature Page
 
34
 
 
 

 
 
Part I. Financial Information
 
Item 1. Consolidated Financial Statements
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Balance Sheets
June 30, 2011 and December 31, 2010 (unaudited)
(Dollars in thousands, except share data)
 
 
 
June 30,
2011
   
December 31,
2010
 
Assets
           
Cash and due from banks
  $ 1,043     $ 561  
Interest-earning demand deposits
    7,904       7,273  
     Cash and Cash Equivalents
    8,947       7,834  
                 
Securities available for sale
    67,118       72,634  
Securities held to maturity (fair value 2011 $7,374; 2010 $7,305)
    7,209       7,183  
Investment in FHLB stock
    1,452       1,513  
Loans held for sale
    879       342  
Loans receivable, net of allowance for loan losses (2011 $399; 2010  $384)
    117,225       114,477  
Bank owned life insurance
    3,205       3,144  
Accrued interest receivable
    906       888  
Premises and equipment, net
    2,763       2,705  
Prepaid FDIC premium
    444       579  
Other assets
    1,128       1,108  
                                 Total Assets
  $ 211,276     $ 212,407  
                 
                                               Liabilities & Stockholders’ Equity
               
                 
Deposits:
               
     Non-interest-bearing
  $ 4,284     $ 3,705  
     Interest-bearing
    157,940       158,701  
                Total Deposits
    162,224       162,406  
                 
Borrowings
    25,205       26,732  
Advances from borrowers for taxes and insurance
    2,287       1,926  
Official bank checks
    457       363  
Other liabilities
    442       488  
                            Total Liabilities
    190,615       191,915  
                 
                                            Stockholders’ Equity
               
                 
Preferred Stock- no par value- 1,000,000 shares authorized; no shares issued and outstanding
    -       -  
Common Stock- $0.10 par value – 10,000,000 shares authorized; 1,785,000 shares issued and outstanding
    179       179  
Additional paid-in-capital
    7,267       7,269  
Retained earnings
    13,507       13,537  
Accumulated other comprehensive income       250        67  
Unearned ESOP shares – at cost
    (542 )     (560 )
                        Total Stockholders’ Equity
    20,661       20,492  
                 
                        Total Liabilities and Stockholders’ Equity
  $ 211,276     $ 212,407  
 
See accompanying notes to consolidated financial statements
 
 
1

 

FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Income
Three Months Ended June 30, 2011 and 2010 (unaudited)
(Dollars in thousands, except per share data)
 
   
2011
   
2010
 
             
Interest and Dividend Income
           
Loans
  $ 1,520     $ 1,602  
    Securities – taxable
    243       392  
    Securities – tax exempt
    12       -  
    Mortgage-backed securities
    215       199  
    Other
    2       3  
                 Total Interest and Dividend Income
    1,992       2,196  
                 
Interest expense
               
     Deposits
    461       653  
 Borrowings
    224       326  
                Total Interest Expense
    685       979  
                 
                Net Interest Income
    1,307       1,217  
Provision for Loan Losses
    7       3  
                Net Interest Income After Provision
               
                   for Loan Losses
    1,300       1,214  
                 
Other Income
               
     Service fees
    44       60  
     Fee income
    6       20  
     Realized gain on sale of securities
    24       -  
     Realized loss on sale of real estate owned
    -       (5 )
     Increase in cash surrender value of bank owned life insurance
    31       32  
     Realized gain on sale of loans
    79       69  
     Mortgage fee income
    41       52  
     Other
    38       34  
               Total Other Income
    263       262  
                 
Other Expense
               
     Salaries and employee benefits
    828       727  
     Occupancy expense
    183       149  
     Data processing costs
    22       26  
     Advertising
    54       53  
     Equipment expense
    115       104  
     Electronic banking
    24       21  
     Directors’ fees
    35       28  
     Mortgage fees and taxes
    37       87  
     FDIC premium expense
    74       59  
     Other expense
    186       180  
               Total Other Expenses
    1,558       1,434  
                 
               Income Before Income Taxes
    5       42  
                 
               Provision (Benefit) for Income Taxes
    (11 )     7  
                 
               Net Income
  $ 16     $ 35  
 
               Earnings per common share – basic and diluted
  $ 0.01     $ 0.02  
 
See accompanying notes to consolidated financial statements
 
 
2

 
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Income
Six Months Ended June 30, 2011 and 2010 (unaudited)
(Dollars in thousands, except per share data)
 
   
2011
   
2010
 
             
Interest and Dividend Income
           
     Loans
  $ 3,044     $ 3,195  
     Securities – taxable
    507       839  
     Securities – tax exempt
    24       -  
     Mortgage-backed securities
    455       416  
     Other
    4       5  
                 Total Interest and Dividend Income
    4,034       4,455  
                 
Interest expense
               
     Deposits
    966       1,388  
 Borrowings
    453       680  
                Total Interest Expense
    1,419       2,068  
                 
                Net Interest Income
    2,615       2,387  
Provision for Loan Losses
    15       6  
                Net Interest Income After Provision
               
                   for Loan Losses
    2,600       2,381  
                 
Other Income
               
     Service fees
    88       117  
     Fee income
    9       26  
     Realized gain (loss) on sale of securities
    24       (8 )
     Realized loss on sale of real estate owned
    -       (5 )
     Increase in cash surrender value of bank owned life insurance
    61       65  
     Realized gain on sale of loans
    125       83  
     Mortgage fee income
    96       82  
     Other
    68       61  
               Total Other Income
    471       421  
                 
Other Expense
               
     Salaries and employee benefits
    1,683       1,414  
     Occupancy expense
    356       299  
     Data processing costs
    49       43  
     Advertising
    97       94  
     Equipment expense
    240       207  
     Electronic banking
    46       37  
     Directors’ fees
    67       55  
     Mortgage fees and taxes
    92       117  
     FDIC premium expense
    144       116  
     Other expense
    381       355  
               Total Other Expenses
    3,155       2,737  
                 
               Income (Loss ) Before Income Taxes
    (84 )     65  
                 
               Benefit for Income Taxes
    (54 )      (3 )
                 
               Net Income (Loss)
  $ (30 )   $ 68  
 
               Earnings (Loss) per common share – basic and diluted
  $ (0.02 )   $ 0.04  
 
See accompanying notes to consolidated financial statements
 
 
3

 

FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Stockholders’ Equity
Six Months Ended June 30, 2011 and 2010 (unaudited)
(Dollars in thousands)
 
   
Common
Stock
   
Additional
Paid in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Unearned
ESOP
Shares
   
Total
 
Balance – January 1, 2010
  $ 179     $ 7,275     $ 13,317     $ 174     $ (595 )   $ 20,350  
                                                 
Comprehensive income:
                                               
Net income
    -       -       68       -       -       68  
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and taxes
    -       -       -       350       -       350  
Total Comprehensive Income
                                            418  
ESOP shares committed to be released (875 shares)
    -       (2 )     -       -       18       16  
Balance – June 30, 2010
  $ 179     $ 7,273     $ 13,385     $ 524     $ (577 )   $ 20,784  
                                                 
Balance – January 1, 2011
  $ 179     $ 7,269     $ 13,537     $ 67     $ (560 )   $ 20,492  
                                                 
Comprehensive income:
                                               
Net loss
    -       -       (30 )     -       -       (30 )
Change in net unrealized  gain on securities available for sale, net of reclassification adjustment and taxes
    -       -       -       183       -       183  
       Total Comprehensive Income
                                            153  
ESOP shares committed to be released (875 shares)
    -       (2 )     -       -       18       16  
Balance – June 30, 2011
  $ 179     $ 7,267     $ 13,507     $ 250     $ (542 )   $ 20,661  
 
See accompanying notes to consolidated financial statements
 
 
4

 
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Cash Flows
 Six Months Ended June 30, 2011 and 2010 (unaudited)
(Dollars in thousands)
       
   
2011
   
2010
 
Cash Flows From Operating Activities
           
Net income (loss)
  $ (30 )   $ 68  
Adjustments to reconcile net income (loss) to net cash provided by (used by) operating activities:
               
Net amortization of premiums and discounts on investments
    369       515  
       Gain on sale of securities available for sale
    (24 )     (2 )
       Loss on sale of securities held to maturity
    -       10  
       Gain on sale of loans
    (125 )     (83 )
       Proceeds from loans sold
    941       3,729  
       Loans originated for sale
    (1,353 )     (7,006 )
       Amortization of net deferred loan origination costs
    7       16  
       Amortization of premium on FHLB advances
    100       -  
       Depreciation and amortization
    198       156  
       Provision for loan losses
    15       6  
       Expense related to ESOP
    16       16  
       Deferred income tax benefit
    (70 )     (28 )
       Earnings on investment in bank owned life insurance
    (61 )     (65 )
       Decrease (increase) in accrued interest receivable
    (18 )     193  
       Decrease in prepaid FDIC premium
    135       108  
       Decrease (increase) in other assets
    (20 )     218  
       Decrease in other liabilities
    (70 )     (14 )
               Loss on sale of real estate owned
    -       5  
                        Net Cash Provided By (Used By) Operating Activities
    10       (2,158 )
                 
Cash Flows From Investing Activities
               
Purchases of securities available for sale
    (18,621 )     (46,889 )
Proceeds from maturities and calls of securities available for sale
    18,630       48,000  
Proceeds from sales of securities available for sale
    1,413       11  
Proceeds from principal paydowns on securities available for sale
    4,034       3,589  
Purchases of securities held to maturity
    (434 )     -  
Proceeds from maturities and calls of securities held to maturity
    -       5  
Proceeds from sales of securities held to maturity
    -       686  
Proceeds from principal paydowns on securities held to maturity
    400       265  
Net decrease (increase) in loans
    (2,770 )     645  
Redemption of FHLB stock
    61       220  
Proceeds from sales of foreclosed real estate
    -       74  
Purchase of premises and equipment
    (256 )     (110 )
                        Net Cash Provided By Investing Activities
    2,457       6,496  
                 
Cash Flows From Financing Activities
               
Net increase (decrease) in deposits
    (182 )     8,252  
Proceeds from borrowings
    4,000       -  
Repayments on borrowings
    (5,627 )     (3,916 )
Net increase in advances from borrowers for taxes and insurance
    361       336  
Net increase in official bank checks
    94       378  
                        Net Cash Provided By (Used By) Financing Activities
    (1,354 )     5,050  
                 
                        Net Increase in Cash
               
                                and Cash Equivalents
    1,113       9,388  
                 
Cash and Cash Equivalents- Beginning
    7,834       5,965  
                 
Cash and Cash Equivalents- Ending
  $ 8,947     $ 15,353  
             
Supplementary Cash Flows Information
           
             
        Interest paid
  $ 1,428     $ 2,084  
                 
        Income taxes paid
  $ -     $ -  
 
See accompanying notes to consolidated financial statements
 
 
5

 
 
Notes to Consolidated Financial Statements
 
Note 1-Basis of Presentation
 
The accompanying unaudited consolidated financial statements of FSB Community Bankshares, Inc. and its wholly owned subsidiary Fairport Savings Bank (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the applicable instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of consolidated financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.  Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, the evaluation of other-than-temporary impairment of investment securities, and the valuation of deferred tax assets. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2010 filed on Form 10-K with the Securities and Exchange Commission (“SEC”) on March 31, 2011.
 
The unaudited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2010, included in the Annual Report filed on Form 10-K with the Securities and Exchange Commission (“SEC”) on March 31, 2011.
 
Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
 
The consolidated financial statements at June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010 include the accounts of the Company, Fairport Savings Bank (the “Bank”) and the Bank’s wholly-owned subsidiary, Oakleaf Services Corporation (“Oakleaf”).  All inter-company balances and transactions have been eliminated in consolidation.  Certain amounts from prior periods may have been reclassified, when necessary, to conform to current period presentation. Such reclassifications had no impact on net income (loss) or stockholders’ equity.
 
The Company has evaluated subsequent events through the date these consolidated financial statements were issued.
 
Note 2-Fair Value Measurement and Disclosure
 
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective reporting dates and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each reporting date.
 
 
6

 
 
Note 2--Fair Value Measurement and Disclosure (Continued)
 
A fair value hierarchy that prioritizes the inputs to valuation methods is used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
 
Level 1:  Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities.
 
Level 2:  Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3:  Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).
 
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used are as follows at June 30, 2011 and at December 31, 2010:
 
June 30, 2011
Securities Available for Sale:
(In Thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                                 
U.S. Government and agency obligations
  $ 34,329     $ -     $ 34,329     $ -  
Mortgage-backed securities - residential
    29,186       -       29,186       -  
SBA pools
    3,603       -       3,603       -  
Total Available for Sale Securities
  $ 67,118     $ -     $ 67,118     $ -  
   
December 31, 2010
Securities Available for Sale:
(In Thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                                 
U.S. Government and agency obligations
  $ 39,336     $ 8,014     $ 31,322     $ -  
Mortgage-backed securities - residential
    29,361       1,673       27,688       -  
SBA pools
    3,937       -       3,937       -  
Total Available for Sale Securities
  $ 72,634     $ 9,687     $ 62,947     $ -  
 
There were five U.S. Government and agency obligations for $4.3 million and one Mortgage-backed security for $1.7 million transferred out of level 1 securities available for sale to level 2 securities available for sale during the six months ended June 30, 2011.  There were three U.S. Government and agency obligations for $3.7 million called during the six months ended June 30, 2011 that were measured as level 1 securities available for sale at December 31, 2010.  All of the transfers were the result of the availability of observable market data used in the securities’ pricing obtained through independent pricing services or dealer market participants. No assets or liabilities have been measured on a non-recurring basis at or for the six months ended June 30, 2011 at or for the year ended December 31, 2010.
 
Accounting guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  In that regard, the defined fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.  Certain assets and liabilities are excluded from the disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
 
 
7

 
 
Note 2--Fair Value Measurement and Disclosure (Continued)
 
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at June 30, 2011 and December 31, 2010:
 
Cash, Due from Banks, and Interest-Earning Demand Deposits
 
The carrying amounts of these assets approximate their fair values.
 
Investment Securities
 
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the banking industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are based on observable market based assumptions (Level 3).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments. The Company had no Level 3 investment securities at June 30, 2011 or at December 31, 2010.
 
Investment in FHLB Stock
 
The carrying value of Federal Home Loan Bank (“FHLB”) stock approximates its fair value based on the restricted nature of the FHLB stock.
 
Loans
 
The fair values of loans held to maturity are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
 
Mortgage loans held for sale in the secondary market are carried at the lower of cost or fair value.  Separate determinations of fair value for residential and commercial loans are made on an aggregate basis.  Fair value is determined based solely on the effect of changes in secondary market interest rates and yield requirements from the commitment date to the date of the financial statements. Realized gains and losses on sales are computed using the specific identification method.
 
Accrued Interest Receivable and Payable
 
The carrying amount of accrued interest receivable and payable approximates fair value.
 
Deposits
 
The fair values disclosed for demand deposits (e.g., NOW accounts, non-interest checking, regular savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  The carrying amounts for variable-rate certificates of deposit approximate their fair values at the reporting date.  Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
 
 
8

 
 
Note 2--Fair Value Measurement and Disclosure (Continued)
 
Borrowings
 
The fair values of FHLB borrowings are estimated using discounted cash flow analyses, based on the quoted rates for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.
 
Off-Balance Sheet Instruments
 
The fair values for off-balance sheet financial instruments (lending commitments and lines of credit) are estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present credit worthiness of the counterparties. Such fees were not material at June 30, 2011 and December 31, 2010.
 
The carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2011 and December 31, 2010 are as follows:
 
   
June 30, 2011
   
December 31, 2010
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
   
(In Thousands)
 
Financial assets:
                       
Cash and due from banks
  $ 6,954     $ 6,954     $ 4,533     $ 4,533  
Interest-earning demand deposits
    1,993       1,993       3,301       3,301  
Securities available for sale
    67,118       67,118       72,634       72,634  
Securities held to maturity
    7,209       7,374       7,183       7,305  
Investment in FHLB stock
    1,452       1,452       1,513       1,513  
Loans held for sale
    879       879       342       342  
Loans, net
    117,225       121,374       114,477       116,350  
Accrued interest receivable
    906       906       888       888  
                                 
Financial liabilities:
                               
Deposits
    162,224       161,344       162,406       161,165  
Borrowings
    25,205       23,687       26,732       25,107  
Accrued interest payable
    59       59       68       68  
                                 
Off-balance sheet instruments:
                               
Commitments to extend credit
    -       -       -       -  
 
 
9

 
 
Note 3 - Securities
 
The amortized cost and estimated fair value of securities with gross unrealized gains and losses at June 30, 2011 and at December 31, 2010 are as follows:
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In Thousands)
 
June 30, 2011:
                       
Available for Sale:
                       
            U.S. Government and agency obligations
  $ 34,423     $ 95     $ (189 )   $ 34,329  
            Mortgage-backed securities - residential
    28,733       506       (53 )     29,186  
SBA pools
    3,583       20       -       3,603  
                                 
    $ 66,739     $ 621     $ (242 )   $ 67,118  
Held to Maturity:
                               
Mortgage-backed securities-residential
  $ 4,515     $ 143     $ -     $ 4,658  
State and Municipal securities
    2,694       28       (6 )     2,716  
                                 
      7,209       171       (6 )     7,374  
December 31, 2010:
                       
Available for Sale:
                       
            U.S. Government and agency obligations
  $ 39,764       32       (460 )     39,336  
            Mortgage-backed securities - residential
    28,882       539       (60 )     29,361  
SBA pools
    3,886       51       -       3,937  
                                 
    $ 72,532     $ 622     $ (520 )   $ 72,634  
Held to Maturity:
                               
Mortgage-backed securities – residential
  $ 4,918     $ 182     $ -     $ 5,100  
State and Municipal securities
    2,265       -       (60 )     2,205  
                                 
      7,183       182       (60 )     7,305  
 
Mortgage-backed securities consist of securities that are issued by Fannie Mae (“FNMA”), Freddie Mac (“FHLMC”), Ginnie Mae (“GNMA”), and Federal Farm Credit Bank (“FFCB”) and are collateralized by residential mortgages.
 
The amortized cost and estimated fair value by contractual maturity of debt securities at June 30, 2011 are shown below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
 
 
10

 
 
Note 3 – Securities (continued)
 
   
Available for Sale
   
Held to Maturity
 
   
Amortized
   
Estimated
   
Amortized
   
Estimated
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(In Thousands)
   
(In Thousands)
 
                         
Due in one year or less
  $ -     $ -     $ -     $ -  
Due after one year through five years
    5,003       5,070       1,178       1,181  
Due after five years through ten years
    13,852       13,862       1,516       1,535  
Due after ten years
    15,568       15,397       -       -  
Mortgage-backed securities – residential
    28,733       29,186       4,515       4,658  
SBA pools
    3,583       3,603       -       -  
                                 
    $ 66,739     $ 67,118     $ 7,209     $ 7,374  
 
For the six months ended June 30, 2011 there was a $23,992 gross realized gain on sale of mortgage-backed securities available for sale resulting from proceeds of $1.4 million.  For the six months ended June 30, 2010 there was a $10,573 gross realized loss on sale of mortgage-backed securities held to maturity resulting from proceeds of $686,000, and a $2,120 gross realized gain on sale of FHLMC common stock available for sale resulting from proceeds of $11,000. In accordance with accounting guidance, the Company was able to sell securities classified as held to maturity after the Company had already collected a substantial portion (at least 85%) of the principal outstanding at acquisition due either to prepayments or to scheduled principal and interest payments on the debt securities.
 
No securities were pledged to secure public deposits or for any other purpose required or permitted by law at June 30, 2011 or at December 31, 2010.
 
The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010:
 
 
11

 
 
Note 3 – Securities (continued)
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
         
Gross
         
Gross
         
Gross
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(In Thousands)
 
June 30, 2011:
                                   
Available for Sale
                                   
U.S. Government and agency obligations
  $ 22,921     $ 189     $ -     $ -     $ 22,921     $ 189  
Mortgaged-backed securities - residential
    8,303       53       -       -       8,303       53  
Held to Maturity
                                               
State and Municipal securities
    987       6       -       -       987       6  
                                                 
    $ 32,211     $ 248     $ -     $ -     $ 32,211     $ 248  
                                                 
December 31, 2010:
                                               
Available for Sale
                                               
U.S. Government and agency obligations
  $ 24,757     $ 460     $ -     $ -     $ 24,757     $ 460  
Mortgaged-backed securities - residential
    8,387       60       -       -       8,387       60  
Held to Maturity
                                               
State and Municipal securities
    1,875       60       -       -       1,875       60  
                                                 
    $ 35,019     $ 580     $ -     $ -     $ 35,019     $ 580  
 
Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issuer (and guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of a security by a rating agency, (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies, and (6) whether the Company intends to sell or more likely than not be required to sell the debt securities.  In the six month period ended June 30, 2011 and the year ended December 31,  2010, the Company did not record an other-than-temporary impairment charge.
 
At June 30, 2011, 21 U.S. Government and agency securities, 6 mortgage-backed securities, and 3 state and municipal securities have been in a continuous unrealized loss position for less than twelve months.  No U.S. Government agency securities, mortgage-backed securities, or state and municipal securities have been in a continuous unrealized loss position for twelve months or more.  The U.S. Government and agency securities and mortgage-backed securities were issued by U.S. government sponsored agencies and the state and municipal securities are general obligation (G.O.) bonds backed by the full faith and credit of local municipalities.  There has never been a default of a New York G.O. in the history of the state. Historical performance does not guarantee future performance, but it does indicate that the risk of loss on default of a G.O. municipal bond for the Company is relatively low. All are paying in accordance with their terms with no deferrals of interest or defaults.  Because the decline in fair value is attributable to changes in interest rates, not credit quality, and because management does not intend to sell and will not be required to sell these securities prior to recovery or maturity, no declines are deemed to be other-than-temporary.
 
 
12

 
 
Note 4 – Loans and The Allowance for Loan Losses
 
Net loans at June 30, 2011 and December 31, 2010 consist of the following:
 
   
2011
   
2010
 
 
 
(In Thousands)
 
                 
Real estate loans:
               
Secured by one-to-four residential
  $ 104,875     $ 102,295  
Home equity lines of credit
    8,947       8,900  
Secured by multifamily residential
    1,128       1,165  
Construction
    297       652  
Commercial
    1,933       1,395  
Other
    80       73  
                 
Total Loans
    117,260       114,480  
                 
Net deferred loan origination costs
    364       381  
Allowance for loan losses
    (399 )     (384 )
                 
Net Loans   $ 117,225     $ 114,477  
 
An analysis of activity in the allowance for loan losses for the six months ended June 30, 2011 and 2010 is as follows:
 
   
2011
   
2010
 
                 
Balance at January 1
  $ 384     $ 368  
       Provision for loan losses
    15       6  
Loans charged-off
    -       -  
Recoveries
    -       -  
                 
Balance at June 30
  $
399
    $
374
 

The loan portfolio is segmented into commercial and consumer loans. Commercial loans consist of commercial real estate. Consumer loans consist of the following classes: residential real estate, construction, home equity lines of credit, and other consumer.
 
The Bank’s primary lending activity is the origination of one-to-four residential real estate mortgage loans.  At June 30, 2011, $104.9 million, or 89.4%, of the total loan portfolio consisted of one-to-four residential real estate mortgage loans compared to $102.3 million, or 89.4%, of the total loan portfolio at December 31, 2010.  The Bank offers fixed-rate and adjustable-rate residential real estate mortgage loans with maturities of up to 30 years and maximum loan amounts generally of up to $750,000.
 
The Bank currently offers fixed-rate conventional mortgage loans with terms of up to 30 years that are fully amortizing with monthly loan payments, and adjustable-rate mortgage loans that provide an initial fixed interest rate for one, three, five, seven or ten years and that amortize over a period of up to 30 years. The Bank originates fixed-rate mortgage loans with terms of less than 15 years, but at rates applicable to 15-year loans.  The Bank originates fixed-rate bi-weekly mortgage loans with terms of up to 30 years that are fully amortizing with bi-weekly loan payments, and “interest only” loans where the borrower pays interest for an initial period (ten years) after which the loan converts to a fully amortizing loan.
 
 
13

 
 
Note 4 – Loans and The Allowance for Loan Losses (continued)
 
Management actively monitors the interest rate risk position to determine the desired level of investment in fixed-rate mortgages.  Depending on market interest rates and the Bank’s capital and liquidity position, all newly originated longer term fixed-rate residential mortgage loans may be retained, or, all or a portion of such loans may be sold in the secondary mortgage market to government sponsored entities such as Freddie Mac or other purchasers.
 
The Bank originates residential, first mortgage loans with the assistance of computer-based underwriting engines licensed from Fannie Mae and/or Freddie Mac. Appraisals of real estate collateral are contracted directly with independent appraisers and not through appraisal management companies. The Bank’s appraisal management policy and procedure is in accordance with all rules and best practice guidance from the Bank’s primary regulator. Credit scoring, using FICO is employed in the ultimate, judgmental credit decision by the Bank’s underwriting staff. The Bank does not use third party contract underwriting services. Residential mortgage loans include fixed and variable interest rate loans secured by one to four family homes generally located in Monroe, Ontario, and Wayne counties of New York State. The Bank’s ability to be repaid on such loans is closely linked to the economic and real estate market conditions in this region. Underwriting policies generally adhere to Fannie Mae and Freddie Mac guidelines for loan requests of conforming and non-conforming amounts. In deciding whether to originate each residential mortgage, the Bank considers the qualifications of the borrower as well as the value of the underlying property.
 
Adjustable-rate mortgage loans generally present different credit risks than fixed-rate mortgage loans primarily because the underlying debt service payments of the borrowers increase as interest rates increase, thereby increasing the potential for default.  Interest-only loans present different credit risks than fully amortizing loans, as the principal balance of the loan does not decrease during the interest-only period.  As a result, the Bank’s exposure to loss of principal in the event of default does not decrease during this period.
 
The Bank offers home equity lines of credit, which are primarily secured by a second mortgage on one-to-four-family residences. At June 30, 2011, home equity lines of credit totaled $8.9 million, or 7.6% of total loans receivable compared to $8.9 million, or 7.7% of total loans receivable at December 31, 2010.
 
The underwriting standards for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan.  The combined loan-to-value ratio (first and second mortgage liens) for home equity lines of credit is generally limited to 90%.  The Company originates home equity lines of credit without application fees or borrower-paid closing costs. Home equity lines of credit are offered with adjustable-rates of interest indexed to the prime rate, as reported in The Wall Street Journal.
 
Multi-family residential loans generally are secured by rental properties.  Multi-family real estate loans are offered with fixed and adjustable interest rates.  Loans secured by multi-family real estate totaled $1.1 million, or 1.0% of the total loan portfolio, at June 30, 2011 compared to $1.2 million, or 1.0% of the total loan portfolio, at December 31, 2010.  Multi-family real estate loans are originated for terms of up to 20 years.  Adjustable-rate multi-family real estate loans are tied to the average yield on U.S. Treasury securities, subject to periodic and lifetime limitations on interest rate changes.
 
Loans secured by multi-family real estate generally involve a greater degree of credit risk than one-to four-family residential mortgage loans and carry larger loan balances.  This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by multi-family real estate typically depends upon the successful operation of the real estate property
 
 
14

 
 
Note 4 – Loans and The Allowance for Loan Losses (continued)
 
securing the loans.  If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.
 
The Bank originates construction loans for the purchase of developed lots and for the construction of single-family residences.  At June 30, 2011, construction loans totaled $297,000, or 0.3% of total loans receivable compared to $652,000, or 0.6% at December 31, 2010.  At June 30, 2011, the additional unadvanced portion of these construction loans totaled $415,000 compared to $357,000 of additional unadvanced portion of construction loans at December 31, 2010. Construction loans are offered to individuals for the construction of their personal residences by a qualified builder.
 
Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser.  We generally also review and inspect each property before disbursement of funds during the term of the construction loan.
 
Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate.  Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions.  If the estimate of construction cost proves to be inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property.  Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the loan.
 
Commercial real estate loans are secured by office buildings, mixed use properties, places of worship, and other commercial properties.  At June 30, 2011, $1.9 million, or 1.6%, of our total loan portfolio consisted of commercial real estate loans compared to $1.4 million, or 1.2%, of our total loan portfolio at December 31, 2010.
 
The Company generally originates adjustable-rate commercial real estate loans with maximum terms of up to 15 years.  The maximum loan-to-value ratio of commercial real estate loans is 70%.
 
Loans secured by commercial real estate generally are larger than one-to-four-family residential loans and involve greater credit risk.  Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers.  Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general.  Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.
 
The Company offers a variety of other loans secured by property other than real estate.  At June 30, 2011, these other loans totaled $80,000, or 0.1% of the total loan portfolio compared to other loans totaling $73,000, or 0.1% of the total loan portfolio at December 31, 2010. These loans include automobile, passbook, overdraft protection and unsecured loans. Due to the relative immateriality of other loans, the Company’s risk associated with these loans is not considered significant.
 
 
15

 
 
Note 4 – Loans and The Allowance for Loan Losses (continued)
 
The following table sets forth the allowance for loan losses allocated by loan class and the activity in our allowance for loan losses for the six months ended June 30, 2011. The allowance for loan losses allocated to each class is not necessarily indicative of future losses in any particular class and does not restrict the use of the allowance to absorb losses in other classes.
 
   
Secured
by 1-4
family
residential
   
Secured by
multifamily
residential
   
Construction
   
Commercial
   
Home
Equity
   
Other/
Unallocated
   
Total
 
Allowance for Loan Losses:
                                         
Beginning Balance December 31, 2010
  $ 242     $ 9     $ 3     $ 14     $ 55     $ 61     $ 384  
Charge Offs
    -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       -       -  
Provisions
    35       (1 )     (2 )     6       (10 )     (13 )     15  
Ending Balance June 30, 2011 (1)
  $ 277     $ 8     $ 1     $ 20     $ 45     $ 48     $ 399  

(1) All Loans are collectively evaluated for impairment.

The Bank’s policies, consistent with regulatory guidelines, provide for the classification of loans that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.  Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.  All other assets are categorized as pass.
 
When the Bank classifies assets as either pass, special mention, substandard, or doubtful, we allocate a portion of the related general loss allowances to such assets as we deem prudent.  The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date.  Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our principal federal regulator, which prior to July 21, 2011 was the Office of Thrift Supervision and was succeeded by the Office of the Comptroller of the Currency (OCC), which can require that we establish additional loss allowances.  We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.
 
At and for the six and twelve months ended June 30, 2011 and December 31, 2010, respectively, there were no loans considered to be impaired. At June 30, 2011 and December 31, 2010 we had no troubled debt restructurings.
 
 
16

 
 
Note 4 – Loans and The Allowance for Loan Losses (continued)
 
The following table presents the risk category of loans by class at June 30, 2011:
 
   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
One-to-four residential
  $ 104,496       -     $ 379       -     $ 104,875  
Home equity lines of credit
    8,947       -       -       -       8,947  
Multi-family residential
    1,128       -       -       -       1,128  
Construction
    297       -       -       -       297  
Commercial
    1,933       -       -       -       1,933  
Other loans
    80       -       -       -       80  
Total
  $ 116,881       -     $ 379       -     $ 117,260  
 
The following table presents the risk category of loans by class at December 31, 2010:
 
   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
One-to-four residential
  $ 102,238       -     $ 57       -     $ 102,295  
Home equity lines of credit
    8,784       -       116       -       8,900  
Multi-family residential
    1,165       -       -       -       1,165  
Construction
    652       -       -       -       652  
Commercial
    1,395       -       -       -       1,395  
Other loans
    73       -       -       -       73  
Total
  $ 114,307       -     $ 173       -     $ 114,480  

The Bank had $325,000 in nonaccrual loans, comprised of one one-to-four residential property, and no foreclosed assets at June 30, 2011, and no nonaccrual loans or foreclosed assets at December 31, 2010.  There were no loans that were past due 90 days or more and still accruing interest at June 30, 2011 and December 31, 2010.  Interest on non-accrual loans that would have been earned if loans were accruing interest was $12,500 for the six months ended June 30, 2011 and $1,500 for the six months ended June 30, 2010.
 
Delinquent Loans. The following table sets forth an analysis of the age of the loan delinquencies by type and by amount past due as of June 30, 2011 and December 31, 2010.
 
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater than
90 Days
   
Total Past
Due
   
Current
   
Total Loans
Receivable
 
   
(Dollars in thousands)
 
At June 30, 2011
                                   
Real estate loans:
                                   
One-to-four residential
  $ 54     $ -     $ 325     $ 379     $ 104,496     $ 104,875  
Home equity lines of credit
    -       -       -       -       8,947       8,947  
Multi-family residential
    -       -       -       -       1,128       1,128  
Construction
    -       -       -       -       297       297  
Commercial
    -       -       -       -       1,933       1,933  
Other loans
    -       -       -       -       80       80  
  Total
  $ 54     $ -     $ 325     $ 379     $ 116,881     $ 117,260  
                                                 
At December 31, 2010
                                               
Real estate loans:
                                               
One-to-four residential
  $ 57     $ -     $ -     $ 57     $ 102,238     $ 102,295  
Home equity lines of credit
    116       -       -       116       8,784       8,900  
Multi-family residential
    -       -       -       -       1,165       1,165  
Construction
    -       -       -       -       652       652  
Commercial
    -       -       -       -       1,395       1,395  
Other loans
    -       -       -       -       73       73  
  Total
  $ 173     $ -     $ -     $ 173     $ 114,307     $ 114,480  

 
17

 
 
Note 5 - Federal Home Loan Bank of New York Stock
 
Federal law requires a member institution of the Federal Home Loan Bank System to hold stock of its district FHLB according to a predetermined formula.  This restricted stock is carried at cost.
 
Management evaluates the FHLB stock for impairment on a quarterly basis.  Management’s determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of its cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.
 
No impairment charges were recorded related to the FHLB stock for the six month periods ended June 30, 2011 and 2010.

Note 6 – Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.

The components of other comprehensive income and related tax effects for the three and six months ended June 30, 2011 and 2010 are as follows:

   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
    (In Thousands)    
 (In Thousands)