XOTC:FSBC FSB Community Bankshares Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012
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
incorporation or organization)
 
(I.R.S. Employer
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 May 14, 2012 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 March 31, 2012 and December 31, 2011
 
1
         
   
Consolidated Statements of Income for the Three Months Ended March 31, 2012 and 2011
 
2
         
   
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011
 
3
         
   
Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2012 and 2011
 
4
         
   
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011
 
5
         
   
Notes to Consolidated Financial Statements
 
7
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
19
         
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
28
         
Item 4.
 
Controls and Procedures
 
28
         
Part II. Other Information
   
         
Item 1.
 
Legal Proceedings
 
28
         
Item 1A.
 
Risk Factors
 
28
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
28
         
Item 3.
 
Defaults upon Senior Securities
 
29
         
Item 4.
 
Mine Safety Disclosures
 
29
         
Item 5.
 
Other Information
 
29
         
Item 6.
 
Exhibits
 
29
         
   
Signature Page
 
30
 
 
 
 

 

Part I. Financial Information
 
Item 1. Consolidated Financial Statements
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Balance Sheets
March 31, 2012 and December 31, 2011 (unaudited)
(Dollars in thousands, except share data)
 
 
 
March 31,
2012
   
December 31, 2011
 
             
 Assets            
Cash and due from banks
  $ 1,360     $ 799  
Interest-earning demand deposits
    6,983       8,238  
Cash and Cash Equivalents
    8,343       9,037  
                 
Securities available for sale
    60,042       68,410  
Securities held to maturity (fair value 2012 $7,448; 2011 $7,499)
    7,168       7,230  
Investment in FHLB stock
    1,263       1,401  
Loans held for sale
    1,160       1,535  
Loans receivable, net of allowance for loan losses (2012 $404; 2011 $411)
    129,939       126,742  
Bank owned life insurance
    3,293       3,265  
Accrued interest receivable
    731       884  
Premises and equipment, net
    3,548       3,654  
Prepaid FDIC premium
    402       437  
Other assets
    719       656  
Total Assets
  $ 216,608     $ 223,251  
                 
Liabilities & Stockholders’ Equity
               
Liabilities
               
                 
Deposits:
               
Non-interest-bearing
  $ 4,871     $ 4,523  
Interest-bearing
    167,060       170,579  
 Total Deposits
    171,931       175,102  
                 
Borrowings
    21,163       24,178  
Advances from borrowers for taxes and insurance
    1,464       2,059  
Official bank checks
    869       342  
Other liabilities
    551       727  
Total Liabilities
    195,978       202,408  
                 
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
    7,259       7,262  
Retained earnings
    13,352       13,465  
Accumulated other comprehensive income
    356       462  
Unearned ESOP shares – at cost
    (516 )     (525 )
 Total Stockholders’ Equity
    20,630       20,843  
                 
 Total Liabilities and Stockholders’ Equity
  $ 216,608     $ 223,251  
 
See accompanying notes to consolidated financial statements
 
 
1

 

 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Income
Three Months Ended March 31, 2012 and 2011 (unaudited)
(Dollars in thousands, except per share data)
 
   
2012
   
2011
 
             
Interest and Dividend Income
           
Loans
  $ 1,580     $ 1,524  
Securities – taxable
    174       264  
Securities – tax exempt
    15       12  
Mortgage-backed securities
    192       240  
Other
    2       2  
Total Interest and Dividend Income
    1,963       2,042  
                 
Interest Expense
               
Deposits
    447       505  
Borrowings
    210       229  
Total Interest Expense
    657       734  
                 
Net Interest Income
    1,306       1,308  
Provision for Loan Losses
    8       8  
Net Interest Income After Provision for Loan Losses
    1,298       1,300  
                 
Other Income
               
Service fees
    47       44  
Fee income
    25       3  
Realized gain on sale of securities
    266       -  
Increase in cash surrender value of bank owned life insurance
    28       30  
Realized gain on sale of loans
    127       46  
Mortgage fee income
    86       55  
Other
    33       30  
Total Other Income
    612       208  
                 
Other Expense
               
Salaries and employee benefits
    981       855  
Occupancy expense
    216       173  
Data processing costs
    21       27  
Advertising
    64       43  
Equipment expense
    151       125  
Electronic banking
    11       22  
Directors’ fees
    32       32  
Mortgage fees and taxes
    69       55  
FDIC premium expense
    38       70  
Audit and taxes
    28       34  
FHLB prepayment penalty
    268       -  
Other expense
    215       161  
Total Other Expense
    2,094       1,597  
                 
Loss Before Income Taxes
    (184 )     (89 )
                 
Benefit for Income Taxes
    (71 )     (43 )
                 
Net Loss
  $ (113 )   $ (46 )
 
Loss per common share
  $ (0.07 )   $ (0.03 )
 
See accompanying notes to consolidated financial statements
 
 
2

 
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2012 and 2011 (unaudited)
(Dollars in thousands)
 
       
   
2012
   
2011
 
             
Other Comprehensive Loss Net of Tax
           
Net unrealized gains (losses) for the period on available for sale securities
  $ 106     $ (347 )
Reclassification adjustment for realized gains included in net loss
    (266 )     -  
Other Comprehensive Loss, Before Tax
    (160 )     (347 )
                 
Income Tax Benefit Related to Other Comprehensive Loss
    54       118  
 Other Comprehensive Loss, Net of Tax
    (106 )     (229 )
                 
 Net Loss
    (113 )     (46 )
 
 Comprehensive Loss
  $ (219 )   $ (275 )
 
See accompanying notes to consolidated financial statements
 
 
3

 
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Stockholders’ Equity
Three Months Ended March 31, 2012 and 2011 (unaudited)
(Dollars in thousands)
 
   
Common
Stock
   
Additional
Paid in
Capital
   
Retained
Earnings
   
Accumulated Other Comprehensive Income
   
Unearned
ESOP
Shares
   
Total
 
Balance – January 1, 2011
  $ 179     $ 7,269     $ 13,537     $ 67     $ (560 )   $ 20,492  
                                                 
Comprehensive loss:
                                               
Net loss
    -       -       (46 )     -       -       (46 )
Other comprehensive loss, net of tax
    -       -       -       (229 )     -       (229 )
Total Comprehensive Loss
                                            (275 )
ESOP shares committed to be released (875 shares)
    -       (1 )     -       -       9       8  
Balance – March 31, 2011
  $ 179     $ 7,268     $ 13,491     $ (162 )   $ (551 )   $ 20,225  
                                                 
Balance – January 1, 2012
  $ 179     $ 7,262     $ 13,465     $ 462     $ (525 )   $ 20,843  
                                                 
Comprehensive loss:
                                               
Net loss
    -       -       (113 )     -       -       (113 )
Other comprehensive loss, net of tax
    -       -       -       (106 )     -       (106 )
Total Comprehensive Loss
                                            (219 )
ESOP shares committed to be released (875 shares)
    -       (3 )     -       -       9       6  
Balance – March 31, 2012
  $ 179     $ 7,259     $ 13,352     $ 356     $ (516 )   $ 20,630  
 
See accompanying notes to consolidated financial statements
 
 
4

 
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Cash Flows
 Three Months Ended March 31, 2012 and 2011 (unaudited)
 (Dollars in thousands)
       
   
2012
   
2011
 
Cash Flows From Operating Activities
           
Net loss
  $ (113 )   $ (46 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Net amortization of premiums and discounts on investments
    195       174  
Gain on sale of securities
    (266 )     -  
Gain on sale of loans
    (127 )     (46 )
Proceeds from loans sold
    3,622       83  
Loans originated for sale
    (3,120 )     (37 )
Amortization of net deferred loan origination costs
    5       5  
Amortization of premium on FHLB advances
    50       49  
FHLB prepayment penalty
    268       -  
Depreciation and amortization
    132       98  
Provision for loan losses
    8       8  
Expense related to ESOP
    6       8  
Deferred income tax benefit
    (88 )     (59 )
Earnings on investment in bank owned life insurance
    (28 )     (30 )
Decrease in accrued interest receivable
    153       59  
Decrease in prepaid FDIC premium
    35       65  
Decrease (increase) in other assets
    (63 )     360  
Decrease in other liabilities
    (34 )     (109 )
Net Cash Provided By Operating Activities
    635       582  
                 
Cash Flows From Investing Activities
               
Purchases of securities available for sale
    (9,838 )     (5,544 )
Proceeds from maturities and calls of securities available for sale
    10,218       5,500  
Proceeds from sales of securities available for sale
    5,757       -  
Proceeds from principal paydowns on securities available for sale
    2,146       1,732  
Proceeds from principal paydowns on securities held to maturity
    58       139  
Net increase in loans
    (3,520 )     (1,517 )
Proceeds from sale of foreclosed real estate
    310          
Redemption of FHLB stock
    138       26  
Purchase of premises and equipment
    (26 )     (138 )
Net Cash Provided By Investing Activities
    5,243       198  
                 
Cash Flows From Financing Activities
               
Net increase (decrease) in deposits
    (3,171 )     786  
Proceeds from borrowings
    5,000       2,000  
Repayments on borrowings and prepayment penalty
    (8,333 )     (2,563 )
Net decrease in advances from borrowers for taxes and insurance
    (595 )     (554 )
Net increase (decrease) in official bank checks
    527       (163 )
Net Cash Used By Financing Activities
    (6,572 )     (494 )
                 
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    (694 )     286  
                 
Cash and Cash Equivalents- Beginning
    9,037       7,834  
                 
Cash and Cash Equivalents- Ending
  $ 8,343     $ 8,120  
 
 
5

 

FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Cash Flows, (Continued)
 
   
2012
   
2011
 
Supplementary Cash Flows Information
           
             
Interest paid
  $ 671     $ 741  
                 
Income taxes paid
  $ -     $ -  
                 
Transfer to foreclosed real estate
  $ 325     $ -  
 
See accompanying notes to consolidated financial statements
 
 
6

 
 
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, 2011 (the “Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on March 28, 2012.
 
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, 2011, included in the Form 10-K filed with the SEC on March 28, 2012.
 
Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
 
The consolidated financial statements at March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011 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 loss or stockholders’ equity.
 
The Company has evaluated subsequent events through the date these consolidated financial statements were issued. On January 30, 2012 the Board of Directors of Fairport Savings Bank (“the Bank”) approved the submission of an application to the New York State Department of Financial Services for conversion from a federally chartered savings bank to a New York State chartered savings bank. The application was submitted but had not been approved as of May 14, 2012, the filing date.
 
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.
 
 
7

 
 
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 March 31, 2012 and at December 31, 2011:
 
March 31, 2012
Securities Available for Sale:
(In Thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
 
U.S. Government and agency obligations
  $ 28,628     $ -     $ 28,628     $ -  
Mortgage-backed securities - residential
    28,001       -       28,001       -  
SBA pools
    3,413       -       3,413       -  
Total Available for Sale Securities
  $ 60,042     $ -     $ 60,042     $ -  
   
December 31, 2011
Securities Available for Sale:
(In Thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
U.S. Government and agency obligations
  $ 33,852     $ -     $ 33,852     $ -  
Mortgage-backed securities - residential
    31,055       -       31,055       -  
SBA pools
    3,503       -       3,503       -  
Total Available for Sale Securities
  $ 68,410     $ -     $ 68,410     $ -  
 
No assets or liabilities have been measured on a non-recurring basis at or for the three months ended March 31, 2012 or at or for the year ended December 31, 2011.
 
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.
 
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at March 31, 2012 and December 31, 2011:
 
 
8

 
 
Note 2--Fair Value Measurement and Disclosure (Continued)
 
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 March 31, 2012 or at December 31, 2011.
 
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.
 
 
9

 
 
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 March 31, 2012 and December 31, 2011.
 
The carrying amounts and estimated fair values of the Company’s financial instruments at March 31, 2012 and December 31, 2011 are as follows:
 
March 31, 2012
                   
(In Thousands)
 
Carrying
Amount
   
Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets:
                             
Cash and due from banks
  $ 1,360     $ 1,360     $ 1,360     $ -     $ -  
Interest-earning demand deposits
    6,983       6,983       6,983       -       -  
Securities available for sale
    60,042       60,042       -       60,042       -  
Securities held to maturity
    7,168       7,448       -       7,448       -  
Investment in FHLB stock
    1,263       1,263       -       1,263       -  
Loans held for sale
    1,160       1,160       -       1,160       -  
Loans, net
    129,939       139,297       -       -       139,297  
Accrued interest receivable
    731       731       731       -       -  
                                         
Financial liabilities:
                                       
Deposits
    171,931       170,949       79,174       91,775       -  
Borrowings
    21,163       20,465       -       20,465       -  
Accrued interest payable
    45       45       45       -       -  
 
December 31, 2011
 
(In Thousands)
 
Carrying
Amount
   
Fair
Value
 
Financial assets:
           
Cash and due from banks
  $ 799     $ 799  
Interest-earning demand deposits
    8,238       8,238  
Securities available for sale
    68,410       68,410  
Securities held to maturity
    7,230       7,499  
Investment in FHLB stock
    1,401       1,401  
Loans held for sale
    1,535       1,535  
Loans, net
    126,742       136,550  
Accrued interest receivable
    884       884  
                 
Financial liabilities:
               
Deposits
    175,102       174,046  
Borrowings
    24,178       23,669  
Accrued interest payable
    59       59  
 
 
10

 
 
Note 3 - Securities
 
The amortized cost and estimated fair value of securities with gross unrealized gains and losses at March 31, 2012 and at December 31, 2011 are as follows:
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In Thousands)
 
March 31, 2012:
                       
Available for Sale:
                       
 U.S. Government and agency obligations
  $ 28,579     $ 89     $ (40 )   $ 28,628  
 Mortgage-backed securities - residential
    27,570       447       (16 )     28,001  
 SBA pools
    3,353       60       -       3,413  
    $ 59,502     $ 596     $ (56 )   $ 60,042  
Held to Maturity:
                               
Mortgage-backed securities - residential
  $ 4,202     $ 194     $ -     $ 4,396  
State and Municipal securities
    2,966       86       -       3,052  
                                 
    $ 7,168     $ 280     $ -     $ 7,448  
December 31, 2011:
                               
Available for Sale:
                               
 U.S. Government and agency obligations
  $ 33,688     $ 179     $ (15 )   $ 33,852  
 Mortgage-backed securities - residential
    30,578       525       (48 )     31,055  
 SBA pools
    3,444       59       -       3,503  
    $ 67,710     $ 763     $ (63 )   $ 68,410  
Held to Maturity:
                               
Mortgage-backed securities – residential
  $ 4,260     $ 160     $ -     $ 4,420  
State and Municipal securities
    2,970       109       -       3,079  
                                 
    $ 7,230     $ 269     $ -     $ 7,499  
 
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 March 31, 2012 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
 
 
11

 
 
Note 3 – Securities (continued)
 
   
Available for Sale
 
Held to Maturity
   
Amortized
Cost
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
 
   
(In Thousands)
 
(In Thousands)
 
Due in one year or less
  $ -     $ -     $ -     $ -  
Due after one year through five years
    3,006       3,036       1,620       1,646  
Due after five years through ten years
    9,535       9,549       1,346       1,406  
Due after ten years
    16,038       16,043       -       -  
Mortgage-backed securities –  residential
    27,570       28,001       4,202       4,396  
SBA pools
    3,353       3,413       -       -  
    $ 59,502     $ 60,042     $ 7,168     $ 7,448  
 
For the three months ended March 31, 2012 there was a $192,000 gross realized gain on sale of mortgage-backed securities available for sale resulting from proceeds of $4.9 million and a $74,000 gross realized gain on sale of U.S. government agency securities available for sale resulting from proceeds of $886,000. There were no sales of securities for the three months ended March 31, 2011.
 
No securities were pledged to secure public deposits or for any other purpose required or permitted by law at March 31, 2012 or at December 31, 2011.
 
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 March 31, 2012 and December 31, 2011:
 
   
Less than 12 Months
 
12 Months or More
   
Total
 
   
Fair
Value
   
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
 
   
(In Thousands)
 
March 31, 2012:
                                   
Available for Sale
                                   
U.S. Government and agency obligations
  $ 5,519     $ 39     $ 516     $ 1     $ 6,035     $ 40  
Mortgage-backed securities - residential
    4,009       14       744       2       4,753       16  
    $ 9,528     $ 53     $ 1,260     $ 3     $ 10,788     $ 56  
December 31, 2011:
                                               
Available for Sale
                                               
U.S. Government and agency obligations
  $ 6,059     $ 14     $ 1,300     $ 1     $ 7,359     $ 15  
Mortgage-backed securities - residential
    9,474       44       792       4       10,266       48  
    $ 15,533     $ 58     $ 2,092     $ 5     $ 17,625     $ 63  
 
 
12

 
 
Note 3 – Securities (continued)
 
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 three month periods ended March 31, 2012 and 2011, and the year ended December 31, 2011, the Company did not record an other-than-temporary impairment charge.
 
At March 31, 2012, seven U.S. Government and agency securities and three mortgage-backed securities were in a continuous unrealized loss position for less than twelve months. At March 31, 2012, one U.S. Government agency security and one mortgage-backed security were 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. 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. There were no state and municipal securities or SBA pools in a continuous loss position for less than or more than twelve months at March 31, 2012 and December 31, 2011.
 
Note 4 – Loans and The Allowance for Loan Losses
 
Net loans at March 31, 2012 and December 31, 2011 consist of the following:
 
   
2012
   
2011
 
   
(In Thousands)
 
Real estate loans:
           
Secured by one-to-four residential
  $ 117,405     $ 113,538  
Home equity lines of credit
    9,588       9,425  
Secured by multifamily residential
    591       1,333  
Construction
    260       938  
Commercial
    2,080       1,489  
Other
    66       64  
 
Total Loans
    129,990       126,787  
                 
Net deferred loan origination costs
    353       366  
Allowance for loan losses
    (404 )     (411 )
 
Net Loans
  $ 129,939     $ 126,742  

The loan portfolio is segmented into commercial and consumer loans. Commercial loans consist of a commercial real estate class. Consumer loans consist of the following classes: residential real estate secured by one-to-four-family residences, residential real estate secured by multi-family residences, construction, home equity lines of credit, and other loans.
 
The Company’s primary lending activity is the origination of one-to-four residential real estate mortgage loans. At March 31, 2012, $117.4 million, or 90.3%, of the total loan portfolio consisted of one-to-four residential real estate mortgage loans compared to $113.5 million, or 89.5%, of the total loan portfolio at December 31, 2011. The Company 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.
 
 
13

 
 
Note 4 – Loans and The Allowance for Loan Losses (continued)
 
The Company 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 Company originates fixed-rate mortgage loans with terms of less than 15 years, but at rates applicable to 15-year loans. The Company 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.
 
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 Company 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 Company’s appraisal management policy and procedure is in accordance with all rules and best practice guidance from the Company’s primary regulator. Credit scoring, using FICO, is employed in the ultimate judgmental credit decision by the Company’s underwriting staff. The Company 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 Company’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 Company 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 Company’s exposure to loss of principal in the event of default does not decrease during this period.
 
The Company offers home equity lines of credit, which are primarily secured by a second mortgage on one-to-four-family residences. At March 31, 2012, home equity lines of credit totaled $9.6 million, or 7.4%, of total loans receivable compared to $9.4 million, or 7.4%, of total loans receivable at December 31, 2011.
 
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, the value of the collateral securing the loan, and payments on the proposed 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 $591,000, or 0.4%, of the total loan portfolio at March 31, 2012, compared to $1.3 million, or 1.1%, of the total loan portfolio at December 31, 2011. 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.
 
 
14

 
 
Note 4 – Loans and The Allowance for Loan Losses (continued)
 
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 securing the loans. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.
 
The Company originates construction loans for the purchase of developed lots and for the construction of single-family residences. At March 31, 2012, construction loans totaled $260,000, or 0.2%, of total loans receivable compared to $938,000, or 0.7%, at December 31, 2011. At March 31, 2012, the additional unadvanced portion of these construction loans totaled $431,000 compared to $350,000 of additional unadvanced portion of construction loans at December 31, 2011. 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, the Company requires an appraisal of the property by an independent licensed appraiser. The Company generally also reviews and inspects 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, the Company 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 March 31, 2012, $2.1 million, or 1.6%, of our total loan portfolio consisted of commercial real estate loans compared to $1.5 million, or 1.2%, of our total loan portfolio at December 31, 2011.
 
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 March 31, 2012, these other loans totaled $66,000, or 0.1%, of the total loan portfolio compared to other loans totaling $64,000, or 0.1%, of the total loan portfolio at December 31, 2011. 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 three months ended March 31, 2012 and 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
 
At March 31, 2012
 
(In thousands)
 
 
Beginning Balance
  $ 289     $ 10     $ 5     $ 15     $ 47     $ 45     $ 411  
Charge Offs
    (15 )     -       -       -       -       -       (15 )
Recoveries
    -       -       -       -       -       -       -  
Provisions
    13       (6 )     (4 )     6       1       (2 )     8  
Ending Balance (1)
  $ 287     $ 4     $ 1     $ 21     $ 48     $ 43     $ 404  
 
At March 31, 2011
                                         
 
Beginning Balance
  $ 242     $ 9     $ 3     $ 14     $ 55     $ 61     $ 384  
Charge Offs
    -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       -       -  
Provisions
    63       -       (2 )     6       (11 )     (48 )     8  
Ending Balance (1)
  $ 305     $ 9     $ 1     $ 20     $ 44     $ 13     $ 392  
 
(1) All Loans are collectively evaluated for impairment.
 
The Company’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 Company classifies assets as pass, a portion of the related general loss allowances is allocated to such assets as deemed 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.  The Company’s determination as to the classification of its assets and the amount of its loss allowances are subject to review by its principal federal regulator, the Office of the Comptroller of the Currency (“OCC”), which can require that the Company establish additional loss allowances.  The Company regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.
 
 
16

 
 
Note 4 – Loans and The Allowance for Loan Losses (continued)
 
The following table presents the risk category of loans by class at March 31, 2012 and at December 31, 2011:
 
     Pass    
Special
Mention
     
Substandard
    Doubtful      Total  
     (In thousands)    
 At March 31, 2012                                    
One-to-four-family residential
  $ 117,187     -     $ 218     -     $ 117,405  
Home equity lines of credit
    9,588     -       -     -       9,588  
Multi-family residential
    591     -       -     -       591  
Construction
    260     -       -     -       260  
Commercial
    2,080     -       -     -       2,080  
Other loans
    66     -       -     -       66  
Total
  $ 129,772     -     $ 218     -     $ 129,990  
 
At December 31, 2011                                    
One-to-four residential
  $ 113,213     -     $ 325     -     $ 113,538  
Home equity lines of credit
    9,425     -       -     -       9,425  
Multi-family residential
    1,333     -       -     -       1,333  
Construction
    938     -       -     -       938  
Commercial
    1,489     -       -     -       1,489  
Other loans
    64     -       -     -       64  
Total
  $ 126,462     -     $ 325     -     $ 126,787  
 
At and for the three and twelve months ended March 31, 2012 and December 31, 2011, respectively, there were no loans considered to be impaired. All loans were collectively evaluated for impairment. At March 31, 2012 and December 31, 2011 the Company had no troubled debt restructurings.
 
The Company had no nonaccrual loans or foreclosed assets at March 31, 2012, and one nonaccrual loan, classified as one-to-four-family residential for $325,000 and no foreclosed assets at December 31, 2011.  There were no loans that were past due 90 days or more and still accruing interest at March 31, 2012 and December 31, 2011.  Interest on non-accrual loans that would have been earned if loans were accruing interest was immaterial for both 2012 and 2011.
 
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 March 31, 2012 and December 31, 2011.
 
   
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 March 31, 2012
                                   
Real estate loans:
                                   
One-to-four residential
  $ 218     $ -     $ -     $ 218     $ 117,187     $ 117,405  
Home equity lines of credit
    -       -       -       -       9,588       9,588  
Multi-family residential
    -       -       -       -       591       591  
Construction
    -       -       -       -       260       260  
Commercial
    -       -       -       -       2,080       2,080  
Other loans
    -       -       -       -       66       66  
  Total
  $ 218     $ -     $ -     $ 218     $ 129,772     $ 129,990  
                                                 
At December 31, 2011
                                               
Real estate loans:
                                               
One-to-four residential
  $ -     $ -     $ 325     $ 325     $ 113,213     $ 113,538  
Home equity lines of credit
    -       -       -       -       9,425       9,425  
Multi-family residential
    -       -       -       -       1,333       1,333  
Construction
    -       -       -       -       938       938  
Commercial
    -       -       -       -       1,489       1,489  
Other loans
    -       -       -       -       64       64  
  Total
  $ -     $ -     $ 325     $ 325     $ 126,462     $ 126,787  
 
 
17

 
 
Note 5 - Federal Home Loan Bank of New York Stock
 
Federal law requires a member institution of the FHLB 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 three month periods ended March 31, 2012 and 2011.
 
Note 6 – Loss Per Common Share
 
Basic loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period. The Company has not granted any restricted stock awards or stock options and had no potentially dilutive common stock equivalents.  Unallocated common shares held by the Employee Stock Ownership Program (“ESOP”) are not included in the weighted-average number of common shares outstanding for purposes of calculating loss per common share until they are committed to be released. The weighted average common shares outstanding were 1,733,396 for the three months ended March 31, 2012, and 1,729,897 for the three months ended March 31, 2011.
 
Note 7 - Recent Accounting Pronouncements
 
Accounting Standards Update No. 2011-12: Comprehensive Income (Topic 220) Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12)
 
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 which was intended to increase the prominence of other comprehensive income in financial statements and help financial statement users better understand the cause of a company’s change in financial position and results of operations. ASU 2011-05 requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement or comprehensive income (one-statement approach) or in a two separate but consecutive statement (two-statement approach). ASU 2011-12 defers the specific requirement in ASU 2011-05 to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income.
 
The amendments are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.
 
 
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Note 7 - Recent Accounting Pronouncements (continued)
 
Accounting Standards Update No. 2011-04: Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosures Requirements in U.S. GAAP and IFRS
 
The amendments of this Update are the result of work by the FASB and the International Accounting Standard Board (IASB) to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (IFRS).  Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements.  The amendment clarified the FASB’s intent about the application of existing fair value measurement and disclosure requirements and changed a particular principle for measuring fair value and for disclosing information about fair value measurements.
 
For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
Throughout Management’s Discussion and Analysis (“MD&A”), the term “the Company” refers to the consolidated entity of FSB Community Bankshares, Inc., Fairport Savings Bank, and Oakleaf Services Corporation, a wholly owned subsidiary of Fairport Savings Bank.  At March 31, 2012, FSB Community Bankshares, MHC the Company’s mutual holding company parent, held 946,050 shares, or 53.0%, of the Company’s common stock, engaged in no significant activities, and was not included in the consolidated financial statements or MD&A.
 
Forward Looking Statements
 
This Quarterly Report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risks and uncertainties, including, among other things, changes in general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate acquired entities, if any; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the Company regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; and changes in the financial condition or future prospects of issuers of securities that we own,  that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.  The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
 
The Company does not undertake, and specifically declines any obligation, to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
 
 
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Critical Accounting Policies
 
The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 28, 2012.  These policies, along with the disclosures presented in the other consolidated financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.  Based on the valuation techniques used and the sensitivity of consolidated financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, the evaluation of investment securities for other-than-temporary impairment and the valuation and recoverability of deferred tax assets to be the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available.
 
Allowance for Loan Losses.  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.  The amount of the allowance is based on significant estimates, and the ultimate losses may vary from such estimates as more information becomes available or conditions change.  The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions used and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
 
As a substantial percentage of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans.  Assumptions are instrumental in determining the value of properties.  Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance.  Management carefully reviews the assumptions supporting such appraisals to determine that the resulting values reasonably reflect amounts realizable on the related loans.
 
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses.  We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews, and other relevant factors.  This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions. Various banking regulators, as an integral part of their examination process, also review the allowance for loan losses. Such regulators may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the allowance for loan losses when their credit evaluations differ from those of management. Additionally, the allowance for loan losses is determined, in part, by the composition and size of the loan portfolio which represents the largest asset type on the consolidated balance sheet.
 
The evaluation has specific, general, and unallocated components.  The specific component relates to loans that are classified as special mention, substandard, doubtful, or loss.  For such loans that are also classified as impaired, an allowance is generally established when the collateral value of the impaired loan is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
 
Actual loan losses may be significantly more than the allowance we have established which could have a material negative effect on our financial results.
 
Other-than-temporary impairment.  When the fair value of a held to maturity or available for sale security is less than its amortized cost basis, an assessment is made at the balance sheet date as to whether other-than-temporary impairment (OTTI) is present.
 
 
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The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover. The principal factors considered are (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, and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.
 
For debt securities, OTTI is considered to have occurred if (1) the Company intends to sell the security, (2) it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or (3) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.
 
In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above 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.
 
For debt securities, credit-related OTTI is recognized in income while noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss).  Credit-related OTTI is measured as the difference between the present value of an impaired security’s expected cash flows and its amortized cost basis.  Noncredit-related OTTI is measured as the difference between the fair value of the security and its amortized costs less any credit-related losses recognized.  For securities classified as held to maturity, the amount of OTTI recognized in other comprehensive income (loss) is accreted to the credit-adjusted expected cash flow amounts of the securities over future periods.  For equity securities, the entire amount of OTTI is recognized in income.
 
Deferred Tax Assets.  Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.  As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
 
Comparison of Financial Condition at March 31, 2012 and December 31, 2011
 
Total Assets.  Total assets decreased by $6.6 million, or 3.0%, to $216.6 million at March 31, 2012 from $223.3 million at December 31, 2011.  The decrease in total assets primarily reflects decreases in securities available for sale, securities held to maturity, cash and cash equivalents, FHLB stock, loans held for sale, premises and equipment, and accrued interest receivable, partially offset by an increase in net loans receivable.
 
Total securities decreased by $8.4 million, or 11.1%, to $67.2 million at March 31, 2012 from $75.6 million at December 31, 2011. The decrease in securities was a result of an $8.4 million, or 12.2%, decrease in securities classified as available for sale to $60.0 million at March 31, 2012 from $68.4 million at December 31, 2011, and a $62,000, or 0.9%, decrease in securities classified as held to maturity.  The balance in securities classified as held to maturity was $7.2 million at March 31, 2012 and at December 31, 2011. The $8.4 million decrease in securities classified as available for sale was attributable to maturities and calls of $10.4 million of U.S. government agency securities, $4.6 million in sales of mortgage-backed securities, $750,000 in sales of U.S. Government and Agency obligations, and $2.3 million in principal repayments received and amortization, partially offset by the purchase of $6.0 million of U.S. government and agency securities, $3.8 million of mortgage-backed securities, and a $160,000 decrease in the fair value of securities classified as available for sale. Securities classified as held to maturity decreased $62,000 as a result of principal repayments and amortization.  All securities purchased in 2012 have been classified as available for sale to provide a portfolio of marketable securities for liquidity as an alternative to borrowings. The Company has reviewed its investment securities portfolio and has determined that no other-than-temporary impairment exists in the portfolio at March 31, 2012.
 
 
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Cash and cash equivalents, primarily interest-earning deposits at the Federal Reserve Bank of New York and FHLB, decreased by $694,000, or 7.7%, to $8.3 million at March 31, 2012 from $9.0 million at December 31, 2011.  The Company continues to maintain a strong liquidity position, retaining excess cash and cash equivalent balances that will allow the Company to capitalize on investment and lending opportunities that may arise in future periods.
 
Investment in FHLB stock decreased by $138,000, or 9.9%, to $1.3 million at March 31, 2012 from $1.4 million at December 31, 2011 due to stock redemptions by the FHLB. The FHLB requires members to purchase stock based on the level of borrowings which decreased during the quarter.
 
Loans held for sale decreased $375,000, or 24.4%, to $1.2 million at March 31, 2012 from $1.5 million at December 31, 2011. The $1.2 million in loans held for sale at March 31, 2012 is comprised of FHA mortgage loans originated and closed by the Company in the first quarter of 2012 that have been committed for sale in the secondary market and will be delivered and sold in the second quarter of 2012.
 
Premises and equipment decreased by $106,000, or 2.9%, to $3.5 million at March 31, 2012 from $3.7 million at December 31, 2011. The decrease was mainly due to the monthly depreciation of furniture and fixtures, office equipment, computer hardware, and building and leasehold improvements. Premises and equipment are recorded at cost and are generally depreciated by the straight-line method over the estimated useful lives of the assets. Furniture and equipment are generally depreciated over a useful life of three to seven years, and leasehold improvements over the shorter of the useful life or the term of the lease.
 
Accrued interest receivable decreased $153,000, or 17.3%, to $731,000 at March 31, 2012 from $884,000 at December 31, 2011.  The decrease was due primarily to a lower balance and lower yield in total securities at March 31, 2012 compared to December 31, 2011.
 
Net loans receivable increased $3.2 million, or 2.5%, to $129.9 million at March 31, 2012 from $126.7 million at December 31, 2011. The Company originated $15.6 million of residential mortgage loans, sold $3.1 million in the secondary market and brokered $522,000 of USDA/Rural Housing and VA mortgage loans as a balance sheet management strategy in the first three months of 2012 to reduce interest rate risk in a potentially rising interest rate environment.  The Company sold these loans at a gain of $127,000 which was recorded in other income in the first three months of 2012.  The Company ended March 31, 2012 with $19.6 million in mortgage loans serviced.  In the current interest rate environment we intend to continue to sell a portion of our fixed-rate residential mortgage loans on a servicing-retained basis resulting in additional loan servicing income, as well as selling the majority of FHA mortgage loans originated on a servicing-released basis.
 
During the first quarter of 2012, the Company received into foreclosed real estate a one-to-four-family residential property for $325,000. The property was sold shortly after resulting in a $15,000 charge off to the allowance for loan losses.
 
The credit quality of the Company’s loan portfolio remains solid.  At March 31, 2012 the Company had net loans receivable of $129.9 million, with no non-performing loans compared to one non-performing loan for $325,000 at December 31, 2011. At March 31, 2012 and December 31, 2011 we had no foreclosed real estate owned or troubled debt restructurings. Management continues to actively monitor the performance of the loan portfolio during these difficult economic times. Credit quality continues to be the highest priority when underwriting loans. Subjective judgments about a borrower’s ability to repay and the value of any underlying collateral are made prior to approving a loan. We believe our stringent underwriting standards have directly resulted in our significantly low level of non-accruing loans and non-performing loans.
 
 
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Liabilities. Total deposits decreased by $3.2 million, or 1.8%, to $171.9 million at March 31, 2012 from $175.1 million at December 31, 2011. Core deposits including non-interest-bearing checking, NOW, savings, and MMA accounts increased by $552,000, and Certificates of Deposits (CD), including Individual Retirement Accounts (IRA) decreased $3.7 million for the first quarter of 2012 as the result of management’s prudent pricing of lower rates for non-relationship customers in the continued low interest rate environment. The Company’s deposit costs have decreased as market interest rates have remained at historically low levels.
 
Borrowings, consisting of FHLB advances, decreased by $3.0 million, or 12.5%, to $21.2 million at March 31, 2012 from $24.2 million at December 31, 2011, as a result of management’s decision to prepay $3.0 million in wholesale borrowings with the proceeds from $5.4 million in investment securities sales.
 
Official Bank checks increased $527,000, or 154.1%, to $869,000 at March 31, 2012 from $342,000 at December 31, 2011.
 
Stockholders’ Equity. Total stockholders’ equity decreased by $213,000, or 1.0%, to $20.6 million at March 31, 2012 from $20.8 million at December 31, 2011.  The decrease resulted from a decrease of $106,000 in accumulated other comprehensive income and a net loss of $113,000, partially offset by a $6,000 increase in committed ESOP shares.  At March 31, 2012, the Bank was considered well capitalized which is the highest standard of capital rating as defined by the Bank’s regulators.
 
Non-Performing Assets.  At March 31, 2012 the Company had no loans classified as non-performing compared to one loan classified as non-performing for $325,000 at December 31, 2011.  At both periods ended March 31, 2012 and December 31, 2011 the Company had no foreclosed assets. At March 31, 2012, management has evaluated the Company’s loan loss reserve and believes it is adequate based on the quality of the current loan portfolio.  At March 31, 2012, there were no other assets that are not disclosed as classified or special mention, where known information about possible credit problems of borrowers caused us to have serious doubts as to the ability of the borrowers to comply with the present loan repayment terms and which may result in impairment or disclosure of such loans in the future.
 
Average balances and yields.  The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated.  All average balances are daily average balances.  Non-accrual loans were included in the computation of average balances, where applicable, but have been reflected in the table as loans carrying a zero yield.  The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.  Yields have been annualized.
 
 
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For the Three months Ended March 31,
 
   
2012
   
2011
 
&