XOTC:FSBC FSB Community Bankshares Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 August 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 June 30, 2012 and December 31, 2011
 
1
       
 
Consolidated Statements of Income for the Three Months Ended June 30, 2012 and 2011
 
2
       
 
Consolidated Statements of Income for the Six Months Ended June 30, 2012 and 2011
 
3
       
 
Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2012 and 2011
 
4
       
 
Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2012 and 2011
 
5
       
 
Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011
 
6
       
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011
 
7
       
 
Notes to Consolidated Financial Statements
 
9
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
21
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
32
       
Item 4.
Controls and Procedures
 
32
       
Part II. Other Information
   
       
Item 1.
Legal Proceedings
 
32
       
Item 1A.
Risk Factors
 
32
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
32
       
Item 3.
Defaults upon Senior Securities
 
32
       
Item 4.
Mine Safety Disclosures
 
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, 2012 and December 31, 2011 (unaudited)
(Dollars in thousands, except share data)
 
 
 
June 30,
2012
   
December 31,
2011
 
             
Assets
               
                 
Cash and due from banks
  $ 1,194     $ 799  
Interest-earning demand deposits
    7,089       8,238  
Cash and Cash Equivalents
    8,283       9,037  
                 
Securities available for sale
    50,811       68,410  
Securities held to maturity (fair value 2012 $7,427; 2011 $7,499)
    7,113       7,230  
Investment in FHLB stock
    1,400       1,401  
Loans held for sale
    2,307       1,535  
Loans receivable, net of allowance for loan losses (2012 $411; 2011 $411)
    137,665       126,742  
Bank owned life insurance
    3,320       3,265  
Accrued interest receivable
    694       884  
Premises and equipment, net
    3,430       3,654  
Prepaid FDIC premium
    368       437  
Other assets
    866       656  
Total Assets
  $ 216,257     $ 223,251  
                 
Liabilities & Stockholders’ Equity
               
Liabilities
               
                 
Deposits:
               
Non-interest-bearing
  $ 4,786     $ 4,523  
Interest-bearing
    163,657       170,579  
Total Deposits
    168,443       175,102  
                 
Borrowings
    23,623       24,178  
Advances from borrowers for taxes and insurance
    2,514       2,059  
Official bank checks
    536       342  
Other liabilities
    524       727  
Total Liabilities
    195,640       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
    7,257       7,262  
Retained earnings
    13,363       13,465  
Accumulated other comprehensive income      325       462  
Unearned ESOP shares – at cost
    (507 )     (525 )
Total Stockholders’ Equity
    20,617       20,843  
                 
Total Liabilities and Stockholders’ Equity
  $ 216,257     $ 223,251  
 
See accompanying notes to consolidated financial statements
 
 
1

 
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Income
Three Months Ended June 30, 2012 and 2011 (unaudited)
(Dollars in thousands, except per share data)
 
   
2012
   
2011
 
             
Interest and Dividend Income
           
Loans
  $ 1,602     $ 1,520  
Securities – taxable
    156       243  
Securities – tax exempt
    14       12  
Mortgage-backed securities
    114       215  
Other
    1       2  
Total Interest and Dividend Income
    1,887       1,992  
                 
Interest Expense
               
Deposits
    377       461  
Borrowings
    180       224  
Total Interest Expense
    557       685  
                 
Net Interest Income
    1,330       1,307  
Provision for Loan Losses
    7       7  
Net Interest Income After Provision for Loan Losses
    1,323       1,300  
                 
Other Income
               
Service fees
    50       44  
Fee income
    8       6  
Realized gain on sale of securities
    42       24  
Bank owned life insurance income
    27       31  
Realized gain on sale of loans
    228       79  
Mortgage fee income
    155       41  
Other
    39       38  
Total Other Income
    549       263  
                 
Other Expense
               
Salaries and employee benefits
    996       828  
Occupancy expense
    217       183  
Data processing costs
    32       22  
Advertising
    56       54  
Equipment expense
    159       115  
Electronic banking
    15       24  
Directors’ fees
    29       35  
Mortgage fees and taxes
    118       37  
FDIC premium expense
    38       74  
Audit and taxes
    18       32  
Other expense
    192       154  
Total Other Expense
    1,870       1,558  
                 
Income Before Income Taxes
    2       5  
                 
Benefit for Income Taxes
    (9 )     (11 )
                 
Net Income
  $ 11     $ 16  
 
Earnings per common share
  $ 0.01     $ 0.01  
 
See accompanying notes to consolidated financial statements
 
 
2

 
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Income
Six Months Ended June 30, 2012 and 2011 (unaudited)
(Dollars in thousands, except per share data)
 
   
2012
   
2011
 
             
Interest and Dividend Income
           
Loans
  $ 3,182     $ 3,044  
Securities – taxable
    330       507  
Securities – tax exempt
    29       24  
Mortgage-backed securities
    306       455  
Other
    3       4  
Total Interest and Dividend Income
    3,850       4,034  
                 
Interest Expense
               
Deposits
    824       966  
Borrowings
    390       453  
Total Interest Expense
    1,214       1,419  
                 
Net Interest Income
    2,636       2,615  
Provision for Loan Losses
    15       15  
Net Interest Income After Provision for Loan Losses
    2,621       2,600  
                 
Other Income
               
Service fees
    97       88  
Fee income
    33       9  
Realized gain on sale of securities
    308       24  
Bank owned life insurance income
    55       61  
Realized gain on sale of loans
    355       125  
Mortgage fee income
    241       96  
Other
    72       68  
Total Other Income
    1,161       471  
                 
Other Expense
               
Salaries and employee benefits
    1,977       1,683  
Occupancy expense
    433       356  
Data processing costs
    53       49  
Advertising
    120       97  
Equipment expense
    310       240  
Electronic banking
    26       46  
Directors’ fees
    61       67  
Mortgage fees and taxes
    187       92  
FDIC premium expense
    76       144  
Audit and taxes
    46       66  
FHLB prepayment penalty
    268       -  
Other expense
    407       315  
Total Other Expense
    3,964       3,155  
                 
Loss Before Income Taxes
    (182 )     (84 )
                 
Benefit for Income Taxes
    (80 )     (54 )
                 
Net Loss
  $ (102 )   $ (30 )
 
Loss per common share
  $ (0.06 )   $ (0.02 )
 
See accompanying notes to consolidated financial statements
 
 
3

 
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2012 and 2011 (unaudited)
(Dollars in thousands)
 
   
2012
   
2011
 
             
Other Comprehensive Income (Loss) Net of Tax
           
Net unrealized gains (losses) for the period on available for sale securities
  $ (5 )   $ 648  
Reclassification adjustment for realized gains included in net income
    (42 )     (24 )
Other Comprehensive Income (Loss), Before Tax
    (47 )       624  
                 
Income Tax Expense (Benefit) Related to Other Comprehensive Income (Loss)
    (16 )     212  
Other Comprehensive Income (Loss), Net of Tax
    (31 )     412  
                 
Net Income
    11       16  
 
Comprehensive Income (Loss)
  $ (20 )   $ 428  
 
See accompanying notes to consolidated financial statements
 
 
4

 
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Comprehensive Income
Six Months Ended June 30, 2012 and 2011 (unaudited)
(Dollars in thousands)
 
   
2012
   
2011
 
             
Other Comprehensive Income (Loss) Net of Tax
           
Net unrealized gains for the period on available for sale securities
  $ 101     $ 301  
Reclassification adjustment for realized gains included in net income( loss)
    (308 )     (24 )
Other Comprehensive Income (Loss), Before Tax
    (207 )       277  
                 
Income Tax Expense (Benefit) Related to Other Comprehensive Income (Loss)
    (70 )     94  
Other Comprehensive Income (Loss), Net of Tax
    (137 )     183  
                 
Net Loss
    (102 )     (30 )
 
Comprehensive Income (Loss)
  $ (239 )   $ 153  
 
See accompanying notes to consolidated financial statements
 
 
5

 
 
FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Stockholders’ Equity
Six Months Ended June 30, 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 income:
                                               
Net loss
    -       -       (30 )     -       -       (30 )
Other comprehensive income, net of tax
    -       -       -       183       -       183  
Total Comprehensive Income
                                            153  
ESOP shares committed to be released (1,749 shares)
    -       (2 )     -       -       18       16  
Balance – June 30, 2011
  $ 179     $ 7,267     $ 13,507     $ 250     $ (542 )   $ 20,661  
                                                 
Balance – January 1, 2012
  $ 179     $ 7,262     $ 13,465     $ 462     $ (525 )   $ 20,843  
                                                 
Comprehensive loss:
                                               
Net loss
    -       -       (102 )     -       -       (102 )
Other comprehensive loss, net of tax
    -       -       -       (137 )     -       (137 )
Total Comprehensive Loss
                                            (239 )
ESOP shares committed to be released (1,749 shares)
    -       (5 )     -       -       18       13  
Balance – June 30, 2012
  $ 179     $ 7,257     $ 13,363     $ 325     $ (507 )   $ 20,617  
 
See accompanying notes to consolidated financial statements
 
 
6

 
 
FSB COMMUNITY BANKSHARES, INC.

Consolidated Statements of Cash Flows
 Six Months Ended June 30, 2012 and 2011 (unaudited)
(Dollars in thousands)
       
   
2012
   
2011
 
Cash Flows From Operating Activities
           
Net loss
  $ (102 )   $ (30 )
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
               
Net amortization of premiums and discounts on investments
    386       369  
Gain on sale of securities
    (308 )     (24 )
Gain on sale of loans
    (355 )     (125 )
Proceeds from loans sold
    10,076       941  
Loans originated for sale
    (10,493 )     (1,353 )
Amortization of net deferred loan origination costs
    19       7  
Amortization of premium on FHLB advances
    100       100  
FHLB prepayment penalty
    268       -  
Depreciation and amortization
    266       198  
Provision for loan losses
    15       15  
Expense related to ESOP
    13       16  
Deferred income tax benefit
    (100 )     (70 )
Earnings on investment in bank owned life insurance
    (55 )     (61 )
Decrease (increase) in accrued interest receivable
    190       (18 )
Decrease in prepaid FDIC premium
    69       135  
Increase in other assets
    (210 )     (20 )
Decrease in other liabilities
    (33 )     (70 )
        Net Cash Provided (Used) By Operating Activities
    (254 )     10  
                 
Cash Flows From Investing Activities
               
Purchases of securities available for sale
    (23,912 )     (18,621 )
Proceeds from maturities and calls of securities available for sale
    25,819       18,630  
Proceeds from sales of securities available for sale
    10,879       1,413  
Proceeds from principal paydowns on securities available for sale
    4,535       4,034  
Purchases of securities held to maturity
    -       (434 )
Proceeds from principal paydowns on securities held to maturity
    110       400  
Net increase in loans
    (10,957 )     (2,770 )
Redemption of FHLB stock
    1       61  
Purchase of premises and equipment
    (42 )     (256 )
Net Cash Provided By Investing Activities
    6,433       2,457  
                 
Cash Flows From Financing Activities
               
Net decrease in deposits
    (6,659 )     (182 )
Proceeds from borrowings
    9,500       4,000  
Repayments on borrowings and prepayment penalty
    (10,423 )     (5,627 )
Net increase in advances from borrowers for taxes and insurance
    455       361  
Net increase in official bank checks
    194       94  
Net Cash Used By Financing Activities
    (6,933 )     (1,354 )
                 
Net Increase (Decrease)  in Cash and Cash Equivalents
    (754 )     1,113  
                 
Cash and Cash Equivalents- Beginning
    9,037       7,834  
                 
Cash and Cash Equivalents- Ending
  $ 8,283     $ 8,947  
 
 
7

 

FSB COMMUNITY BANKSHARES, INC.
 
Consolidated Statements of Cash Flows, (Continued)
 
   
2012
   
2011
 
Supplementary Cash Flows Information
           
             
Interest paid
  $ 1,228     $ 1,428  
                 
Income taxes paid
  $ -     $ -  
 
See accompanying notes to consolidated financial statements
 
 
8

 
 
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 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 and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
 
The consolidated financial statements at June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 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 income (loss) or stockholders’ equity.
 
The Bank completed its conversion from a federally-chartered stock savings bank to a New York State-chartered savings bank effective June 29, 2012. As a result of the conversion the bank will be regulated by New York State’s Department of Financial Services and by the Federal Deposit Insurance Corporation (“FDIC”).
 
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.
 
 
9

 
 
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, 2012 and at December 31, 2011:
 
June 30, 2012
Securities Available for Sale:
(In Thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
 
U.S. Government and agency obligations
  $ 25,005     $ -     $ 25,005     $ -  
Mortgage-backed securities - residential
    22,485       -       22,485       -  
SBA pools
    3,321       -       3,321       -  
Total Available for Sale Securities
  $ 50,811     $ -     $ 50,811     $ -  
   
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 and six months ended June 30, 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.
 
 
10

 
 
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, 2012 and December 31, 2011:
 
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, 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.
 
 
11

 
 
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, 2012 and December 31, 2011.
 
The carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2012 and December 31, 2011 are as follows:
 
June 30, 2012
                   
(In Thousands)
 
Carrying
Amount
   
Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets:
                             
Cash and due from banks
  $ 1,194     $ 1,194     $ 1,194     $ -     $ -  
Interest-earning demand deposits
    7,089       7,089       7,089       -       -  
Securities available for sale
    50,811       50,811       -       50,811       -  
Securities held to maturity
    7,113       7,427       -       7,427       -  
Investment in FHLB stock
    1,400       1,400       -       1,400       -  
Loans held for sale
    2,307       2,307       -       2,307       -  
Loans, net
    137,665       146,677       -       -       146,677  
Accrued interest receivable
    694       694       694       -       -  
                                         
Financial liabilities:
                                       
Deposits
    168,443       167,627       79,106       88,521       -  
Borrowings
    23,623       23,244       -       23,244       -  
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  
 
 
12

 
 
Note 3 - Securities
 
The amortized cost and estimated fair value of securities with gross unrealized gains and losses at June 30, 2012 and at December 31, 2011 are as follows:
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In Thousands)
 
June 30, 2012:
                       
Available for Sale:
                       
U.S. Government and agency obligations
  $ 24,941     $ 71     $ (7 )   $ 25,005  
Mortgage-backed securities - residential
    22,133       393       (41 )     22,485  
SBA pools
    3,244       77       -       3,321  
    $ 50,318     $ 541     $ (48 )   $ 50,811  
Held to Maturity:
                               
Mortgage-backed securities-residential
  $ 4,149     $ 224     $ -     $ 4,373  
State and Municipal securities
    2,964       90       -       3,054  
                                 
    $ 7,113     $ 314     $ -     $ 7,427  
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 June 30, 2012 are shown below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
 
 
13

 
 
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
    2,001       2,031       1,618       1,644  
Due after five years through ten years
    6,525       6,533       1,346       1,410  
Due after ten years
    16,415       16,441       -       -  
Mortgage-backed securities – residential
    22,133       22,485       4,149       4,373  
SBA pools
    3,244       3,321       -       -  
    $ 50,318     $ 50,811     $ 7,113     $ 7,427  
 
For the six months ended June 30, 2012 there was a $234,000 gross realized gain on sale of mortgage-backed securities available for sale resulting from proceeds of $10.0 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. For the six months ended June 30, 2011 there was a $24,000 gross realized gain on sale of mortgage-backed securities available for sale resulting from proceeds of $1.4 million.
 
No securities were pledged to secure public deposits or for any other purpose required or permitted by law at June 30, 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 June 30, 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)
 
June 30, 2012:
                                   
Available for Sale
                                   
U.S. Government and agency obligations
  $ 6,031     $ 6     $ 511     $ 1     $ 6,542     $ 7  
Mortgage-backed securities - residential
    5,022       41       -       -       5,022       41  
    $ 11,053     $ 47     $ 511     $ 1     $ 11,564     $ 48  
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  
 
 
14

 
 
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 and six month periods ended June 30, 2012 and 2011, and the year ended December 31, 2011, the Company did not record an other-than-temporary impairment charge.
 
At June 30, 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 June 30, 2012, one U.S. Government agency security was 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 June 30, 2012 or December 31, 2011.
 
Note 4 – Loans and The Allowance for Loan Losses
 
Net loans at June 30, 2012 and December 31, 2011 consist of the following:
 
     
2012
   
2011
 
     
(In Thousands)
 
 
Real estate loans:
           
 
Secured by one-to-four-family residential
  $ 124,275     $ 113,538  
 
Home equity lines of credit
    10,256       9,425  
 
Secured by multi-family residential
    485       1,333  
 
Construction
    417       938  
 
Commercial
    2,193       1,489  
 
Other
    73       64  
 
 
Total Loans
    137,699       126,787  
                   
 
Net deferred loan origination costs
    377       366  
 
Allowance for loan losses
    (411 )     (411 )
 
 
Net Loans
  $ 137,665     $ 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-family residential real estate mortgage loans.  At June 30, 2012, $124.3 million, or 90.2%, of the total loan portfolio consisted of one-to-four-family 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.
 
 
15

 
 
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 June 30, 2012, home equity lines of credit totaled $10.3 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 $485,000, or 0.4%, of the total loan portfolio at June 30, 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.
 
 
16

 
 
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 June 30, 2012, construction loans totaled $417,000, or 0.3%, of total loans receivable compared to $938,000, or 0.7%, at December 31, 2011.  At June 30, 2012, the additional unadvanced portion of these construction loans totaled $522,000 compared to $350,000 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 June 30, 2012, $2.2 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 June 30, 2012, these other loans totaled $73,000, 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.
 
 
17

 
 
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 and six months ended June 30, 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
multi-family
residential
   
Construction
   
Commercial
   
Home
Equity
   
Other/
Unallocated
   
Total
 
Three months ended June 30, 2012
 
(In thousands)
 
                                                         
Beginning Balance
  $ 287     $ 4     $ 1     $ 21     $ 48     $ 43     $ 404  
Charge Offs
    -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       -       -  
Provisions
    18       -       1       1       6       (19 )     7  
Ending Balance (1)
  $ 305     $ 4     $ 2     $ 22     $ 54     $ 24     $ 411  
                                                         
Six months ended June 30, 2011
                                                       
                                                         
Beginning Balance
  $ 289     $ 10     $ 5     $ 15     $ 47     $ 45     $ 411  
Charge Offs
    (15 )     -       -       -       -       -       (15 )
Recoveries
    -       -       -       -       -       -       -  
Provisions
    31       (6 )     (3 )     7       7       (21 )     15  
Ending Balance (1)
  $ 305     $ 4     $ 2     $ 22     $ 54     $ 24     $ 411  
                                                         
Three months ended June 30, 2011
                                                       
                                                         
Beginning Balance
  $ 305     $ 9     $ 1     $ 20     $ 44     $ 13     $ 392  
Charge Offs
    -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       -       -  
Provisions
    (28 )     (1 )     -       -       1       35       7  
Ending Balance (1)
  $ 277     $ 8     $ 1     $ 20     $ 45     $ 48     $ 399  
                                                         
Six months ended  June 30, 2011
                                                       
                                                         
Beginning Balance
  $ 242     $ 9     $ 3     $ 14     $ 55     $ 61     $ 384  
Charge Offs
    -       -       -       -       -       -       -  
Recoveries
    -       -       -       -       -       -       -  
Provisions
    35       (1 )     (2 )     6       (10 )     (13 )     15  
Ending Balance (1)
  $ 277     $ 8     $ 1     $ 20     $ 45     $ 48     $ 399  
 
(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.
 
 
18

 
 
Note 4 – Loans and The Allowance for Loan Losses (continued)
 
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 regulators, the New York State Department of Financial Services and the FDIC, 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.
 
The following table presents the risk category of loans by class at June 30, 2012 and at December 31, 2011:
 
   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
 
 
(In thousands)
 
At June 30, 2012
                             
One-to-four-family residential
  $ 123,988     $ 70