Net loans at June 30, 2011 and December 31, 2010 consist of the following:
| |
|
2011
|
|
|
2010
|
|
|
|
|
(In Thousands)
|
|
| |
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
Secured by one-to-four residential
|
|
$ |
104,875 |
|
|
$ |
102,295 |
|
|
Home equity lines of credit
|
|
|
8,947 |
|
|
|
8,900 |
|
|
Secured by multifamily residential
|
|
|
1,128 |
|
|
|
1,165 |
|
|
Construction
|
|
|
297 |
|
|
|
652 |
|
|
Commercial
|
|
|
1,933 |
|
|
|
1,395 |
|
|
Other
|
|
|
80 |
|
|
|
73 |
|
| |
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
117,260 |
|
|
|
114,480 |
|
| |
|
|
|
|
|
|
|
|
|
Net deferred loan origination costs
|
|
|
364 |
|
|
|
381 |
|
|
Allowance for loan losses
|
|
|
(399 |
) |
|
|
(384 |
) |
| |
|
|
|
|
|
|
|
|
| Net Loans |
|
$ |
117,225 |
|
|
$ |
114,477 |
|
An analysis of activity in the allowance for loan losses for the six months ended June 30, 2011 and 2010 is as follows:
| |
|
2011
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$ |
384 |
|
|
$ |
368 |
|
|
Provision for loan losses
|
|
|
15 |
|
|
|
6 |
|
|
Loans charged-off
|
|
|
- |
|
|
|
- |
|
|
Recoveries
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Balance at June 30
|
|
$ |
399
|
|
|
$ |
374
|
|
The loan portfolio is segmented into commercial and consumer loans. Commercial loans consist of commercial real estate. Consumer loans consist of the following classes: residential real estate, construction, home equity lines of credit, and other consumer.
The Bank’s primary lending activity is the origination of one-to-four residential real estate mortgage loans. At June 30, 2011, $104.9 million, or 89.4%, of the total loan portfolio consisted of one-to-four residential real estate mortgage loans compared to $102.3 million, or 89.4%, of the total loan portfolio at December 31, 2010. The Bank offers fixed-rate and adjustable-rate residential real estate mortgage loans with maturities of up to 30 years and maximum loan amounts generally of up to $750,000.
The Bank currently offers fixed-rate conventional mortgage loans with terms of up to 30 years that are fully amortizing with monthly loan payments, and adjustable-rate mortgage loans that provide an initial fixed interest rate for one, three, five, seven or ten years and that amortize over a period of up to 30 years. The Bank originates fixed-rate mortgage loans with terms of less than 15 years, but at rates applicable to 15-year loans. The Bank originates fixed-rate bi-weekly mortgage loans with terms of up to 30 years that are fully amortizing with bi-weekly loan payments, and “interest only” loans where the borrower pays interest for an initial period (ten years) after which the loan converts to a fully amortizing loan.
Note 4 – Loans and The Allowance for Loan Losses (continued)
Management actively monitors the interest rate risk position to determine the desired level of investment in fixed-rate mortgages. Depending on market interest rates and the Bank’s capital and liquidity position, all newly originated longer term fixed-rate residential mortgage loans may be retained, or, all or a portion of such loans may be sold in the secondary mortgage market to government sponsored entities such as Freddie Mac or other purchasers.
The Bank originates residential, first mortgage loans with the assistance of computer-based underwriting engines licensed from Fannie Mae and/or Freddie Mac. Appraisals of real estate collateral are contracted directly with independent appraisers and not through appraisal management companies. The Bank’s appraisal management policy and procedure is in accordance with all rules and best practice guidance from the Bank’s primary regulator. Credit scoring, using FICO is employed in the ultimate, judgmental credit decision by the Bank’s underwriting staff. The Bank does not use third party contract underwriting services. Residential mortgage loans include fixed and variable interest rate loans secured by one to four family homes generally located in Monroe, Ontario, and Wayne counties of New York State. The Bank’s ability to be repaid on such loans is closely linked to the economic and real estate market conditions in this region. Underwriting policies generally adhere to Fannie Mae and Freddie Mac guidelines for loan requests of conforming and non-conforming amounts. In deciding whether to originate each residential mortgage, the Bank considers the qualifications of the borrower as well as the value of the underlying property.
Adjustable-rate mortgage loans generally present different credit risks than fixed-rate mortgage loans primarily because the underlying debt service payments of the borrowers increase as interest rates increase, thereby increasing the potential for default. Interest-only loans present different credit risks than fully amortizing loans, as the principal balance of the loan does not decrease during the interest-only period. As a result, the Bank’s exposure to loss of principal in the event of default does not decrease during this period.
The Bank offers home equity lines of credit, which are primarily secured by a second mortgage on one-to-four-family residences. At June 30, 2011, home equity lines of credit totaled $8.9 million, or 7.6% of total loans receivable compared to $8.9 million, or 7.7% of total loans receivable at December 31, 2010.
The underwriting standards for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. The combined loan-to-value ratio (first and second mortgage liens) for home equity lines of credit is generally limited to 90%. The Company originates home equity lines of credit without application fees or borrower-paid closing costs. Home equity lines of credit are offered with adjustable-rates of interest indexed to the prime rate, as reported in The Wall Street Journal.
Multi-family residential loans generally are secured by rental properties. Multi-family real estate loans are offered with fixed and adjustable interest rates. Loans secured by multi-family real estate totaled $1.1 million, or 1.0% of the total loan portfolio, at June 30, 2011 compared to $1.2 million, or 1.0% of the total loan portfolio, at December 31, 2010. Multi-family real estate loans are originated for terms of up to 20 years. Adjustable-rate multi-family real estate loans are tied to the average yield on U.S. Treasury securities, subject to periodic and lifetime limitations on interest rate changes.
Loans secured by multi-family real estate generally involve a greater degree of credit risk than one-to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate typically depends upon the successful operation of the real estate property
Note 4 – Loans and The Allowance for Loan Losses (continued)
securing the loans. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.
The Bank originates construction loans for the purchase of developed lots and for the construction of single-family residences. At June 30, 2011, construction loans totaled $297,000, or 0.3% of total loans receivable compared to $652,000, or 0.6% at December 31, 2010. At June 30, 2011, the additional unadvanced portion of these construction loans totaled $415,000 compared to $357,000 of additional unadvanced portion of construction loans at December 31, 2010. Construction loans are offered to individuals for the construction of their personal residences by a qualified builder.
Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We generally also review and inspect each property before disbursement of funds during the term of the construction loan.
Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the loan.
Commercial real estate loans are secured by office buildings, mixed use properties, places of worship, and other commercial properties. At June 30, 2011, $1.9 million, or 1.6%, of our total loan portfolio consisted of commercial real estate loans compared to $1.4 million, or 1.2%, of our total loan portfolio at December 31, 2010.
The Company generally originates adjustable-rate commercial real estate loans with maximum terms of up to 15 years. The maximum loan-to-value ratio of commercial real estate loans is 70%.
Loans secured by commercial real estate generally are larger than one-to-four-family residential loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.
The Company offers a variety of other loans secured by property other than real estate. At June 30, 2011, these other loans totaled $80,000, or 0.1% of the total loan portfolio compared to other loans totaling $73,000, or 0.1% of the total loan portfolio at December 31, 2010. These loans include automobile, passbook, overdraft protection and unsecured loans. Due to the relative immateriality of other loans, the Company’s risk associated with these loans is not considered significant.
Note 4 – Loans and The Allowance for Loan Losses (continued)
The following table sets forth the allowance for loan losses allocated by loan class and the activity in our allowance for loan losses for the six months ended June 30, 2011. The allowance for loan losses allocated to each class is not necessarily indicative of future losses in any particular class and does not restrict the use of the allowance to absorb losses in other classes.
| |
|
Secured
by 1-4
family
residential
|
|
|
Secured by
multifamily
residential
|
|
|
Construction
|
|
|
Commercial
|
|
|
Home
Equity
|
|
|
Other/
Unallocated
|
|
|
Total
|
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance December 31, 2010
|
|
$ |
242 |
|
|
$ |
9 |
|
|
$ |
3 |
|
|
$ |
14 |
|
|
$ |
55 |
|
|
$ |
61 |
|
|
$ |
384 |
|
|
Charge Offs
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Recoveries
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Provisions
|
|
|
35 |
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
6 |
|
|
|
(10 |
) |
|
|
(13 |
) |
|
|
15 |
|
|
Ending Balance June 30, 2011 (1)
|
|
$ |
277 |
|
|
$ |
8 |
|
|
$ |
1 |
|
|
$ |
20 |
|
|
$ |
45 |
|
|
$ |
48 |
|
|
$ |
399 |
|
(1) All Loans are collectively evaluated for impairment.
The Bank’s policies, consistent with regulatory guidelines, provide for the classification of loans that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention. All other assets are categorized as pass.
When the Bank classifies assets as either pass, special mention, substandard, or doubtful, we allocate a portion of the related general loss allowances to such assets as we deem prudent. The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our principal federal regulator, which prior to July 21, 2011 was the Office of Thrift Supervision and was succeeded by the Office of the Comptroller of the Currency (OCC), which can require that we establish additional loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.
At and for the six and twelve months ended June 30, 2011 and December 31, 2010, respectively, there were no loans considered to be impaired. At June 30, 2011 and December 31, 2010 we had no troubled debt restructurings.
Note 4 – Loans and The Allowance for Loan Losses (continued)
The following table presents the risk category of loans by class at June 30, 2011:
| |
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
One-to-four residential
|
|
$ |
104,496 |
|
|
|
- |
|
|
$ |
379 |
|
|
|
- |
|
|
$ |
104,875 |
|
|
Home equity lines of credit
|
|
|
8,947 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,947 |
|
|
Multi-family residential
|
|
|
1,128 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,128 |
|
|
Construction
|
|
|
297 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
297 |
|
|
Commercial
|
|
|
1,933 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,933 |
|
|
Other loans
|
|
|
80 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
80 |
|
|
Total
|
|
$ |
116,881 |
|
|
|
- |
|
|
$ |
379 |
|
|
|
- |
|
|
$ |
117,260 |
|
The following table presents the risk category of loans by class at December 31, 2010:
| |
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
One-to-four residential
|
|
$ |
102,238 |
|
|
|
- |
|
|
$ |
57 |
|
|
|
- |
|
|
$ |
102,295 |
|
|
Home equity lines of credit
|
|
|
8,784 |
|
|
|
- |
|
|
|
116 |
|
|
|
- |
|
|
|
8,900 |
|
|
Multi-family residential
|
|
|
1,165 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,165 |
|
|
Construction
|
|
|
652 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
652 |
|
|
Commercial
|
|
|
1,395 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,395 |
|
|
Other loans
|
|
|
73 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
73 |
|
|
Total
|
|
$ |
114,307 |
|
|
|
- |
|
|
$ |
173 |
|
|
|
- |
|
|
$ |
114,480 |
|
The Bank had $325,000 in nonaccrual loans, comprised of one one-to-four residential property, and no foreclosed assets at June 30, 2011, and no nonaccrual loans or foreclosed assets at December 31, 2010. There were no loans that were past due 90 days or more and still accruing interest at June 30, 2011 and December 31, 2010. Interest on non-accrual loans that would have been earned if loans were accruing interest was $12,500 for the six months ended June 30, 2011 and $1,500 for the six months ended June 30, 2010.
Delinquent Loans. The following table sets forth an analysis of the age of the loan delinquencies by type and by amount past due as of June 30, 2011 and December 31, 2010.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(Dollars in thousands)
|
|
|
At June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four residential
|
|
$ |
54 |
|
|
$ |
- |
|
|
$ |
325 |
|
|
$ |
379 |
|
|
$ |
104,496 |
|
|
$ |
104,875 |
|
|
Home equity lines of credit
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,947 |
|
|
|
8,947 |
|
|
Multi-family residential
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,128 |
|
|
|
1,128 |
|
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
297 |
|
|
|
297 |
|
|
Commercial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,933 |
|
|
|
1,933 |
|
|
Other loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
80 |
|
|
|
80 |
|
|
Total
|
|
$ |
54 |
|
|
$ |
- |
|
|
$ |
325 |
|
|
$ |
379 |
|
|
$ |
116,881 |
|
|
$ |
117,260 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four residential
|
|
$ |
57 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
57 |
|
|
$ |
102,238 |
|
|
$ |
102,295 |
|
|
Home equity lines of credit
|
|
|
116 |
|
|
|
- |
|
|
|
- |
|
|
|
116 |
|
|
|
8,784 |
|
|
|
8,900 |
|
|
Multi-family residential
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,165 |
|
|
|
1,165 |
|
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
652 |
|
|
|
652 |
|
|
Commercial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,395 |
|
|
|
1,395 |
|
|
Other loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
73 |
|
|
|
73 |
|
|
Total
|
|
$ |
173 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
173 |
|
|
$ |
114,307 |
|
|
$ |
114,480 |
|
Note 5 - Federal Home Loan Bank of New York Stock
Federal law requires a member institution of the Federal Home Loan Bank System to hold stock of its district FHLB according to a predetermined formula. This restricted stock is carried at cost.
Management evaluates the FHLB stock for impairment on a quarterly basis. Management’s determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of its cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.
No impairment charges were recorded related to the FHLB stock for the six month periods ended June 30, 2011 and 2010.
Note 6 – Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects for the three and six months ended June 30, 2011 and 2010 are as follows:
| |
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
| |
|
(In Thousands) |
|
|
(In Thousands)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain on available for sale securities
|
|
$ |
648 |
|
|
$ |
127 |
|
|
$ |
301 |
|
|
$ |
531 |
|
|
Reclassification adjustment for realized gain included in net income
|
|
|
(24 |
) |
|
|
- |
|
|
|
(24 |
) |
|
|
(2 |
) |
|
Net Unrealized Gain
|
|
|
624 |
|
|
|
127 |
|
|
|
277 |
|
|
|
529 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect
|
|
|
212 |
|
|
|
42 |
|
|
|
94 |
|
|
|
179 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax amount
|
|
$ |
412 |
|
|
$ |
85 |
|
|
$ |
183 |
|
|
$ |
350 |
|
Note 7 - Earnings Per Common Share
Basic earnings per common share are calculated by dividing net income by the weighted-average number of common shares outstanding during the period. The Company has not granted any restricted stock awards or stock options during the three and six months ended June 30, 2011 and 2010 and had no potentially dilutive common stock equivalents. Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released. The weighted average common shares outstanding were 1,730,772 for the three months ended June 30, 2011, 1,730,337 for the six months ended June 30, 2011, 1,727,273 for the three months ended June 30, 2010 and 1,726,838 for the six months ended June 30, 2010.
Note 8 - Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2011-05 “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income.” ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is assessing the impact of ASU 2011-05 on our comprehensive income presentation.
In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in GAAP and IFRSs (International Financial Reporting Standards). ASU 2011-04 is effective prospectively during interim and annual periods beginning on or after December 15, 2011. Early adoption by public entities is not permitted. The Company is currently assessing the impact of ASU 2011-04 on the Company’s consolidated financial statements.
In April 2011, the FASB issued ASU No. 2011-03 “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreement.” ASU 2011-03 removes from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company believes that the adoption of the standard will not have a significant impact on the Company’s consolidated financial statements.
In April 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring, as clarified, is effective on a prospective basis. The Company believes that the adoption of the standard will not have a significant impact on the Company’s consolidated financial statements.
In January 2011, the FASB issued ASU No. 2011-01 “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” The provisions of ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” required the disclosure of more granular information on the nature and extent of troubled debt restructurings and their effect on the allowance for loan and lease losses effective for the Company’s reporting period ended March 31, 2011. The amendments in ASU No. 2011-01 deferred the effective date related to these disclosures, enabling creditors to provide such disclosures after the FASB completed their project clarifying the guidance for determining what constitutes a troubled debt restructuring. As the provisions of ASU No. 2011-01 only defer the effective date of disclosure requirements related to troubled debt restructurings, the adoption had no impact on the Company’s consolidated statements of income and balance sheets.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Throughout the 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 June 30, 2011, 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 bank 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.
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 31, 2011. 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 doubtful, substandard, or special mention. 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.
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 June 30, 2011 and December 31, 2010
Total Assets. Total assets decreased by $1.1 million, or 0.5%, to $211.3 million at June 30, 2011 from $212.4 million at December 31, 2010. The modest decrease in total assets primarily reflects decreases in securities available for sale and prepaid FDIC premium, partially offset by increases in net loans receivable, cash and cash equivalents, and loans held for sale.
Total securities decreased by $5.5 million, or 6.9%, to $74.3 million at June 30, 2011 from $79.8 million at December 31, 2010. The decrease in securities was a result of a $5.5 million, or 7.6%, decrease in securities classified as available for sale to $67.1 million at June 30, 2011 from $72.6 million at December 31, 2010 and a $26,000, or 0.4%, increase in securities classified as held to maturity to $7.2 million at June 30, 2011 from $7.2 million at December 31, 2010. The $5.5 million decrease in securities classified as available for sale was attributable to maturities and calls of $18.6 million of U.S. government agency securities, $1.4 million in sales of securities, and $4.4 million in principal repayments received and amortization, partially offset by the purchase of $13.5 million of U.S. government agency securities and $5.1 million of mortgage-backed securities, and a $277,000 increase in the fair value of securities classified as available for sale.
Securities classified as held to maturity increased $26,000 as a result of purchases of $434,000 of State and Municipal bonds, partially offset by $408,000 in principal repayments and amortization. All securities purchased in 2011, with the exception of State and Municipal bonds classified as held to maturity, 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 for the six months ended June 30, 2011, and has determined that no other-than-temporary impairment exists in the portfolio at June 30, 2011.
Net loans receivable increased $2.7 million, or 2.4%, to $117.2 million at June 30, 2011 from $114.5 million at December 31, 2010. The Company had $13.8 million of fixed-rate loan refinances and home purchase originations, sold $474,000 in mortgage loans in the secondary market, committed $879,000 in mortgage loans for sale, and brokered $4.3 million of Federal Housing Administration (FHA) mortgage loans in the first six months of 2011. The $5.7 million of combined sold residential mortgages and brokered FHA mortgage loans in the secondary market generated a net gain of $125,000 which was recorded in other income. Management believed that selling FHA loans was a prudent interest rate risk decision. Total loans sold and serviced as of June 30, 2011 totaled $18.4 million compared to $19.1 million as of December 31, 2010. 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.
Cash and cash equivalents, primarily interest-earning deposits at the Federal Reserve Bank of New York and Federal Home Loan Bank of New York, increased by $1.1 million, or 14.2%, to $8.9 million at June 30, 2011 from $7.8 million at December 31, 2010. The Bank continues to maintain a strong liquidity position, retaining excess cash and cash equivalent balances that will allow the Bank to capitalize on investment and lending opportunities that may arise in future periods.
Loans held for sale increased $537,000, or 157.0%, to $879,000 at June 30, 2011 from $342,000 at December 31, 2010. The $879,000 in loans held for sale at June 30, 2011 is comprised of FHA mortgage loans originated and closed by the Bank in the second quarter of 2011 that have been committed for sale in the secondary market and will be delivered and funded in the third quarter of 2011.
The credit quality of the Bank’s loan portfolio remains solid. The Bank continues not to be involved in, and has no exposure to, sub-prime or Alt-A lending activities. The Bank ended the second quarter of 2011 with net loans receivable of $117.2 million, with one residential property for $325,000 in non-performing loans and no foreclosed real estate compared to $114.5 million, with no non-performing loans or foreclosed real estate assets at December 31, 2010. At June 30, 2011 and December 31, 2010, the Bank had no loans that are considered to be 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.
Prepaid FDIC premium decreased by $135,000, or 23.3%, to $444,000 at June 30, 2011from $579,000 at December 31, 2010. The Federal Deposit Insurance Corporation adopted a final rule pursuant to which all insured depository institutions were required to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. Under the rule, this pre-payment of approximately $793,000 to the Bank was due on December 31, 2009. We will continue to amortize this premium paid on December 31, 2009 on a quarterly basis through December 31, 2012.
Deposits and Borrowings. Total deposits decreased by $182,000, or 0.1%, to $162.2 million at June 30, 2011 from $162.4 million at December 31, 2010. The decrease consists of $420,000 in non-interest bearing checking accounts, NOW accounts, money market accounts, and savings accounts, and core deposit growth of $238,000 including IRAs and Certificates of Deposit. With excess liquidity through the second quarter of 2011 and slower mortgage loan growth than anticipated, the Bank has not aggressively promoted deposit growth through promotional advertising.
Borrowings, consisting of Federal Home Loan Bank (“FHLB”) advances, decreased by $1.5 million, or 5.7%, to $25.2 million at June 30, 2011 from $26.7 million at December 31, 2010. The decrease of $1.5 million in the first six months of 2011 included $5.6 million in maturities of FHLB fixed rate borrowings, $4.0 million in new FHLB fixed rate borrowings, and $100,000 in amortization of deferred premium expense.
In July 2010, the Company restructured a portion of its FHLB advances by repaying $13.2 million of existing borrowings and replacing these borrowings with $13.2 million of new, lower cost FHLB advances. This transaction resulted in $638,000 in prepayment penalties that have been deferred and are recognized in interest expense as an adjustment to the cost of the Company’s new borrowings in future periods. At June 30, 2011 there was $444,000 remaining in deferred premium expense on total FHLB borrowings.
Stockholders’ Equity. Total stockholders’ equity increased by $169,000, or 0.8%, to $20.7 million at June 30, 2011 from $20.5 million at December 31, 2010. There was an increase of $183,000 in accumulated other comprehensive income, and a $16,000 increase in committed ESOP shares, partially offset by a net loss of $30,000. At June 30, 2011 the Bank was considered well capitalized the highest standard of capital rating as defined by the Bank’s regulators.
Non-Performing Assets. At June 30, 2011 the Company had $325,000 in loans classified as non-performing compared to no loans classified as non-performing at December 31, 2010. For both periods ended June 30, 2011 and December 31, 2010 the Company had no foreclosed assets. At June 30, 2011, management has evaluated the Bank’s loan loss reserve and believes it is adequate based on the quality of the current loan portfolio. The increase in one-to-four-family real estate mortgage loans classified as substandard was the cause for the shift of a portion of the allowance from unallocated to allocated to one-to-four-family residential real estate mortgage loans in the allowance for loan losses. At June 30, 2011, 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.
| |
|
For the Three months Ended June 30, |
|
| |
|
2011 |
|
|
2010 |
|
|
| |
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
| |
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
| |
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
| |
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
116,447 |
|
|
$ |
1,520 |
|
|
|
5.22 |
% |
|
$ |
115,822 |
|
|
$ |
1,602 |
|
|
|
5.53 |
% |
|
Securities - taxable
|
|
|
41,305 |
|
|
|
243 |
|
|
|
2.35 |
|
|
|
56,240 |
|
|
|
392 |
|
|
|
2.79 |
|
|
Mortgage-backed securities
|
|
|
36,398 |
|
|
|
215 |
|
|
|
2.36 |
|
|
|
25,217 |
|
|
|
199 |
|
|
|
3.16 |
|
|
Securities - tax exempt (1)
|
|
|
2,472 |
|
|
|
18 |
|
|
|
2.91 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other
|
|
|
6,276 |
|
|
|
2 |
|
|
|
0.13 |
|
|
|
12,464 |
|
|
|
3 |
|
|
|
0.10 |
|
|
Total interest-earning assets
|
|
|
202,898 |
|
|
|
1,998 |
|
|
|
3.94 |
% |
|
|
209,743 |
|
|
|
2,196 |
|
|
|
4.19 |
|
|
Non-interest-earning assets
|
|
|
8,257 |
|
|
|
|
|
|
|
|
|
|
|
8,982 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
211,155 |
|
|
|
|
|
|
|
|
|
|
$ |
218,725 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$ |
11,711 |
|
|
|
10 |
|
|
|
0.34 |
% |
|
$ |
10,892 |
|
|
|
19 |
|
|
|
0.70 |
% |
|
Passbook savings
|
|
|
24,405 |
|
|
|
19 |
|
|
|
0.31 |
|
|
|
26,518 |
|
|
|
52 |
|
|
|
0.78 |
|
|
Money market savings
|
|
|
27,018 |
|
|
|
33 |
|
|
|
0.49 |
|
|
|
25,493 |
|
|
|
66 |
|
|
|
1.04 |
|
|
Individual retirement accounts
|
|
|
18,646 |
|
|
|
105 |
|
|
|
2.25 |
|
|
|
18,459 |
|
|
|
131 |
|
|
|
2.84 |
|
|
Certificates of deposit
|
|
|
75,826 |
|
|
|
294 |
|
|
|
1.55 |
|
|
|
78,082 |
|
|
|
385 |
|
|
|
1.97 |
|
|
Borrowings
|
|
|
26,238 |
|
|
|
224 |
|
|
|
3.41 |
|
|
|
30,874 |
|
|
|
326 |
|
|
|
4.22 |
|
Total interest-bearing liabilities
|
|
|
183,844 |
|
|
|
685 |
|
|
|
1.49 |
% |
|
|
190,318 |
|
|
|
979 |
|
|
|
2.06 |
% |
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
4,049 |
|
|
|
|
|
|
|
|
|
|
|
4,272 |
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,788 |
|
|
|
|
|
|
|
|
|
|
|
3,450 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
190,681 |
|
|
|
|
|
|
|
|
|
|
|
198,040 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
20,474 |
|
|
|
|
|
|
|
|
|
|
|
20,685 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
211,155 |
|
|
|
|
|
|
|
|
|
|
$ |
218,725 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$ |
1,313 |
|
|
|
|
|
|
|
|
|
|
$ |
1,217 |
|
|
|
|
|
|
Interest rate spread (2)
|
|
|
|
|
|
|
|
|
|
|
2.45 |
% |
|
|
|
|
|
|
|
|
|
|
2.13 |
% |
|
Net interest-earning assets (3)
|
|
$ |
19,054 |
|
|
|
|
|
|
|
|
|
|
$ |
19,425 |
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
2.59 |
% |
|
|
|
|
|
|
|
|
|
|
2.32 |
% |
|
|
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
110 |
% |
|
|
|
|
|
|
|
|
|
|
110 |
% |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Tax-exempt interest income is presented on a tax equivalent basis using a 35 percent federal tax rate.
|
|
(2)
|
Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
|
(3)
|
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
|
|
(4)
|
Net interest margin represents net interest income divided by total interest-earning assets.
|
| |
|
For the Six Months Ended June 30, |
|
| |
|
2011 |
|
|
2010 |
|
| |
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
| |
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
| |
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
|
Balance
|
|
|
Expense
|
|
|
Cost
|
|
| |
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
116,238 |
|
|
$ |
3,044 |
|
|
|
5.24 |
% |
|
$ |
115,123 |
|
|
$ |
3,195 |
|
|
|
5.55 |
% |
|
Securities - taxable
|
|
|
44,260 |
|
|
|
507 |
|
|
|
2.29 |
|
|
|
57,722 |
|
|
|
839 |
|
|
|
2.91 |
|
|
Mortgage-backed securities
|
|
|
34,071 |
|
|
|
455 |
|
|
|
2.67 |
|
|
|
25,458 |
|
|
|
416 |
|
|
|
3.27 |
|
|
Securities - tax exempt (1)
|
|
|
2,368 |
|
|
|
37 |
|
|
|
3.13 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other
|
|
|
6,043 |
|
|
|
4 |
|
|
|
0.13 |
|
|
|
9,352 |
|
|
|
5 |
|
|
|
0.11 |
|
|
Total interest-earning assets
|
|
|
202,980 |
|
|
|
4,047 |
|
|
|
3.99 |
% |
|
|
207,655 |
|
|
|
4,455 |
|
|
|
4.29 |
% |
|
Non-interest-earning assets
|
|
|
8,522 |
|
|
|
|
|
|
|
|
|
|
|
9,255 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
211,502 |
|
|
|
|
|
|
|
|
|
|
$ |
216,910 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$ |
11,622 |
|
|
|
22 |
|
|
|
0.38 |
% |
|
$ |
9,958 |
|
|
|
34 |
|
|
|
0.68 |
% |
|
Passbook savings
|
|
|
24,674 |
|
|
|
47 |
|
|
|
0.38 |
|
|
|
26,702 |
|
|
|
124 |
|
|
|
0.93 |
|
|
Money market savings
|
|
|
27,300 |
|
|
|
82 |
|
|
|
0.60 |
|
|
|
24,463 |
|
|
|
132 |
|
|
|
1.08 |
|
|
Individual retirement accounts
|
|
|
18,477 |
|
|
|
214 |
|
|
|
2.32 |
|
|
|
18,267 |
|
|
|
272 |
|
|
|
2.98 |
|
|
Certificates of deposit
|
|
|
76,276 |
|
|
|
601 |
|
|
|
1.58 |
|
|
|
77,785 |
|
|
|
826 |
|
|
|
2.12 |
|
|
Borrowings
|
|
|
26,270 |
|
|
|
453 |
|
|
|
3.45 |
|
|
|
31,961 |
|
|
|
680 |
|
|
|
4.26 |
|
Total interest-bearing liabilities
|
|
|
184,619 |
|
|
|
1,419 |
|
|
|
1.54 |
% |
|
|
189,136 |
|
|
|
2,068 |
|
|
|
2.19 |
% |
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
3,921 |
|
|
|
|
|
|
|
|
|
|
|
4,107 |
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,519 |
|
|
|
|
|
|
|
|
|
|
|
3,026 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
191,059 |
|
|
|
|
|
|
|
|
|
|
|
196,269 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
20,443 |
|
|
|
|
|
|
|
|
|
|
|
20,651 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
211,502 |
|
|
|
|
|
|
|
|
|
|
$ |
216,920 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$ |
2,628 |
|
|
|
|
|
|
|
|
|
|
$ |
2,387 |
|
|
|
|
|
|
Interest rate spread (2)
|
|
|
|
|
|
|
|
|
|
|
2.45 |
% |
|
|
|
|
|
|
|
|
|
|
2.10 |
% |
|
Net interest-earning assets (3)
|
|
$ |
18,361 |
|
|
|
|
|
|
|
|
|
|
$ |
18,519 |
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
2.59 |
% |
|
|
|
|
|
|
|
|
|
|
2.30 |
% |
|
|
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
110 |
% |
|
|
|
|
|
|
|
|
|
|
110 |
% |
|
|
|
|
|
|
|
|
|
(1)
|
Tax-exempt interest income is presented on a tax equivalent basis using a 35 percent federal tax rate.
|
|
(2)
|
Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
|
(3)
|
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
|
|
(4)
|
Net interest margin represents net interest income divided by total interest-earning assets.
|
Comparison of Operating Results for the Three Months Ended June 30, 2011 and June 30, 2010
General. The Company had a net income of $16,000 for the quarter ended June 30, 2011 compared to net income of $35,000 for the quarter ended June 30, 2010. Net income per basic and diluted share was $0.01 for the quarter ended June 30, 2011 compared to net income per basic and diluted share of $0.02 for the quarter ended June 30, 2010. The Company’s net interest margin for the quarter ended June 30, 2011 increased 27 basis points to 2.59% from 2.32% for the quarter ended June 30, 2010, due to a decrease in the cost of our interest-bearing liabilities of 57 basis points from 2.06% to 1.49%, which was partially offset by a decrease in the yield on our interest-earning assets of 25 basis points from 4.19% to 3.94%.
The $19,000 decrease in net income for the second quarter of 2011 compared to the second quarter of 2010 resulted from a $124,000 increase in other expense and a $4,000 increase in provision for loan losses, partially offset by a $90,000 increase in net interest income, an $18,000 decrease in income tax expense, and a $1,000 increase in other income. The $124,000 increase in other expense was mainly due to the increased investment in our loan origination division with additional salaries and employee benefits expense, occupancy, equipment, and miscellaneous other operating expenses. The $4,000 increase in provision for loan losses was the result of additional funding of the loan loss reserve based on management’s evaluation of the growth in the mortgage loan portfolio. The $90,000 increase in net interest income is reflective of the Company’s ability to reduce its deposit and borrowing costs in a low interest rate environment, partly offset by a decrease in interest income in interest earning assets. The $18,000 decrease in income tax expense resulted from a tax benefit (reduction in expense) due to the increase in cash surrender value of our bank-owned life insurance and municipal bond interest income which are tax exempt for income tax purposes.
Interest and Dividend Income. Interest and dividend income decreased by $204,000 or 9.3%, to $2.0 million for the three months ended June 30, 2011 from $2.2 million for the three months ended June 30, 2010. The $204,000 decrease in interest and dividend income resulted from an $82,000, or 5.1%, decrease in interest income from loans, a $149,000, or 38.0%, decrease in interest income from taxable securities, and a $1,000, or 33.3%, decrease in interest income from other sources, mainly interest-earning deposits at the Federal Reserve Bank of New York and Federal Home Loan Bank of New York, partially offset by a $12,000, or 100.0%, increase in interest income from tax exempt securities, and a $16,000, or 8.0%, increase in interest income from mortgage-backed securities. Average interest-earning assets decreased by $6.8 million, or 3.3%, to $202.9 million for the three months ended June 30, 2011 from $209.7 million for the three months ended June 30, 2010. The yield on interest-earning assets decreased by 25 basis points to 3.94% for the three months ended June 30, 2011 compared to 4.19% for the three months ended June 30, 2010. The overall decrease in interest and dividend income resulted from a decrease in yield on all interest earning asset categories, despite a volume increase in higher yielding interest earning assets, primarily loans, at June 30, 2011.
Interest Expense. Interest expense decreased $294,000, or 30.0%, to $685,000 for the three months ended June 30, 2011 from $979,000 for the three months ended June 30, 2010. The decrease in interest expense resulted primarily from significantly lower average rates paid on deposits and borrowings and lower average balances on deposits and borrowings in this historically low interest rate environment. The average balance of interest-bearing liabilities decreased $6.5 million, or 3.4%, to $183.8 million for the three months ended June 30, 2011 compared to $190.3 million for the three months ended June 30, 2010. The average cost of interest-bearing liabilities decreased by 57 basis points to 1.49% for the three months ended June 30, 2011 from 2.06% for the three months ended June 30, 2010. The average cost of deposit accounts decreased by 47 basis points to 1.17% for the three months ended June 30, 2011 compared to 1.64% for the three months ended June 30, 2010. The average cost of borrowings decreased by 81 basis points to 3.41% for the three months ended June 30, 2011 compared to 4.22% for the three months ended June 30, 2010. The average balance of borrowings decreased $4.6 million, or 15.0%, to $26.2 million for the three months ended June 30, 2011 compared to $30.9 million for the three months ended June 30, 2010. The decrease in interest expense reflects the Bank’s management of lower deposit and borrowing costs in a historically low interest rate environment. The Bank has continued to respond to the lower interest rate environment allowing for downward deposit re-pricing of all deposits accounts and borrowings decreasing our overall cost of funds.
At June 30, 2011, we had $16.5 million of certificates of deposit, including IRAs that will mature during the third quarter of 2011, with a weighted average cost of 1.46%. Based on current market rates, if these funds remain with the Bank with similar maturities, the rates paid on these deposits will decrease.
Net Interest Income. Net interest income increased $90,000, or 7.4%, to $1.3 million for the three months ended June 30, 2011 from $1.2 million for the three months ended June 30, 2010. The increase in net interest income was due primarily to a lower average cost of deposits and borrowings, partially offset by a decrease in interest earning assets and decrease in yield on interest earning assets. The Company’s net interest margin increased 27 basis points to 2.59% for the three months ended June 30, 2011 from 2.32% for the three months ended June 30, 2010.
Provision for Loan Losses. Based on management’s evaluation of the factors that determine the level of the allowance for loan losses we recorded $7,000 in provision for loan losses for the three month period ended June 30, 2011 and $3,000 for the three month period ended June 30, 2010. The allowance for loan losses as of June 30, 2011 was $399,000, or 0.34% of total loans, compared to $374,000, or 0.31%, of total loans as of June 30, 2010. We ended the quarter with $325,000 in one non-accrual loan at June 30, 2011 compared to $23,000 in non-accrual loans at June 30, 2010. We recorded no charge offs in the second quarter of 2011 and 2010. We had no foreclosed real estate at June 30, 2011 or at June 30, 2010.
Other Income. Total other income increased $1,000, or 0.4%, to $263,000 for the three months ended June 30, 2011 compared to $262,000 for the three months ended June 30, 2010. In the three months ended June 30, 2011 compared to the three months ended June 30, 2010, there was a $24,000 increase in realized gain on sale of securities, a $10,000 increase in realized gain on sale of loans, a $5,000 increase in realized gain (loss) on sale of real estate owned, and a $4,000 increase in miscellaneous other income, partially offset by a $16,000 decrease in deposit service fees, a $14,000 decrease in commissions from Oakleaf Services insurance/annuity and security sales, an $11,000 decrease in mortgage fee income, and $1,000 decrease in BOLI income. There was a $24,000 realized gain on sales of securities in the three months ended June 30, 2011 and no sales of securities in the three months ended June 30, 2010. There were no sales of real estate owned for the three months ended June 30, 2011 compared to a $5,000 loss on sale of real estate owned for the three months ended June 30, 2010.
Other Expense. Total other expense increased $124,000, or 8.7%, to $1.6 million for the three months ended June 30, 2011 compared to $1.4 million for the three months ended June 30, 2010, primarily the result of additional expenses related to our three mortgage origination offices. The $124,000 increase included a $101,000 increase in salaries and employee benefits, a $34,000 increase in occupancy expense, a $15,000 increase in FDIC insurance premium expense, an $11,000 increase in equipment expense, a $7,000 increase in directors fees, a $6,000 increase in miscellaneous other expenses, a $3,000 increase in electronic banking , and a $1,000 increase in advertising expense, partially offset by a $50,000 decrease in mortgage fees and taxes, and a $4,000 decrease in data processing costs.
Income Tax Expense. We had pre-tax income of $5,000 for the three months ended June 30, 2011 compared to pre-tax income of $42,000 for the three months ended June 30, 2010, and had a $11,000 tax benefit for the three months ended June 30, 2011, compared to a $7,000 tax expense for the three months ended June 30, 2010, an increase in tax benefit of $18,000. The effective tax benefit rate was (220.00)% for the three months ended June 30, 2011 compared to a tax expense rate of 16.6% for the three months ended June 30, 2010. The high effective tax benefit rate in the quarter ended June 30, 2011 was mainly the result of the benefit (reduction in tax expense) due to the increase in the cash surrender value of our bank owned life insurance and municipal bond interest income, which are tax exempt. The lower effective tax rate in the quarter ended June 30, 2010 was a result of bank owned life insurance income and the utilization of New York State mortgage recording tax credits in the periods that had been previously subject to a valuation allowance. The New York State franchise tax recorded on taxable assets for the quarters ended June 30, 2011 and 2010 exceeded the mortgage tax generated in each of these periods.
Comparison of Operating Results for the Six Months Ended June 30, 2011 and June 30, 2010
General. We had a net loss of $30,000 for the six months ended June 30, 2011 compared to net income of $68,000 for the six months ended June 30, 2010. The $98,000 decrease in net income for the first six months of 2011 compared to the first six months of 2010 was attributable to an increase in other expense of $418,000 and an increase in provision for loan losses of $9,000, partially offset by an increase in net interest income of $228,000, an increase in other income of $50,000, and an increase in income tax benefit of $51,000. The net interest margin increased by 29 basis points to 2.59% for the six months ended June 30, 2011 from 2.30% for the six months ended June 30, 2010. The increase in the net interest margin reflects a decrease in the cost of our interest-bearing liabilities partially offset by the decrease in the yield on interest-earning assets for the six months ended June 30, 2011 compared to June 30, 2010, together with a volume increase in higher yielding assets, mainly mortgage loans, replacing lower yielding assets, mainly securities and interest earning deposits. The $228,000 increase in net interest income was primarily due to the Company’s ability to reduce interest-bearing liabilities costs at a quicker pace than interest-earning assets in a low interest rate environment. The $418,000 increase in other expense was primarily due to additional expenses related to further expansion of our three mortgage origination offices that opened in January 2010 including additional salaries and employee benefits, occupancy, equipment, and other miscellaneous expenses. The $50,000 increase in other income was mainly due to increases in realized gain on sale of loans, realized gain on sale of securities, mortgage fee income, and other miscellaneous income. The $51,000 decrease in income tax expense resulted from a tax benefit (reduction in expense) due to the increase in cash surrender value of our bank-owned life insurance and municipal bond interest income which are tax exempt for Federal income tax purposes.
Interest and Dividend Income. Interest and dividend income decreased by $421,000, or 9.5%, to $4.0 million for the six months ended June 30, 2011 from $4.5 million for the six months ended June 30, 2010. The decrease in interest and dividend income resulted primarily from a $332,000, or 39.6%, decrease in interest income from taxable securities, a $151,000, or 4.7%, decrease in interest income from loans, and a $1,000, or 20.0%, decrease in interest income from other sources, mainly interest-earning deposits at the Federal Reserve Bank and Federal Home Loan Bank, partially offset by a $39,000, or 9.4% increase in interest income from mortgage-backed securities, and a $24,000, or 100.0%, increase in interest income from tax exempt securities. Average interest-earning assets decreased by $4.7 million, or 2.3%, to $203.0 million for the six months ended June 30, 2011 from $207.7 million for the six months ended June 30, 2010. The yield on interest earning assets decreased by 30 basis points to 3.99% for the six months ended June 30, 2011 compared to 4.29% for the six months ended June 30, 2010, reflecting decreases in interest yields in loans, taxable securities and mortgage-backed securities, partially offset by increases in interest yields on tax exempt securities and other interest earning deposits.
Interest Expense. Interest expense decreased $649,000, or 31.4%, to $1.4 million for the six months ended June 30, 2011 from $2.1 million for the six months ended June 30, 2010. The decrease in interest expense on interest-bearing liabilities resulted from lower average rates paid on deposit and borrowings and a decrease in the aggregate average balance. Average balances in interest bearing liabilities decreased $4.5 million, or 2.4%, to $184.6 million for the six months ended June 30, 2011 compared to $189.1 million for the six months ended June 30, 2010. The average cost of interest-bearing liabilities decreased by 65 basis points to 1.54% for the six months ended June 30, 2011 from 2.19% for the six months ended June 30, 2010. The average cost of deposit accounts decreased by 55 basis points to 1.22% for the six months ended June 30, 2011 compared to 1.77% for the six months ended June 30, 2010. The average cost of borrowings decreased by 81 basis points to 3.45% for the six months ended June 30, 2011 compared to 4.26% for the six months ended June 30, 2010. The decrease in interest expense reflects a significantly lower cost of funds in total deposits and borrowings in a lower interest rate environment.
Net Interest Income. Net interest income increased $228,000, or 9.6%, to $2.6 million for the six months ended June 30, 2011 from $2.4 million for the six months ended June 30, 2010. The increase in net interest income was primarily due to a decrease in the average cost of our interest-bearing liabilities of 65 basis points, while the average yield on our interest-earning assets decreased by 30 basis points. Our net interest margin increased by 29 basis points to 2.59% for the six months ended June 30, 2011 from 2.30% for the six months ended June 30, 2010. The increase in net interest margin was also attributable to the repositioning of the assets from shorter-term investments to long-term mortgages for the six months ended June 30, 2011 compared to the six months ended June 30, 2010.
Provision for Loan Losses. Based on management’s evaluation of the factors that determine the level of the allowance for loan losses, we recorded a $15,000 provision for loan losses for the six month period ended June 30, 2011 compared to the $6,000 provision for loan losses for the six month period ended June 30, 2010. We continue to maintain exceptional credit quality within our loan portfolio with no charge-offs recorded within either reporting period. The allowance for loan losses at June 30, 2011 was $399,000 or 0.34% of total loans, compared to $374,000 or 0.31% of total loans at June 30, 2010. We ended the quarter with $325,000 in one non-accrual loan at June 30, 2011 compared to $23,000 in non-accrual loans at June 30, 2010. We had no foreclosed real estate at June 30, 2011 or 2010.
Other Income. Other income increased $50,000, or 11.9%, to $471,000 for the six months ended June 30, 2011 compared to $421,000 for the six months ended June 30, 2010. The $50,000 increase was due to a $42,000 increase in gain on sale of mortgage loans in the secondary market, a $32,000 increase in realized gain on sale of securities, a $14,000 increase in mortgage fee income, a $7,000 increase in other miscellaneous income, and a $5,000 realized increase on sale of foreclosed real estate, partially offset by a $29,000 decrease in deposit service fees, a $17,000 decrease in commissions from Oakleaf Services insurance/annuity and security sales, and $4,000 less in bank owned life insurance income.
Other Expenses. Other expenses increased $418,000, or 15.3%, to $3.2 million for the six months ended June 30, 2011 compared to $2.7 million for the six months ended June 30, 2010. The increase was primarily the result of expenses related to our three mortgage origination offices which opened in January 2010. The $418,000 increase resulted from a $269,000 increase in salaries and employee benefits, a $57,000 increase in occupancy expense, a $33,000 increase in equipment expense, a $28,000 increase in FDIC insurance premium expense, a $26,000 increase in other expenses, a $12,000 increase in directors fees, a $9,000 increase in electronic banking, a $6,000 increase in data processing costs, and a $3,000 increase in advertising, partially offset by a $25,000 decrease in mortgage fees and taxes.
Income Taxes. The Company had a pre-tax loss of $84,000 for the six months ended June 30, 2011 compared to pre-tax income of $65,000 for the six months ended June 30, 2010, and had a $54,000 tax benefit for the six months ended June 30, 2011, compared to a $3,000 tax benefit for the six months ended June 30, 2010, a change of $51,000. The effective tax rate was (64.3)% for the six months ended June 30, 2011 compared to (4.6)% for the six months ended June 30, 2010. The effective tax benefit for the six months ended June 30, 2011 was primarily due to the cash surrender value of the bank owned life insurance and municipal bond interest income, which are tax exempt. The effective tax benefit for the six months ended June 30, 2010 was the result of bank owned life insurance income and the utilization of New York State mortgage recording tax credits in the current period.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB, maturities and principal repayments of securities, and loan sales. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our asset/liability management committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 20.0% or greater. At June 30, 2011 our liquidity ratio was 59.4%. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of June 30, 2011.
We regularly adjust our investments in liquid assets based upon our assessment of:
(i) expected loan demand;
(ii) expected deposit flows;
(iii) yields available on interest-earning deposits and securities; and
(iv) the objectives of our asset/liability management program.
Excess liquid assets are invested generally in interest-earning deposits, short-term and intermediate-term securities and federal funds sold.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2011, cash and cash equivalents totaled $8.9 million.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.
At June 30, 2011, we had $5.7 million in loan commitments outstanding. In addition to commitments to originate loans, we had $8.8 million in unused lines of credit to borrowers. Certificates of deposit, including IRAs comprised solely of certificates of deposits, due within one year of June 30, 2011 totaled $59.1 million, or 62.0% of our certificates of deposit and 36.4% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds including loan sales, other deposit products, including certificates of deposit, and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2012. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activity is, and will continue to be, originating loans. During the three months ended June 30, 2011, we originated $7.0 million of loans.
Financing activities consist primarily of activity in deposit accounts and FHLB borrowings. We experienced a net decrease in total deposits of $968,000 for the quarter ended June 30, 2011. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB of New York, which provides an additional source of funds. FHLB borrowings decreased by $1.5 million to $25.2 million for the six months ended June 30, 2011 compared to a net decrease of $3.9 million to $30.7 million for the six months ended June 30, 2010. Historically, FHLB borrowings have primarily been used to fund loan demand and expand the investment portfolio. At June 30, 2011, we had the ability to borrow approximately $82.7 million from the Federal Home Loan Bank, of which $25.7 million had been advanced, gross of premium.
The Bank also has a repurchase agreement with a third party broker providing an additional $10.0 million in liquidity. Funds obtained under the repurchase agreement are secured by the Bank’s U.S. Government and agency obligations. There were no advances outstanding under the repurchase agreement at June 30, 2011 or at December 31, 2010.
Fairport Savings Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2011, Fairport Savings Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company is a party to credit-related financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit. We follow the same credit policies in making commitments as we do for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments to extend credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by us, is based on our credit evaluation of the customer.
At June 30, 2011 and 2010, we had $5.7 million and $3.2 million, respectively, of commitments to grant loans, and $8.8 million and $9.0 million, respectively, of unfunded commitments under lines of credit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable since the Company is a smaller reporting company.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at June 30, 2011.
There were no significant changes made in the Company’s internal control over financial reporting or in other factors that could significantly affect the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II – Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Item 1A. Risk Factors
In addition to the other information contained this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the Year Ended December 31, 2010, as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factors also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.
The Standard & Poor’s downgrade in the U.S. government’s sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, could result in risks to the Company and general economic conditions that we are not able to predict.
On August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor's downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Bank. These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions. These ratings downgrades could result in a significant adverse impact to the Company, and could exacerbate the other risks to which the Company is subject, including those described under Risk Factors in the Company’s 2010 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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(a)
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There were no sales of unregistered securities during the period covered by this Report.
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(c)
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There were no issuer repurchases of securities during the period covered by this Report.
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. [Removed and Reserved]
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are either filed as part of this report or are incorporated herein by reference:
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3.1
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Charter of FSB Community Bankshares, Inc.*
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3.2
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Bylaws of FSB Community Bankshares, Inc.*
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4
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Form of Common Stock Certificate of FSB Community Bankshares, Inc.*
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10.1
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Supplemental Executive Retirement Plan*
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10.2
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Form of Employee Stock Ownership Plan*
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10.3
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Supplemental Executive Retirement Plan for K. Maroney**
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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*
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Filed as exhibits to the Company’s Registration Statement on Form SB-2, and any amendments thereto, with the Securities and Exchange Commission (Registration No. 333-141380) on March 16, 2007.
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**
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Filed as an exhibit to the Company’s Current Report on Form 8-K, file with the Securities and Exchange Commission on August 4, 2010.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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FSB COMMUNITY BANKSHARES, INC.
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Date: August 12, 2011
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/s/ Dana C. Gavenda
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Dana C. Gavenda
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President and Chief Executive Officer
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Date: August 12, 2011
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/s/ Kevin D. Maroney
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Kevin D. Maroney
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Executive Vice President and Chief Financial Officer
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