SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2010
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File No. 001-52751
FSB Community Bankshares, Inc.
------------------------------
(Exact name of registrant as specified in its charter)
United States 74-3164710
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
45 South Main Street, Fairport, New York 14450
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(Address of Principal Executive Offices) Zip Code
(585) 223-9080
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(Registrant's telephone number)
N/A
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(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 .
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Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
YES NO .
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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 |_| Accelerated filer |_|
Non-accelerated filer |_| 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 NO X
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As of May 14, 2010 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.
[PG NUMBER]
FSB Community Bankshares, Inc.
FORM 10-Q
Index
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Page
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Part I. Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2010
and December 31, 2009 1
Consolidated Statements of Income for the Three Months Ended
March 31, 2010 and 2009 2
Consolidated Statements of Stockholders' Equity for the Three
Months Ended March 31, 2010 and 2009 3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2010 and 2009 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4T. Controls and Procedures 24
Part II. Other Information
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. [Reserved] 25
Item 5. Other Information 25
Item 6. Exhibits 26
Signature Page 27
Part I. Financial Information
Item 1. Consolidated Financial Statements
FSB COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
March 31, 2010 and December 31, 2009 (unaudited)
(Dollars in thousands, except share data)
March 31, December 31,
Assets 2010 2009
------------------ ------------------
Cash and due from banks $ 5,941 $ 3,385
Interest-earning demand deposits 5,502 2,580
------------------ ------------------
Cash and Cash Equivalents 11,443 5,965
Securities available for sale 77,861 76,111
Securities held to maturity (fair value 2010 $5,391; 2009 $6,222) 5,295 6,137
Investment in FHLB stock 1,736 1,886
Loans receivable, net of allowance for loan losses (2010 $371; 2009
$368) 113,150 116,372
Bank owned life insurance 3,046 3,013
Accrued interest receivable 1,243 1,156
Premises and equipment, net 2,534 2,556
Foreclosed real estate 79 79
Prepaid FDIC premium 739 793
Other assets 388 375
------------------ ------------------
Total Assets $ 217,514 $ 214,443
================== ==================
Liabilities & Stockholders' Equity
Deposits:
Non-interest-bearing $ 3,740 $ 3,955
Interest-bearing 159,450 152,555
------------------ ------------------
Total Deposits 163,190 156,510
Long-term borrowings 31,260 34,590
Advances from borrowers for taxes and insurance 1,346 2,012
Official bank checks 470 432
Other liabilities 592 549
------------------ ------------------
Total Liabilities 196,858 194,093
------------------ ------------------
Stockholders' Equity
Preferred Stock- no par- 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 7,274 7,275
Retained earnings 13,350 13,317
Accumulated other comprehensive income 439 174
Unearned ESOP shares - at cost (586) (595)
------------------ ------------------
Total Stockholders' Equity 20,656 20,350
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 217,514 $ 214,443
================== ==================
See accompanying notes to consolidated financial statements
1
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Income
Three Months Ended March 31, 2010 and 2009 (unaudited)
(Dollars in thousands, except per share data)
2010 2009
------------------ ------------------
Interest and Dividend Income
Loans $ 1,593 $ 1,907
Securities - taxable 447 267
Mortgage-backed securities 217 326
Other 2 1
------------------ ------------------
Total Interest and Dividend Income 2,259 2,501
------------------ ------------------
Interest expense
Deposits 735 879
Borrowings:
Short-term - 1
Long-term 354 424
------------------ ------------------
Total Interest Expense 1,089 1,304
------------------ ------------------
Net Interest Income 1,170 1,197
Provision for Loan Losses 3 6
------------------ ------------------
Net Interest Income After Provision
for Loan Losses 1,167 1,191
------------------ ------------------
Other Income
Service fees 57 49
Fee income 6 11
Realized gain (loss) on sale of securities (8) -
Increase in cash surrender value of bank owned life insurance 33 -
Realized gain on sale of loans 14 29
Other 57 45
Total Other Income 159 134
------------------ ------------------
Other Expense
Salaries and employee benefits 687 693
Occupancy expense 150 125
Data processing costs 17 23
Advertising 41 32
Equipment expense 103 90
Electronic banking 16 20
Directors' fees 27 28
Mortgage fees and taxes 30 44
FDIC premium expense 57 22
Other expense 175 169
------------------ ------------------
Total Other Expenses 1,303 1,246
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Income Before Income Taxes 23 79
Provision (Benefit) for Income Taxes (10) 28
------------------- -------------------
Net Income $ 33 $ 51
=================== ===================
Earnings per common share $ 0.02 $ 0.03
=================== ===================
See accompanying notes to consolidated financial statements
2
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Stockholders' Equity
Three Months Ended March 31, 2010 and 2009 (unaudited)
(Dollars in thousands)
Accumulated
Additional Other Unearned
Common Paid in Retained Comprehensive ESOP
Stock Capital Earnings Income (Loss) Shares Total
-------- ----------- ----------- ---------------- ------------ -----------
Balance - January 1, 2009 $ 179 $ 7,286 $ 13,249 $ (43) $ (630) $ 20,041
-----------
Comprehensive income:
Net income - - 51 - - 51
Change in net unrealized gain
(loss) on securities
available for sale, net of
reclassification adjustment
and taxes - - - 291 - 291
-----------
Total Comprehensive Income 342
ESOP shares committed to be
released - (3) - - 9 6
-------- ----------- ----------- ---------------- ------------ -----------
Balance - March 31, 2009 $ 179 $ 7,283 $ 13,300 $ 248 $ (621) $ 20,389
======== =========== =========== ================ ============ ===========
Balance - January 1, 2010 $ 179 $ 7,275 $ 13,317 $ 174 $ (595) $ 20,350
-----------
Comprehensive income:
Net income - - 33 - - 33
Change in net unrealized gain
on securities available
for sale, net of
reclassification adjustment
and taxes - - - 265 - 265
-----------
Total Comprehensive Income 298
ESOP shares committed to be
released - (1) - - 9 8
-------- ----------- ----------- ---------------- ------------ -----------
Balance - March 31, 2010 $ 179 $ 7,274 $ 13,350 $ 439 $ (586) $ 20,656
======== =========== =========== ================ ============ ===========
See accompanying notes to consolidated financial statements
3
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2010 and 2009 (unaudited)
(Dollars in thousands)
2010 2009
------------------ -----------------
Cash Flows From Operating Activities
Net income $ 33 $ 51
Adjustments to reconcile net income to net cash used by operating
activities:
Net amortization of premiums and discounts on investments 280 59
Net increase in principal receivable on mortgage backed securities (480) (260)
Gain on sale of securities available for sale (2) -
Loss on sale of securities held to maturity 10 -
Gain on sale of loans (14) (29)
Proceeds from loans sold 2,125 4,788
Loans originated for sale (2,111) (4,759)
Amortization of net deferred loan origination costs 15 6
Depreciation and amortization 78 67
Provision for loan losses 3 6
Expense related to ESOP 8 6
Deferred income tax expense (16) (13)
Earnings on investment in bank owned life insurance (33) -
Decrease (increase) in accrued interest receivable (87) 26
Increase in prepaid FDIC premium and other assets 45 (9)
Decrease in other liabilities (81) (173)
------------------ -----------------
Net Cash Used By Operating Activities (227) (234)
------------------ -----------------
Cash Flows From Investing Activities
Purchases of securities available for sale (21,506) (16,427)
Proceeds from maturities and calls of securities available for sale 17,000 8,835
Proceeds from sales of securities available for sale 11 -
Proceeds from principal paydowns on securities available for sale 3,380 794
Proceeds from principal paydowns on securities held to maturity 114 188
Proceeds from sales of securities held to maturity 686 -
Net decrease in loans 3,204 7,061
Redemption of Federal Home Loan Bank stock 150 322
Purchase of premises and equipment (56) (23)
------------------ -----------------
Net Cash Provided By Investing Activities 2,983 750
------------------ -----------------
Cash Flows From Financing Activities
Net increase in deposits 6,680 10,873
Net decrease in short-term borrowings - (3,850)
Repayments on long-term borrowings (3,330) (3,313)
Net decrease in advances from borrowers for taxes and insurance (666) (715)
Net increase (decrease) in official bank checks 38 (80)
------------------ -----------------
Net Cash Provided By Financing Activities 2,722 2,915
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Net Increase in Cash
and Cash Equivalents 5,478 3,431
Cash and Cash Equivalents- Beginning 5,965 3,173
------------------ -----------------
Cash and Cash Equivalents- Ending $ 11,443 $ 6,604
================== =================
4
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows, (Continued)
2010 2009
-------------- ---------------
Supplementary Cash Flows Information
Interest paid $ 1,101 $ 1,294
============== ================
Income taxes paid $ - $ 85
============== ================
See accompanying notes to consolidated financial statements
5
Notes to Consolidated Financial Statements
Note 1-Basis of Presentation
The accompanying unaudited consolidated financial statements of FSB Community
Bankshares, Inc. and its wholly owned subsidiary Fairport Savings Bank
(collectively, the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and the applicable instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes necessary for a complete presentation of consolidated financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a fair
presentation have been included.
The Company follows accounting standards set by the Financial Accounting
Standards Board, commonly referred to as the "FASB". The FASB sets generally
accepted accounting principles ("GAAP") that the Company follows. References to
GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards
Codification, sometimes referred to as the Codification or ASC. The FASB
finalized the Codification effective for periods ending on or after September
15, 2009.
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, 2009, included in the Annual Report filed on Form 10-K
with the Securities and Exchange Commission ("SEC") on March 29, 2010.
Operating results for the three months ended March 31, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010.
The consolidated financial statements at March 31, 2010 and December 31, 2009
and for the three months ended March 31, 2010 and 2009 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.
The Company has evaluated subsequent events through the date the 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.
The Company follows ASC Topic 820, Fair Value Measurements and Disclosures,
which defines fair value, establishes a framework for measuring fair value under
GAAP, and expands disclosures about fair value measurements. ASC Topic 820
applies to other accounting pronouncements that require or permit fair value
measurements.
6
Note 2-Fair Value Accounting and Measurement (Continued)
ASC Topic 820 establishes a fair value hierarchy that prioritizes the
inputs to valuation methods 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 under ASC Topic 820 are as follows:
Level 1: Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical unrestricted assets
or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that
are observable either directly or indirectly, for substantially the
full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are
both significant to the fair value measurement and unobservable (i.e.
supported with little or no market activity).
An asset or liability's level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value
measurement.
For assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used are as follows
at March 31, 2010 and at December 31, 2009:
(In Thousands)
2010
Securities Available for Sale: Total Level 1 Level 2 Level 3
------ ------- ------- -------
U.S. Government obligations $56,794 $ 6,828 $49,966 $ -
Mortgage-backed securities 21,067 - 21,067 -
------ ------- ------- -------
Total Available for Sale Securities $77,861 $ 6,828 $71,033 $ -
====== ======= ======= =======
(In Thousands)
2009
Securities Available for Sale: Total Level 1 Level 2 Level 3
------ ------- ------- -------
Equity securities $ 12 $ 12 $ - $ -
U.S. Government obligations 54,629 5,548 49,081 -
Mortgage-backed securities 21,470 - 21,470 -
------ ------- ------- -------
Total Available for Sale Securities $76,111 $ 5,560 $70,551 $ -
====== ======= ======= =======
There were no transfers between level 1 and level 2 during the quarter ended
March 31, 2010. No assets or liabilities have been measured on a
non-recurring basis at or for the quarter ended March 31, 2010 and at
December 31, 2009.
7
Note 2-Fair Value Accounting and Measurement (Continued)
FASB ASC Topic 825-10-50, Disclosure about Fair Value of Financial
Instruments, 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. ASC Topic 825-10-50 excludes certain financial instruments and
all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at March
31, 2010 and December 31, 2009:
Cash, Due from Banks, and Interest-Bearing 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 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 generally based on
available market evidence (Level 3). In the absence of such evidence,
management's best estimate is used. Management's best estimate consists of
both internal and external support on certain Level 3 investments. Internal
cash flow models using a present value formula that includes assumptions
market participants would use along with indicative exit pricing obtained
from broker/dealers (where available) are used to support fair values of
certain Level 3 investments. The Company had no Level 3 investment
securities at March 31, 2010 or December 31, 2009.
Investment in FHLB Stock
The carrying value of FHLB stock approximates its fair value based on the
restricted nature of the FHLB stock.
Loans
The fair values of loans held for investment 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.
There were no loans held for sale at March 31, 2010 and at December 31,
2009.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and payable approximates
fair value.
8
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.
Borrowings
The fair values of FHLB long-term 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.
The carrying amounts and estimated fair values of the Company's financial
instruments at March 31, 2010 and December 31, 2009 are as follows:
March 31, 2010 December 31, 2009
----------------------------------- -----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- -------------- ----------------- --------------
(In Thousands)
Financial assets:
Cash and due from banks $ 5,941 $ 5,941 $ 3,385 $ 3,385
Interest bearing demand deposits 5,502 5,502 2,580 2,580
Securities available for sale 77,861 77,861 76,111 76,111
Securities held to maturity 5,295 5,391 6,137 6,222
FHLB stock 1,736 1,736 1,886 1,886
Loans, net 113,150 116,451 116,372 118,883
Accrued interest receivable 1,243 1,243 1,156 1,156
Financial liabilities:
Deposits 163,190 162,434 156,510 155,606
Long-term borrowings 31,260 29,418 34,590 32,579
Accrued interest payable 117 117 129 129
Off-balance sheet instruments:
Commitments to extend credit - - - -
9
Note 3 - Securities
The amortized cost and estimated fair value of securities with gross unrealized
gains and losses at March 31, 2010 and December 31, 2009 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- -------------- ----------------- --------------
(In Thousands)
March 31, 2010:
Available for Sale:
U.S. Government obligations $ 56,534 $ 261 $ (1) $ 56,794
Mortgage-backed securities -
residential 20,662 409 (4) 21,067
---------------- -------------- ----------------- --------------
$ 77,196 $ 670 $ (5) $ 77,861
=============== ============== ================= =============
Held to Maturity:
Mortgage-backed securities -
residential $ 5,295 $ 96 $ - $ 5,391
=============== ============== ================= =============
December 31, 2009:
Available for Sale:
Equity securities $ 9 $ 3 $ - $ 12
U.S. Government obligations 54,842 100 (313) 54,629
Mortgage-backed securities -
residential 20,997 473 - 21,470
---------------- -------------- ----------------- --------------
$ 75,848 $ 576 $ (313) $ 76,111
=============== ============== ================= =============
Held to Maturity:
Mortgage-backed securities -
residential $ 6,137 $ 86 $ (1) $ 6,222
=============== ============== ================= =============
Mortgage-backed securities consist of securities issued by FNMA, FHLMC, GNMA,
and FFCB (Federal Farm Credit Bank) that are collateralized by residential
mortgages.
The amortized cost and estimated fair value by contractual maturity of debt
securities at March 31, 2010 are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
10
Note 3 - Securities (continued)
Available for Sale Held to Maturity
--------------------------------------- ------------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------------- --------------------- ---------------- -----------------
(In Thousands) (In Thousands)
Due in one year or less $ - $ - $ - $ -
Due after one year through five years 8,849 8,866 - -
Due after five years through ten years 16,062 16,114 - -
Due after ten years 31,623 31,814 - -
Mortgage-backed securities -
residential 20,662 21,067 5,295 5,391
--------------- --------------------- ---------------- -----------------
$ 77,196 $ 77,861 $ 5,295 $ 5,391
=============== ===================== ================ =================
For the three months ended March 31, 2010 there was a $10,573 gross realized
loss on sale of mortgage-backed securities held to maturity resulting from
proceeds of $686,000, and a $2,120 gross realized gain on sale of FHLMC common
stock available for sale resulting from proceeds of $11,000. In accordance with
accounting guidance, the Company was able to sell securities classified as held
to maturity after the Company had already collected a substantial portion (at
least 85%) of the principal outstanding at acquisition due either to prepayments
or to scheduled principal and interest payments on the debt securities. There
were no sales of securities for the three months ended March 31, 2009.
No securities were pledged to secure public deposits or for any other purpose
required or permitted by law at March 31, 2010 and December 31, 2009.
The following table shows gross unrealized losses and fair value, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position, at March 31, 2010 and December 31, 2009:
Less than 12 Months 12 Months or More Total
----------------------------- ----------------------------- ----------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ---------------- ------------- -------------- ----------- ----------------
(In Thousands)
March 31, 2010:
U.S. Government
obligations $ 1,999 $ 1 $ - $ - $ 1,999 $ 1
Mortgaged-backed
securities -
residential 980 4 - - 980 4
----------- ---------------- ------------- -------------- ----------- ----------------
$ 2,979 $ 5 $ - $ - $ 2,979 $ 5
=========== ================ ============= ============== =========== =================
December 31, 2009:
U.S. Government
obligations $ 27,241 $ 313 $ - - $ 27,241 $ 313
Mortgaged-backed
securities -
residential 442 1 18 - 460 1
----------- ---------------- ------------- -------------- ----------- ----------------
$ 27,683 $ 314 $ 18 $ - $ 27,701 $ 314
=========== ================ ============= ============== =========== =================
11
Note 3 - Securities (continued)
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (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. In 2009 and in the three month period ended
March 31, 2010, the Company did not record an other-than-temporary impairment
charge.
At March 31, 2010, two debt securities and one mortgage-backed security have
been in a continuous unrealized loss position for less than twelve months. No
debt securities or mortgage-backed securities have been in a continuous
unrealized loss position for more than twelve months. The debt securities and
mortgage-backed securities were issued by U.S. government sponsored agencies and
are paying in accordance with their terms with no deferrals of interest or
defaults. As management believes the Company 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.
Note 4 - 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 Federal Home Loan Bank ("FHLB") according to a
predetermined formula. This restricted stock is carried at cost.
Management evaluates the FHLB stock for impairment in accordance with FASB ASC
Topic 942-10-15, Financial Services - Depository and Lending. Management's
determination of whether this investment is impaired is based on its assessment
of the ultimate recoverability of its cost rather than by recognizing temporary
declines in value. The determination of whether a decline affects the ultimate
recoverability of cost is influenced by criteria such as (1) the significance of
the decline in net assets of the FHLB as compared to the capital stock amount
for the FHLB and the length of time this situation has persisted, (2)
commitments by the FHLB to make payments required by law or regulation and the
level of such payments in relation to the operating performance of the FHLB, and
(3) the impact of legislative and regulatory changes on institutions and,
accordingly, on the customer base of the FHLB.
No impairment charges were recorded related to the FHLB stock for the three
month period ended March 31, 2010 and in 2009.
Note 5 - 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 months ended March 31, 2010 and 2009 are as follows:
12
Note 5 - Comprehensive Income (continued)
For the Three Months
Ended March 31,
2010 2009
---- ----
Unrealized holding gain on available for sale
securities $ 404 $ 449
Reclassification adjustment for realized
gain included in net income (2) -
------------- -------------
Net Unrealized Gain 402 449
Tax effect 137 158
------------- -------------
Net of tax amount $ 265 $ 291
============= =============
Note 6 - Earnings Per Common Share
Basic earnings per common share are calculated by dividing the 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 and, during
the three months ended March 31, 2010 and 2009, 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 1,726,398 for the
three months ended March 31, 2010 and 1,722,900 for the three months ended March
31, 2009.
Note 7 - Recent Accounting Pronouncements
In January 2010, the FASB issued updated guidance on "Equity, Accounting for
Distributions to Stockholders with Components of Stock and Cash". The amendments
in this update clarify that the stock portion of a distribution to stockholders
that allows them to elect to receive cash or stock with a potential limitation
on the total amount of cash that all stockholders can elect to receive in the
aggregate is considered a share issuance that is reflected in earnings per share
prospectively and is not a stock dividend. This update codifies the consensus
reached in recent accounting guidance for Accounting for Stock Dividends,
Including Distributions to Stockholders with Components of Stock and Cash. This
update is effective for interim and annual periods ending on or after December
15, 2009, and should be applied on a retrospective basis. The adoption of this
guidance did not have a material effect on the Company's consolidated results of
operations or financial position.
In January 2010, the FASB issued updated guidance on "Consolidation, Accounting
and Reporting for Decreases in Ownership of a Subsidiary - A Scope
Clarification". This update clarifies that the scope of the decrease in
ownership provisions of Subtopic 810-10 and related guidance applies to a
subsidiary or group of assets that is a business or nonprofit activity; a
subsidiary that is a business or nonprofit activity that is transferred to an
equity method investee or joint venture; and an exchange of a group of assets
that constitutes a business or nonprofit activity for a non-controlling interest
in an entity (including an equity method investee or joint venture). This update
also clarifies that the decrease in ownership guidance in Subtopic 810-10 does
not apply to: (a) sales of in-substance real estate; and (b) conveyances of oil
and gas mineral rights, even if these transfers involve businesses. The
amendments in this update expand the
13
Note 7 - Recent Accounting Pronouncements (continued)
disclosure requirements about deconsolidation of a subsidiary or de-recognition
of a group of assets to include the valuation techniques used to measure the
fair value of any retained investment; the nature of any continuing involvement
with the subsidiary or entity acquiring the group of assets; and whether the
transaction that resulted in the deconsolidation or de-recognition was a related
party or whether the former subsidiary or entity acquiring the assets will
become a related party after the transaction. This update is effective beginning
in the period that the entity adopts the amendments to guidance on
"Non-controlling Interests in Consolidated Financial Statements - an amendment
of ARB 51)". If an entity has previously adopted this guidance, the amendments
are effective beginning in the first interim or annual reporting period ending
on or after December 15, 2009. The amendments in this update should be applied
retrospectively to the first period that entity adopts the guidance on
"Non-controlling Interests in Consolidated Financial Statements". The Company
does not believe that the adoption of this guidance will have a material effect
on its consolidated results of operations or financial position.
The FASB has issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements. This ASU requires
some new disclosures and clarifies some existing disclosure requirements about
fair value measurement as set forth in Codification Subtopic 820-10 to now
require:
o A reporting entity to disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers;
and
o In the reconciliation for fair value measurements using
significant unobservable inputs, a reporting entity should
present separately information about purchases, sales,
issuances, and settlements.
In addition, ASU 2010-06 clarifies the requirements of the following existing
disclosures:
o For purposes of reporting fair value measurement for each class
of assets and liabilities, a reporting entity needs to use
judgment in determining the appropriate classes of assets and
liabilities; and
o A reporting entity should provide disclosures about the
valuation techniques and inputs used to measure fair value for
both recurring and nonrecurring fair value measurements.
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Early
adoption is permitted.
The FASB has issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to
Certain Recognition and Disclosure Requirements. The amendments in the ASU
remove the requirement for an SEC filer to disclose a date through which
subsequent events have been evaluated in both issued and revised financial
statements. Revised financial statements include financial statements revised as
a result of either correction of an error or retrospective application of U.S.
GAAP. The FASB also clarified that if the financial statements have been
revised, then an entity that is not an SEC filer should disclose both the date
that the financial statements were issued or available to be issued and the date
the revised financial statements were issued or available to be issued.
The FASB believes these amendments remove potential conflicts with the SEC's
literature. In addition, the amendments in the ASU require an entity that is a
conduit bond obligor for conduit debt securities that are traded in a public
market to evaluate subsequent events through the date of issuance of its
financial statements and must disclose such date.
14
Note 7 - Recent Accounting Pronouncements (continued)
All of the amendments in the ASU were effective upon issuance (February 24,
2010) except for the use of the issued date for conduit debt obligors. That
amendment is effective for interim or annual periods ending after June 15, 2010.
Note 8 - Formation of Subsidiary
On August 14, 2009 the Board of Directors of the Bank approved through
resolution the formation of a wholly-owned subsidiary to be known as Fairport
Mortgage Corp. to engage in the activities of residential lending. The Bank has
applied and received approvals by both the Office of Thrift Supervision (OTS)
and the New York State Banking Department to establish the subsidiary.
In January of 2010, the Bank hired six mortgage loan originators, two support
staff and opened three mortgage loan origination offices located in Canandaigua,
Pittsford, and Watertown, New York. These eight employees are currently employed
by the Bank until the mortgage subsidiary is approved by the FHA as a
non-supervised loan correspondent. The process for approval is currently in
progress with the anticipation for completion by June 30, 2010. At that time,
Fairport Mortgage Corp. will begin operating as a wholly owned subsidiary of the
Bank to broker mortgages directly to correspondent investors.
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 March 31, 2010, 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 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.
15
Forward Looking Statements (continued)
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 Company follows accounting standard set by the Financial Accounting
Standards Board, commonly referred to as the "FASB". The FASB sets generally
accepted accounting principles ("GAAP") that the Company follows. References to
GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards
Codification, sometimes referred to as the Codification or ASC.
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 29, 2010. 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
determined. 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.
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
16
Critical Accounting Policies (continued)
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. The deferred tax assets and liabilities represent the
future tax return consequences of the temporary differences, which will either
be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the deferred
tax assets and liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Comparison of Financial Condition at March 31, 2010 and December 31, 2009
Total Assets. Total assets increased by $3.1 million, or 1.4%, to $217.5
million at March 31, 2010 from $214.4 million at December 31, 2009. The increase
in total assets primarily reflects increases in cash and cash equivalents, and
securities available for sale, partially offset by decreases in net loans
receivable and securities held to maturity.
17
Comparison of Financial Condition at March 31, 2010 and December 31, 2009
(continued)
Cash and cash equivalents increased by $5.5 million, or 91.8% to $11.4 million
at March 31, 2010 from $6.0 million at December 31, 2009.
Total securities increased by $908,000, or 1.1%, to $83.2 million at March 31,
2010 from $82.2 million at December 31, 2009. Securities classified as available
for sale increased $1.8 million to $77.9 million at March 31, 2010 from $76.1
million at December 31, 2009. The $1.8 million increase was attributable to the
purchase of $20.4 million of U.S. government agency securities, purchases of
$1.1 million of mortgage-backed securities, a $510,000 increase in principal
receivable, and a $402,000 increase in the fair value of securities available
for sale, partially offset by maturities and calls of $17.0 million of U.S.
government agency securities classified as available for sale, and $3.7 million
in principal repayments received and amortization. We sold the remaining $8,750
of amortized cost of FHLMC common stock held in available for sale securities
for a realized gain on sale of $2,120.
Securities classified as held to maturity decreased $842,000 to $5.3 million at
March 31, 2010 from $6.1 million at December 31, 2009 primarily as a result of
the sale of $691,000 of mortgage-backed securities with a realized loss of
$10,573 and $121,000 in principal repayments and amortization. In accordance
with accounting guidance, the sale of securities classified as held to maturity
occurred after the Company received a minimum of 85% of the principal
outstanding at acquisition due either to prepayments or to scheduled principal
and interest payments on the debt securities. All securities purchased in 2010
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 quarter ended March 31,
2010, and has determined that no other-than-temporary impairment exists in the
portfolio.
Investment in FHLB of New York stock decreased by $150,000, or 8.0%, to $1.7
million at March 31, 2010, from $1.9 million at December 31, 2009 due to stock
redemptions. The FHLB of New York requires members to purchase and redeem stock
based on the level of borrowings.
Net loans receivable decreased by $3.2 million, or 2.8%, to $113.2 million at
March 31, 2010 from $116.4 million at December 31, 2009. The Company continues
to execute its business plan of making high quality loans to existing and new
customers in our market area with $5.5 million of fixed-rate loan refinances and
home purchase originations in the first three months of 2010. The Bank sold $2.1
million in residential mortgage loans in the first quarter of 2010 as management
made the decision to sell long term, fixed-rate loans in this historically low
interest rate environment. The Bank sold these loans at a gain of $14,000 which
was recorded in other income, and will realize servicing income on these loans
as long as they have outstanding balances. Management felt that selling these
loans was a prudent interest rate risk decision in order to position the balance
sheet for higher interest rates in the future. Total loans sold and serviced as
of March 31, 2010 totaled $18.3 million compared to $16.8 million as of December
31, 2009. We may experience further declines in our total residential mortgages
loan portfolio with additional mortgage loan sales based on the current economic
conditions and our desired interest rate sensitivity position. In the current
interest rate environment we intend to continue to sell a portion of our
existing fixed-rate residential mortgage loans on a servicing retained basis,
resulting in additional loan servicing income.
The Bank opened three mortgage loan origination offices in January of 2010
located in Canandaigua, Pittsford, and Watertown, New York. Six additional
mortgage loan originators and two support staff members were hired at these
locations. The Bank intends to continue to emphasize aggressive, yet prudent
originations of loans secured by one-to-four family residential real estate. As
previously discussed, Fairport Mortgage Corp., a wholly owned subsidiary of the
Bank, will begin operations to broker mortgage loans directly to correspondent
investors upon approval by the FHA as a non-supervised correspondent.
18
Comparison of Financial Condition at March 31, 2010 and December 31, 2009
(continued)
The Company has never been involved with, and has no direct exposure to,
sub-prime lending activities. 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
low level of non-accruing loans.
Deposits and Borrowings. Total deposits increased by $6.7 million, or 4.3%,
to $163.2 million at March 31, 2010 from $156.5 million at December 31, 2009.
Certificates of deposit, including IRAs, increased by $4.5 million for the first
three months of 2010. During the same timeframe, transaction accounts, including
checking, NOW, money market and savings accounts, increased by $2.2 million. The
significant deposit growth demonstrates our competitive strength in our market.
The net deposit growth was primarily attributable to the Webster branch growth
of $3.9 million and the Irondequoit branch growth of $2.8 million. The branch
staff has done an excellent job in attracting new clients and increasing core
deposits, which has had a positive impact on the Bank's balance sheet.
Long term borrowings decreased by $3.3 million, or 9.6%, to $31.3 million at
March 31, 2010 from $34.6 million on December 31, 2009. We repaid these
borrowings in the first three months of 2010 using increased deposits.
Stockholders' Equity. Total stockholders' equity increased by $306,000 or
1.5%, to $20.7 million at March 31, 2010 from $20.4 million at December 31,
2009. The increase resulted from $33,000 in net income, an increase of $265,000
in accumulated other comprehensive income, and an $8,000 increase from committed
ESOP shares. The Bank's capital ratios continue to classify Fairport Savings
Bank as a well capitalized bank, the highest standard of capital rating as
defined by the Bank's regulators.
Non-Performing Assets. At March 31, 2010 and at December 31, 2009, the
Company had one loan for $23,000 classified as non-performing and one foreclosed
asset for $79,000. At March 31, 2010 and December 31, 2009 non-performing assets
as a percent of total assets was 0.05%, significantly below the industry
average. At March 31, 2010, management has evaluated the Bank's loan loss
reserve and believes it is adequately funded based on the quality of the current
loan portfolio. At March 31, 2010, there were no other assets that are not
disclosed or 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 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.
19
For the Three Months Ended March 31,
------------------------------------------------------------------------------
2010 2009
------------------------------------- -------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- ------------- ---------- --------- --------------- ---------
(Dollars in thousands)
Interest-earning assets:
Loans......................... $ 114,369 $ 1,593 5.57% $ 133,281 $ 1,907 5.72%
Securities.................... 59,222 447 3.02 24,528 267 4.35
Mortgage-backed securities.... 25,700 217 3.38 28,905 326 4.51
Other......................... 6,206 2 0.13 2,232 1 0.18
---------- ------------- ---------- --------- --------------- ---------
Total interest-earning assets 205,497 2,259 4.40 188,946 2,501 5.29
------------- ---------------
Non-interest-earning assets... 9,577 6,407
---------- ---------
Total assets............... $ 215,074 $ 195,353
========== =========
Interest-bearing liabilities:
NOW accounts.................. $ 9,014 $ 16 0.71% $ 7,517 $ 15 0.80%
Passbook savings.............. 26,887 73 1.09 13,467 26 0.77
Money market savings......... 23,422 65 1.11 17,363 94 2.17
Individual retirement accounts 18,072 141 3.12 16,989 166 3.91
Certificates of deposit....... 77,485 440 2.27 73,059 578 3.16
Borrowings.................... 33,060 354 4.28 40,782 425 4.17
---------- ------------- ---------- --------- --------------- ---------
Total interest-bearing
liabilities.............. 187,940 1,089 2.32 169,177 1,304 3.08
---------- ------------- --------- ---------------
Non-interest-bearing liabilities:
Demand deposits......... 3,940 3,422
Other......................... 2,646 2,531
---------- ---------
Total liabilities........ 194,526 175,130
Stockholders' equity.......... 20,548 20,223
---------- ---------
Total liabilities and
stockholders' equity..... $ 215,074 $ 195,353
========== =========
Net interest income........... $ 1,170 $ 1,197
============= ===============
Interest rate spread (1)...... 2.08% 2.21%
Net interest-earning assets (2) $ 17,557 $ 19,769
========== =========
Net interest margin (3)....... 2.28% 2.53%
Average interest-earning assets
to average interest-bearing
liabilities................ 109% 112%
(1) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
(2) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by total
interest-earning assets.
Comparison of Operating Results for the Three Months Ended March 31, 2010 and
March 31, 2009
General. We had net income of $33,000 for the three months ended March 31,
2010 compared to net income of $51,000 for the three months ended March 31,
2009. The decrease of $18,000 in net income for the first quarter of 2010
compared to the first quarter of 2009 resulted primarily from a decrease in net
interest income of $27,000, an increase in other expense of $57,000, partially
offset by an increase in other income of $25,000, and decreases in income tax
expense of $38,000, and the provision for loan losses of $3,000. The decrease in
net interest income was the result of a volume reduction in higher yielding
assets, mainly mortgages, being replaced by an increased volume of lower
yielding assets, primarily investment securities, partially offset by the
Company's ability to reduce the deposit costs in a low interest rate
environment. The net interest margin decreased 25 basis points to 2.28% in the
first quarter of 2010 from 2.53% in the first quarter of 2009. The decline in
net interest margin is a reflection of a balance sheet repositioning of the loan
portfolio out of longer term assets into shorter term investments. Accepting
margin compression in the short term in order to reduce interest rate risk
exposure was decided as a prudent measure in an unprecedented low interest rate
environment. The increase in non-interest expense that negatively affected the
first quarter of 2010 compared to the first quarter of 2009 was an increase in
FDIC premium expense, and additional occupancy and equipment expenses related to
our Webster branch that opened in September 2009 and our three mortgage
origination offices that opened in January 2010.
20
Comparison of Operating Results for the Three Months Ended March 31, 2010 and
March 31, 2009 (continued)
Interest and Dividend Income. Interest and dividend income decreased by
$242,000 or 9.7%, to $2.3 million for the three months ended March 31, 2010 from
$2.5 million for the three months ended March 31, 2009. The decrease in interest
and dividend income resulted from a $314,000 or 16.5% decrease in interest
income from loans, a $109,000 or 33.4% decrease in interest income from
mortgage-backed securities, partially offset by a $180,000 or 67.4% increase in
securities income, and a $1,000 or 100.0% increase in other interest income
primarily interest earning demand accounts. Average interest-earning assets
increased by $16.6 million, or 8.8%, to $205.5 million for the three months
ended March 31, 2010 from $188.9 million for the three months ended March 31,
2009. The yield on interest-earning assets decreased by 89 basis points to 4.40%
for the three months ended March 31, 2010 compared to 5.29% for the three months
ended March 31, 2009, reflecting a yield decrease in all interest earning asset
categories as a result of the repositioning of assets into lower yielding assets
and a lower market interest rate environment at March 31, 2010.
Interest Expense. Interest expense decreased $215,000 or 16.5%, to $1.1
million for the three months ended March 31, 2010 from $1.3 million for the
three months ended March 31, 2009. The decrease in interest expense resulted
from lower average rates paid on deposits despite an increase in average rates
paid on borrowings and higher total aggregate average liabilities. The average
balance of interest-bearing liabilities increased $18.8 million, or 11.1%, to
$187.9 million for the three months ended March 31, 2010 compared to $169.2
million for the three months ended March 31, 2009. The average cost of
interest-bearing liabilities decreased by 76 basis points to 2.32% for the three
months ended March 31, 2010 from 3.08% for the three months ended March 31,
2009. The average cost of deposit accounts decreased by 84 basis points to 1.90%
for the three months ended March 31, 2010 compared to 2.74% for the three months
ended March 31, 2009. However, the average cost of Passbook savings accounts
increased by 32 basis points to 1.09% for the three months ended March 31, 2010
from 0.77% for the three months ended March 31, 2009 as a result of a high yield
savings account promotion for the grand opening of the Webster branch in
September 2009. The average cost of borrowings increased by 11 basis points to
4.28% for the three months ended March 31, 2010 compared to 4.17% for the three
months ended March 31, 2009, reflective of maturities of lower yielding
borrowings despite a decrease in expense of $71,000. The average balance of
borrowings decreased $7.7 million or 18.9%, to $33.1 million for the three
months ended March 31, 2010 compared to $40.8 million for the three months ended
March 31, 2009. The decrease in interest expense reflects the Bank's management
of lower deposit costs in a historically low interest rate environment. The Bank
has continued to respond to the lower interest rate environment allowing for
deposit re-pricing in a downward fashion of higher cost CDs and Money market
savings accounts, decreasing our overall cost of funds.
At March 31, 2010, we had $23.7 million of certificates of deposit, including
IRAs, that will mature during the second quarter of 2010 with a weighted average
cost of 2.60%. Based on current market rates, if these funds remain with
Fairport Savings Bank with similar maturities, the rates paid on these deposits
will decrease.
Net Interest Income. Net interest income decreased $27,000 or 2.3%, to $1.2
million for the three months ended March 31, 2010 from $1.2 million for the
three months ended March 31, 2009. The decrease in net interest income was due
primarily to an increase in lower yielding earning assets, partially offset by a
lower average cost of deposits lowering the overall cost of interest bearing
liabilities. The Company's net interest margin decreased 25 basis points to
2.28% for the three months ended March 31, 2010 from 2.53% for the three months
ended March 31, 2009.
Provision for Loan Losses. Based on management's evaluation of the factors
that determine the level of the allowance for loan losses, we recorded $3,000 in
provision for loan losses for the three month period ended March 31, 2010
compared to a $6,000 provision for loan losses for the three months ended March
31, 2009. The allowance for loan losses as of March 31, 2010 was $371,000 or
0.33% of total
21
Comparison of Operating Results for the Three Months Ended March 31, 2010 and
March 31, 2009 (continued)
loans, compared to $350,000 or 0.27% of total loans as of March 31, 2009. We
ended the quarter with $23,000 in non-accrual loans as of March 31, 2010
compared to $133,000 in non-accrual loans as of March 31, 2009. We recorded no
charge offs in the first quarter of 2010 or 2009. We had one foreclosed asset of
$79,000 at March 31, 2010 and no foreclosed real estate at March 31, 2009.
Other Income. Total other income increased $25,000 or 18.7%, to $159,000
for the three months ended March 31, 2010 compared to $134,000 for the three
months ended March 31, 2009. In the three months ended March 31, 2010 versus the
three months ended March 31, 2009, there was an increase of $33,000 in BOLI
income, an $8,000 increase in service fee income primarily from deposit account
service charge fees, and a $12,000 increase in other income primarily from
mortgage fees, partially offset by a decrease of $5,000 in commissions from
Oakleaf Services insurance/annuity and security sales, $15,000 less in gain on
sale of mortgage loans in the secondary market and an $8,000 net loss on sale of
available for sale securities, reflecting a $10,000 loss on mortgage backed
securities held to maturity, as previously discussed, partially offset by a
$2,000 gain on sale of FHLMC common stock available for sale.
Other Expense. Total other expense increased $57,000, or 4.6%, to $1.3
million for the three months ended March 31, 2010 compared to $1.2 million for
the three months ended March 31, 2009. The increase was primarily the result of
a $35,000 increase in FDIC insurance premium expense to $57,000 for the three
months ended March 31, 2010, compared to $22,000 for the three months ended
March 31, 2009. Occupancy expense increased by $25,000 and equipment expense
increased by $13,000 with additional occupancy and equipment expenses related to
our Webster branch that opened in September 2009 and our three mortgage
origination offices that opened in January 2010. Advertising expense increased
by $9,000 and other expense increased by $6,000. These increases were partially
offset by a decrease in salaries and benefits expense of $6,000 reflecting the
Bank's continued expense reductions initiatives in the first quarter of 2010
compared to the first quarter of 2009, $14,000 less in mortgage fees and taxes,
$6,000 less in data processing expense, and $4,000 less in electronic banking
expense.
Income Tax Expense. We had pre-tax income of $23,000 for the three months
ended March 31, 2010 versus pre-tax income of $79,000 for the three months ended
March 31, 2009, which resulted in a $10,000 tax benefit for the three months
ended March 31, 2010, versus a $28,000 tax expense for the three months ended
March 31, 2009, a change in taxes of $38,000. The effective tax benefit rate was
(43.5)% for the three months ended March 31, 2010 compared to a tax expense rate
of 35.4% for the three months ended March 31, 2009. The high effective tax
benefit rate in the quarter ended March 31, 2010 was a result of the utilization
of New York State mortgage recording tax credits in the current period that had
been previously subject to a valuation allowance. The New York State franchise
tax recorded on taxable assets for the current quarter 2010 exceeded the
mortgage tax generated in its 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 Federal Home Loan Bank of New York, maturities and
principal repayments of securities, and recently, but to a lesser extent, 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 10.0% or greater. For the quarter ended March 31,
2010, our liquidity ratio averaged 19.6%. We believe that we have enough sources
of liquidity to satisfy our short and long-term liquidity needs as of March 31,
2010.
We regularly adjust our investments in liquid assets based upon our assessment
of:
22
Liquidity and Capital Resources (continued)
(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 March 31, 2010, cash and cash equivalents totaled
$11.4 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 March 31, 2010, we had $3.9 million in loan commitments outstanding. In
addition to commitments to originate loans, we had $9.0 million in unused lines
of credit to borrowers. Certificates of deposit, including individual retirement
accounts comprised solely of certificates of deposits, due within one year of
March 31, 2010 totaled $59.5 million, or 60.3% of our certificates of deposit
and 36.5% 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 Federal Home Loan Bank
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 March 31, 2010. 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 March 31, 2010, we originated $5.5 million of
loans.
Financing activities consist primarily of activity in deposit accounts and
Federal Home Loan Bank borrowings. We experienced a net increase in total
deposits of $6.7 million for the quarter ended March 31, 2010. 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 Federal Home Loan Bank of New York, which
provides an additional source of funds. Federal Home Loan Bank borrowings
decreased by $3.3 million to $31.3 million for the three months ended March 31,
2010, compared to a net decrease of $7.2 million to $38.3 million for the three
months ended March 31, 2009. Historically, Federal Home Loan Bank borrowings
have primarily been used to fund loan demand and expanding the investment
portfolio. At March 31, 2010, we had the ability to borrow approximately $85.0
million from the Federal Home Loan Bank of New York, of which $31.3 million had
been advanced.
The Bank also has a repurchase agreement with Morgan Keegan 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 March 31, 2010 or
December 31, 2009.
23
Liquidity and Capital Resources (continued)
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 March 31, 2010, 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 for equity lines of 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 March 31, 2010 and 2009, we had $3.9 million and $4.5 million, respectively,
of commitments to grant loans, and $9.0 million and $7.5 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 4T. 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, as of
the end of the period covered by this report, our disclosure controls and
procedures were effective to ensure that information required to be disclosed in
the reports that the Company files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
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 has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
24
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 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, 2009, 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 set forth below 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.
Legislative proposals have been introduced that would eliminate the Office of
Thrift Supervision and would require Fairport Savings Bank and FSB Community
Bankshares, Inc. to become regulated by other federal regulatory agencies.
Legislation has been proposed that would implement sweeping changes to the
current bank regulatory structure. The most recent proposal would eliminate our
current primary federal regulator, the Office of Thrift Supervision, and require
both Fairport Savings Bank and FSB Community Bankshares, Inc. to be regulated by
the Office of the Comptroller of the Currency (the primary federal regulator for
national banks). The proposed legislation provides that the Board of Governors
of the Federal Reserve System would be responsible for promulgating regulations
for holding companies (like FSB Community Bankshares, Inc.) with the Office of
the Comptroller of the Currency being responsible for the application and
enforcement of such regulations. In addition, compliance with new regulations
and being supervised by one or more new regulatory agencies could increase our
expenses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) There were no sales of unregistered securities during the period
covered by this Report.
(b) Not applicable.
(c) There were no issuer repurchases of securities during the period
covered by this Report.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. [Reserved]
Item 5. Other Information
None.
25
Item 6. Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
3.1 Charter of FSB Community Bankshares, Inc.*
3.2 Bylaws of FSB Community Bankshares, Inc.*
4 Form of Common Stock Certificate of FSB Community Bankshares, Inc.*
10.1 Supplemental Executive Retirement Plan*
10.2 Form of Employee Stock Ownership Plan*
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
---------------
* 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.
26
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.
FSB COMMUNITY BANKSHARES, INC.
Date: May 14, 2010 /s/ Dana C. Gavenda
-------------------------------------
Dana C. Gavenda
President and Chief Executive Officer
Date: May 14, 2010 /s/ Kevin D. Maroney
-------------------------------------
Kevin D. Maroney
Executive Vice President and Chief
27
Financial Officer