SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2007
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to ______________________
Commission File No.001-52751
FSB Community Bankshares, Inc.
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(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)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 .
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES X NO .
--- ---
As of November 13, 2007 there were 1,785,000 shares of the Registrant's
common stock, par value $0.10 per share, outstanding, of which 945,050 shares
or, 53% were held by FSB Community Bankshares, MHC, the Registrant's mutual
holding company.
FSB Community Bankshares, Inc.
FORM 10-QSB
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 September 30, 2007
and December 31, 2006 1
Consolidated Statements of Operations for the Three
Months Ended September 30, 2007 and 2006 2
Consolidated Statements of Operations for the Nine
Months Ended September 30, 2007 and 2006 3
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended September 30, 2007 and 2006 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2007 and 2006 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan
of Operations 11
Item 3. Controls and Procedures 23
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
Signatures Page 25
Part I. Financial Information
Item 1. Consolidated Financial Statements
FSB COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
September 30, 2007 and December 31, 2006 (unaudited)
(Dollars in thousands, except per share data)
September 30, December 31,
2007 2006
--------------------- ---------------------
Assets
Cash and due from banks $ 1,207 $ 1,718
Interest-earning demand deposits
6,745 980
Cash and Cash Equivalents 7,952 2,698
Securities available for sale 447 604
Securities held to maturity (fair value 2007 - $29,588, 2006 - $23,873) 29,617 24,191
Investment in FHLB stock 1,143 1,490
Loans receivable, net of allowance for loan losses (2007 - $319
2006 - $322) 122,500 121,137
Foreclosed real estate 41 -
Accrued interest receivable 861 873
Premises and equipment, net 2,578 2,146
Other assets 278 200
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Total Assets $ 165,417 $ 153,339
===================== =====================
Liabilities & Stockholders' Equity
Deposits:
Non-interest bearing $ 3,433 $ 3,402
Interest bearing 117,763 105,178
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Total Deposits 121,196 108,580
Short term borrowings - 4,200
Long term borrowings 19,770 23,824
Advances from borrowers for taxes and insurance 1,951 1,828
Other liabilities 2,195 1,037
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Total Liabilities 145,112 139,469
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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;
shares issued and outstanding - 2007 - 1,785,000; 2006 - 100 179 -
Additional paid-in-capital 7,291 10
Retained earnings 13,257 13,505
Accumulated other comprehensive income 252 355
Unearned ESOP shares - at cost (674) -
--------------------- --------------------
Total Stockholders' Equity 20,305 13,870
--------------------- --------------------
Total Liabilities and Stockholders' Equity $ 165,417 $ 153,339
===================== ====================
See accompanying notes to consolidated financial statements
1
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Operations
Three Months Ended September 30, 2007 and 2006 (unaudited)
(Dollars in thousands)
2007 2006
--------------------- ---------------------
Interest and Dividend Income
Loans $ 1,819 $ 1,753
Securities - taxable 293 240
Mortgage - backed securities 76 72
Other 120 17
Total Interest and Dividend Income 2,308 2,082
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Interest Expense
Deposits 1,146 906
Borrowings:
Long term 241 252
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Total Interest Expense 1,387 1,158
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Net Interest Income 921 924
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Other Income
Service fees 26 20
Fee income 25 35
Realized gain on sale of securities available for sale 81 -
Other 37 31
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Total Other Income 169 86
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Other Expense
Salaries and employee benefits 594 565
Occupancy expense 109 62
Data processing costs 15 31
Advertising 63 51
Equipment expense 77 82
Electronic banking 24 29
Directors fees 24 20
Mortgage fees and taxes 45 42
Other expense 140 91
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Total Other Expense 1,091 973
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Income (Loss) Before Income Taxes (1) 37
Provision for Income Taxes - 10
--------------------- ---------------------
Net Income (Loss) $ (1) $ 27
===================== =====================
Basic earnings per common share $ - $ .03
Basic average common shares outstanding 1,381 946
See accompanying notes to consolidated financial statements
2
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Operations
Nine Months Ended September 30, 2007 and 2006 (unaudited)
(Dollars in thousands)
2007 2006
--------------------- ---------------------
Interest and Dividend Income
Loans $ 5,394 $ 5,004
Securities - taxable 770 692
Mortgage-backed securities 199 228
Other 167 63
--------------------- ---------------------
Total Interest and Dividend Income 6,530 5,987
--------------------- ---------------------
Interest Expense
Deposits 3,173 2,493
Borrowings:
Short term 29 10
Long term 757 679
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Total Interest Expense 3,959 3,182
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Net Interest Income 2,571 2,805
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Other Income
Service fees 75 57
Fee income 67 112
Gain on sale of securities available for sale 81 -
Other 105 90
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Total Other Income 328 259
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Other Expense
Salaries and employee benefits 1,767 1,580
Occupancy expense 325 196
Data processing costs 68 68
Advertising 225 132
Equipment expense 255 231
Electronic banking 45 69
Directors fees 77 68
Mortgage fees and taxes 116 130
Other expense 407 297
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Total Other Expense 3,285 2,771
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Income (Loss) Before Income Taxes (386) 293
Provision (Benefit) for Income Taxes (138) 102
--------------------- ---------------------
Net Income (Loss) $ (248) $ 191
===================== =====================
Basic earnings (loss) per common share $ (0.23) $ .20
Basic average common shares outstanding 1,093 946
See accompanying notes to consolidated financial statements
3
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 2007 and 2006 (unaudited)
(Dollars in thousands)
Accumulated
Additional Other Unearned
Preferred Paid in Retained Comprehensive ESOP
Stock Common Stock Capital Earnings Income Shares Total
--------- ------------ ---------- --------- ------------- ----------- ---------
Balance - January 1, 2006 $ - $ - $ 10 $ 13,272 $ 336 $ - $ 13,618
Comprehensive income
Net income 191 191
Change in net unrealized gain
on securities available for sale,
net of taxes 3 3
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Total Comprehensive Income - - - - - - 194
---------- ------------ ----------- -------- -------------- ---------- --------
Balance - September 30, 2006 $ - $ - $ 10 $ 13,463 $ 339 $ - $ 13,812
========== ============ =========== ======== ============== ========== ========
Balance - January 1, 2007 $ - $ - $ 10 $ 13,505 $ 355 $ - $ 13,870
Comprehensive loss
Net loss (248) (248)
Change in net unrealized gain
on securities available for
sale, net of taxes (103) (103)
--------
Total Comprehensive Loss (351)
Shares issued in public offering 179 7,281 7,460
Shares purchased by ESOP (700) (700)
ESOP shares committed to be
released - - - - - 26 26
---------- ------------ --------- -------- -------------- ---------- --------
Balance - September 30, 2007 $ - $ 179 $ 7,291 $ 13,257 $ 252 $ (674) $ 20,305
========== ============ ========= ======== ============== ========== ========
See accompanying notes to consolidated financial statements
4
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2007 and 2006 (unaudited)
(Dollars in thousands)
2007 2006
--------------------- ---------------------
Cash Flows From Operating Activities
Net income (loss) $ (248) $ 191
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Gain on sale of securities available for sale (81) -
Gain on sale of loans (2) -
Net amortization of premiums and discounts on securities 25 34
Amortization of net deferred loan origination fees (42) (96)
Depreciation and amortization 224 164
ESOP expense 26 -
Deferred income tax benefit (3) (27)
(Increase) decrease in accrued interest receivable 12 (52)
Increase in other assets (70) (133)
Increase in other liabilities 1,206 2,627
--------------------- ---------------------
Net Cash Provided By Operating Activities 1,047 2,708
--------------------- ---------------------
Cash Flows From Investing Activities
Purchase of securities held to maturity (12,366) (1,500)
Proceeds from maturities and calls of securities
held to maturity 6,915 2,441
Proceeds from sale of securities available for sale 82 -
Net increase in loans (2,108) (11,741)
Proceeds from sales of loans 748 726
Net (increase) decrease of Federal Home Loan Bank stock 347 (117)
Purchase of premises and equipment (656) (285)
Proceeds from sale of foreclosed real estate - 225
--------------------- ---------------------
Net Cash Used By Investing Activities (7,038) (10,251)
--------------------- ---------------------
Cash Flows From Financing Activities
Net increase in deposits 12,616 3,347
Net decrease in short term borrowings (4,200) -
Proceeds from long-term borrowings - 5,000
Repayments on long-term borrowings (4,054) (2,663)
Net increase (decrease) in advances from borrowers
for taxes and insurance 123 (810)
Net proceeds from common stock offering 7,460 -
Purchase of shares for employee stock ownership program (700) -
--------------------- ---------------------
Net Cash Provided By Financing Activities 11,245 4,874
--------------------- ---------------------
Net Increase (Decrease) in Cash 5,254 (2,669)
and Cash Equivalents
Cash and Cash Equivalents- Beginning 2,698 5,092
--------------------- ---------------------
Cash and Cash Equivalents- End $ 7,952 $ 2,423
===================== =====================
5
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows, Cont'd
Supplementary Cash Flows Information 2007 2006
--------------------- ---------------------
Interest paid $ 3,954 $ 3,189
===================== =====================
Income taxes paid $ 14 $ 117
===================== =====================
Non-cash Operating, Investing and Financing Activities
Transfer of loans to foreclosed assets $ 41 -
===================== =====================
See accompanying notes to consolidated financial statements
6
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of FSB Community
Bankshares, Inc., and its wholly owned subsidiary (the "Company") have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and the instructions
of Form 10-QSB. 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 unaudited consolidated financial statements and "Management's Discussion and
Analysis or Plan of Operation" should be read in conjunction with the Company's
audited financial statements for the years ended December 31, 2006 and 2005,
included in the Prospectus filed under Rule 424(b)(3) with the Securities and
Exchange Commission ("SEC") on May 23, 2007, as subsequently amended.
Operating results for the three and nine months ended September 30, 2007 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007.
The consolidated financial statements at September 30, 2007 and December 31,
2006 and for the three and nine months ended September 30, 2007 and 2006 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 have been reclassified, when necessary, to
conform to the current period presentation.
Note 2 - Minority Stock Issuance
On August 10, 2007 the Company completed its initial public stock offering
("Offering"). In the Offering, the Company sold 838,950 shares, or 47.0% of its
outstanding common stock, at a price of $10.00 per share to the Bank's
depositors, the Bank's employee stock ownership plan and the public.
Additionally, the Company issued 946,050 shares, or 53.0% of its common stock,
to FSB Community Bankshares, MHC, the Company's federally chartered mutual
holding company parent. Gross proceeds from the Offering were $8.4 million.
Costs of approximately $929,000 associated with the Offering have been deducted
from the proceeds from the sale of stock.
7
Note 3 - Earnings (Loss) Per Share
The Company had 100 shares of common stock issued and oustanding for the year
ended December 31, 2006 and from January 1, 2007 to August 10, 2007. On August
10, 2007 the Company issued 1,785,000 shares of common stock and cancelled 100
shares.
Basic earnings (loss) per common share is calculated by dividing the net income
(loss) by the weighted-average number of common shares outstanding during the
period. The common shares issued to FSB Community Bankshares, MHC of 946,050 are
assumed to be outstanding for all periods presented, consistent with the
provisions of SFAS No. 128, Earnings per Share, pertaining to changes in capital
structure. The 838,950 shares issued to the public are included in the weighted
average common shares outstanding calculation since the date of their issuance.
Unallocated common shares held by the ESOP are not included in the weighted-
average number of common shares outstanding for purposes of calculating basic
earnings per common share until they are committed to be released. The Company
has not granted any restricted stock awards or stock options and, during the
nine months ended September 30, 2007 and 2006, had no potentially dilutive
common stock equivalents.
Note 4 - Comprehensive Income (Loss)
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 (loss).
The components of other comprehensive income (loss) and related tax effects for
the three and nine months ended September 30, 2007 and 2006 are as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2007 2006 2007 2006
---- ----- ---- ----
(In Thousands) (In Thousands)
Unrealized holding gain (loss) on available for sale $ (9) $ 15 $ (79) $ 5
securities
Less reclassification adjustment for realized gains
included in net income (loss) (81) - (81) -
------- ------ ------ -------
Net unrealized gain (loss) (90) 15 (160) 5
Tax effect 31 (5) 57 (2)
------- ------ ------ -------
Net of tax amount $ (59) $ 10 $(103) $ 3
======= ====== ======= =======
8
Note 5 - Employee Stock Ownership Plan
In connection with the Offering described in Note 2, the Bank established an
Employee Stock Ownership Plan ("ESOP") for its employees which acquired 69,972
shares of the Company's common stock in connection with the Offering with funds
provided by a loan from the Company. Accordingly, $699,720 of common stock
acquired by the ESOP is shown as a reduction of stockholders' equity. The ESOP
loan will be repaid principally from the Bank's contributions to the ESOP. The
loan is being repaid in annual installments through 2026 and bears interest at
Wall Street Journal prime lending rate (7.75% at September 30, 2007). Shares are
released to participants proportionately as the loan is repaid.
The Company accounts for the ESOP in accordance with American Institute of
Certified Public Accountants (AICPA) Statement of Position 93-6. The cost of
shares issued to the ESOP but not yet allocated to participants is presented in
the consolidated statement of financial condition as a reduction of
stockholders' equity. Compensation expense is recorded based on the market price
of the shares as they are committed to be released for allocation to participant
accounts. The difference between the market price and the cost of shares
committed to be released is recorded as an adjustment to additional paid-in
capital. Dividends on allocated shares will be recorded as a reduction of
retained earnings, and dividends on unallocated shares, if any, will be recorded
as a reduction of debt. The Company recognized $26,000 of compensation expense
for the quarter and nine months ended September 30, 2007.
Shares will be considered outstanding for earnings per share calculations when
they are committed to be released; unallocated shares will not be considered
outstanding.
Note 6 - Regulatory Capital Requirements
At September 30, 2007, the Bank met each of its minimum regulatory capital
requirements. The following table summarizes the Bank's regulatory capital
position at September 30, 2007:
Minimum to be Well-
Minimum For Capital Capitalized Under Prompt
(Dollars in thousands) Actual Adequacy Purposes Corrective Action Provisions
------ ------------------- ----------------------------
At September 30, 2007: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Tangible (to adjusted total assets) $16,304 10.05% $2,432 1.50% N/A N/A
Tier I (to risk-weighted assets) 16,304 21.90 2,978 4.00 $4,467 6.00%
Core (to adjusted total assets) 16,304 10.05 6,487 4.00 8,108 5.00
Total (to risk-weighted assets) 16,623 22.33 5,956 8.00 7,445 10.00
9
Note 7 - Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). The interpretation clarifies the
accounting for uncertainty in income taxes recognized in a company's financial
statements in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Specifically, the pronouncement prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The interpretation also provides guidance on the related
derecognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition of uncertain tax positions. The adoption of
FIN 48 did not have any effect on our consolidated financial statements. In May
2007, the FASB issued FASB Staff Position ("FSP") FIN 48-1 "Definition of
Settlement in FASB Interpretation No. 48" (FSP FIN 48-1). FSP FIN 48-1 provides
guidance on how to determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is
effective retroactively to January 1, 2007. The implementation of this standard
did not have any impact on our consolidated financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
SFAS 157 applies to other accounting pronouncements that require or permit fair
value measurements. The new guidance is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. We are evaluating the impact, if any, of the
adoption of SFAS 157 on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. SFAS 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007 (i.e., January 1, 2008 for the Company). We are evaluating the
impact, if any, of the adoption of SFAS 159 on our consolidated financial
statements.
10
Item 2. Management's Discussion and Analysis or Plan of Operation
General
Throughout the Management's Discussion and Analysis or Plan of Operation
("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 September
30, 2007, FSB Community Bankshares, MHC the Company's mutual holding company
parent, held 53% of the Company's outstanding common stock, engaged in no
significant activities and was not included in the MD&A.
On August 10, 2007, the Company sold 838,950 shares, or 47% of its common stock,
to subscribers in connection with its initial public stock offering, including
69,972 shares purchased by Fairport Savings Bank Employee Stock Ownership Plan.
Upon completion of the transaction, FSB Community Bankshares, MHC, the Company's
federally chartered mutual holding company parent, held 946,050 shares or 53% of
the Company's outstanding common stock. Net proceeds from the initial public
offering were approximately $7.5 million.
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 economic conditions including real estate values in the Company's
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company's market area and competition,
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 ("the Consolidated Financial
Statements") included in the Company's Prospectus filed pursuant to Rule 424(b)
on May 23, 2007, as subsequently amended. These policies, along with the
disclosures presented in the other 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. We have identified the accounting of our allowance for loan losses
as our critical accounting policy.
11
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 the Bank's 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. Management considers 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 a specific and general component. The specific
component relates to loans that are delinquent or otherwise identified as a
problem loan through the application of our loan review process and our loan
grading system. All such loans are evaluated individually, with principal
consideration given to the value of the collateral securing the loan. Specific
allowances are established as required by this analysis. The general component
is determined by segregating the remaining loans by type of loan, risk weighting
(if applicable) and payment history. Management also analyzes historical loss
experience, delinquency trends, general economic conditions and geographic
concentrations. This analysis establishes factors that are applied to the loan
groups to determine the amount of the general component of the allowance for
loan losses.
Actual loan losses may be significantly more than the allowance we have
established which could have a material negative effect on our financial
results.
Comparison of Financial Condition at September 30, 2007 and December 31, 2006
Total Assets. Total assets increased by $12.1 million, or 7.9%, to
$165.4 million at September 30, 2007 from $153.3 million at December 31, 2006.
The primary increase in total assets reflected increases in cash and cash
equivalents of $5.3 million, securities held to maturity of $5.4 million, and
loans receivable of $1.4 million. Asset growth was funded by subscription funds
from the Company's stock offering that closed in August 2007 and increased cash
and cash equivalents resulting from deposit growth primarily in the Irondequoit
branch since opening in January 2007. Premises and equipment increased by
$432,000 mainly due to additional building and equipment costs associated with
the Irondequoit branch.
12
Cash and cash equivalents increased by $5.3 million, or 196.3% to $8.0
million at September 30, 2007 from $2.7 million at December 31, 2006. The
increase was primarily due to proceeds received from the Company's stock
offering, which were held in interest earning cash deposits at correspondent
banks. It is anticipated that the proceeds will be used for short term
investments and funding loan demand in the fourth quarter of 2007.
Loans receivable increased by $1.4 million, or 1.2%, to $122.5 million
at September 30, 2007 from $121.1 million at December 31, 2006. The increase in
loans receivable was the result of fixed rate mortgage loan and fixed rate home
equity originations, offset partially by principal reductions in commercial real
estate loans. The Bank has experienced an increase in fixed rate home equity
loan volume with less demand for adjustable home equity loans in the current
interest rate environment. The Bank continues not to be involved in, and has no
exposure to, sub-prime lending activities.
Investment securities increased by $5.3 million, or 21.3%, to $30.1
million at September 30, 2007 from $24.8 million at December 31, 2006. The
increase was primarily attributable to $9.9 million in purchases of United
States Government agency securities, $2.5 million in purchases of adjustable
rate mortgage-backed securities, partially offset by the maturity of $5.7
million of United States Government agency securities, $1.2 million of principal
payments received from mortgage-backed securities, the sale of $82,000 of FHLMC
common stock, and a $79,000 decrease in the fair market value of securities
classified as available for sale.
Deposits and Borrowings. Deposits increased by $12.6 million, or 11.6%,
to $121.2 million at September 30, 2007 from $108.6 million at December 31,
2006. Certificates of deposit, including IRAs, increased by $9.7 million, and
transaction accounts, including checking, money market and savings accounts,
increased by $2.9 million. In the first nine months of 2007 we experienced
modest growth in both the number and size of checking and savings accounts. In
the current interest rate environment, our customer base still favors short term
traditional certificates of deposits with a maturity of one year or less. The
net deposit growth was primarily attributable to $11.0 million in deposit growth
in the Irondequoit branch since opening on January 4, 2007.
Borrowings decreased by $8.2 million, or 29.3%, to $19.8 million at
September 30, 2007 from $28.0 million on December 31, 2006. We decreased our
short-term Federal Home Loan Bank borrowings by $4.2 million and our long-term
Federal Home Loan Bank borrowings by $4.0 million. These funding sources were
replaced by deposits obtained primarily in our Irondequoit branch.
Other liabilities increased by $1.2 million, or 120.0%, to $2.2 million
at September 30, 2007 from $1.0 million at December 31, 2006. This increase was
attributable to $1.8 million in outstanding official bank checks at September
30, 2007, compared to $516,000 in outstanding official bank checks at December
31, 2006, caused by the payment of property taxes due at the end of September
from customer mortgage escrow accounts.
Total Stockholders' Equity. Total stockholders' equity increased by
$6.4 million, or 46.0%, to $20.3 million at September 30, 2007 from $13.9
million at December 31, 2006. The increase was attributable to the Company's
public offering that generated net proceeds of $7.5 million after payment of
$929,000 in offering expenses. Net proceeds of $699,720 were used to purchase
stock for the Employee Stock Ownership Plan. In addition, the Company had a net
loss of $248,000 for the nine months ended September 30, 2007.
13
Non-Performing Assets. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated.
September 30, 2007 December 31, 2006
2007 2007
------------------ -----------------
(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One- to four-family residential................. $ - $ 143
Home equity lines of credit..................... 100 28
Multi-family residential........................ - -
Construction.................................... - -
Commercial...................................... - -
- -
------------------ -----------------
Other loans......................................
Total......................................... 100 171
------------------ -----------------
Accruing loans 90 days or more past due: - -
------------------ -----------------
Total non-performing loans............... 100 171
------------------ -----------------
Foreclosed real estate....................... 41 -
Other non-performing assets.................. - -
------------------ -----------------
Total non-performing assets.................. $ 141 $ 171
------------------ -----------------
Ratios:
Total non-performing loans to total loans 0.08% 0.14%
Total non-performing loans to total assets 0.06% 0.11%
Total non-performing assets to total assets 0.09% 0.11%
At September 30, 2007, there were no other loans or other assets that are not
disclosed in the table 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.
14
Average balances and yields. The following table sets 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, but have
been reflected in the table as loans carrying a zero yield. The Bank has no tax
exempt securities or loans. The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest
income.
For the Three Months Ended September 30,
-------------------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
----------- ---------- ---------- ----------- ---------- --------
Interest-earning assets:
Loans......................... $ 121,315 $ 1,819 6.00% $ 118,475 1,753 5.92%
Securities - taxable.......... 22,011 293 5.32 20,675 240 4.64
Mortgage-backed securities.... 7,221 76 4.21 6,725 72 4.28
Other......................... 9,229 120 5.20 1,480 17 4.59
---------- ---------- ---------- ----------
Total interest-earning assets 159,776 2,308 5.78 147,355 2,082 5.65
---------- ----------- ---------- -----
Noninterest-earning assets.... 7,242 3,126
---------- ----------
Total assets............... $ 167,018 $ 150,481
========== ==========
Interest-bearing liabilities:
NOW accounts.................. $ 6,336 10 0.63 $ 3,896 5 0.51
Passbook savings.............. 17,913 56 1.25 11,895 23 0.77
Money market savings.........
Individual retirement accounts 10,681 79 2.96 10,734 70 2.61
16,021 181 4.52 14,887 149 4.00
Certificates of deposit....... 70,975 820 4.62 66,045 659 3.99
Borrowings.................... 19,838 241 4.86 21,803 252 4.64
---------- ---------- ---------- ----------
Total interest-bearing
liabilities.............. 141,764 1,387 3.91% 129,260 1,158 3.58%
----------- ----------- -------- ---------- --------- -----
Noninterest-bearing liabilities:
Demand deposits......... 3,222 4,079
Other......................... 2,079 3,762
---------- ----------
Total liabilities........ 147,065 137,101
Stockholders' equity.......... 19,953 13,380
---------- ----------
Total liabilities and Stockholders'
equity................... $ 167,018 $ 150,481
========== ==========
Net interest income........... $ 921 $ 924
========== ==========
Interest rate spread (1)...... 1.87% 2.07%
===== =====
Net interest-earning assets (2) $ 18,012 $ 18,095
========== ==========
Net interest margin (3)....... 2.31% 2.51%
========== ======
Average interest-earning assets to average
interest-bearing liabilities 113% 115%
========== ====
---------------------
(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.
15
For the Nine Months Ended September 30,
-------------------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
---------- ----------- ----------- ----------- ---------- --------
Interest-earning assets:
Loans......................... $ 120,622 $ 5,394 5.96% $ 113,931 5,004 5.86%
Securities - taxable.......... 20,067 770 5.12 20,256 692 4.56
Mortgage-backed securities.... 6,339 199 4.19 7,164 228 4.24
Other......................... 4,322 167 5.15 1,940 63 4.33
---------- ---------- ---------- ----------
Total interest-earning assets 151,350 6,530 5.75 143,291 5,987 5.57
---------- ----------- ---------- --------
Noninterest-earning assets.... 5,636 3,147
---------- ----------
Total assets............... $ 156,986 $ 146,438
========== ==========
Interest-bearing liabilities:
NOW accounts.................. $ 5,537 26 0.63 $ 3,575 14 0.52
Passbook savings.............. 14,542 132 1.21 12,127 60 0.66
Money market savings......... 10,498 225 2.86 10,646 187 2.34
Individual retirement accounts 15,578 511 4.37 14,789 421 3.80
Certificates of deposit....... 68,234 2,279 4.45 64,231 1,811 3.76
Borrowings.................... 21,519 786 4.87 20,489 689 4.48
---------- ---------- ---------- ----------
Total interest-bearing
liabilities.............. 135,908 3,959 3.88% 125,857 3,182 3.37%
---------- ----------- ---------- ----------- ---------- -----
Noninterest-bearing liabilities:
Demand deposits......... 3,197 4,068
Other......................... 2,294 2,957
---------- ----------
Total liabilities........ 141,399 132,882
Stockholders' equity.......... 15,587 13,556
---------- ----------
Total liabilities and Stockholders'
equity................... $ 156,986 $ 146,438
========== ==========
Net interest income........... $ 2,571 $ 2,805
========== ==========
Interest rate spread (1)...... 1.87% 2.20%
========= =====
Net interest-earning assets (2) $ 15,442 $ 17,434
========== ==========
Net interest margin (3)....... 2.26% 2.61%
========= =========
Average interest-earning assets to average
interest-bearing liabilities 111% 114%
========== ==========
---------------------
(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.
16
Comparison of Operating Results for the Three Months Ended September 30, 2007
and September 30, 2006
General. We had a net loss of $1,000 for the three months ended
September 30, 2007 compared to net income of $27,000 for the three months ended
September 30, 2006. The $28,000 decrease was attributable to a $3,000 decrease
in net interest income, $118,000 increase in other expenses, partially offset by
an $83,000 increase in other income, and a $10,000 decrease in the provision for
income taxes.
Interest and Dividend Income. Interest and dividend income increased by
$226,000, or 10.8% to $2.3 million for the three months ended September 30, 2007
from $2.1 million for the three months ended September 30, 2006. The increase in
interest and dividend income resulted from a $103,000 increase in other interest
income due to a higher volume of interest earning cash deposits at correspondent
banks due to proceeds received from the Company's stock offering, an increase in
loans of $66,000 with larger volumes in mortgages and home equity loans, an
increase in securities income of $53,000 with additional volume in investments,
and an increase in interest on mortgage backed securities of $4,000. Average
interest-earning assets increased by $12.4 million, or 8.4%, to $159.8 million
for the three months ended September 30, 2007 from $147.4 million for the three
months ended September 30, 2006. The average yield on interest earning assets
increased by 13 basis points to 5.78% for the three months ended September 30,
2007 compared to 5.65% for the three months ended September 30, 2006 reflecting
modest increases in most asset categories yields with higher yielding assets
added to their respective categories within the last year.
Interest Expense. Interest expense increased $229,000, or 19.1%, to
$1.4 million for the three months ended September 30, 2007 from $1.2 million for
the three months ended September 30, 2006. The increase in interest expense
resulted from an increase in both the average balance and average cost of
interest-bearing liabilities. The average balance of interest-bearing
liabilities increased $12.5 million, or 9.7%, to $141.8 million for the three
months ended September 30, 2007 compared to $129.3 million for the three months
ended September 30, 2006. The average cost of interest-bearing liabilities
increased by 33 basis points to 3.91% for the three months ended September 30,
2007 from 3.58% for the three months ended September 30, 2006. The average cost
of deposit accounts increased by 39 basis points to 3.76% for the three months
ended September 30, 2007 compared to 3.37% for the three months ended December
31, 2006. In addition, the average cost of borrowings from the Federal Home Loan
Bank increased by 22 basis points to 4.86% for the three months ended September
30, 2007 compared to 4.64% for the three months ended September 30, 2006. The
increase in interest expense reflects the trend of rising interest rates for new
and renewing deposits over the last twelve months.
Based upon current market rates, we expect our cost of funds to
stabilize in the fourth quarter of 2007. We have $22.2 million of certificates
of deposit that will mature during the fourth quarter of 2007 with a weighted
average cost of 4.49%. Based on current market rates, if these funds remain with
Fairport Savings Bank with similar maturities, the rates we pay on these
deposits would not materially change.
17
Net Interest Income. Net interest income decreased $3,000, or 0.3%, to
$921,000 for the three months ended September 30, 2007 from $924,000 for the
three months ended September 30, 2006. The decrease in net interest income was
due primarily to a 33 basis point increase in the average cost of our
interest-bearing liabilities, while the average yield on our interest-earning
assets increased by only 13 basis points. The decrease in the net interest
income was primarily due to the interest rate sensitive liabilities on our
balance sheet consisting mainly of savings, money market and certificates of
deposit accounts repricing at a higher interest rate and at a faster speed
compared to the assets on our balance sheet that are comprised of mainly fixed
rate securities and loans. Our net interest margin decreased 20 basis points to
2.31% for the three months ended September 30, 2007 from 2.51% for the three
months ended September 30, 2006.
Provision for Loan Losses. Based on management's evaluation of the
factors that determine the level of the allowance for loan losses, we recorded
no provision for loan losses for the three month periods ended September 30,
2007 and September 30, 2006. We continue to maintain exceptional credit quality
within our loan portfolio with one charge-off for $3,000 recorded for the three
months ended September 30, 2007. The allowance for loan losses as of September
30, 2007 was $319,000, or 0.26% of total loans, compared to $322,000, or 0.27%
of total loans as of December 31, 2006. We had non-accrual loans totaling
$100,000, or 0.08% of total loans receivable as of September 30, 2007 compared
to $171,000, or 0.14% of loans receivable in non-accrual status as of September
30, 2006. We had $41,000 in foreclosed real estate as of September 30, 2007 and
no foreclosed real estate as of December 31, 2006.
Other Income. Other income increased by $83,000, or 96.5%, to $169,000
for the three months ended September 30, 2007 compared to $86,000 for the three
months ended September 30, 2006. The increase in other income was primarily the
result of an $81,000 gain on the sale of available for sale securities.
Other Expense. Other expense increased $118,000, or 12.1%, to $1.1
million for the three months ended September 30, 2007 compared to $973,000 for
the three months ended September 30, 2006. The increase was the result of
$29,000 in additional salaries and benefits expense primarily due to annual cost
of living raises, staffing of the Irondequoit branch, ESOP expense of $26,000,
an increase of $47,000 in occupancy expenses consisting primarily of leasing
costs, maintenance and depreciation of the Irondequoit branch, an increase of
$12,000 in advertising due to direct mail costs of a free checking program, and
an increase of $46,000 in miscellaneous other expenses, primarily related to the
Irondequoit branch as well as increased costs associated with being a newly
registered public company, partially offset by a decrease in data processing
costs of $16,000 by switching vendors for POS/ debit card processing.
Income Tax Expense/Benefit. We had a pre-tax loss of $1,000 for the
three months ended September 30, 2007 versus a pre-tax profit of $37,000 for the
three months ended September 30, 2006, which resulted in no provision for income
taxes for the three months ended September 30, 2007, versus a $10,000 provision
for income taxes for the three months ended September 30, 2006, a change of
$10,000.
Comparison of Operating Results for the Nine Months Ended September 30, 2007 and
September 30, 2006
General. We had a net loss of $248,000 for the nine months ended
September 30, 2007 compared to net income of $191,000 for the nine months ended
September 30, 2006. The $439,000 decrease was attributable to a decrease in net
interest income of $234,000, an increase in other expense of $514,000, offset
partially by an increase in other income of $69,000, and a decrease in income
taxes of $240,000. The decrease in net interest income resulted from a decrease
in our net interest margin of 35 basis points and the increase in other expenses
18
resulted primarily from the additional cost of salaries and benefits, occupancy,
and other operating expenses incurred in connection with the operation of our
Irondequoit branch that opened in January 2007. The increase in other income was
primarily the result of an $81,000 gain on sale of securities available for
sale.
Interest and Dividend Income. Interest and dividend income increased by
$543,000, or 9.1% to $6.5 million for the nine months ended September 30, 2007
from $6.0 million for the nine months ended September 30, 2006. The increase in
interest and dividend income resulted primarily from a $390,000, or 7.8%,
increase in interest income from loans with larger volumes of mortgages and home
equity loans, a $104,000, or 165.1% increase in other interest from short term
interest earning cash deposits at correspondent banks, a $78,000, or 11.3%
increase in securities income resulting from additional volume in Government
Agency bonds, partially offset by a $29,000, or 12.7%, decrease in interest
income resulting from a decrease in mortgage backed securities volume. Average
interest-earning assets increased by $8.1 million, or 5.7%, to $151.4 million
for the nine months ended September 30, 2007 from $143.3 million for the nine
months ended September 30, 2006. The yield on interest earning assets increased
by 18 basis points to 5.75% for the nine months ended September 30, 2007
compared to 5.57% for the nine months ended September 30, 2006, reflecting
modest increases with higher yielding mortgages, securities and interest earning
cash deposits.
Interest Expense. Interest expense increased $777,000, or 24.3%, to
$4.0 million for the nine months ended September 30, 2007 from $3.2 million for
the nine months ended September 30, 2006. The increase in interest expense
resulted from an increase in both the average balance and average cost of
interest-bearing liabilities. The average balance of interest-bearing
liabilities increased $10.0 million, or 7.9%, to $135.9 million for the nine
months ended September 30, 2007 compared to $125.9 million for the nine months
ended September 30, 2006. The average cost of interest-bearing liabilities
increased by 51 basis points to 3.88% for the six months ended September 30,
2007 from 3.37% for the nine months ended September 30, 2006. The average cost
of deposit accounts increased by 55 basis points to 3.70% for the nine months
ended September 30, 2007 compared to 3.15% for the nine months ended September
30, 2006. In addition, the average cost of Federal Home Loan Bank advances
increased by 39 basis points to 4.87% for the nine months ended September 30,
2007 compared to 4.48% for the nine months ended September 30, 2006. The
interest expense increase was primarily attributable to customer preference for
higher yielding certificates of deposits in the higher short term interest rate
environment that we are currently experiencing. We did offer higher than market
promotional interest rates on savings, money market and certificate of deposit
accounts in the Irondequoit branch during the first six months of 2007; however
we will experience lower cost of funds and some deposit run-off as the
certificates of deposit begin to renew in the fourth quarter of 2007.
Net Interest Income. Net interest income decreased $234,000, or 8.4%,
to $2.6 million for the nine months ended September 30, 2007 from $2.8 million
for the nine months ended September 30, 2006. The decrease in net interest
income was due primarily to a 51 basis point increase in the average cost of our
interest-bearing liabilities, while the average yield on our interest-earning
assets increased by only 18 basis points, as the flat yield curve that we
experienced for much of the 9 months ended September 30, 2007 continued to
decrease our net interest rate spread and net interest margin. Our net interest
margin decreased 35 basis points to 2.26% for the nine months ended September
30, 2007 from 2.61% for the nine months ended September 30, 2006.
Provision for Loan Losses. Based on management's evaluation of the
factors that determine the level of the allowance for loan losses, we recorded
no provision for loan losses for the nine month periods ended September 30, 2007
and September 30, 2006. We continue to maintain exceptional credit quality
within our loan portfolio with one charge-off for $3,000 recorded for the nine
months ended September 30, 2007. The allowance for loan losses as of September
30, 2007 was $319,000, or 0.26% of total loans, compared to $322,000, or 0.27%
19
of total loans as of December 31, 2006. We had non-accrual loans totaling
$100,000, or 0.08% of total loans receivable as of September 30, 2007 compared
to $171,000, or 0.14% of loans in non-accrual status as of December 31, 2006. We
had $41,000 in foreclosed real estate as of September 30, 2007 and no foreclosed
real estate as of December 31, 2006.
Other Income. Other income increased $69,000, or 26.6%, to $328,000 for
the nine months ended September 30, 2007 compared to $259,000 for the nine
months ended September 30, 2006. The increase in other income was primarily the
result of an $81,000 realized gain on the sale of available for sale securities,
an increase of $18,000 in service fees on overdrawn checking accounts, an
increase of $15,000 in other miscellaneous income including mortgage fees and
ATM fees, partially offset by a $45,000 decrease in fee income from Oakleaf
Services Corporation, our subsidiary that offers non-deposit investment products
such as annuities, insurance and mutual funds. Oakleaf Services Corporation's
decrease in fee income is reflective of typical volume and fee income in the
nine months ended September 30, 2007 compared to exceptionally strong volume and
fee income in the nine months ended September 30, 2006.
Other Expense. Other expense increased $514,000, or 18.4%, to $3.3
million for the nine months ended September 30, 2007 compared to $2.8 million
for the nine months ended September 30, 2006. The increase was the result of an
additional $187,000 in salaries and benefits expense primarily due to annual
cost of living raises effective January 1 of each year, staffing of the
Irondequoit branch which was not open in 2006, and ESOP expense of $26,000, an
increase of $129,000 in occupancy expenses consisting primarily of leasing
costs, maintenance and depreciation of the Irondequoit branch, an increase of
$93,000 in advertising expense with the Irondequoit branch and direct mail
expense associated with a free checking program, and an increase of $105,000 in
miscellaneous other expenses related to the Irondequoit branch as well as
increased costs associated with being a newly registered public company.
Income Tax Expense/Benefit. We had a pre-tax loss of $386,000 for the
nine months ended September 30, 2007 versus a pre-tax profit of $293,000 for the
nine months ended September 30, 2006, which resulted in a $138,000 tax benefit
for the nine months ended September 30, 2007, versus a $102,000 tax provision
for the nine months ended September 30, 2006, a change of $240,000. The
effective tax rate was (35.8%) for the nine months ended September 30, 2007
compared to 34.8% for the nine months ended September 30, 2006.
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 4.0% or greater. For the
nine months ended September 30, 2007, our liquidity ratio averaged 6.8%. We
believe that we have enough sources of liquidity to satisfy our short and
long-term liquidity needs as of September 30, 2007.
20
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- 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 September 30, 2007, cash and cash
equivalents totaled $8.0 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 September 30, 2007, we had $2.9 million in loan commitments
outstanding. In addition to commitments to originate loans, we had $7.6 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 September 30, 2007 totaled $57.6 million, or 65.7% of our
certificates of deposit and 47.5% 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 at September 30, 2007. 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 originating loans. During the nine
months ended September 30, 2007, we originated $12.4 million of loans, and
during the nine months ended September 30, 2006, we originated $23.6 million of
loans. We purchased $12.4 million of securities held-to-maturity during the nine
months ended September 30, 2007 year as compared to $1.5 million of
securities-held-to-maturity purchases during the nine months ended September 30,
2006.
Financing activities consist primarily of activity in deposit accounts
and Federal Home Loan Bank advances. We experienced a net increase in total
deposits of $12.6 million for the nine months ended September 30, 2007 compared
to a net increase of $3.3 million for the nine months ended September 30, 2006.
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.
21
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 advances
decreased by $8.2 million to $19.8 million for the nine months ended September
30, 2007, compared to a net increase of $2.3 million during the nine months
ended September 30, 2006. Federal Home Loan Bank advances have primarily been
used to fund loan demand. At September 30, 2007, we had the ability to borrow
approximately $94.0 million from the Federal Home Loan Bank of New York, of
which $19.8 million had been advanced.
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 September 30, 2007, Fairport Savings Bank
exceeded all regulatory capital requirements. The Bank's leverage (Tier 1)
capital at September 30, 2007 was $16.3 million, or 10.05% of adjusted assets.
In ordered to be classified as "well capitalized" under regulatory guidelines,
the Bank is required to have Tier 1 capital of $8.1 million, or 5.00% of
adjusted assets. To be classified as a well capitalized bank under regulatory
guidelines, the Bank must have a total risk-based capital ratio of 10.0%. The
Bank's total risk-based capital ratio at September 30, 2007 was 22.33%.
The net proceeds from the stock offering increased our liquidity and
capital resources. Over time, the initial level of liquidity will be reduced as
net proceeds from the stock offering are used for general corporate purposes,
including the funding of loans. Our financial condition and results of
operations were enhanced by the net proceeds from the stock offering, resulting
in increased net interest-earning assets and net interest income. However, due
to the increase in equity resulting from the net proceeds raised in the stock
offering, our return on equity will be adversely affected in periods following
the stock offering.
Off-Balance Sheet Arrangements
In the ordinary course of business, Fairport Savings Bank 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 September 30, 2007 and 2006, we had $2.9 million and $3.0 million,
respectively, of commitments to grant loans, and $7.6 million and $7.7 million,
respectively, of unfunded commitments under lines of credit.
22
Item 3. 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.
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 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) The stock offering, which was completed on August 10, 2007, resulted in
gross proceeds of $8.4 million through the sale of 838,950 shares at a
price of $10 per share. Expenses related to the offering were $929,000.
Net proceeds of the offering were approximately $7.5 million.
The Company loaned $699,720 to the Bank's ESOP in connection with the
stock offering. In addition to the funds used for the ESOP loan,
approximately $3 million of the net proceeds of the offering were
retained by the Company and the remainder of the net proceeds were
contributed to the Bank in the form of additional paid in capital. All
such proceeds have been invested in short-term investments or have been
used to fund loan originations.
(c) There were no issuer repurchases of securities during the period
covered by this Report.
Item 3. Defaults Upon Senior Securities
Not applicable.
23
Item 4. Submission of Matters to a Vote of Security Holders
During the period covered by this report, the Company did not submit any
matters to the vote of security holders.
Item 5. Other Information
Not applicable
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 Employment Agreement between FSB Community Bankshares, Inc. and Dana C.
Gavenda*
10.2 Supplemental Executive Retirement Plan*
10.3 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).
24
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: November 14, 2007 /s/ Dana C. Gavenda
-------------------------------------
Dana C. Gavenda
President and Chief Executive Officer
Date: November 14, 2007 /s/ Kevin D. Maroney
-------------------------------------
Kevin D. Maroney
Senior Vice President and Chief
Financial Officer
25