SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2008
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.
------------------------------
(Exact name of registrant as specified in its charter)
United States 74-3164710
------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
45 South Main Street, Fairport, New York 14450
----------------------------------------- -----
(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 .
--- ---
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
--- ---
As of May 12, 2008 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.
Purpose of Filing 10-Q/A
The reason for filing this Form 10-Q/A is to correct a typographical error in
the amount of the Registrant's Total Assets as of March 31, 2008 disclosed on
the balance sheet in "Part I. Financial Information, Consolidated Balance Sheets
as of March 31, 2008 and December 31, 2007." All other information in the Form
10-Q/A remains unchanged from the initial filing.
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, 2008
and December 31, 2007 1
Consolidated Statements of Operations for the Three Months Ended
March 31, 2008 and 2007 2
Consolidated Statements of Stockholders' Equity for the Three Months Ended
March 31, 2008 and 2007 3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2008 and 2007 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4T. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signature Page 18
Part I. Financial Information
Item 1. Consolidated Financial Statements
FSB COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
March 31, 2008 and December 31, 2007 (unaudited)
(Dollars in thousands, except per share data)
March 31, December 31,
---------------------- -------------------
Assets 2008 2007
Cash and due from banks $ 1,319 $ 1,159
Interest-earning demand deposits 8,008 8,285
-----------------
Cash and Cash Equivalents 9,327 9,444
Securities available for sale 38,681 244
Securities held to maturity (fair value 2008 - $15,651, 2007- $28,597) 15,548 28,550
Investment in FHLB stock 2,183 1,405
Loans receivable, net of allowance for loan losses of: 2008 - $321,
2007 - $319 123,606 124,326
Accrued interest receivable 956 872
Premises and equipment, net 2,466 2,525
Other assets 67 264
----------------- -----------------
Total Assets $ 193,034 $ 167,630
================= =================
Liabilities & Stockholders' Equity
Deposits:
Non-interest-bearing $ 3,382 $ 3,169
Interest-bearing 124,917 115,989
----------------- -----------------
Total Deposits 128,299 119,158
Borrowings 42,890 25,581
Advances from borrowers for taxes and insurance 1,348 1,898
Other liabilities 451 844
-----------------
Total Liabilities 172,988 147,481
-----------------
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 7,291 7,293
Retained earnings 13,118 13,224
Accumulated other comprehensive income 114 118
Unearned ESOP shares - at cost (656) (665)
----------------- -----------------
Total Stockholders' Equity 20,046 20,149
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 193,034 $ 167,630
================= =================
See accompanying notes to consolidated financial statements
1
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Operations
Three Months Ended March 31, 2008 and 2007 (unaudited)
(Dollars in thousands, except per share data)
2008 2007
----------------- -------------------
Interest and Dividend Income
Loans $ 1,817 $ 1,794
Securities - taxable 313 235
Mortgage-backed securities 202 59
Other 74 6
----------------- -----------------
Total Interest and Dividend Income 2,406 2,094
----------------- -----------------
Interest expense
Deposits 1,142 962
Borrowings:
Short-term -- 30
Long-term 378 261
----------------- -----------------
Total Interest Expense 1,520 1,253
----------------- -----------------
Net Interest Income 886 841
----------------- -----------------
Other Income
Service fees 24 24
Fee income 15 22
Other 55 35
----------------- -----------------
Total Other Income 94 81
----------------- -----------------
Other Expenses
Salaries and employee benefits 637 625
Occupancy expense 114 107
Data processing costs 16 24
Advertising 61 102
Equipment expense 85 93
Electronic banking 18 7
Directors fees 26 29
Mortgage fees and taxes 30 24
Other expense 157 121
----------------- -----------------
Total Other Expenses 1,144 1,132
----------------- -----------------
Loss Before Income Taxes (164) (210)
Benefit for Income Taxes (58) (75)
----------------- -----------------
Net Loss $ (106) $ (135)
================= =================
Loss per common share $ (0.06) $ (0.14)
================= =================
See accompanying notes to consolidated financial statements
2
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Stockholders' Equity
Three Months Ended March 31, 2008 and 2007 (unaudited)
(Dollars in thousands)
Accumulated
Additional Other Unearned
Preferred Common Paid in Retained Comprehensive ESOP
Stock Stock Capital Earnings Income Shares Total
----------- --------- ---------- ----------- -------------- ---------- ---------
Balance - January 1, 2007 $ -- $ -- $ 10 $ 13,505 $ 355 -- $ 13,870
Comprehensive loss:
Net loss -- -- -- (135) -- -- (135)
Change in net unrealized gain
on securities available
for sale, net of taxes -- -- -- -- (50) -- (50)
---------
Total Comprehensive Loss -- -- -- -- -- -- (185)
---------- ---------
Balance - March 31, 2007 $ -- $ -- $ 10 $ 13,370 $ 305 -- $ 13,685
======== ======== ======== ========== =========== ==========
Balance - January 1, 2008 $ -- $ 179 $ 7,293 $ 13,224 $ 118 (665) $ 20,149
Comprehensive loss
Net loss -- -- -- (106) -- -- (106)
Change in net unrealized gain
on securities available
for sale, net of taxes -- -- -- -- (4) -- (4)
----------
Total Comprehensive Loss (110)
----------
ESOP shares committed to
be released -- -- (2) -- -- 9 7
--------- ---------- ------ ----------
Balance - March 31, 2008 $ -- $ 179 $ 7,291 $ 13,118 $ 114 (656) $ 20,046
======== ======== ======== =========== =========== ====== ==========
See accompanying notes to consolidated financial statements
3
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2008 and 2007 (unaudited)
(Dollars in thousands)
2008 2007
---------------- ----------------
Cash Flows From Operating Activities
Net Loss $ (106) $ (135)
Adjustments to reconcile net loss to net cash used by
operating activities:
Net amortization of premiums and discounts on investments 69 8
Amortization of net deferred loan origination costs 3 (1)
Depreciation and amortization 68 76
Expense related to stock-based compensation plans 7 --
Deferred income tax benefit (28) (23)
Decrease (increase) in accrued interest receivable (84) 144
Increase in other assets (5) (52)
Increase (decrease) in other liabilities (372) 111
-------------- --------------
Net Cash Provided (Used) By Operating Activities (448) 128
-------------- --------------
Cash Flows From Investing Activities
Purchase of securities held to maturity (3,001) (2,000)
Proceeds from maturities and calls of securities
held to maturity 15,487 3,243
Proceeds from principal paydowns of securities held to maturity 572 436
Purchase of securities available for sale (38,565) --
Net (increase) decrease in loans (639) 1,312
Proceeds from sales of loans 1,364 262
Purchase (sale) of Federal Home Loan Bank stock (778) 287
Purchase of premises and equipment (9) (791)
-------------- --------------
Net Cash Provided (Used) By Investing Activities (25,569) 2,749
-------------- --------------
Cash Flows From Financing Activities
Net increase in deposits 9,141 5,639
Net decrease in short term borrowings -- (4,200)
Proceeds from FHLB long-term borrowings 17,500 --
Repayments on long-term borrowings (191) (2,182)
Net decrease in advances from borrowers
for taxes and insurance (550) (523)
-------------- --------------
Net Cash Provided (Used) By Financing Activities 25,900 (1,266)
-------------- --------------
Net Increase (Decrease) in Cash
and Cash Equivalents (117) 1,611
Cash and Cash Equivalents- Beginning 9,444 2,182
-------------- --------------
Cash and Cash Equivalents- End $ 9,327 $ 3,793
============== ==============
4
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows, Continued
2008 2007
------------ ------------
Supplementary Cash Flows Information
Interest paid $ 1,462 $ 1,259
============ ============
Income taxes paid $ -- $ --
============ ============
-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 (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-Q. 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 of Financial Condition and Results of Operations" should be read in
conjunction with the Company's audited financial statements for the years ended
December 31, 2007 and 2006, included in the Annual Report filed on Form 10-KSB
with the Securities and Exchange Commission ("SEC") on March 31, 2008.
Operating results for the three months ended March 31, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2008.
The consolidated financial statements at March 31, 2008 and December 31, 2007
and for the three months ended March 31, 2008 and 2007 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 current
period presentation.
Note 2-Fair Value Accounting
In September 2006, the FASB issued FASB Statement 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. The Company adopted SFAS 157 on
January 1, 2008.
SFAS 157 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 SFAS 157 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).
6
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, 2008:
(Dollars in Thousands) Total Level 1 Level 2 Level 3
----- ------- ------- -------
Securities available for sale $ 38,681 $ -- $ 38,681 $ --
========= ========= ======== =======
The fair values for available-for-sale securities in the table above were based
upon a market approach. Securities that are fixed income instruments that are
not quoted on an exchange, but are traded in active markets, are obtained
through third party data service providers or dealer market participants which
the Company has historically transacted both purchases and sales of investment
securities. Prices obtained from these sources include market quotations.
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 was
effective as of January 1, 2008. The Company chose not to elect the fair value
option for any of its financial instruments.
Note 3-Recent Accounting Pronouncements
FASB Statement No. 141 (R) "Business Combinations" was issued in December of
2007. This Statement establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree. The Statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
guidance will become effective as of the beginning of a company's fiscal year
beginning after December 15, 2008. This new pronouncement will impact our
accounting for business combinations after January 1, 2009.
Staff Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded
at Fair Value through Earnings" expresses the views of the staff regarding
written loan commitments that are accounted for at fair value through earnings
under generally accepted accounting principles. To make the staff's views
consistent with current authoritative accounting guidance, the SAB revises and
rescinds portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments." Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. SAB 109
did not have an impact on our consolidated financial statements.
7
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 requires entities that utilize derivative instruments to
provide qualitative disclosures about their objectives and strategies for using
such instruments, as well as any details of credit-risk-related contingent
features contained within derivatives. SFAS 161 also requires entities to
disclose additional information about the amounts and location of derivatives
located within the financial statements, how the provisions of SFAS 133 have
been applied, and the impact that hedges have on an entity's financial position,
financial performance, and cash flows. SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged. We do not utilize derivative instruments; therefore SFAS 161 will
have no impact on our consolidated financial statements.
In February 2008, the FASB issued a FASB Staff Position (FSP) FAS 140-3,
"Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions." This FSP addresses the issue of whether or not these transactions
should be viewed as two separate transactions or as one "linked" transaction.
The FSP includes a "rebuttable presumption" that presumes linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria.
The FSP will be effective for fiscal years beginning after November 15, 2008 and
will apply only to original transfers made after that date; early adoption will
not be allowed. We are currently evaluating the potential impact the new
pronouncement will have on our consolidated financial statements.
FASB Statement No. 160 "Non-controlling Interests in Consolidated Financials
Statements--an amendment of ARB No. 51" was issued in December of 2007. This
Statement establishes accounting and reporting standards for the Noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective as of the beginning of a Company's fiscal year
beginning after December 15, 2008. The Company is currently evaluating the
potential impact the new pronouncement will have on its consolidated financial
statements.
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 months ended March 31, 2008 and 2007 are as follows:
March 31, 2008 March 31, 2007
-------------- --------------
(In Thousands)
Unrealized holding loss on available for sale securities $ (6) $ (76)
Tax effect (2) (26)
--------- ---------
Net of tax amount $ (4) $ (50)
========= =========
8
Note 5- Loss Per Common Share
Basic loss per common share is calculated by dividing the net 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 only from the date such shares were issued. The
Company has not granted any restricted stock awards or stock options and, during
the three months ended March 31, 2008 and 2007, 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 basic loss per common share until they are committed to
be released. The basic average common shares outstanding were 1,718,526 and
946,050 for the three months ended March 31, 2008 and March 31, 2007.
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, 2008, 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 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 areas 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 Annual Report on Form 10KSB filed with
the Securities and Exchange Commission on March 31, 2008. 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.
9
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 assumFptions 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 allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is generally established when the collateral value of the impaired
loan is lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience adjusted for
qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
Actual loan losses may be significantly more than the allowance we have
established which could have a material negative effect on our financial
results.
Comparison of Financial Condition at March 31, 2008 and December 31, 2007
Total Assets. Total assets increased by $25.4 million, or 15.2%, to $193.0
million at March 31, 2008 from $167.6 million at December 31, 2007. The primary
increase in total assets reflected increases in the investment securities
classified as available for sale funded by FHLB advances, deposit growth, and
United States government agency securities maturities from the held to maturity
portfolio. Part of the asset growth was attributable to a mortgage-backed
securities balance sheet leverage strategy executed in February 2008 funded by
FHLB advances, described below.
Loans receivable decreased by $720,000, or 0.6%, to $123.6 million at March 31,
2008 from $124.3 million at December 31, 2007. The decrease in loans receivable
was the result of sales of 30-year fixed-rate residential mortgage loans
totaling $1.4 million, partially offset by net portfolio increases in fixed and
adjustable rate residential mortgages totaling $697,000. The Bank continues not
to be involved in, and has no exposure to, sub-prime lending activities.
10
Investment securities increased by $25.4 million, or 88.2%, to $54.2 million at
March 31, 2008 from $28.8 million at December 31, 2007. The increase was
primarily attributable to the purchase of $23.5 million of United States
Government agency securities, purchases of $18.0 million of mortgage-backed
securities, partially offset with maturities of $15.5 million of United States
Government agency securities, and $572,000 of principal payments received from
mortgage-backed securities. Additionally, in February 2008, the Company executed
a $14.6 million mortgage-backed securities balance sheet leverage strategy in an
effort to increase earnings that, at the time of the transaction, generated a
positive 149 basis point spread over Federal Home Loan Bank funding costs. All
securities purchased in the first quarter of 2008, other than $3.0 million of
United States Government agency securities, were classified as securities
available for sale. Management made the decision to increase the securities
classified as available for sale providing a portfolio of marketable securities
for liquidity as an alternative to borrowings.
Investment in FHLB of New York stock increased by $778,000, or 55.4% to $2.2
million at March 31, 2008, from $1.4 million at December 31, 2007. The FHLB of
New York requires members to purchase additional stock with additional
borrowings.
Deposits and Borrowings. Total deposits increased by $9.1 million, or 7.6%,
to $128.3 million at March 31, 2008 from $119.2 million at December 31, 2007.
Certificates of deposit, including IRAs, increased by $7.3 million. Transaction
accounts, including checking, NOW, money market and savings accounts, increased
by $1.8 million. The net deposit growth was attributable to the Irondequoit
branch growth of $5.4 million, Fairport branch growth of $2.2 million and
Penfield branch growth of $1.5 million.
Borrowings increased by $17.3 million, or 67.6%, to $42.9 million at March 31,
2008 from $25.6 million on December 31, 2007. Borrowings increased by $14.6
million as part of the balance sheet leverage strategy to fund mortgage-backed
securities classified as available for sale.
Stockholders' Equity. Total stockholders' equity decreased by $103,000, or
0.5%, to $20.0 million at March 31, 2008 from $20.1 million at December 31,
2007. The decrease resulted from a net loss of $106,000 for the three months
ended March 31, 2008, a $4,000 decrease in accumulated other comprehensive
income, and a $7,000 decrease in ESOP shares committed to be released.
Non-Performing Assets. At March 31, 2008, there were no loans or other
assets classified as non-performing assets compared to $63,000 in
one-to-four-family residential mortgage loans classified as non-performing
assets at December 31, 2007, which were brought current in January 2008.
At March 31, 2008, there were no loans or 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.
11
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 yields set forth
below include the effect of deferred fees, discounts and premiums that are
amortized or accreted to interest income. Yields have been annualized.
For the Quarter Ended March 31,
-------------------------------------------------------------------
2008 2007
--------------------------------- -------------------------------
Interest Interest
Average Income/ Yield/ Average Income Yield/
Balance Expense Cost Balance Expense Cost
----------- -------- --------- --------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans......................... $ 122,962 1,817 5.91% $ 120,473 $ 1,794 5.96%
Securities.................... 26,466 313 4.73 19,416 235 4.84
Mortgage-backed securities.... 17,668 202 4.57 5,773 59 4.09
Other......................... 8,915 74 3.32 454 6 5.29
---------- --------- --------- --------
Total interest-earning assets 176,011 2,406 5.47 146,116 2,094 5.73
--------- ---- -------- ----
Noninterest-earning assets.... 4,987 4,694
----------- ---------
Total assets............... $ 180,998 $ 150,810
========== =========
Interest-bearing liabilities:
NOW accounts.................. $ 5,669 12 0.85 $ 4,885 7 0.57
Passbook savings.............. 13,461 38 1.13 12,190 31 1.02
Money market savings......... 10,851 67 2.47 10,207 71 2.78
Individual retirement accounts 16,122 181 4.49 14,999 157 4.19
Certificates of deposit....... 74,082 844 4.56 65,462 696 4.25
Borrowings.................... 35,363 378 4.28 24,193 291 4.81
---------- --------- --------- --------
Total interest-bearing
liabilities.............. 155,548 1,520 3.91% 131,936 1,253 3.80%
---------- --------- ---- --------- -------- ----
Noninterest-bearing liabilities:
Demand deposits......... 3,083 3,246
Other......................... 2,255 1,844
---------- ---------
Total liabilities........ 160,886 137,026
Stockholders' equity.......... 20,112 13,784
---------- ---------
Total liabilities and
stockholders' equity..... $ 180,998 $ 150,810
========== =========
Net interest income........... $ 886 $ 841
========= ========
Interest rate spread (1)...... 1.56% 1.93%
==== ====
Net interest-earning assets (2) $ 20,463 $ 14,180
========== =========
Net interest margin (3)....... 2.01% 2.30%
========== =========
Average interest-earning assets
to average interest-bearing
liabilities................ 113% 111%
=== ===
---------------------
(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, 2008 and
March 31, 2007
General. We had a net loss of $106,000 for the three months ended March 31,
2008 compared to a net loss of $135,000 for the three months ended March 31,
2007. The decrease of $29,000 in net loss for the first quarter of 2008 compared
to the first quarter of 2007 resulted primarily from an increase in net interest
income. This improvement was generated by an increase in interest-earning
assets, due to the investment of the proceeds of our initial stock offering that
closed in August 2007 and the leverage strategy discussed earlier.
12
Interest and Dividend Income. Interest and dividend income increased by
$312,000, or 14.9%, to $2.4 million for the three months ended March 31, 2008
from $2.1 million for the three months ended March 31, 2007. The increase in
interest and dividend income resulted from a $23,000, or 1.3%, increase in
interest income from loans, a $78,000, or 33.2%, increase in interest income
from securities, a $143,000, or 242.4% increase in interest income from
mortgage-backed securities, and a $68,000 or 1133.3% increase in other interest
income from federal funds sold. Average interest-earning assets increased by
$29.9 million, or 20.5%, to $176.0 million for the three months ended March 31,
2008 from $146.1 million for the three months ended March 31, 2007. The yield on
interest-earning assets decreased by 26 basis points to 5.47% for the three
months ended March 31, 2008 compared to 5.73% for the three months ended March
31, 2007, reflecting decreases in short- and long-term interest rates over the
last year.
Interest Expense. Interest expense increased $267,000, or 21.3%, to $1.5
million for the three months ended March 31, 2008 from $1.3 million for the
three months ended March 31, 2007. The increase in interest expense resulted
from an increase in the average balance in interest-bearing liabilities and an
increase in the average cost of interest-bearing liabilities. The average
balance of interest-bearing liabilities increased $23.6 million, or 17.9%, to
$155.5 million for the three months ended March 31, 2008 compared to $131.9
million for the three months ended March 31, 2007. The average cost of
interest-bearing liabilities increased by 11 basis points to 3.91% for the three
months ended March 31, 2008 from 3.80% for the three months ended March 31,
2007. The average cost of deposit accounts increased by 23 basis points to 3.80%
for the three months ended March 31, 2008 compared to 3.57% for the three months
ended March 31, 2007. In contrast, the average cost of borrowings decreased by
53 basis points to 4.28% for the three months ended March 31, 2008 compared to
4.81% for the three months ended March 31, 2007. The increase in interest
expense reflects a higher volume of deposits and borrowings due to the leverage
transaction.
At March 31, 2008, we had $21.2 million of certificates of deposit, including
individual retirement accounts that will mature during the second quarter of
2008 with a weighted average cost of 4.7%. Based on current market rates, if
these funds remain with Fairport Savings Bank with similar maturities, the rates
we pay on these deposits will decrease.
Net Interest Income. Net interest income increased $45,000, or 5.4%, to
$886,000 for the three months ended March 31, 2008 from $841,000 for the three
months ended March 31, 2007. The increase in net interest income was due
primarily to an increase in average interest-earning assets of $6.3 million more
than interest-bearing liabilities, due to the investment of the proceeds of the
initial stock offering that closed in August 2007. The Company's net interest
margin decreased 29 basis points to 2.01% for the three months ended March 31,
2008 from 2.30% for the three months ended March 31, 2007. The decrease in net
interest margin is consistent with the lagging effect of the flat or inverted
yield curve that existed for much of 2007, as well as competitive market rates
for certificates of deposit and the impact of the balance sheet leverage
transaction. We expect that the decrease in the Federal Fund's rate of 200 basis
points during the first quarter of 2008 should improve our net interest margin
over the next few quarters, as certificates of deposits mature and renew at
these lower interest rates.
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 March 31, 2008 and
March 31, 2007. The allowance for loan losses as of March 31, 2008 was $321,000,
or 0.27% of total loans, compared to $322,000, or 0.27% of total loans as of
March 31, 2007. In the first quarter of 2008 we had a recovery of $2,000 from a
previously charged-off consumer loan. We had no non-accrual loans as of March
31, 2008 compared to $46,000, or 0.04% of loans in non-accrual status as of
March 31, 2007.
13
Other Income. Total other income increased $13,000, or 16.0%, to $94,000
for the three months ended March 31, 2008 compared to $81,000 for the three
months ended March 31, 2007. The increase was the result of a $20,000 increase
mainly due to overdraft protection fees on customer checking accounts, which is
included in other on the Consolidated Statements of Operations, and a $7,000
decrease in commissions from Oakleaf insurance/annuity and security sales.
Other Expenses. Other expenses increased $12,000, or 1.1%, to $1.1 million
for the three months ended March 31, 2008 compared to $1.1 million for the three
months ended March 31, 2007. The increase was the result of an additional
$12,000 in salaries and benefits expense primarily due to annual cost of living
raises effective January 1 of each year, an increase of $7,000 in occupancy
expenses primarily due to increased lease expense for the Penfield branch, a
decrease of $41,000 in advertising and marketing expenses, and an increase of
$34,000 in miscellaneous other expenses, primarily the additional costs
associated with being a public company.
Income Tax Expense/Benefit. We had a pre-tax loss of $164,000 for the three
months ended March 31, 2008 versus a pre-tax loss of $210,000 for the three
months ended March 31, 2007, which resulted in a $58,000 tax benefit for the
three months ended March 31, 2008, versus a $75,000 tax benefit for the three
months ended March 31, 2007, a change of $17,000. The effective tax rate was
(35.4%) for the three months ended March 31, 2008 compared to (35.7%) for the
three months ended March 31, 2007.
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,
2008, our liquidity ratio averaged 24.0%. We believe that we have enough sources
of liquidity to satisfy our short- and long-term liquidity needs as of March 31,
2008.
We regularly adjust our investments in liquid assets based upon our
assessment of:
(i) expected loan demand;
(ii) expected deposit flows;
(iii) yields available on interest-earning deposits and securities; and
(iv) the objectives of our asset/liability management program.
Excess liquid assets are invested generally in interest-earning deposits,
short-term and intermediate-term securities and federal funds sold.
Our most liquid assets are cash and cash equivalents. The levels of these assets
are dependent on our operating, financing, lending and investing activities
during any given period. At March 31, 2008, cash and cash equivalents totaled
$9.3 million.
14
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, 2008, we had $4.6 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
March 31, 2008 totaled $72.6 million, or 77.6% of our certificates of deposit
and 56.6% 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, 2008. 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 quarter ended March 31, 2008, we originated $3.9 million of loans.
However, the steepened yield curve, deposit growth, and FHLB advance
availability provided the opportunity to increase our investment portfolio by
$25.4 million during the quarter ended March 31, 2008.
Financing activities consist primarily of activity in deposit accounts and
Federal Home Loan Bank borrowings. We experienced a net increase in total
deposits of $9.1 million for the quarter ended March 31, 2008. 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
increased by $17.3 million to $42.9 million at March 31, 2008, compared to a net
decrease of $6.4 million for the quarter ended March 31, 2007. Federal Home Loan
Bank borrowings have primarily been used to fund loan demand; however $14.6
million of advances were used to fund the balance sheet leverage transaction. At
March 31, 2008, we had the ability to borrow approximately $94.8 million from
the Federal Home Loan Bank of New York, of which $42.9 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 March 31, 2008, Fairport Savings Bank
exceeded all regulatory capital requirements, and was considered "well
capitalized" under regulatory guidelines.
The net proceeds from our 2007 minority stock offering significantly 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 will be 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 was adversely affected
following the stock offering.
15
Off-Balance Sheet Arrangements
In the ordinary course of business, the 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 March 31, 2008 and 2007, we had $4.6 million and $1.9 million, respectively,
of commitments to grant loans, and $7.6 million and $8.0 million, respectively,
of unfunded commitments under lines of credit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable since the Company is a smaller reporting company.
Item 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.
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
Not applicable since the Company is a smaller reporting company.
16
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. 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).
17
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: August 8, 2008 /s/ Dana C. Gavenda
---------------------------------------
Dana C. Gavenda
President and Chief Executive Officer
Date: August 8, 2008 /s/ Kevin D. Maroney
---------------------------------------
Kevin D. Maroney
Executive Vice President and Chief
Financial Officer
18