SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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.
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(Exact name of registrant as specified in its charter)
United States 4-3164710
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
45 South Main Street, Fairport, New York 14450
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(Address of Principal Executive Offices) Zip Code
(585) 223-9080
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(Registrant's telephone number)
N/A
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES X NO .
---- ----
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 [ ]
(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 November 14, 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.
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 September 30, 2008
and December 31, 2007 1
Consolidated Statements of Operations for the Three Months Ended
September 30, 2008 and 2007 2
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2008 and 2007 3
Consolidated Statements of Stockholders' Equity for the Nine Months Ended
September 30, 2008 and 2007 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2008 and 2007 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
Signature Page 23
Part I. Financial Information
Item 1. Consolidated Financial Statements
FSB COMMUNITY BANKSHARES, INC.
Consolidated Balance Sheets
September 30, 2008 and December 31, 2007 (unaudited)
(Dollars in thousands, except per share data)
September 30, December 31,
Assets 2008 2007
--------------- ---------------
Cash and due from banks $ 2,801 $ 1,159
Interest-earning demand deposits 3,796 8,285
--------------- ---------------
Cash and Cash Equivalents 6,597 9,444
Securities available for sale 41,386 244
Securities held to maturity (fair value 2008 - $8,603, 2007- $28,597) 8,566 28,550
Investment in FHLB stock 2,184 1,405
Loans receivable, net of allowance for loan losses of: 2008 - $335,
2007 - $319 136,963 124,326
Accrued interest receivable 948 872
Premises and equipment, net 2,363 2,525
Other assets 513 264
--------------- ---------------
Total Assets $ 199,520 $ 167,630
=============== ===============
Liabilities & Stockholders' Equity
Deposits:
Non-interest-bearing $ 3,147 $ 3,169
Interest-bearing 129,217 115,989
--------------- ---------------
Total Deposits 132,364 119,158
Borrowings 42,622 25,581
Advances from borrowers for taxes and insurance 985 1,898
Official bank checks 3,340 513
Other liabilities 353 331
--------------- ---------------
Total Liabilities 179,664 147,481
--------------- ---------------
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 7,288 7,293
Retained earnings 13,129 13,224
Accumulated other comprehensive income (loss) (102) 118
Unearned ESOP shares - at cost (638) (665)
--------------- ---------------
Total Stockholders' Equity 19,856 20,149
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 199,520 $ 167,630
=============== ===============
See accompanying notes to consolidated financial statements
1
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Operations
Three Months Ended September 30, 2008 and 2007 (unaudited)
(Dollars in thousands, except per share data)
2008 2007
---------------- ---------------
Interest and Dividend Income
Loans $ 1,962 $ 1,819
Securities - taxable 350 293
Mortgage-backed securities 288 76
Other 14 120
---------------- ---------------
Total Interest and Dividend Income 2,614 2,308
---------------- ---------------
Interest Expense
Deposits 998 1,146
Long Term Borrowings 465 241
---------------- ---------------
Total Interest Expense 1,463 1,387
---------------- ---------------
Net Interest Income 1,151 921
Provision for Loan Losses 8 --
---------------- ----------------
Net Interest Income After Provision
for Loan Losses 1,143 921
---------------- ----------------
Other Income
Service fees 57 31
Fee income 53 25
Realized gain on sale of securities available for sale -- 81
Impairment loss on securities available for sale (57) --
Other 36 32
---------------- ----------------
Total Other Income 89 169
---------------- ----------------
Other Expenses
Salaries and employee benefits 655 594
Occupancy expense 118 109
Data processing costs 22 15
Advertising 54 63
Equipment expense 84 77
Electronic banking 15 24
Directors' fees 28 24
Mortgage fees and taxes 86 45
Other expense 135 140
--------------- ----------------
Total Other Expenses 1,197 1,091
--------------- ----------------
Income (Loss) Before Income Taxes 35 (1)
Provision for Income Taxes 34 --
--------------- ----------------
Net Income (Loss) $ 1 $ (1)
=============== ================
Earnings (Loss) per common share $ 0.00 $ (0.00)
=============== ================
See accompanying notes to consolidated financial statements
2
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Operations
Nine Months Ended September 30, 2008 and 2007 (unaudited)
(Dollars in thousands, except per share data)
2008 2007
---------------- ---------------
Interest and Dividend Income
Loans $ 5,626 $ 5,394
Securities - taxable 1,033 770
Mortgage-backed securities 792 199
Other 104 167
---------------- ---------------
Total Interest and Dividend Income 7,555 6,530
---------------- ---------------
Interest Expense
Deposits 3,205 3,173
Short Term Borrowings -- 29
Long Term Borrowings 1,274 757
---------------- ---------------
Total Interest Expense 4,479 3,959
---------------- ---------------
Net Interest Income 3,076 2,571
Provision for Loan Losses 14 --
---------------- ----------------
Net Interest Income After Provision
for Loan Losses 3,062 2,571
---------------- ----------------
Other Income
Service fees 146 91
Fee income 107 67
Realized gain on sale of securities available for sale -- 81
Impairment loss on securities available for sale (57) --
Other 118 89
---------------- ----------------
Total Other Income 314 328
---------------- ----------------
Other Expenses
Salaries and employee benefits 1,839 1,767
Occupancy expense 346 325
Data processing costs 63 68
Advertising 203 225
Equipment expense 249 255
Electronic banking 50 45
Directors' fees 85 77
Mortgage fees and taxes 182 116
Other expense 474 407
--------------- ----------------
Total Other Expenses 3,491 3,285
--------------- ----------------
Loss Before Income Taxes (115) (386)
Benefit for Income Taxes (20) 138
--------------- ----------------
Net Loss $ (95) $ (248)
=============== ================
Loss per common share $ (0.06) $ (0.23)
=============== ================
See accompanying notes to consolidated financial statements
3
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 2008 and 2007
(unaudited) (Dollars in thousands)
Accumulated
Additional Other Unearned
Common Paid in Retained Comprehensive ESOP
Stock Capital Earnings Income (Loss) Shares Total
------------ ------------ ------------ ---------------- ------------- ----------
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
============ ============ ============ ================ ============= ==========
Balance - January 1, 2008 $ 179 $ 7,293 $ 13,224 $ 118 $ (665) $ 20,149
Comprehensive loss:
Net loss -- -- (95) -- -- (95)
Change in net unrealized
gain (loss) on securities
available for sale, net of
taxes -- -- -- (220) -- (220)
----------
Total Comprehensive Loss (315)
ESOP shares committed to be
released -- (5) -- -- 27 22
------------ ------------ ------------ ---------------- ------------- ----------
Balance - September 30, 2008 $ 179 $ 7,288 $ 13,129 $ (102) $ (638) $ 19,856
============ ============ ============ ================ ============= ==========
See accompanying notes to consolidated financial statements
4
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2008 and 2007 (unaudited)
(Dollars in thousands)
2008 2007
------------------- -------------------
Cash Flows From Operating Activities
Net Loss $ (95) $ (248)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Gain on sale of securities available for sale -- (81)
Impairment loss on securities available-for-sale 57 --
Net amortization of premiums and discounts on investments 233 25
Gain on sale of loans (9) (2)
Amortization of net deferred loan origination fees (17) (42)
Depreciation and amortization 201 224
Provision for loan losses 14 --
Expense related to stock-based compensation plans 22 26
Deferred income tax benefit (36) (3)
Decrease (increase) in accrued interest receivable (76) 12
Increase in other assets (258) (70)
Increase in other liabilities 153 (108)
------------------- -------------------
Net Cash Provided (Used) By Operating Activities 189 (267)
Cash Flows From Investing Activities
Purchase of securities held to maturity (3,001) (12,366)
Proceeds from maturities and calls of securities held to maturity 20,999 6,915
Proceeds from principal paydowns of securities held to maturity 1,970 --
Purchase of securities available for sale (51,439) --
Proceeds from maturities and calls of securities available for sale 7,500 --
Proceeds from principal paydowns of securities available for sale 2,206 --
Proceeds from sales of securities available for sale -- 82
Net increase in loans (14,543) (2,108)
Proceeds from sales of loans 1,918 748
Purchase (redemption) of Federal Home Loan Bank stock (779) 347
Purchase of premises and equipment (28) (656)
------------------- -------------------
Net Cash Used By Investing Activities (35,197) (7,038)
Cash Flows From Financing Activities
Net increase in deposits 13,206 12,616
Net decrease in short term borrowings -- (4,200)
Proceeds from borrowings 21,500 --
Repayments on borrowings (4,459) (4,054)
Net increase (decrease) in advances from borrowers
for taxes and insurance (913) 123
Net increase in official bank checks 2,827 1,314
Net proceeds from common stock offering -- 7,460
Purchase of shares for employee stock ownership program -- (700)
------------------- -------------------
Net Cash Provided By Financing Activities 32,161 12,559
Net Increase (Decrease) in Cash
and Cash Equivalents (2,847) 5,254
Cash and Cash Equivalents- Beginning 9,444 2,698
------------------- -------------------
Cash Equivalents- End $ 6,597 $ 7,952
=================== ===================
5
FSB COMMUNITY BANKSHARES, INC.
Consolidated Statements of Cash Flows, Continued
2008 2007
------------------- -------------------
Supplementary Cash Flows Information
Interest paid $ 4,536 $ 3,954
=================== ===================
Income taxes paid $ 1 $ 14
=================== ===================
Non-Cash Operating, Investing and Financing Activities
Transfer of loans to foreclosed assets $ - $ 41
=================== ===================
See accompanying notes to consolidated financial statements
6
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 accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to 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 nine months ended September 30, 2008 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008.
The consolidated financial statements at September 30, 2008 and December 31,
2007 and for the three and nine months ended September 30, 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 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).
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.
7
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
September 30, 2008:
(Dollars in Thousands) Total Level 1 Level 2 Level 3
----- ------- ------- -------
Securities available for sale $41,386 $ -- $41,386 $ --
======= ======= ======= =======
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.
Securities are evaluated periodically to determine whether a decline in their
fair value is other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline, in addition to the reasons underlying the
decline, to determine whether the loss in value is other than temporary. The
term "other than temporary" is not intended to indicate that the decline is
permanent, but indicates that the prospect for a near-term recovery of value is
not necessarily favorable. Once a decline in fair value is determined to be
other than temporary the cost basis of the security is reduced through a charge
to earnings in the consolidated statement of income.
At September 30, 2008, the Company recorded a $57,000 other-than-temporary
impairment charge related to its investment in Federal Home Loan Mortgage
Corporation (Freddie Mac) common stock. The impairment charge in the Company's
holdings of Freddie Mac common stock resulted from the decline in market value
of these shares in connection with the federal government's conservatorship of
Freddie Mac in September 2008. The carrying value of the Company's remaining
Freddie Mac common stock at September 30, 2008 after the other-than-temporary
impairment charge was $8,757. The Company does not have any preferred stock
issued by Freddie Mac or Fannie Mae.
Note 3-Recent Accounting Pronouncements
In October 2008, the FASB issued FSP SFAS No. 157-3, "Determining the Fair Value
of a Financial Asset When The Market for That Asset Is Not Active" (FSP 157-3),
to clarify the application of the provisions of SFAS 157 in an inactive market
and how an entity would determine fair value in an inactive market. FSP 157-3 is
effective immediately and applies to the Company's September 30, 2008
consolidated financial statements. The application of the provisions of FSP
157-3 did not materially affect the Company's results of operations or financial
condition as of and for the period ended September 30, 2008.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." This Statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements. This Statement is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles." The Company is currently evaluating
the potential impact the new pronouncement will have on its consolidated
financial statements.
8
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 loss and related tax effects for the three
and nine months ended September 30, 2008 and 2007 are as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
---- ---- ---- ----
Unrealized holding loss on securities
available for sale $ (72) $ (9) $ (395) $ (79)
Reclassification adjustment for realized
gains included in net loss -- (81) -- (81)
Reclassification adjustment for impairment
loss on securities available-for-sale
included in net loss 57 -- 57 --
------------ ------------ ------------ -----------
Net unrealized loss (15) (90) (338) (160)
Tax effect 7 31 118 57
Net of tax amount $ (8) $ (59) $ (220) $ (103)
============ ============ ============ ============
Note 5- Earnings (Loss) Per Common Share
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 only from the date such shares
were issued. The Company has not granted any restricted stock awards or stock
options and, during the nine months ended September 30, 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 earnings (loss) per common share
until they are released. The basic average common shares outstanding were
1,718,526 for the three months and nine months ended September 30, 2008 and
1,380,690 for the three months ended September 30, 2007 and 1,092,522 for the
nine months ended September 30, 2007.
9
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 September 30, 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 filed on Form 10-KSB 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. Based on the valuation techniques used and the sensitivity of
financial statement amounts to the methods, assumptions and estimates underlying
those amounts, management has identified the determination of the allowance for
loan losses and the evaluation of investment securities for other that temporary
impairment to be the accounting areas that require the most subjective and
complex judgments, and as such could be the most subject to revision as new
information becomes available.
Allowance for Loan Losses. The allowance for loan losses is the amount
estimated by management as necessary to absorb credit losses incurred in the
loan portfolio that are both probable and reasonably estimable at the balance
sheet date. The amount of the allowance is based on significant estimates, and
the ultimate losses may vary from such estimates as more information becomes
available or conditions change. The methodology for determining the allowance
for loan losses is considered a critical accounting policy by management due to
the high degree of judgment involved, the subjectivity of the assumptions used
and the potential for changes in the economic environment that could result in
changes to the amount of the recorded allowance for loan losses.
As a substantial percentage of our loan portfolio is collateralized by real
estate, appraisals of the underlying value of property securing loans are
10
critical in determining the amount of the allowance required for specific loans.
Assumptions are instrumental in determining the value of properties. Overly
optimistic assumptions or negative changes to assumptions could significantly
affect the valuation of a property securing a loan and the related allowance
determined. Management carefully reviews the assumptions supporting such
appraisals to determine that the resulting values reasonably reflect amounts
realizable on the related loans.
Management performs a quarterly evaluation of the adequacy of the allowance for
loan losses. We consider a variety of factors in establishing this estimate
including, but not limited to, current economic conditions, delinquency
statistics, geographic concentrations, the adequacy of the underlying
collateral, the financial strength of the borrower, results of internal loan
reviews and other relevant factors. This evaluation is inherently subjective as
it requires material estimates by management that may be susceptible to
significant change based on changes in economic and real estate market
conditions.
The 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.
The Company carries most of its investments at fair value with any unrealized
gains or losses on those securities reported net of tax as an adjustment to
stockholders' equity, except for other-than-temporary impairment losses, which
are charged to earnings. All securities purchased in 2008, other than $3.0
million of United States Government agency securities purchased in January 2008,
have been classified as securities available for sale. The Company's ability to
fully realize the value of its investments in various securities is dependent on
the underlying creditworthiness of the issuing organizations. In evaluating the
security portfolio for other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has been
less than cost, (2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Company to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
At September 30, 2008, the Company recorded a $57,000 other-than-temporary
impairment charge related to it's investment in Federal Home Loan Mortgage
Corporation (Freddie Mac) common stock. The impairment charge in the Company's
holdings of Freddie Mac common stock resulted from the decline in market value
of these shares in connection with the federal government's conservatorship of
Freddie Mac in September 2008. The carrying value of the Company's remaining
Freddie Mac common stock at September 30, 2008 after the other-than-temporary
impairment charge was $8,757. The Company does not have any preferred stock
issued by Freddie Mac or Fannie Mae.
Comparison of Financial Condition at September 30, 2008 and December 31, 2007
Total Assets. Total assets increased by $31.9 million, or 19.0%, to $199.5
million at September 30, 2008 from $167.6 million at December 31, 2007. The
primary increase in total assets reflected increases in securities and loans
receivable, partially offset with decreases in cash and cash equivalents.
Cash and cash equivalents decreased by $2.8 million, or 29.8% to $6.6 million on
September 30, 2008 from $9.4 million on December 31, 2007. With the Federal
Reserve decreasing short term interest rates 325 basis points from 5.25% to
2.00% since September 2007, management decided to invest excess interest earning
demand deposits in higher yielding securities and loans.
11
Securities increased by $21.2 million, or 73.6%, to $50.0 million at September
30, 2008 from $28.8 million at December 31, 2007. The increase was attributable
to the purchase of $33.9 million of United States Government agency securities,
purchases of $20.5 million of mortgage-backed securities, partially offset with
maturities of $28.5 million of United States Government agency securities, $4.2
million of principal payments received from mortgage-backed securities, and a
$395,000 decrease in the fair value of securities available for sale. In
February 2008, the Company executed a $14.6 million mortgage-backed securities
balance sheet leverage strategy in an effort to increase earnings that is
performing as projected at the time of the transaction. All securities purchased
in 2008, other than $3.0 million of United States Government agency securities
purchased in January 2008, have been 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 $779,000 or 55.5% to $2.2
million at September 30, 2008, from $1.4 million at December 31, 2007. The FHLB
of New York requires members to purchase stock based on the level of borrowings.
Loans receivable increased by $12.6 million, or 10.2%, to $136.9 million at
September 30, 2008 from $124.3 million at December 31, 2007. The increase in
loans receivable was primarily the result of increases in net residential
mortgage loans totaling $13.2 million, home equity loan and line increases
totaling $1.1 partially offset by sales of fixed rate 30 year residential
mortgages totaling $1.7 million. The Bank has never been involved with, and has
no direct exposure to, sub-prime lending activities. The Bank continues to
execute on its business plan of making high quality loans to existing customers
and new customers in our market area with $5.1 million, or 15.3% annualized loan
growth in the third quarter of 2008. Our loan strategy continues to be in
residential mortgage, home equity loan and home equity line of credit
originations which provide a higher yield than alternative investment yields.
Credit quality, proven by our lack of non-accruals continues to be the highest
priority when underwriting a loan. Subjective judgments about a borrower's
ability to repay and the value of any underlying collateral are made prior to
approving a loan.
Deposits and Borrowings. Total deposits increased by $13.2 million, or
11.1%, to $132.4 million at September 30, 2008 from $119.2 million at December
31, 2007. Certificates of deposit, including IRAs, increased by $7.0 million.
Transaction accounts, including checking, NOW, money market and savings
accounts, increased by $6.2 million. The net deposit growth was attributable to
the Irondequoit branch growth of $6.0 million, Fairport branch growth of $3.6
million and Penfield branch growth of $3.6 million.
Borrowings increased by $17.0 million, or 66.4%, to $42.6 million at September
30, 2008 from $25.6 million on December 31, 2007. The increase in borrowings
included $14.6 million as part of the balance sheet leverage strategy executed
in February 2008.
Official Bank Checks. Official bank checks increased by $2.8 million, or
551.1%, to $3.3 million at September 30, 2008 from $513,000 at December 31,
2007. This increase was caused by the payment of property taxes due at September
30, 2008 from customer mortgage escrow accounts.
Stockholders' Equity. Total stockholders' equity decreased by $293,000 or
1.5%, to $19.9 million at September 30, 2008 from $20.1 million at December 31,
2007. The decrease resulted principally from a net loss of $95,000 for the nine
months ended September 30, 2008, and a $220,000 decrease in accumulated other
comprehensive income (loss).
Non-Performing Assets. At September 30, 2008, the Company had no
non-performing assets compared to $63,000 in one-to-four-family residential
mortgage loans classified as non-performing assets at December 31, 2007.
At September 30, 2008, there were no loans or other assets that are not
12
disclosed or disclosed as classified or special mention, where known information
about possible credit problems of borrowers caused us to have serious doubts as
to the ability of the borrowers to comply with the present loan repayment terms
and which may result in disclosure of such loans in the future.
Average balances and yields. The following tables set forth average balance
sheets, average yields and costs, and certain other information at and for the
periods indicated. All average balances are daily average balances. Non-accrual
loans were included in the computation of average balances, where applicable,
but have been reflected in the table as loans carrying a zero yield. The yields
set forth below include the effect of deferred fees, discounts and premiums that
are amortized or accreted to interest income. Yields have been annualized.
For the Three Months Ended September 30,
---------------------------------------------------------------------
2008 2007
----------------------------------- --------------------------------
Interest Interest
Average Income Yield/ Average Income Yield/
Balance Expense Cost Balance Expense Cost
----------- ----------- ---------- ---------- ---------- -------
(Dollars in thousands)
Interest-earning assets:
Loans......................... $ 134,873 $ 1,962 5.82% $ 121,315 $ 1,819 6.00%
Securities.................... 29,211 350 4.79 22,011 293 5.32
Mortgage-backed securities.... 24,997 288 4.61 7,221 76 4.21
Other......................... 3,063 14 1.83 9,229 120 5.20
----------- ----------- ---------- ----------
Total interest-earning assets 192,144 2,614 5.44% 159,776 2,308 5.78%
----------- --------- ---------- -------
Non-interest-earning assets... 5,554 7,242
----------- ----------
Total assets............... $ 197,698 $ 167,018
=========== ==========
Interest-bearing liabilities:
NOW accounts.................. $ 7,776 $ 24 1.23% 6,336 10 0.63
Passbook savings.............. 14,248 32 .90 17,913 56 1.25
Money market savings......... 11,860 57 1.92 10,681 79 2.96
Individual retirement accounts 16,339 177 4.33 16,021 181 4.52
Certificates of deposit....... 75,916 708 3.73 70,975 820 4.62
Borrowings.................... 44,838 465 4.15% 19,838 241 4.86
----------- ----------- ---------- ----------
Total interest-bearing
liabilities.............. 170,977 1,463 3.42% 141,764 1,387 3.91%
----------- ----------- --------- ---------- ---------- -------
Non-interest-bearing liabilities:
Demand deposits............... 3,220 3,222
Other......................... 3,671 2,079
----------- ----------
Total liabilities........ 177,868 147,065
Stockholders' equity.......... 19,830 19,953
----------- ----------
Total liabilities and
stockholders' equity..... $ 197,698 $ 167,018
=========== ==========
Net interest income........... $ 1,151 $ 921
=========== ==========
Interest rate spread (1)...... 2.02% 1.87%
========= =======
Net interest-earning assets (2) $ 21,167 $ 18,012
=========== ===========
Net interest margin (3)....... 2.40% 2.31%
============ ==========
Average interest-earning assets
to average interest-bearing
liabilities................ 112% 113%
=========== ===========
_____________________
(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.
13
For the Three Months Ended September 30,
---------------------------------------------------------------------
2008 2007
----------------------------------- --------------------------------
Interest Interest
Average Income Yield/ Average Income Yield/
Balance Expense Cost Balance Expense Cost
----------- ----------- ---------- ---------- ---------- -------
(Dollars in thousands)
Interest-earning assets:
Loans......................... $ 128,300 $ 5,626 5.85% $ 120,622 $ 5,394 5.96%
Securities.................... 29,018 1,033 4.75 20,067 770 5.12
Mortgage-backed securities.... 23,138 792 4.56 6,339 199 4.19
Other......................... 5,055 104 2.74 4,322 167 5.15
----------- ----------- ---------- ----------
Total interest-earning assets 185,511 7,555 5.43% 151,350 6,530 5.75%
----------- --------- ---------- -------
Non-interest-earning assets... 5,122 5,636
----------- -----------
Total assets............... $ 190,633 $ 156,986
=========== ============
Interest-bearing liabilities:
NOW accounts.................. $ 6,733 $ 51 1.01% $ 5,537 $ 26 0.63
Passbook savings.............. 13,984 103 .98 14,542 132 1.21
Money market savings......... 11,307 176 2.08 10,498 225 2.86
Individual retirement accounts 16,246 538 4.42 15,578 225 4.37
Certificates of deposit....... 75,456 2,337 4.13 68,234 2,279 4.45
Borrowings.................... 40,774 1,274 4.17 21,519 786 4.87
----------- ----------- ---------- ----------
Total interest-bearing
liabilities.............. 164,500 4,479 3.63% 135,908 3,959 3.88%
----------- ----------- -------- ---------- ---------- ---------
Non-interest-bearing liabilities:
Demand deposits......... 3,202 3,197
Other......................... 2,904 2,294
----------- -----------
Total liabilities........ 170,606 141,399
Stockholders' equity.......... 20,027 15,587
----------- -----------
Total liabilities and
stockholders' equity..... $ 190,633 $ 156,986
=========== ============
Net interest income........... $ 3,076 $ 2,571
=========== ===========
Interest rate spread (1)...... 1.80% 1.87%
======== =========
Net interest-earning assets (2) $ 21,011 $ 15,442
============ ============
Net interest margin (3)....... 2.21 2.26%
=========== ===========
Average interest-earning assets
to average interest-bearing
liabilities................ 113% 111%
============ ============
14
Comparison of Operating Results for the Three Months Ended September 30, 2008
and September 30, 2007
General. We had net income of $1,000 for the three months ended September
30, 2008 compared to a net loss of $1,000 for the three months ended September
30, 2007. The increase of $2,000 in net income for the third quarter of 2008
compared to the third quarter of 2007 resulted primarily from an increase in net
interest income of $230,000, partially offset by an increase in provision for
loan losses of $8,000, decrease in other income of $80,000, increase of other
expenses of $106,000, and increase in income tax expense of $34,000. The
increase in net interest income was the result of a steepened yield curve that
positively impacted the net interest margin increasing to 2.40% in the third
quarter of 2008 compared to a 2.31% net interest margin in the third quarter of
2007. The improved net interest margin resulted primarily from an improved yield
from mortgage backed securities, the benefit of a higher percentage of earning
assets deployed in higher yielding loan assets, and lower funding costs.
Securities are evaluated periodically to determine whether a decline in their
fair value is other than temporary. At September 30, 2008, the Company recorded
a $57,000 other-than-temporary impairment loss related to its investment in
Freddie Mac common stock.
Interest and Dividend Income. Interest and dividend income increased by
$306,000 or 13.3%, to $2.6 million for the three months ended September 30, 2008
from $2.3 million for the three months ended September 30, 2007. The increase in
interest and dividend income resulted from a $143,000 or 7.9%, increase in
interest income from loans, a $57,000 or 19.5%, increase in interest income from
securities, a $212,000 or 278.9% increase in interest income from
mortgage-backed securities, offset by a $106,000 or 88.3% decrease in other
interest income, primarily interest earning demand accounts. Average
interest-earning assets increased by $32.3 million, or 20.2%, to $192.1 million
for the three months ended September 30, 2008 from $159.8 million for the three
months ended September 30, 2007. The yield on interest-earning assets decreased
by 34 basis points to 5.44% for the three months ended September 30, 2008
compared to 5.78% for the three months ended September 30, 2007, reflecting the
effect of the 325 basis point drop in interest rates by the Federal Reserve
since September 2007.
Interest Expense. Interest expense increased $76,000 or 5.5%, to $1.5
million for the three months ended September 30, 2008 from $1.4 million for the
three months ended September 30, 2007. The increase in interest expense resulted
from an increase in the average balances in interest-bearing liabilities which
was mitigated by the lower rates paid on these liabilities. The average balance
of interest-bearing liabilities increased $29.2 million, or 20.6%, to $171.0
million for the three months ended September 30, 2008 compared to $141.8 million
for the three months ended September 30, 2007. The average cost of
interest-bearing liabilities decreased by 49 basis points to 3.42% for the three
months ended September 30, 2008 from 3.91% for the three months ended September
30, 2007. The average cost of deposit accounts decreased by 60 basis points to
3.16% for the three months ended September 30, 2008 compared to 3.76% for the
three months ended September 30, 2007. The average cost of borrowings decreased
by 71 basis points to 4.15% for the three months ended September 30, 2008
compared to 4.86% for the three months ended September 30, 2007. The increase in
interest expense reflects a higher volume of deposits and borrowings.
At September 30, 2008, we had $33.3 million of certificates of deposit,
including individual retirement accounts that will mature during the fourth
quarter of 2008 with a weighted average cost of 3.85%. Based on current market
rates, if these funds remain with Fairport Savings Bank, the rates we pay on
these deposits will remain similar, depending on the maturity term.
Net Interest Income. Net interest income increased $230,000 or 25.0%, to
$1.2 million for the three months ended September 30, 2008 from $921,000 for the
three months ended September 30, 2007. The increase in net interest income was
due primarily to an increase in average interest-earning assets of $3.2 million
15
more than interest-bearing liabilities, due to the investment of the proceeds of
the initial stock offering that closed in August 2007. The improved net interest
margin resulted primarily from an improved yield from mortgage backed
securities, the benefit of a higher percentage of earning assets deployed in
higher yielding loan assets, and lower funding costs. The Company's net interest
margin increased 9 basis points to 2.40% for the three months ended September
30, 2008 from 2.31% for the three months ended September 30, 2007. The increase
in net interest margin was also attributable to the effect of a normal yield
curve in 2008 compared to the effect of the flat or inverted yield curve that
existed for much of 2007. If the current interest rate environment remains
relatively stable through the remainder of 2008, we anticipate modest
improvement in our net interest margin with certificates of deposits maturing
and renewing at similar interest rates, and new loan volume added at higher
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 $8,000 in
provision for loan losses for the three month period ended September 30, 2008
compared to no provision for loan losses for the three months ended September
30, 2007. The allowance for loan losses as of September 30, 2008 was $335,000 or
..24% of total loans, compared to $319,000 or .26% of total loans as of September
30, 2007. We ended the quarter with no non-accrual loans as of September 30,
2008 compared to $100,000 or .08% of loans in non-accrual loan status as of
September 30, 2007. We had $41,000 in foreclosed real estate as of September 30,
2007 and no foreclosed real estate as of September 30, 2008.
Other Income. Total other income decreased $80,000 or 47.3%, to $89,000 for
the three months ended September 30, 2008 compared to $169,000 for the three
months ended September 30, 2007. In the three months ended September 2007, there
was an $81,000 gain on sale of available for sale securities compared to no gain
on sale of available for sale securities in 2008. In the three months ended
September 30, 2008, the Company recorded a $57,000 other-than-temporary
impairment loss related to its investment in Freddie Mac common stock. The
decrease was partially offset by a $30,000 increase in checking account service
charge fees associated with the courtesy overdraft protection at point of sale
and ATM's, and an increase of $28,000 in commissions from Oakleaf Services
insurance/annuity and security sales.
Other Expenses. Other expenses increased $106,000, or 9.7%, to $1.2 million
for the three months ended September 30, 2008 compared to $1.1 million for the
three months ended September 30, 2007. The increase was the primary result of an
increase of $61,000 in salaries and benefits expense primarily due to annual
cost of living raises effective January 1 of each year, and $41,000 in mortgage
fees and taxes with additional mortgage volume.
The Federal Deposit Insurance Corporation ("FDIC") imposes an assessment against
institutions for deposit insurance. This assessment is based on the risk
category of the institution and ranges from 5 to 43 basis points of the
institution's deposits. Federal law requires that the designated reserve ratio
for the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of
estimated insured deposits. If this reserve ratio drops below 1.15% or the FDIC
expects it to do so within six months, the FDIC must, within 90 days, establish
and implement a plan to restore the designated reserve ratio to 1.15% of
estimated insured deposits within five years (absent extraordinary
circumstances).
Recent bank failures coupled with deteriorating economic conditions have
significantly reduced the deposit insurance fund's reserve ratio. As of June 30,
2008, the designated reserve ratio was 1.01% of estimated insured deposits at
March 31, 2008. As a result of this reduced reserve ratio, on October 16, 2008,
the FDIC published a proposed rule that would restore the reserve ratios to its
required level. The proposed rule would raise the current deposit insurance
assessment rates uniformly for all institutions by 7 basis points (to a range
from 12 to 50 basis points) for the first quarter of 2009. The proposed rule
would also alter the way the FDIC calculates federal deposit insurance
assessment rates beginning in the second quarter of 2009 and thereafter.
16
Under the proposed rule, the FDIC would first establish an institution's initial
base assessment rate. This initial base assessment rate would range, depending
on the risk category of the institution, from 10 to 45 basis points. The FDIC
would then adjust the initial base assessment (higher or lower) to obtain the
total base assessment rate. The adjustments to the initial base assessment rate
would be based upon an institution's levels of unsecured debt, secured
liabilities, and brokered deposits. The total base assessment rate would range
from 8 to 77.5 basis points of the institution's deposits. There can be no
assurance that the proposed rule will be implemented by the FDIC or implemented
in its proposed form.
In addition, the Emergency Economic Stabilization Act of 2008 (EESA) temporarily
increased the limit on FDIC insurance coverage for deposits to $250,000 through
December 31, 2009, and the FDIC took action to provide coverage for newly issued
senior unsecured debt and non-interest bearing transaction accounts in excess of
the $250,000 limit, for which institutions will be assessed additional premiums.
These actions will increase the Company's non-interest expense in 2009 and in
future years as long as the increased premiums are in place.
Income Tax Expense/Benefit. We had pre-tax income of $35,000 for the three
months ended September 30, 2008 versus a pre-tax loss of $1,000 for the three
months ended September 30, 2007, which resulted in a $34,000 tax expense for the
three months ended September 30, 2008, versus no taxes recorded for the three
months ended September 30, 2007, a change of $34,000. The effective tax rate was
97.1% for the three months ended September 30, 2008 compared to no taxes for the
three months ended September 30, 2007. There was no tax benefit recognized as a
result of the $57,000 other-than-temporary impairment loss recorded on September
30, 2008. For tax purposes, this loss is considered to be a capital loss. Given
the Company's lack of current and expected capital income, the Company has
concluded that it is unlikely the tax benefit of the loss will be utilized.
Comparison of Operating Results for the Nine Months Ended September 30, 2008
and September 30, 2007
General. We had a net loss of $95,000 for the nine months ended September
30, 2008 compared to a net loss of $248,000 for the nine months ended September
30, 2007. The improvement was attributable to an increase in net interest income
of $505,000, partially offset by an increase in other expenses of $206,000, a
decrease in other income of $14,000, a provision for loan losses of $14,000, and
a decrease in income tax benefit of $118,000. The net interest income
improvement for the nine months ended September 30, 2008 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, the $14.6 million balance
sheet leverage transaction in February 2008, the benefit of a higher percentage
of earning assets deployed in higher yielding loan assets, and lower funding
costs due to a steepened yield curve.
Interest and Dividend Income. Interest and dividend income increased by
$1.1 million, or 16.9% to $7.6 million for the nine months ended September 30,
2008 from $6.5 million for the nine months ended September 30, 2007. The
increase in interest and dividend income resulted primarily from a $232,000 or
4.3%, increase in interest income from loans, a $263,000 or 34.2%, increase in
interest income from securities, a $593,000 or 298.0% increase in interest
income from mortgage-backed securities, offset by a $63,000 or 37.7% decrease in
interest income from other sources. Average interest-earning assets increased by
$34.2 million, or 22.6%, to $185.5 million for the nine months ended September
30, 2008 from $151.3 million for the nine months ended September 30, 2007. The
yield on interest earning assets decreased by 32 basis points to 5.43% for the
nine months ended September 30, 2008 compared to 5.75% for the nine months ended
September 30, 2007, reflecting the effect of the 325 basis point drop in
interest rates by the Federal Reserve since September 2007.
Interest Expense. Interest expense increased $520,000 or 13.1%, to $4.5
million for the nine months ended September 30, 2008 from $4.0 million for the
nine months ended September 30, 2007. The increase in interest expense resulted
from an increase in average balances in interest-bearing liabilities of $28.6
17
million, or 21.0%, to $164.5 million for the nine months ended September 30,
2008 compared to $135.9 million for the nine months ended September 30, 2007.
The average cost of interest-bearing liabilities decreased by 25 basis points to
3.63% for the nine months ended September 30, 2008 from 3.88% for the nine
months ended September 30, 2007. The average cost of deposit accounts decreased
by 25 basis points to 3.45% for the nine months ended September 30, 2008
compared to 3.70% for the nine months ended September 30, 2007. In addition, the
average cost of borrowings decreased by 70 basis points to 4.17% for the nine
months ended September 30, 2008 compared to 4.87% for the nine months ended
September 30, 2007. The interest expense increase was the result of increased
volume in both deposits and borrowings.
Net Interest Income. Net interest income increased $505,000 or 19.6%, to
$3.1 million for the nine months ended September 30, 2008 from $2.6 million for
the nine months ended September 30, 2007. The increase in net interest income
was due primarily to an increase of interest bearing assets of $5.6 million more
than interest bearing liabilities. The average cost of our interest-bearing
liabilities decreased by 25 basis points, while the average yield on our
interest-earning assets decreased by 32 basis points, as the deposit growth of
the Bank has primarily been in time deposits, which carry higher costs than
other deposit alternatives. Our net interest margin decreased by 5 basis points
to 2.21% for the nine months ended September 30, 2008 from 2.26% for the nine
months ended September 30, 2007.
Provision for Loan Losses. Based on management's evaluation of the factors
that determine the level of the allowance for loan losses, we recorded a $14,000
provision for loan losses for the nine month period ended September 30, 2008
compared to no provision for loan losses for the nine month period ended
September 30, 2007. We continue to maintain exceptional credit quality within
our loan portfolio with no charge-offs recorded within the reporting period. The
allowance for loan losses as of September 30, 2008 was $335,000 or .24% of total
loans, compared to $319,000 or .26% of total loans as of September 30, 2007. We
had no non-accrual loans as of September 30, 2008 compared to $100,000 or .08%
of loans in non-accrual status as of September 30, 2007.
Other Income. Other income decreased $14,000 or 4.3%, to $314,000 for the
nine months ended September 30, 2008 compared to $328,000 for the nine months
ended September 30, 2007. The decrease in other income was primarily the result
of the impairment loss on securities available for sale recorded in the third
quarter of 2008 of $57,000 and an $81,000 gain on sale of available for sale
securities in the third quarter of 2007 compared to no gain on sale of
securities available for sale in 2008. The decrease is offset by a $40,000
increase in our Oakleaf subsidiary revenue and a $55,000 increase in Service
fees from an increase in checking account service charge fees associated with
the courtesy overdraft protection at point of sale and ATM's.
Other Expenses. Other expenses increased $206,000 or 6.3%, to $3.5 million
for the nine months ended September 30, 2008 compared to $3.3 million for the
nine months ended September 30, 2007. The increase was mainly the result of an
additional $72,000 in salaries and benefits expense primarily due to annual cost
of living raises effective January 1 of each year, a $66,000 increase in
mortgage fees and taxes due to increased loan volume, a $21,000 increase in
occupancy expense due to property taxes, an increase of $67,000 in other
expenses, including legal fees, primarily due to increased costs associated with
being a newly registered public company.
Income Tax Benefit. We had a pre-tax loss of $115,000 for the nine months
ended September 30, 2008 versus a pre-tax loss of $386,000 for the nine months
ended September 30, 2007, which resulted in a $20,000 tax benefit for the nine
months ended September 30, 2008, versus a $138,000 tax benefit for the nine
months ended September 30, 2007, a change of $118,000. The effective tax rate
was (17.4%) for the nine months ended September 30, 2008 compared to (35.8%) for
the nine months ended September 30, 2007. There was no tax benefit recognized as
a result of the $57,000 other-than-temporary impairment loss recorded on
September 30, 2008. For tax purposes, this loss is considered to be a capital
loss. Given the Company's lack of current and expected capital income, the
Company has concluded that it is unlikely the tax benefit of the loss will be
utilized.
18
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 September
30, 2008, our liquidity ratio averaged 19.6%. We believe that we have enough
sources of liquidity to satisfy our short and long-term liquidity needs as of
September 30, 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 September 30, 2008, cash and cash equivalents
totaled $6.6 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, 2008, we had $3.6 million in loan commitments outstanding. In
addition to commitments to originate loans, we had $7.7 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, 2008 totaled $58.3 million, or 62.6% of our certificates of
deposit and 44.1% 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 September 30, 2009. 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 nine months ended September 30, 2008, we originated $26.6 million of
loans.
19
Financing activities consist primarily of activity in deposit accounts and
Federal Home Loan Bank borrowings. We experienced a net increase in total
deposits of $3.2 million for the quarter ended September 30, 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 $17.0 million to $42.6 million for the nine months ended September
30, 2008, compared to a net decrease of $8.2 million to $19.8 million for the
nine months ended September 30, 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 September 30, 2008, we
had the ability to borrow approximately $103.3 million from the Federal Home
Loan Bank of New York, of which $42.6 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, 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.
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 September 30, 2008 and 2007, we had $3.6 million and $2.9 million,
respectively, of commitments to grant loans, and $7.7 million and $7.7 million,
respectively, of unfunded commitments under lines of credit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable since the Company is a smaller reporting company.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
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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.
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
Not applicable
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.*
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4 Form of Common Stock Certificate of FSB Community Bankshares, Inc.*
10.1 Amended and Restated 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).
** Filed as an exhibit to the Company's Current Report on form 8-K filed
with the Securities and Exchange Commission on September 25, 2008.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FSB COMMUNITY BANKSHARES, INC.
Date: November 13, 2008 /s/ Dana C. Gavenda
-----------------------------------
Dana C. Gavenda
President and Chief Executive Officer
Date: November 13, 2008 /s/ Kevin D. Maroney
-----------------------------------
Kevin D. Maroney
Executive Vice President and Chief
Financial Officer
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