FSB Community Bankshares 10-Q 2010 Q3 Quarterly report

UNITED STATES

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, 2010

OR

o 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 incorporation or organization)	(I.R.S. Employer Identification Number)

45 South Main Street, Fairport, New York	14450
(Address of Principal Executive Offices)	Zip Code

	(585) 223-9080
(Registrant’s telephone number)

	N/A
(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 o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES o  NO o.

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	o	Accelerated filer	o
	Non-accelerated filer	o	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 o   NO x

As of November 12, 2010 there were 1,785,000 shares of the Registrant’s common stock, par value $0.10 per share, outstanding, 946,050 of which were held by FSB Community Bankshares, MHC, the Registrant’s mutual holding company.

FSB Community Bankshares, Inc.

FORM 10-Q

Index

		Page
	Part I. Financial Information
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009		1
	Consolidated Statements of Income for the Three Months Ended September 30, 2010 and 2009		2
	Consolidated Statements of Income for the Nine Months Ended September 30, 2010 and 2009		3
	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2010 and 2009		4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009		5
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		29
Item 4T.	Controls and Procedures		29
	Part II. Other Information
Item 1.	Legal Proceedings		30
Item 1A.	Risk Factors		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults upon Senior Securities		30
Item 4.	[Removed and Reserved]		30
Item 5.	Other Information		30
Item 6.	Exhibits		30
	Signature Page		32

Part I. Financial Information

Item 1.  Consolidated Financial Statements

FSB COMMUNITY BANKSHARES, INC.

Consolidated Balance Sheets

September 30, 2010 and December 31, 2009 (unaudited)

(Dollars in thousands, except share data)

	September 30,  2010			December 31, 2009
Assets
Cash and due from banks	$	9,525		$	3,385
Interest-earning demand deposits		1,105			2,580
Cash and Cash Equivalents		10,630			5,965
Securities available for sale		75,139			75,483
Securities held to maturity (fair value 2010 $5,687; 2009 $6,183)		5,523			6,098
Investment in FHLB stock		1,608			1,886
Loans held for sale		695			-
Loans receivable, net of allowance for loan losses (2010 $381; 2009  $368)		113,948			116,372
Bank owned life insurance		3,112			3,013
Accrued interest receivable		1,009			1,156
Premises and equipment, net		2,534			2,556
Foreclosed real estate		-			79
Prepaid FDIC premium		631			793
Other assets		728			999
Total Assets	$	215,557		$	214,400
Liabilities & Stockholders’ Equity
Deposits:
Non-interest-bearing	$	3,872		$	3,955
Interest-bearing		158,477			152,555
Total Deposits		162,349			156,510
Borrowings		28,800			34,590
Advances from borrowers for taxes and insurance		906			2,012
Official bank checks		1,881			432
Other liabilities		724			506
Total Liabilities		194,660			194,050
Stockholders’ Equity
Preferred Stock- no par value- 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		7,271			7,275
Retained earnings		13,477			13,317
Accumulated other comprehensive income		538			174
Unearned ESOP shares – at cost		(568	)		(595	)
Total Stockholders’ Equity		20,897			20,350
Total Liabilities and Stockholders’ Equity	$	215,557		$	214,400
See accompanying notes to consolidated financial statements

1

FSB COMMUNITY BANKSHARES, INC.

Consolidated Statements of Income

Three Months Ended September 30, 2010 and 2009 (unaudited)

(Dollars in thousands, except per share data)

	2010		2009
Interest and Dividend Income
Loans	$	1,614	$	1,669
Securities – taxable		285		415
Securities – tax exempt		3		-
Mortgage-backed securities		218		264
Other		7		2
Total Interest and Dividend Income		2,127		2,350
Interest expense
Deposits		590		844
Borrowings		293		404
Total Interest Expense		883		1,248
Net Interest Income		1,244		1,102
Provision for Loan Losses		8		7
Net Interest Income After Provision
for Loan Losses		1,236		1,095
Other Income
Service fees		56		73
Fee income		10		5
Realized gain on sale of securities		95		-
Increase in cash surrender value of bank owned life insurance		34		-
Realized gain on sale of loans		155		4
Other		92		51
Total Other Income		442		133
Other Expense
Salaries and employee benefits		894		613
Occupancy expense		151		130
Data processing costs		27		25
Advertising		39		76
Equipment expense		107		92
Electronic banking		22		21
Directors’ fees		30		25
Mortgage fees and taxes		61		71
FDIC premium expense		58		80
Other expense		168		152
Total Other Expenses		1,557		1,285
Income (Loss ) Before Income Taxes		121		(57	)
Provision (Benefit) for Income Taxes		29		(23	)
Net Income (Loss)	$	92	$	(34	)
Earnings (Loss) per common share	$	0.05	$	(0.02	)
See accompanying notes to consolidated financial statements

2

FSB COMMUNITY BANKSHARES, INC.

Consolidated Statements of Income

Nine Months Ended September 30, 2010 and 2009 (unaudited)

(Dollars in thousands, except per share data)

	2010			2009
Interest and Dividend Income
Loans	$	4,809		$	5,333
Securities – taxable		1,124			983
Securities – tax exempt		3			-
Mortgage-backed securities		634			889
Other		12			5
Total Interest and Dividend Income		6,582			7,210
Interest expense
Deposits		1,978			2,586
Borrowings:
Short-term		-			1
Long-term		973			1,234
Total Interest Expense		2,951			3,821
Net Interest Income		3,631			3,389
Provision for Loan Losses		14			21
Net Interest Income After Provision for Loan Losses		3,617			3,368
Other Income
Service fees		173			188
Fee income		36			33
Realized gain on sale of securities		87			92
Realized loss on sale of foreclosed real estate		(5	)		-
Increase in cash surrender value of bank owned life insurance		99			-
Realized gain on sale of  loans		238			49
Other		235			154
Total Other Income		863			516
Other Expense
Salaries and employee benefits		2,308			1,862
Occupancy expense		450			379
Data processing costs		70			72
Advertising		133			160
Equipment expense		314			269
Electronic banking		59			60
Directors’ fees		85			82
Mortgage fees and taxes		178			187
FDIC premium expense		174			261
Other expense		523			490
Total Other Expenses		4,294			3,822
Income Before Income Taxes		186			62
Provision for Income Taxes		26			18
Net Income	$	160		$	44
Earnings per common share	$	0.09		$	0.03
See accompanying notes to consolidated financial statements

3

FSB COMMUNITY BANKSHARES, INC.

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2010 and 2009 (unaudited) 

(Dollars in thousands)

	Common Stock		Additional Paid in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Unearned ESOP Shares			Total
Balance – January 1, 2009	$	179	$	7,286		$	13,249	$	(43	)	$	(630	)	$	20,041
Comprehensive income:
Net income		-		-			44		-			-			44
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and taxes		-		-			-		373			-			373
Total Comprehensive Income															417
ESOP shares committed to be
released		-		(10	)		-		-			26			16
Balance – September 30, 2009	$	179	$	7,276		$	13,293	$	330		$	(604	)	$	20,474
Balance – January 1, 2010	$	179	$	7,275		$	13,317	$	174		$	(595	)	$	20,350
Comprehensive income:
Net income		-		-			160		-			-			160
Change in net unrealized  gain on securities available for sale, net of reclassification adjustment and taxes		-		-			-		364			-			364
Total Comprehensive Income															524
ESOP shares committed to be released		-		(4	)		-		-			27			23
Balance – September 30, 2010	$	179	$	7,271		$	13,477	$	538		$	(568	)	$	20,897

See accompanying notes to consolidated financial statements

4

FSB COMMUNITY BANKSHARES, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2010 and 2009 (unaudited) 

(Dollars in thousands)

	2010			2009
Cash Flows From Operating Activities
Net income	$	160		$	44
Adjustments to reconcile net income to net cash used by operating activities:
Net amortization of premiums and discounts on investments		743			479
Gain on sale of securities available for sale		(97	)		(92	)
Loss on sale of securities held to maturity		10			-
Gain on sale of loans		(238	)		(49	)
Proceeds from loans sold		7,377			12,709
Loans originated for sale		(7,834	)		(12,660	)
Amortization of net deferred loan origination costs		23			11
Depreciation and amortization		238			221
Provision for loan losses		14			21
Expense related to ESOP		23			16
Deferred income tax expense (benefit)		1			(43	)
Earnings on investment in bank owned life insurance		(99	)		-
Decrease (increase) in accrued interest receivable		147			(321	)
Decrease (increase) in prepaid FDIC premium and other assets		433			(272	)
Increase (decrease) in other liabilities		29			(103	)
Loss on sale of foreclosed real estate		5			-
Net Cash Provided By/(Used By) Operating Activities		935			(39	)
Cash Flows From Investing Activities
Purchases of securities available for sale		(80,230	)		(79,566	)
Proceeds from maturities and calls of securities available for sale		71,800			33,037
Proceeds from sales of securities available for sale		3,188			5,355
Proceeds from principal paydowns on securities available for sale		5,494			3,602
Purchases of securities held to maturity		(510	)		-
Proceeds from principal paydowns on securities held to maturity		387			850
Proceeds from maturities and calls of securities held to maturity		-			-
Proceeds from sales of securities held to maturity		686			-
Net decrease in loans		2,387			18,718
Redemption of FHLB stock		278			310
Proceeds from sales of foreclosed real estate		74			-
Purchase of premises and equipment		(216	)		(495	)
Net Cash Provided By/(Used By) Investing Activities		3,338			(18,189	)
Cash Flows From Financing Activities
Net increase in deposits		5,839			32,625
Net decrease in short-term borrowings		-			(3,850	)
Repayments on long-term borrowings		(5,790	)		(4,459	)
Net decrease in advances from borrowers for taxes and insurance		(1,106	)		(1,210	)
Net increase in official bank checks		1,449			1,992
Net Cash Provided By Financing Activities		392			25,098
Net Increase in Cash
and Cash Equivalents		4,665			6,870
Cash and Cash Equivalents- Beginning		5,965			3,173
Cash and Cash Equivalents- Ending	$	10,630		$	10,043

5

FSB COMMUNITY BANKSHARES, INC.

Consolidated Statements of Cash Flows, (Continued)

	2010		2009
Supplementary Cash Flows Information
Interest paid	$	3,002	$	3,836
Income taxes paid	$	-	$	115
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 Fairport Savings Bank (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the applicable instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of consolidated financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.  Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, the evaluation of other-than-temporary impairment of investment securities, and the valuation of deferred tax assets. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2009 filed on Form 10-K with the Securities and Exchange Commission (“SEC”) on March 29, 2010.

The unaudited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2009, included in the Annual Report filed on Form 10-K with the Securities and Exchange Commission (“SEC”) on March 29, 2010.

Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The consolidated financial statements at September 30, 2010 and December 31, 2009 and for the three and nine months ended September 30, 2010 and 2009 include the accounts of the Company, Fairport Savings Bank (the “Bank”) and the Bank’s wholly-owned subsidiary, Oakleaf Services Corporation (“Oakleaf”).  All inter-company balances and transactions have been eliminated in consolidation.  Certain amounts from prior periods may have been reclassified, when necessary, to conform to current period presentation.

The Company has evaluated subsequent events through the date these consolidated financial statements were issued.

Note 2-Fair Value Measurement and Disclosure

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective reporting dates and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each reporting date.

7

The Company follows Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.  ASC Topic 820 applies to other accounting pronouncements that require or permit fair value measurements.

ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are as follows:

Level 1:  Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities.

Level 2:  Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3:  Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used are as follows at September 30, 2010 and at December 31, 2009:

Note 2--Fair Value Measurement and Disclosure (Continued)

September 30, 2010 Securities Available for Sale: (In Thousands)	Total		Level 1		Level 2		Level 3
U.S. Government agency securities	$	43,898	$	5,000	$	38,898	$	-
Mortgage-backed securities - residential		27,254		2,079		25,175		-
SBA pools		3,987		-		3,987		-
Total Available for Sale Securities	$	75,139	$	7,079	$	68,060	$	-
(In Thousands)
December 31, 2009 Securities Available for Sale: (In Thousands)	Total		Level 1		Level 2		Level 3
Equity securities	$	12	$	12	$	-	$	-
U.S. Government agency securities		54,629		5,548		49,081		-
Mortgage-backed securities - residential		20,842		-		20,842		-
Total Available for Sale Securities	$	75,483	$	5,560	$	69,923	$	-

8

Note 2--Fair Value Measurement and Disclosure (Continued)

There were no transfers between level 1 and level 2 during the nine months ended September 30, 2010.  No assets or liabilities have been measured on a non-recurring basis at or for the nine months ended September 30, 2010 or for the year ended December 31, 2009.

Financial Accounting Standards Board (FASB) ASC Topic 825-10-50, Disclosure about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  In that regard, the defined fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlemen t of the instrument.  ASC Topic 825-10-50 excludes certain assets and liabilities from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at September 30, 2010 and December 31, 2009:

Cash, Due from Banks, and Interest-Bearing Demand Deposits

The carrying amounts of these assets approximate their fair values.

Investment Securities

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3).  In the absence of such evidence, management’s be st estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments. The Company had no Level 3 investment securities at September 30, 2010 or at December 31, 2009.

Investment in FHLB Stock

The carrying value of FHLB stock approximates its fair value based on the restricted nature of the FHLB stock.

Loans Held for Sale

The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for specific attributes of that loan. Loans held for sale are carried at their cost at September 30, 2010, which approximated fair value since the loans were sold in the subsequent period for amounts substantially equal to the carrying value. There were no loans held for sale at December 31, 2009.

9

Loans

The fair values of loans held for investment are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Accrued Interest Receivable and Payable

The carrying amount of accrued interest receivable and payable approximates fair value.

Deposits

The fair values disclosed for demand deposits (e.g., NOW accounts, non-interest checking, regular savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  The carrying amounts for variable-rate certificates of deposit approximate their fair values at the reporting date.  Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings

The fair values of FHLB long-term borrowings are estimated using discounted cash flow analyses, based on the quoted rates for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.

Off-Balance Sheet Instruments

The fair values for off-balance sheet financial instruments (lending commitments and lines of credit) are estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present credit worthiness of the counterparties.

The carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2010 and December 31, 2009 are as follows:

	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In Thousands)
Financial assets:
Cash and due from banks	$	9,525	$	9,525	$	3,385	$	3,385
Interest bearing demand deposits		1,105		1,105		2,580		2,580
Securities available for sale		75,139		75,139		75,483		75,483
Securities held to maturity		5,523		5,687		6,098		6,183
FHLB stock		1,608		1,608		1,886		1,886
Loans held for sale		695		695		-		-
Loans, net		113,948		119,854		116,372		118,883
Accrued interest receivable		1,009		1,009		1,156		1,156
Financial liabilities:
Deposits		162,349		161,325		156,510		155,606
Borrowings		28,800		26,929		34,590		32,579
Accrued interest payable		78		78		129		129
Off-balance sheet instruments:
Commitments to extend credit		-		-		-		-

10

Note 3 - Securities

 The amortized cost and estimated fair value of securities with gross unrealized gains and losses at September 30, 2010 and at December 31, 2009 are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
September 30, 2010:
Available for Sale:
U.S. Government agency securities	$	43,651	$	249	$	(2	)	$	43,898
Mortgage-backed securities - residential		26,735		525		(6	)		27,254
SBA pools		3,937		50		-			3,987
	$	74,323	$	824	$	(8	)	$	75,139

Held to Maturity:
Mortgage-backed securities – residential	$	5,013	$	152	$	-	$	5,165
State and Municipal securities		510		12		-		522
		5,523		164		-		5,687

December 31, 2009:
Available for Sale:
Equity securities	$	9	$	3	$	-		$	12
U.S. Government agency securities		54,842		100		(313	)		54,629
Mortgage-backed securities – residential		20,369		473		-			20,842

	$	75,220	$	576	$	(313	)	$	75,483
Held to Maturity:
Mortgage-backed securities – residential	$	6,098	$	86	$	(1	)	$	6,183

The Company’s investment securities portfolio consists primarily of U.S. Government sponsored agency securities, U.S Government mortgage-backed securities, U.S. Government sponsored agency mortgage-backed securities, SBA pools, and State and Municipal securities.  The U.S. Government sponsored agency securities and the U.S. Government sponsored mortgage-backed securities have little credit risk because their principal and interest payments are backed by an agency of the U.S. Government.  At September 30, 2010 the Company’s securities portfolio contained $7.4 million of U.S. Government mortgage-backed securities and SBA pools, including $1.3 million classified as held to maturity, and $6.1 million classified as available for sale.

The amortized cost and estimated fair value by contractual maturity of debt securities at September 30, 2010 are shown below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

11

Note 3 – Securities (continued)

	Available for Sale				Held to Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In Thousands)				(In Thousands)
Due in one year or less	$	-	$	-	$	-	$	-
Due after one year through five years		7,320		7,348		-		-
Due after five years through ten years		20,576		20,704		510		522
Due after ten years		15,755		15,846		-		-
Mortgage-backed securities – residential		26,735		27,254		5,013		5,165
SBA pools		3,937		3,987		-		-
	$	74,323	$	75,139	$	5,523	$	5,687

For the nine months ended September 30, 2010 there was a $10,573 gross realized loss on sale of mortgage-backed securities held to maturity resulting from proceeds of $686,000, a $2,120 gross realized gain on sale of FHLMC common stock available for sale resulting from proceeds of $11,000, and a $95,033 gross realized gain on sale of U.S. government agency securities available for sale resulting from proceeds of $3,177,000. In accordance with accounting guidance, the Company was able to sell securities classified as held to maturity after the Company had already collected a substantial portion (at least 85%) of the principal outstanding at acquisition due either to prepayments or to scheduled principal and interest payments on the debt securities.  For the nine months ended September 30, 2009 there was a $92,000 realized gain on sale of mortgage-backed securities classified as available for sale resulting from proceeds of $5.3 million.

No securities were pledged to secure public deposits or for any other purpose required or permitted by law at September 30, 2010 or at December 31, 2009.

The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009:

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Note 3 – Securities (continued)

	Less than 12 Months				12 Months or More					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(In Thousands)
September 30, 2010:
U.S. Government agency securities	$	5,027	$	2		$	-	$	-		$	5,027	$	2
Mortgaged-backed securities – residential		1,487		6			-		-			1,487		6
	$	6,514	$	8		$	-	$	-		$	6,514	$	8

December 31, 2009:
U.S. Government agency securities	$	27,241	$	313	$	-	$	-	$	27,241	$	313
Mortgaged-backed securities – residential		442		1		18		-		460		1
	$	27,683	$	314	$	18	$	-	$	27,701	$	314

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issuer (and guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of a security by a rating agency, (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies, and (6) whether the Company intends to sell or might be required to sell the debt securities.  In 2009 and in the nine month period ended September 30, 2010, the Company did not record an other-than-temporary impairment charge.

At September 30, 2010, six U.S Government agency securities and one mortgage-backed security have been in a continuous unrealized loss position for less than twelve months.  No U.S Government agency securities or mortgage-backed securities have been in a continuous unrealized loss position for twelve months or more.  The U.S Government agency securities and mortgage-backed security were issued by U.S. government sponsored agencies and are paying in accordance with their terms with no deferrals of interest, or defaults.  As management believes the Company does not intend to sell and will not be required to sell these securities prior to recovery or maturity, no declines are deemed to be other-than-temporary.

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Note 4 - Federal Home Loan Bank of New York Stock

Federal law requires a member institution of the Federal Home Loan Bank System to hold stock of its district Federal Home Loan Bank (“FHLB”) according to a predetermined formula.  This restricted stock is carried at cost.

Management evaluates the FHLB stock for impairment on a quarterly basis.  Management’s determination of whether this investment is impaired is based on its assessment of the ultimate recoverability of its cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer ba se of the FHLB.

No impairment charges were recorded related to the FHLB stock for the nine month period ended September 30, 2010 or in 2009.

Note 5 – FHLB Debt Restructure

In July 2010, the Company restructured a portion of its Federal Home Loan Bank advances by repaying $13.2 million of existing borrowings and replacing these borrowings with $13.2 millionof new, lower cost FHLB advances. This transaction resulted in $638,000 in prepayment penalties that will be deferred and recognized in interest expense as an adjustment to the cost of the Company’s new borrowings in future periods. The existing borrowings were a combination of fixed-rate and amortizing advances with an average cost of 4.29% and an average duration of 1.47 years. The new borrowings are all fixed-rate borrowings with an average cost of 3.09% including the deferred adjustment to the carrying value of the new borrowings. The $13.2 million of new advances have an average du ration of 3.11 years.   The relevant accounting treatment for this transaction was an interpretation of the guidance provided in ASC 470-50. This transaction was executed as an earnings and interest rate risk strategy, resulting in lower FHLB advance costs and an extension of average duration.

Note 6 – Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.

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The components of other comprehensive income and related tax effects for the three and nine months ended September 30, 2010 and 2009 are as follows:

	For the Three Months   Ended September 30,					For the Nine months  Ended September 30,
	2010			2009		2010			2009
	(In Thousands)					(In Thousands)
Unrealized holding gain on available for sale securities	$	118		$	768	$	649		$	613
Reclassification adjustment for realized  gain included in net income		(95	)		-		(97	)		(92	)
Net Unrealized Gain		23			768		552			521
Tax effect		9			232		188			148
Net of tax amount	$	14		$	536	$	364		$	373

Note 7 - Earnings Per Common Share

Basic earnings per common share are calculated by dividing net income by the weighted-average number of common shares outstanding during the period. The Company has not granted any restricted stock awards or stock options and, during the three and nine months ended September 30, 2010 and 2009, had no potentially dilutive common stock equivalents.  Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released.  The weighted average common shares outstanding were 1,728,148 for the three months ended September 30, 2010 and 1,727,280 for the nine months ended September 30, 2010, and 1,724,649 for the three months ended September 30, 2009 and 1,723,781 for the nine months ended September 30, 2009.

Note 8 - Recent Accounting Pronouncements

In January 2010, the FASB issued updated guidance on “Equity, Accounting for Distributions to Stockholders with Components of Stock and Cash”.  The amendments in this update clarify that the stock portion of a distribution to stockholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all stockholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend.  This update codifies the consensus reached in recent accounting guidance for Accounting for Stock Dividends, Including Distributions to Stockholders with Components of Stock and Cash.  This update is effective for interim and annual periods ending on or after December 15, 2009, and s hould be applied on a retrospective basis.  The adoption of this guidance did not have a material effect on the Company’s consolidated results of operations or financial position.

The FASB has issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10 to now require:

● A reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and

● In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

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In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

● For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

● A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The Company adopted the required provisions of ASU 2010-06, with no significant impact on its financial condition or results of operations.

The FASB has issued ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, codifies the consensus reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting   provisions within subtopic 310-40.

ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The adoption of this guidance did not impact the Company’s financial position or results of operations.

The FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, in order to help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures. 

This ASU requires more information about the credit quality of financing receivables in the disclosures to consolidated financial statements, such as aging information and credit quality indicators.  Both new and existing disclosures must be disaggregated by portfolio segment or class.  The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The amendments in this Update apply to all public and nonpublic entities with financing receivables.  Financing receivables include loans and trade accounts receivable.  However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments. 

For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010.  The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010.  The adoption of this guidance will not impact the Company’s financial position or results of operations, but will require new disclosures.

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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, 2010, FSB Community Bankshares, MHC the Company’s mutual holding company parent, held 946,050 shares, or 53.0%, of the Company’s common stock, engaged in no significant activities, and was not included in the MD&A.

Forward Looking Statements

This Quarterly Report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risks and uncertainties, including, among other things, changes in general economic conditions, either nationally or in our market areas, that are worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; adverse changes in the securities markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to succes sfully integrate acquired entities, if any; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; changes in our organization, compensation and benefit plans; changes in our financial condition or results of operations that reduce capital available to pay dividends; and changes in the financial condition or future prospects of issuers of securities that we own,  that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.  The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance a nd could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically declines any obligation, to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 29, 2010.  These policies, along with the disclosures presented in the other consolidated financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.  Based on the valuation techniques used and the sensitivity of consolidated financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, the evaluation of investment securitie s for other-than-temporary impairment and the valuation and recoverability of deferred tax assets to be the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available.

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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 a llowance for loan losses.

As a substantial percentage of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans.  Assumptions are instrumental in determining the value of properties.  Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance.  Management carefully reviews the assumptions supporting such appraisals to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses.  We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews, and other relevant factors.  This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions. Various banking regulators, as an integral part of their examination process, also review the allowance for loan losses. Such regulators may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the allowance for loan losses when their credit evaluations differ from those of management. Additionally, the allowance for loan losses is determined, in part, by the composition and size of the loan portfolio which represents the largest asset type on the consolidated statement of financial condition.

The evaluation has specific, general, and unallocated components.  The specific component relates to loans that are classified as doubtful, substandard, or special mention.  For such loans that are also classified as impaired, an allowance is generally established when the collateral value of the impaired loan is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general l osses in the portfolio.

Actual loan losses may be significantly more than the allowance we have established which could have a material negative effect on our financial results.

Other than temporary impairment.  When the fair value of a held to maturity or available for sale security is less than its amortized cost basis, an assessment is made at the balance sheet date as to whether other-than-temporary impairment (OTTI) is present.

The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover. The principal factors considered are (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issuer (and guarantor, if any) and adverse conditions specifically related to the

security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of a security by a rating agency, and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

For debt securities, OTTI is considered to have occurred if (1) the Company intends to sell the security, (2) it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or (3) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.

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In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For debt securities, credit-related OTTI is recognized in income while noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss).  Credit-related OTTI is measured as the difference between the present value of an impaired security’s expected cash flows and its amortized cost basis.  Noncredit-related OTTI is measured as the difference between the fair value of the security and its amortized costs less any credit-related losses recognized.  For securities classified as held to maturity, the amount of OTTI recognized in other comprehensive income (loss) is accreted to the credit-adjusted expected cash flow amounts of the securities over future periods.  For equity securities, the entire amount of OTTI is recognized in income.

Deferred Tax Assets.  Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.  As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Comparison of Financial Condition at September 30, 2010 and December 31, 2009

Total Assets.  Total assets increased by $1.2 million, or 0.5%, to $215.6 million at September 30, 2010 from $214.4 million at December 31, 2009.  The modest growth in assets for the nine months ended September 30, 2010 was the result, in part, of management’s ongoing strategy of selling long-term fixed rate mortgages in the current low interest rate environment.  The increase in total assets primarily reflects increases in cash and cash equivalents, and loans held for sale, partially offset by decreases in securities available for sale, securities held to maturity, net loans receivable, and Federal Home Loan Bank stock.

Cash and cash equivalents, primarily interest-earning deposits at the Federal Reserve Bank and Federal Home Loan Bank, increased by $4.7 million, or 78.2%, to $10.6 million at September 30, 2010 from $6.0 million at December 31, 2009.  The Bank continues to maintain a strong liquidity position, retaining significant cash and cash equivalent balances that will allow the Bank to capitalize on investment and lending opportunities that may arise in future periods.

Total securities decreased by $919,000, or 1.1%, to $80.7 million at September 30, 2010 from $81.6 million at December 31, 2009. Securities classified as available for sale decreased $344,000 to $75.1 million at September 30, 2010 from $75.5 million at December 31, 2009.  The $344,000 decrease was attributable to maturities and calls of $71.9 million of U.S. government agency securities classified as available for sale, and $6.2 million in principal repayments received and amortization, partially offset by the purchase of $64.3 million of U.S. government agency securities, $4.0 million of SBA pools, and $11.9 million of mortgage-backed securities, and a $552,000 increase in the fair value of securities available for sale. Management elected to diversify the investment portfolio by purchasing SBA pools and State and Municipal securities, to lessen the concentration in callable U.S government agency securities. We sold $8,750 of FHLMC common stock and $2.9 million in U.S. government agency securities held in available for sale securities for realized gains on sale of $2,120 and $95,033 respectively in the first nine months of 2010.

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Securities classified as held to maturity decreased $575,000, or 9.4% to $5.5 million at September 30, 2010 from $6.1 million at December 31, 2009 primarily as a result of the sale of $691,000 of mortgage-backed securities with a realized loss of $10,573 and $394,000 in principal repayments and amortization, partially offset by the purchase of $510,000 in State and Municipal securities.  In accordance with accounting guidance, the sale of securities classified as held to maturity occurred after the Company received a minimum of 85% of the principal outstanding at acquisition due either to prepayments or to scheduled principal and interest payments on the debt securities.  All securities purchased in 2010, with the exception of State and Municipal bonds classified as held to maturity, have been classified as availabl e for sale to provide a portfolio of marketable securities for liquidity as an alternative to borrowings. The Company has reviewed its investment securities portfolio for the three and nine months ended September 30, 2010, and has determined that no other-than-temporary impairment exists in the portfolio.

Investment in FHLB of New York stock decreased by $278,000, or 14.7%, to $1.6 million at September 30, 2010, from $1.9 million at December 31, 2009 due to stock redemptions.  The FHLB of New York requires members to purchase and redeem stock based on the level of borrowings.

Net loans receivable decreased $2.4 million, or 2.1%, to $113.9 million at September 30, 2010 from $116.4 million at December 31, 2009.  The Company continues to execute its business plan of making high quality loans to existing and new customers in our market area with $25.3 million of fixed-rate loan refinances and home purchase originations in the first nine months of 2010.  The Bank sold $7.4 million of long-term, fixed-rate conventional residential mortgage loans and FHA mortgage loans as a balance sheet management strategy in the first nine months of 2010 to reduce interest rate risk in a potentially rising rate environment.  The $7.4 million of sold loans included $3.0 million in direct broker loans and $4.4 million in correspondent loans. The Bank sold these loans at a gain of $238,000 which was re corded in other income, and will realize servicing income on these loans as long as they have outstanding balances.  Management believed that selling these loans was a prudent interest rate risk decision.  Total loans sold and serviced as of September 30, 2010 totaled $18.3 million compared to $16.8 million as of December 31, 2009. We may experience further declines in our total residential mortgages loan portfolio with additional mortgage loan sales. In the current interest rate environment we intend to continue to sell a portion of our existing fixed-rate residential mortgage loans on a servicing retained basis resulting in additional loan servicing income, as well as selling the majority of FHA mortgage loans originated on a servicing released basis.  At September 30, 2010, the Bank had $695,000 in loans held for sale comprised of six FHA mortgage loans totaling $607,000 and one conventional loan for $88,000 originated and closed by the Bank in the third quarter of 2010 that have been committed for sale in the secondary market and will be delivered and funded in the fourth quarter of 2010.

The Bank opened three mortgage loan origination offices in January of 2010 located in Canandaigua, Pittsford, and Watertown, New York.  Six additional mortgage loan originators and three support staff members were hired at these locations. The Bank intends to continue to emphasize aggressive, yet prudent originations of loans secured by one-to-four family residential real estate. The mortgage origination offices were established as Fairport Mortgage, a division of Fairport Savings Bank.   The primary responsibilities of the Fairport Mortgage origination team will be to originate mortgage loans to increase the bank’s current mortgage loan portfolio, to originate loans for the Bank to close and sell as a correspondent to outside investors, and also to broker a select portion of residential mortgage loans di rectly to other investors.

The Company has never been involved with, and has no direct exposure to, sub-prime lending activities.  Credit quality continues to be the highest priority when underwriting loans. Subjective judgments about a borrower’s ability to repay and the value of any underlying collateral are made prior to approving a loan.

We believe our stringent underwriting standards have directly resulted in our significantly low level of non-accruing loans.

Deposits and Borrowings. Totaldeposits increased by $5.8 million, or 3.7%, to $162.3 million at September 30, 2010 from $156.5 million at December 31, 2009.  The $5.8 million deposit increase consists of core deposit growth of $5.5 million including non-interest bearing checking accounts, NOW accounts, money market accounts, and savings accounts, and $278,000 million in non-core deposit growth including IRAs and Certificates of Deposit.  Management believes that the deposit growth is the result, in part, of customers’ preference for the flexibility provided by short-term core deposits in the current low interest rate e nvironment, as well as the Bank’s competitive strength in our market.

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The net deposit growth for the first nine months of 2010 is primarily attributable to the Webster branch growth of $6.6 million and the Penfield branch growth of $2.0 million, offset by decreases in the Fairport and Irondequoit branch offices totaling $2.8 million. We believe our marketing efforts at these newer branch offices and focus on customer service has resulted in attracting new customers and increasing core deposits.

Long term borrowings decreased by $5.8 million, or 16.7%, to $28.8 million at September 30, 2010 from $34.6 million on December 31, 2009.  The Company used its increased deposits as a source of liquidity to decrease Federal Home Loan Bank advances and does not intend to renew maturing FHLB advances during the remainder of 2010 as a result of management’s decision to replace wholesale borrowings through core deposit growth.

In July 2010, the Bank restructured a portion of its Federal Home Loan Bank advances by repaying $13.2 million of existing borrowings and replacing these borrowings with $13.2 million of new, lower cost FHLB advances. This transaction resulted in $638,000 of prepayment penalties that were deferred and will be recognized in interest expense as an adjustment to the cost of the Company’s new borrowings in future periods.  The existing borrowings were a combination of fixed-rate and amortizing advances with an average cost of 4.29% and an average duration of 1.47 years.  The new borrowings are all fixed-rate advances with an average cost of 3.09% including the deferred adjustment to the carrying value of the new borrowings. The $13.2 million of new advances have an average duration of 3.11 years.  The re levant accounting treatment for this transaction was an interpretation of the guidance provided in ASC 470-50.  This transaction was executed as an earnings and interest rate risk strategy, resulting in lower FHLB advance costs and an extension in average duration.

Stockholders’ Equity. Total stockholders’ equity increased by $547,000 or 2.7%, to $20.9 million at September 30, 2010 from $20.4 million at December 31, 2009.  The increase resulted from $160,000 in net income, an increase of $364,000 in accumulated other comprehensive income, and a $23,000 increase in committed ESOP shares.  The Bank continued to exceed the requirement to be categorized as well capitalized, the highest standard of capital rating as defined by the Bank’s regulators, at the end of the third quarter 2010.

Non-Performing Assets. At September 30, 2010 and December 31, 2009 the Company had one loan for $23,000 classified as non-performing. At September 30, 2010 the Company had no foreclosed assets compared to one foreclosed asset for $79,000 at December 31, 2009.  At September 30, 2010 non-performing assets as a percent of total assets was 0.01%, and at December 31, 2009 non-performing assets as a percent of total assets was 0.05%, significantly below the industry average in both periods. At September 30, 2010, management has evaluated the Bank’s loan loss reserve and believes it is adequate based on the quality of the current loan portfolio.  At September 30, 2010, there were no other assets that are not disclosed as classified or special mention, where known information about possible credit problems of borrowers caused us to have serious doubts as to the ability of the borrowers to comply with the present loan repayment terms and which may result in impairment or disclosure of such loans in the future.

Average balances and yields.  The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated.  All average balances are daily average balances.  Non-accrual loans were included in the computation of average balances, where applicable, but have been reflected in the table as loans carrying a zero yield.  The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.  Yields have been annualized.

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	For the Three Months Ended September 30,
	2010									2009
	Average Balance			Interest Income/ Expense			Yield/ Cost			Average Balance			Interest Income/ Expense			Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans	$	117,871		$	1,614			5.48	%	$	117,379		$	1,669			5.69	%
Securities - taxable		49,769			285			2.29			52,972			415			3.13
Mortgage-backed securities		28,493			218			3.06			27,468			264			3.84
State and Municipal securities (1)		433			4			3.70			-			-			-
Other		13,088			7			0.21			5,335			2			0.15
Total interest-earning assets		209,654			2,128			4.06	%		203,154			2,350			4.63	%
Non-interest-earning assets		8,530									4,625
Total assets	$	218,184								$	207,779
Interest-bearing liabilities:
NOW accounts	$	10,301		$	14			0.54	%	$	8,627		$	13			0.60	%
Passbook savings		27,292			45			0.66			15,827			26			0.66
Money market savings  Individual retirement accounts		27,185			57			0.84			22,787			88			1.54
		18,172			121			2.66			17,857			161			3.61
Certificates of deposit		76,535			353			1.84			77,475			556			2.87
Borrowings		29,533			293			3.97			37,426			404			4.32
Total interest-bearing liabilities		189,018			883			1.87	%		179,999			1,248			2.77	%
Non-interest-bearing liabilities:
Demand deposits		4,166									3,763
Other		4,174									3,877
Total liabilities		197,358									187,639
Stockholders’ equity		20,826									20,140
Total liabilities and stockholders’ equity	$	218,184								$	207,779
Net interest income				$	1,245								$	1,102
Interest rate spread (2)								2.19	%								1.86	%
Net interest-earning assets (3)	$	20,636								$	23,155
Net interest margin (4)					2.38	%								2.17	%
Average interest-earning assets to average interest-bearing liabilities		111	%								113	%

(1) Tax-exempt interest income is presented on a tax equivalent basis using a 35 percent federal tax rate.

(2) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by total interest-earning assets.

22

	For the Nine months Ended September 30,
	2010									2009
	Average Balance			Interest Income/ Expense			Yield/ Cost			Average Balance			Interest Income/ Expense			Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans	$	116,049		$	4,809			5.53	%	$	124,995		$	5,333			5.69	%
Securities - taxable		55,042			1,124			2.72			37,676			983			3.48
Mortgage-backed securities		26,481			634			3.19			28,386			889			4.18
State and Municipal securities (1)		146			3			3.65			-			-			-
Other		10,611			12			0.15			5,771			5			0.12
Total interest-earning assets		208,329			6,582			4.21	%		196,828			7,210			4.88	%
Non-interest-earning assets		8,979									4,513
Total assets	$	217,308								$	201,341
Interest-bearing liabilities:
NOW accounts	$	10,074		$	48			0.64	%	$	8,118		$	41			0.67	%
Passbook savings		26,900			169			0.84			14,476			76			0.70
Money market savings  Individual retirement accounts		25,380			189			0.99			20,182			267			1.76
		18,235			393			2.87			17,519			494			3.76
Certificates of deposit		77,364			1,179			2.03			75,369			1,708			3.02
Borrowings		31,143			973			4.17			38,703			1,235			4.25
Total interest-bearing liabilities		189,096			2,951			2.08	%		174,367			3,821			2.92	%
Non-interest-bearing liabilities:
Demand deposits		4,127									3,580
Other		3,291									3,154
Total liabilities		196,514									181,101
Stockholders’ equity		20,794									20,240
Total liabilities and stockholders’ equity	$	217,308								$	201,341
Net interest income				$	3,631								$	3,389
Interest rate spread (2)								2.13	%								1.96	%
Net interest-earning assets (3)	$	19,233								$	22,461
Net interest margin (4)					2.32	%								2.30	%
Average interest-earning assets to average interest-bearing liabilities		110	%								113	%

(1) Tax-exempt interest income is presented on a tax equivalent basis using a 35 percent federal tax rate.

(2) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by total interest-earning assets.

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Comparison of Operating Results for the Three Months Ended September 30, 2010 and September 30, 2009

General.The Company had net income of $92,000 for the three months ended September 30, 2010 compared to a net loss of $34,000 for the three months ended September 30, 2009.  The increase of $126,000 in earnings for the third quarter of 2010 compared to the third quarter of 2009 resulted primarily from an increase in net interest income of $142,000, and an increase in other income of $309,000, partially offset by an increase in other expenses of $272,000 and an increase in income taxes of $52,000.  The net interest margin increased 21 basis points to 2.38% in the third quarter of 2010 from 2.17% in the third quarter of 2009.  The increase in net interest margin, reflective of an increase in net interest income, was the result of the Company’s ability to reduce the deposit and borrowing costs in a low interest rate environment, partly offset by decreased yields on interest earning assets. The increase in other income was due to increases in realized gain on sale of securities, realized gain on sale of loans, increase in cash surrender value of bank owned life insurance, and miscellaneous other income, primarily additional mortgage fees collected, partially offset by a modest decrease in deposit service fees. The increase in other expense is primarily due to expenses related to our Webster branch that opened in September 2009 and our three mortgage origination offices that opened in January 2010 including additional salaries and employee benefits, occupancy, equipment, data processing costs, directors fees, and miscellaneous other expenses, partially offset by a decrease in FDIC premium expense, advertising, and mortgage fees and taxes.

Interest and Dividend Income.  Interest and dividend income decreased by $223,000 or 9.5%, to $2.1 million for the three months ended September 30, 2010 from $2.3 million for the three months ended September 30, 2009.  The decrease in interest and dividend income resulted from a $55,000 or 3.3% decrease in interest income from loans, a $46,000 or 17.4% decrease in interest income from mortgage-backed securities, and a $130,000 or 31.3% decrease in interest income from taxable securities, partially offset by a $5,000 or 250.0% increase in other interest income primarily interest-earning deposit accounts at the Federal Reserve Bank and Federal Home Loan Bank and a $3,000 or 100.0% increa se in interest income from tax exempt securities. Average interest-earning assets increased by $6.5 million, or 3.2%, to $209.7 million for the three months ended September 30, 2010 from $203.2 million for the three months ended September 30, 2009.  The yield on interest-earning assets decreased by 57 basis points to 4.06% for the three months ended September 30, 2010 compared to 4.63% for the three months ended September 30, 2009, reflecting a yield decrease in higher yielding interest earning asset categories as a result of the repositioning of assets into lower yielding, yet shorter maturity, assets in a lower market interest rate environment at September 30, 2010.

Interest Expense.  Interest expense decreased $365,000 or 29.3%, to $883,000 for the three months ended September 30, 2010 from $1.2 million for the three months ended September 30, 2009 despite higher average balances.  The decrease in interest expense resulted primarily from significantly lower average rates paid on deposits, and lower average balances and a modest decrease in the rates paid on borrowings.  The average balance of interest-bearing liabilities increased $9.0 million, or 5.0%, to $189.0 million for the three months ended September 30, 2010 compared to $180.0 million for the three months ended September 30, 2009.  The average cost of interest-bearing liabilities, however, decreased by 90 basis points to 1.87% for the three months ended September 30, 2010 from 2.77% for the three months ended September 30, 2009.  The average cost of deposit accounts decreased by 89 basis points to 1.48% for the three months ended September 30, 2010 compared to 2.37% for the three months ended September 30, 2009. The average cost of borrowings decreased by 35 basis points to 3.97% for the three months ended September 30, 2010 compared to 4.32% for the three months ended September 30, 2009. The average balance of borrowings decreased $7.9 million or 21.1%, to $29.5 million for the three months ended September 30, 2010 compared to $37.4 million for the three months ended September 30, 2009.  The decrease in interest expense reflects the Bank’s management of lower deposit costs in a historically low interest rate environment.  The Bank has continued to respond to the lower interest rate environment allowing for deposit re-pricing in a downw ard fashion of higher cost CDs, IRAs and money market savings accounts, decreasing our overall cost of funds.

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At September 30, 2010, we had $18.9 million of certificates of deposit, including IRAs that will mature during the fourth quarter of 2010 with a weighted average cost of 1.75%. Based on current market rates, if these funds remain with Fairport Savings Bank with similar maturities, the rates paid on these deposits will decrease.

Net Interest Income. Net interest income increased $142,000 or 12.9%, to $1.2 million for the three months ended September 30, 2010 from $1.1 million for the three months ended September 30, 2009.  The increase in net interest income was due primarily to a lower average cost of deposits and borrowings lowering the overall cost of interest bearing liabilities, partially offset by a decrease in higher yielding earning assets, lowering the overall cost of interest-earning assets. The Company’s net interest margin increased 21 basis points to 2.38% for the three months ended September 30, 2010 from 2.17% for the three months ended September 30, 2009.

Provision for Loan Losses.  Based on management’s evaluation of the factors that determine the level of the allowance for loan losses, we recorded $7,500 in provision for loan losses for both three month periods ended September 30, 2010 and September 30, 2009.  The allowance for loan losses as of September 30, 2010 was $381,000 or 0.33% of total loans, compared to $360,000 or 0.31% of total loans as of September 30, 2009. We ended the quarter with $23,000 in non-accrual loans at September 30, 2010 compared to $93,000 in non-accrual loans at September 30, 2009.  We recorded no charge offs in the third quarter of 2010 compared to $4,000 in the third quarter of 2009.   We had no foreclosed real estate at September 30, 2010 or 2009.

Other Income.  Total other income increased $309,000 or 232.3%, to $442,000 for the three months ended September 30, 2010 compared to $133,000 for the three months ended September 30, 2009. In the three months ended September 30, 2010 compared to the three months ended September 30, 2009, there was an increase of $34,000 in the cash surrender value of bank owned life insurance, a $151,000 increase in gain on sale of loans, a $95,000 increase in realized gain on sale of securities, a $41,000 increase in other income primarily from mortgage fees, and an increase of $5,000 in commissions from Oakleaf Services insurance/annuity and security sales,  partially offset by a decrease of $17,000 in service fee income primarily from deposit account service charge fees.

Other Expense.  Total other expense increased $272,000, or 21.2%, to $1.6 million for the three months ended September 30, 2010 compared to $1.3 million for the three months ended September 30, 2009.  The increase was primarily the result of expenses related to our Webster branch that opened in September 2009 and our three mortgage origination offices that opened in January 2010 including a $281,000 increase in salaries and employee benefits, a $21,000 increa se in occupancy expense, a $15,000 increase in equipment expense, a $2,000 increase in data processing costs, a $1,000 increase in electronic banking, a $5,000 increase in directors’ fees, and a $16,000 increase in other expenses, partially offset by a $22,000 decrease in FDIC insurance premium expense, a $10,000 decrease in mortgage fees and taxes, and a $37,000 decrease in advertising expense due to promotional expenses related to the Webster branch opening in 2009.

Income Tax Expense.  We had pre-tax income of $121,000 for the three months ended September 30, 2010 compared to a pre-tax loss of $57,000 for the three months ended September 30, 2009, and had a $29,000 tax expense for the three months ended September 30, 2010, compared to a $23,000 tax benefit for the three months ended September 30, 2009, a change in taxes of $52,000.  The effective tax rate was 24.0% for the three months ended September 30, 2010 compared to a tax benefit rate of (40.4)% for the three months ended September 30, 2009.  The lower effective tax rate in the quarter ended September 30, 2010 was a result of the benefit (reduction in expense) due the increase in the cash surrender value of our bank owned life insurance, which is tax exempt.

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Comparison of Operating Results for the Nine months Ended September 30, 2010 and September 30, 2009

General.  We had net income of $160,000 for the nine months ended September 30, 2010 compared to net income of $44,000 for the nine months ended September 30, 2009.  The $116,000 increase was attributable to an increase in net interest income of $242,000, an increase in other income of $347,000, and a $7,000 decrease in the provision for loan losses, partially offset by an increase in other expenses of $472,000, and an increase in income tax expense of $8,000. The net interest margin increased by 2 basis points to 2.32% for the nine months ended September 30, 2010 from 2.30% for the nine months ended September 30, 2009.  The increase in net interest margin reflects a decrease in our yield on total average interest-bearing liabilities compared to the yield on total average interest-earning assets for the nine months ended September 30, 2010 compared to September 30, 2009. The increase in net interest income is primarily due to the Company’s ability to reduce interest-bearing liabilities costs through disciplined deposit pricing at a quicker pace than interest-earning assets in a low interest rate environment.The increase in other income was mainly due to increases in the cash surrender value of bank owned life insurance, realized gain on sale of loans and miscellaneous other income, primarily additional mortgage fees collected, partially offset by modest decrease in realized gain on sale of securities recorded in 2010 compared to 2009, deposit service fees, and a realized loss on sale of foreclosed real estate in 2009. The increase in no n-interest expense is primarily due to expenses related to our Webster branch that opened in September 2009 and our three mortgage origination offices that opened in January 2010 including additional salaries and employee benefits, occupancy, equipment, directors’ fees, and other miscellaneous expenses, partially offset by a decrease in FDIC premium expense, advertising, mortgage fees and taxes, and data processing costs.

 Interest and Dividend Income.  Interest and dividend income decreased by $628,000, or 8.7%, to $6.6 million for the nine months ended September 30, 2010 from $7.2 million for the nine months ended September 30, 2009.  The decrease in interest and dividend income resulted primarily from a $524,000, or 9.8% decrease in interest income from loans, and a $255,000, or 28.7% decrease in interest income from mortgage-backed securities, partially offset by a $141,000, or 14.3% increase in interest income from taxable securities, a $3,000, or 100.0% increase in tax-exempt securities, and a $7,000, or 140.0% increase in interest income from other sources, mainly interest-earning deposits a t the Federal Reserve Bank and Federal Home Loan Bank.  Average interest-earning assets increased by $11.5 million, or 5.8%, to $208.3 million for the nine months ended September 30, 2010 from $196.8 million for the nine months ended September 30, 2009.  The yield on interest earning assets, however, decreased by 67 basis points to 4.21% for the nine months ended September 30, 2010 compared to 4.88% for the nine months ended September 30, 2009, reflecting decreases in interest yields on loans, taxable securities, and mortgage-backed securities.

Interest Expense.  Interest expense decreased $870,000, or 22.8%, to $3.0 million for the nine months ended September 30, 2010 from $3.8 million for the nine months ended September 30, 2009.  The decrease in interest expense resulted from lower average rates paid on deposit liabilities despite a $22.2 million increase in the aggregate average balance, and lower average rates paid on a $7.6 million decrease in average balances in borrowings. Average balances in interest bearing liabilities increased $14.7 million, or 8.4%, to $189.1 million for the nine months ended September 30, 2010 compared to $174.4 million for the nine months ended September 30, 2009.  The average cost of interest-bearing liabilities decreased by 84 basis points to 2.08% for the nine months ended September 30, 2010 from 2.92% for the nine months ended September 30, 2009.  The average cost of deposit accounts decreased by 87 basis points to 1.67% for the nine months ended September 30, 2010 compared to 2.54% for the nine months ended September 30, 2009. The average cost of borrowings decreased by 8 basis points to 4.17% for the nine months ended September 30, 2010 compared to 4.25% for the nine months ended September 30, 2009.  The decrease in interest expense reflects a significantly lower cost of funds in total deposits and a modest decrease in borrowing costs in a lower interest rate environment.

26

Net Interest Income. Net interest income increased $242,000, or 7.1%, to $3.6 million for the nine months ended September 30, 2010 from $3.4 million for the nine months ended September 30, 2009.  The increase in net interest income was primarily due to a decrease in the average cost of our interest-bearing liabilities of 84 basis points, while the average yield on our interest-earning assets decreased by 67 basis points.  Our net interest margin increased by 2 basis points to 2.32% for the nine months ended September 30, 2010 from 2.30% for the nine months ended September 30, 2009. The increase in net interest margin was primarily attributable to a lower average cost of deposits and bo rrowings lowering the overall cost of interest bearing liabilities, partially offset by a decrease in higher yielding interest earning assets.

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, 2010 compared to the $21,000 provision for loan losses for the nine month period ended September 30, 2009.  We continue to maintain exceptional credit quality within our loan portfolio with no charge-offs recorded in the first nine months of 2010 compared to one charge-off for $4,000 in the first nine months of 2009.  The allowance for loan losses as of September 30, 2010 was $381,000 or 0.33% of total loans, compared to $360,000 or 0.31% of tot al loans as of September 30, 2009. We ended the quarter with $23,000 in non-accrual loans at September 30, 2010 compared to $93,000 in non-accrual loans at September 30, 2009. We had no foreclosed real estate at September 30, 2010 or 2009.

Other Income.  Other income increased $347,000, or 67.3%, to $863,000 for the nine months ended September 30, 2009 compared to $516,000 for the nine months ended September 30, 2009.  The $347,000 increase was due to a $99,000 increase in the cash surrender value of bank owned life insurance, a $189,000 increase in gain on sale of loans in the secondary market, an $81,000 increase in other income primarily from mortgage fees, $3,000 more in commissions from Oakleaf Services insurance/annuity and security sales, partially offset by $5,000 less in realized gain on sale of securities, a $5,000 realized loss on sale of foreclosed real estate in 2010, and a $15,000 decrease in deposit servic e fees.

Other Expenses.  Other expenses increased $472,000, or 12.4%, to $4.3 million for the nine months ended September 30, 2010 compared to $3.8 million for the nine months ended September 30, 2009.  The increase was primarily the result of expenses related to our Webster branch that opened in September 2009 and our three mortgage origination offices that opened in January 2010 including: a $446,000 increase in salaries and employee benefits, a $71,000 increase in occupancy expense, a $45,000 increase in equipment expense, a $33,000 increase in other expenses, and a $3,000 increase in directors’ fees.  These increases were partially offset by a $87,000 decrease in FDIC insurance premium expense, due to the one-time special assessments in the second quarter of 2009, a $27,000 decrease in advertising due to promotional expenses related to the Webster branch opening in 2009, a $2,000 decrease in data processing costs, a $1,000 decrease in electronic banking fees, and a $9,000 decrease in mortgage fees and taxes.

Income Taxes.  The Company had pre-tax income of $186,000 for the nine months ended September 30, 2010 versus pre-tax income of $62,000 for the nine months ended September 30, 2009, and had a $26,000 tax expense for the nine months ended September 30, 2010, versus an $18,000 tax expense for the nine months ended September 30, 2009, an increase of $8,000.  The effective tax rate was 14.0% for the nine months ended September 30, 2009 compared to 29.0% for the nine months ended September 30, 2009.  The lower effective tax rate for the nine months ended September 30, 2010 was a result of the benefit (reduction in expense) due to the increase in the cash surrender value of the Com pany’s Bank owned life insurance, which is tax exempt.

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 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. 0; We seek to maintain a liquidity ratio of 10.0% or greater.  For the quarter ended September 30, 2010, our liquidity ratio averaged 25.1%.  We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2010.

27

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, 2010, cash and cash equivalents totaled $10.6 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, 2010, we had $9.6 million in loan commitments outstanding.  In addition to commitments to originate loans, we had $9.2 million in unused lines of credit to borrowers. Certificates of deposit, including IRAs comprised solely of certificates of deposits, due within one year of September 30, 2010 totaled $65.7 million, or 69.6% of our certificates of deposit and 40.5% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds including loan sales, other deposit products, including certificates of deposit, and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2011. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activity is and will continue to be originating loans. During the three months ended September 30, 2010, we originated $7.8 million of loans.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank borrowings.  We experienced a net decrease in total deposits of $2.4 million for the quarter ended September 30, 2010.  Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

Liquidity management is both a daily and long-term function of business management.  If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of New York, which provides an additional source of funds.  Federal Home Loan Bank borrowings decreased by $5.8 million to $28.8 million for the nine months ended September 30, 2010, compared to a net decrease of $8.3 million to $37.2 million for the nine months ended September 30, 2009.  Historically, Federal Home Loan Bank borrowings have primarily been used to fund loan demand and expanding the investment portfolio.  At September 30, 2010, we had the ability to borrow approximately $85.5 million from the Federal Home Loan Bank of New York, of which $29.4 million had been advanced.  ; At September 30, 2010 there was $598,000 remaining in deferred premium expense on $13.2 million Federal Home Loan Bank borrowings from the debt restructuring previously mentioned.

28

The Bank also has a repurchase agreement with a third party broker providing an additional $10.0 million in liquidity.  Funds obtained under the repurchase agreement are secured by the Bank’s U.S Government and agency obligations.  There were no advances outstanding under the repurchase agreement at September 30, 2010 or at December 31, 2009.

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, 2010, Fairport Savings Bank exceeded all regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines.

Off-Balance Sheet Arrangements

In the ordinary course of business, the Company is a party to credit-related financial instruments with off-balance sheet risk to meet the financing needs of our customers.  These financial instruments include commitments to extend credit.  We follow the same credit policies in making commitments as we do for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by us, is based on our credit evaluation of the customer.

At September 30, 2010 and 2009, we had $9.6 million and $2.8 million, respectively, of commitments to grant loans, and $9.2 million and $7.9 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 our disclosure controls and procedures were effective at September 30, 2010.

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.

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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
 

There are no material updates and additions to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the Year Ended December 31, 2009 and subsequent quarters’ reports on Form 10-Q, as filed with the Securities and Exchange Commission.  Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

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. [Removed and Reserved]

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are either filed as part of this report or are incorporated herein by reference:

3.1	Charter of FSB Community Bankshares, Inc.*
3.2	Bylaws of FSB Community Bankshares, Inc.*
4	Form of Common Stock Certificate of FSB Community Bankshares, Inc.*
10.1	Supplemental Executive Retirement Plan*
10.2	Form of Employee Stock Ownership Plan*
10.3	Supplemental Executive Retirement Plan for K. Maroney**
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

30

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*	Filed as exhibits to the Company’s Registration Statement on Form SB-2, and any amendments thereto, with the Securities and Exchange Commission (Registration No. 333-141380) on March 16, 2007.
**	Filed as an exhibit to the Company’s Current Report on Form 8-K, file with the Securities and Exchange Commission on August 4, 2010.

31

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 12, 2010	/s/ Dana C. Gavenda
	Dana C. Gavenda
	President and Chief Executive Officer
Date:   November 12, 2010	/s/ Kevin D. Maroney
	Kevin D. Maroney
	Executive Vice President and Chief Financial Officer

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