Fraternity Community Bancorp (FRTR) 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number:0-54271

FRATERNITY COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	27-3683448
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
764 Washington Boulevard, Baltimore, Maryland	21230
(Address of principal executive offices)	(Zip Code)

Issuer’s telephone number, including area code:(410) 539-1313

Not applicable

(Former name, former address and former fiscal year, 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 filing requirements for the past 90 days.    Yes  x    No  ¨

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of May 11, 2012, the registrant had 1,587,000 shares of common stock issued and outstanding.

INDEX

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Statements of Financial Condition as of March 31, 2012 (unaudited) and December 31, 2011		1
	Consolidated Statements of Income for the Three Months Ended March 31, 2012 and 2011 (unaudited)		2
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 (unaudited)		3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2012 and 2011 (unaudited)		4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (unaudited)		5
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		48
Item 4.	Controls and Procedures		48
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		49
Item 1A.	Risk Factors		49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		49
Item 3.	Defaults Upon Senior Securities		49
Item 4.	Mine Safety Disclosures		49
Item 5.	Other Information		49
Item 6.	Exhibits		49
SIGNATURES			50

i

PART I.FINANCIAL INFORMATION

Item 1. Financial Statements

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

ASSETS

	March 31, 2012			December 31, 2011
	(unaudited)
Cash and cash equivalents:
Cash and due from banks	$	701,791		$	1,033,637
Interest-bearing deposits in other banks		12,094,351			13,889,505
Total cash and cash equivalents		12,796,142			14,923,142
Investment securities:
Available-for-sale - at fair value		31,272,099			31,419,356
Held-to-maturity - at amortized cost (fair value approximates $7,886,089 and $7,970,403, respectively)		7,729,237			7,837,293
Loans - net of allowance for loan losses of $1,250,000 (2012 and 2011)		113,368,937			111,924,984
Property and equipment, net		751,946			740,501
Federal Home Loan Bank stock - at cost - restricted		1,306,500			1,306,500
Bank stock - at cost - unrestricted		60,600			60,600
Ground rents - net of valuation allowance of $45,500 (2012 and 2011)		854,996			854,996
Accrued interest receivable		657,599			605,197
Investment in bank-owned life insurance		4,396,163			4,354,252
Deferred income taxes		605,178			630,908
Other assets		769,793			673,356
TOTAL ASSETS	$	174,569,190		$	175,331,085
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	119,904,980		$	121,200,060
Advances from the Federal Home Loan Bank		22,500,000			22,500,000
Advances by borrowers for taxes and insurance		1,172,506			831,448
Other liabilities		758,107			682,888
Total liabilities		144,335,593			145,214,396
Commitments and contingencies		0			0
Stockholders’ Equity:
Preferred stock, $0.01 par value; authorized 1,000,000; none issued		0			0
Common stock, $0.01 par value; authorized 15,000,000; issued and outstanding, 1,587,000 shares at March 31, 2012		15,870			15,870
Additional paid in capital		14,942,055			14,944,647
Retained earnings - substantially restricted		16,222,840			16,170,684
Unearned ESOP shares		(1,137,350	)		(1,163,800	)
Accumulated other comprehensive income		190,182			149,288
Total stockholders’ equity		30,233,597			30,116,689
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	174,569,190		$	175,331,085

See accompanying notes.

1

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended March 31,
	2012		2011
	(unaudited)		(unaudited)
INTEREST INCOME:
Interest and fees on loans:
Real estate loans	$	1,467,294	$	1,461,152
Other loans		1,178		1,256
Interest and dividends on investments and bank deposits		275,955		198,217
Income from ground rents owned		11,644		12,132
Total interest income		1,756,071		1,672,757
INTEREST EXPENSE:
Interest on deposits		461,776		668,291
Interest on borrowings		169,353		220,876
Total interest expense		631,129		889,167
NET INTEREST INCOME		1,124,942		783,590
PROVISION FOR LOAN LOSSES		73,019		60,058
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,051,923		723,532
NON-INTEREST INCOME:
Income on bank-owned life insurance		41,912		43,781
Gain on sale of loans		18,941		0
Other income		12,298		11,280
Total non-interest income		73,151		55,061
NON-INTEREST EXPENSES:
Salaries and employee benefits		573,188		506,539
Occupancy expenses		126,316		129,661
Legal fees		45,950		8,583
Federal Deposit Insurance premiums		35,559		40,142
Accounting and auditing expense		31,711		29,750
Data processing expense		109,534		99,301
Directors fees		26,479		24,817
Other general and administrative expenses		114,350		101,328
Total non-interest expenses		1,063,087		940,121
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)		61,987		(161,528	)
INCOME TAX EXPENSE (BENEFIT)		9,831		(80,900	)
NET INCOME (LOSS)	$	52,156	$	(80,628	)
EARNINGS (LOSS) PER COMMON SHARE - BASIC	$	0.04	$	0
EARNINGS (LOSS) PER COMMON SHARE - DILUTED	$	0.04	$	0

See accompanying notes.

2

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended March 31,
	2012			2011
	(unaudited)			(unaudited)
NET INCOME (LOSS)	$	52,156		$	(80,628	)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period		68,156			58,305
Less: income taxes on unrealized losses arising during the period		(27,262	)		(23,322	)
OTHER COMPREHENSIVE INCOME		40,894			34,983
COMPREHENSIVE INCOME (LOSS)	$	93,050		$	(45,645	)

See accompanying notes.

3

Fraternity Community Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Three Months Ended March 31, 2012 and 2011

	Common Stock		Additional Paid In Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, December 31, 2010	$	0	$	0		$	16,146,785		$	0		$	(160,210	)	$	15,986,575
Net Loss		0		0			(80,628	)		0			0			(80,628	)
Other Comprehensive Income		0		0			0			0			34,983			34,983
Acquisition of unearned ESOP shares										(1,269,600	)					(1,269,600	)
Issuance of Common Stock		15,870		14,949,545			0			0			0			14,965,415
Balance, March 31, 2011	$	15,870	$	14,949,545		$	16,066,157		$	(1,269,600	)	$	(125,227	)	$	29,636,745
Balance, December 31, 2011	$	15,870	$	14,944,647		$	16,170,684		$	(1,163,800	)	$	149,288		$	30,116,689
Net Income		0		0			52,156			0			0			52,156
Other Comprehensive Income		0		0			0			0			40,894			40,894
ESOP shares released		0		(2,592	)		0			26,450			0			23,858
Balance, March 31, 2012	$	15,870	$	14,942,055		$	16,222,840		$	(1,137,350	)	$	190,182		$	30,233,597

See accompanying notes.

4

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Three Months Ended			Three Months Ended
	March 31, 2012			March 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	52,156		$	(80,628	)
Adjustments to reconcile net income (loss) provided by operating activities:
Depreciation		21,480			21,740
Gain on sale of loans		(18,941	)		0
Origination of loans sold		(1,173,000	)		0
Proceeds from loans sold		1,191,941			0
Amortization/accretion of premium/discount		90,246			42,468
Increase in value of bank-owned life insurance		(41,912	)		(43,782	)
Stock based compensation (ESOP)		23,858			0
Provision for loan losses		73,019			60,058
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		(148,838	)		258,047
Other liabilities		75,219			172,225
Net cash provided by operating activities		145,228			430,128
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans		(1,851,075	)		2,066,472
Acquisition of property and equipment		(32,925	)		(17,489	)
Purchase of:
Investment securities available-for-sale		(1,029,051	)		(14,765,090	)
Proceeds from:
Principal paydowns on investment securities available-for-sale		1,172,417			1,141,779
Principal paydowns on investment securities held-to-maturity		88,325			0
Sale of other real estate owned		334,103			0
Net cash used in investing activities		(1,318,206	)		(11,574,328	)

5

Fraternity Community Bancorp, Inc.

Consolidated Statements of Cash Flows (Continued)

	Three Months Ended			Three Months Ended
	March 31, 2012			March 31, 2011
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(1,295,080	)		(2,559,886	)
Repayments of Federal Home Loan Bank borrowings		0			(83,333	)
Proceeds from issuance of Common Stock, net		0			13,695,815
Increase in advances by borrowers for taxes and insurance		341,058			516,667
Net cash (used in) provided by financing activities		(954,022	)		11,569,263
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(2,127,000	)		425,063
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		14,923,142			25,881,831
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	12,796,142		$	26,306,894
Cash paid for interest	$	631,198		$	896,175
Cash paid for taxes	$	0		$	0
Transfer of loans to other real estate owned	$	334,103		$	0

On March 31, 2011, the Company loaned $1,269,600 to the Employee Stock Ownership Plan, which was used to purchase 126,960 shares of common stock. The loan is secured by the shares purchased and is shown as Unearned ESOP shares in the consolidated balance sheets.

See accompanying notes.

6

FRATERNITY COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIODS

ENDED MARCH 31, 2012 AND 2011

(UNAUDITED)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Fraternity Community Bancorp, Inc. (the “Company”) was incorporated on October 12, 2010 to serve as the holding company for Fraternity Federal Savings & Loan Association (the “Bank”), a federally chartered savings bank. On March 31, 2011, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a federal mutual savings bank to a federal stock savings bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 1,587,000 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $14,968,600, net of offering expenses of approximately $901,400. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 126,960 shares of common stock sold in the offering. All material intercompany accounts and transactions have been eliminated in consolidation.

In accordance with the Office of the Comptroller of the Currency (the “OCC”) regulations, upon the completion of the conversion, the Bank restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, or any other period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation.

Nature of Operations

Fraternity Federal Savings and Loan (the “Bank”) provides a full range of banking services to individuals and businesses through its main office and three branches in the Baltimore metropolitan area. Its primary deposit products are certificates of deposit and demand, savings, NOW, and money market accounts. Its primary lending products are consumer loans and real estate mortgages.

7

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 reporting period. Actual results could differ from those estimates.

Earnings per Common Share

Basic earnings per share amounts are based on the weighted average number of shares outstanding for the period and the net income applicable to common stockholders. Weighted average shares excludes unallocated ESOP shares. The Company has no dilutive potential common shares for the three month periods ended March 31, 2012 or 2011.

	Three Months Ended March 31, 2012		Three Months Ended March 31, 2011
Net Income (Loss)	$	52,156	$	(80,628	)
Weighted average common shares outstanding		1,471,502		1,460,040
Basic and diluted earnings per share	$	.04	$	(.06	)

2. INVESTMENT SECURITIES

The amortized cost and fair values of investment securities are as follows:

		000000,		000000,		000000,		000000,
	March 31, 2012 (unaudited)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Bank Notes and Corporate Bonds	$	2,496,316	$	31,094	$	7,425	$	2,519,985
Obligations of U.S. Government Agencies		6,696,750		86,678		12,800		6,770,628
Mortgage-backed securities:
FNMA		8,768,765		139,210		132		8,907,843
GNMA		7,716,000		47,350		25,686		7,737,664
FHLMC		2,206,762		13,147		1,244		2,218,665
FNMA CMO		2,500,080		51,765		0		2,551,845
Private Label CMO		577,583		4,413		16,527		565,469
	$	30,962,256	$	373,657	$	63,814	$	31,272,099

8

		000000,		000000,		000000,		000000,
	March 31, 2012 (unaudited)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Municipal Bonds	$	549,436	$	15,819	$	0	$	565,255
SBA Pools		2,263,170		11,489		0		2,274,659
Mortgage-backed securities:
FNMA		4,916,631		129,544		0		5,046,175
	$	7,729,237	$	156,852	$	0	$	7,886,089

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Bank Notes and Corporate Bonds	$	2,495,526	$	7,844	$	16,935	$	2,486,435
Obligations of U.S. Government Agencies		6,696,656		126,082		0		6,822,738
Mortgage-backed securities:
FNMA		9,370,220		119,118		172		9,489,166
GNMA		7,019,669		31,425		41,879		7,009,215
FHLMC		2,334,789		7,438		17,889		2,324,338
FNMA CMO		2,636,100		67,091		0		2,703,191
Private Label CMO		623,176		5,259		44,162		584,273
	$	31,176,136	$	364,257	$	121,037	$	31,419,356

		000000,		000000,		000000,		000000,
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Municipal Bonds	$	551,202	$	17,283	$	0	$	568,485
SBA Pools		2,345,921		12,401		0		2,358,322
Mortgage-backed securities:
FNMA		4,940,170		103,426		0		5,043,596
	$	7,837,293	$	133,110	$	0	$	7,970,403

9

The amortized cost and fair value of debt securities at March 31, 2012 and December 31, 2011 by contractual maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have to call or repay obligations with or without call or prepayment penalties.

	March 31, 2012 Available-for-Sale (unaudited)
	Amortized Cost		Fair Value
Due in one year through five years	$	2,502,451	$	2,526,021
Due in five years through ten years		6,372,125		6,485,528
Due after ten years		22,087,680		22,260,550
	$	30,962,256	$	31,272,099

	March 31, 2012 Held-to-Maturity (unaudited)
	Amortized Cost		Fair Value
Due in one year through five years	$	1,162,339	$	1,170,394
Due in five years through ten years		4,916,631		5,046,175
Due after ten years		1,650,267		1,669,520
	$	7,729,237	$	7,886,089

	December 31, 2011 Available-for-Sale
	Amortized Cost		Fair Value
Due in one year through five years	$	2,502,994	$	2,493,771
Due in five years through ten years		6,513,583		6,654,782
Due after ten years		22,159,559		22,270,803
	$	31,176,136	$	31,419,356

	December 31, 2011 Held-to-Maturity
	Amortized Cost		Fair Value
Due in one year through five years	$	1,243,103	$	1,254,845
Due in five years through ten years		4,940,170		5,043,596
Due after ten years		1,654,020		1,671,962
	$	7,837,293	$	7,970,403

10

The Bank recognized gross gains on sales of available-for-sale securities of $0 for the three months ended March 31, 2012 and 2011. The Bank recognized gross losses on sales of available-for-sale securities of $0 for the three months ended March 31, 2012 and 2011.

Securities with unrealized losses, segregated by length of impairment, as of March 31, 2012 and December 31, 2011 were as follows:

	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
March 31, 2012 (unaudited)
Available-for-sale:
Bank Notes and Corporate Bonds	$	1,492,575	$	7,425	$	0	$	0	$	1,492,575	$	7,425
Obligation of U.S. Government Agencies		1,987,200		12,800		0		0		1,987,200		12,800
Mortgage-backed securities:
FNMA		0		0		7,470		132		7,470		132
GNMA		4,918,449		25,686		0		0		4,918,449		25,686
FHLMC		838,742		1,244		0		0		838,742		1,244
Private Label CMO		0		0		320,412		16,527		320,412		16,527
	$	9,236,966	$	47,155	$	327,882	$	16,659	$	9,564,848	$	63,814
Held-to-Maturity:	$	0	$	0	$	0	$	0	$	0	$	0

	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
December 31, 2011
Available-for-sale:
Bank Notes and Corporate Bonds	$	1,483,065	$	16,935	$	0	$	0	$	1,483,065	$	16,935
Mortgage-backed securities:
FNMA		7,336		132		1,444		40		8,780		172
GNMA		4,022,149		41,879		0		0		4,022,149		41,879
FHLMC		1,598,353		17,889		0		0		1,598,353		17,889
Private Label CMO		0		0		293,611		44,162		293,611		44,162
	$	7,110,903	$	76,835	$	295,055	$	44,202	$	7,405,958	$	121,037
Held-to-Maturity:	$	0	$	0	$	0	$	0	$	0	$	0

11

Declines in the fair value of investment securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

Furthermore, as of March 31, 2012, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes that it is more likely than not that the Bank will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2012, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Bank’s consolidated income statement.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans and allowance for loan losses consisted of the following:

	March 31, 2012 (unaudited)			December 31, 2011
Real Estate Loans:
Owner Occupied One-to-four family	$	74,605,982		$	75,958,333
Non Owner Occupied One-to-four family		13,094,617			11,932,813
Home Equity Lines of Credit		9,977,641			9,501,693
Commercial Real Estate		11,134,499			10,040,391
Residential Construction		3,164,157			3,088,974
Land		2,575,244			2,584,476
Total Real Estate Loans		114,552,140			113,106,680
Consumer Loans		48,042			50,486
Commercial Loans		18,755			17,818
Total Loans		114,618,937			113,174,984
Less:
Allowance for loan losses		(1,250,000	)		(1,250,000	)
Total loans and allowance for loan losses	$	113,368,937		$	111,924,984

12

Management segregates its loan portfolio into portfolio segments which is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. These risk factors are periodically reviewed by management and revised as deemed appropriate. The Company’s loan portfolio is segregated into the following portfolio segments:

Owner Occupied One -To- Four Family Residential Loans. This portfolio segment consists of the origination of first mortgage loans and closed end home equity second mortgage loans secured by one-to- four family residential properties located in our market area. The Company offers both fixed and adjustable rate products on properties located in the Company’s primary market area. These loans are generally for terms of 15, 20 and 30 years amortized on a monthly basis. The Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Non Owner Occupied One -To- Four Family Real Estate Loans.Loans secured by investment properties represent a unique credit risk to us and, as a result, we adhere to special underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties often depend on the maintenance of the property and the payment of rent by its tenants. Payments on loans secured by rental properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We generally require collateral on these loans to be a first mortgage along with an assignment of rents and leases, although we might accept a second mortgage where the combined loan-to-value ratio is low.

Home Equity Lines of Credit. This portfolio segment consists primarily of open end, second mortgage loans secured by one –to- four family residential properties. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial Real Estate Loans. This portfolio segment consists primarily of loans secured by commercial real estate. Loans secured by commercial real estate generally may have larger balances and more risk of default than one- to- four family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.

Residential Construction Loans. This portfolio includes construction loans to individuals and builders, primarily for the construction of residential properties. Construction financing generally involves greater risk than long-term financing on improved, owner-occupied real estate. Our portfolio consists of both construction/permanent loans to individuals for their principal residence as well as speculative construction loans to builders. Construction loans are underwritten on the basis of the estimated value of the property as completed. For our construction/permanent loans to individuals for their principal residence, repayment is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. For our speculative construction loans to builders, repayment is primarily dependent on the cashflows of the builder and the success of the project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long term financing.

Land. This portfolio consists primarily of first mortgage loans on developed residential land. Land loans have a higher level of risk than loans for the purchase of existing homes since collateral values can only be estimated at the time the loan is approved.

13

Consumer Loans. This portfolio segment includes small balance unsecured loans to individuals, automobile loans and deposit account loans. Consumer loans are generally originated at higher interest rates than residential mortgage loans because of their higher risk. Collections are highly dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In the case where collateral may be present, repossessed collateral for a defaulted loan may not provide an adequate source of repayment as a result of damage, loss or depreciation.

Commercial Loans. This portfolio segment consists of unsecured lines of credit and closed end loans to business owners that have personal guarantees. These loans generally have higher interest rates and shorter terms than one- to- four family residential loans. These loans have a higher level of risk than one- to- four family residential loans. The increased risk is due to the increased difficulty of monitoring and higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

The balance of impaired loans was $4,160,704 and $4,101,788 as of March 31, 2012 and December 31, 2011, respectively.

Non-Performing/Past Due Loans - Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due. Non-accrual loans totaled $3,897,885 and $3,838,051 at March 31, 2012 and December 31, 2011, respectively. Accruing loans past due more than 90 days totaled $0 at March 31, 2012 and December 31, 2011.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, we have segmented our loan portfolio by product type. Our loan segments are residential construction, owner occupied one- to- four family residential, non owner occupied one- to- four family real estate, land, commercial real estate, home equity lines of credit (“HELOC”), consumer and commercial.

To establish the allowance for loan losses, loans are pooled by portfolio class and an historical loss percentage is applied to each class. The historical loss percentage is based upon a rolling 12 month history. That calculation determines the required allowance for loan loss level. The Company then applies additional loss multipliers to the different classes of loans to reflect various environmental factors. Management applies judgment to develop its own view of loss probability within that range, using external and internal parameters with the objective of establishing an allowance for loss inherent within these portfolios as of the reporting date.

The Bank’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient enough to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

14

Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal or interest payments. As of March 31, 2012 there are 4 loans totaling $1,073,128 classified as troubled debt restructurings. The following is a summary of our troubled debt restructurings as of March 31, 2012 and December 31, 2011:

	March 31, 2012 (unaudited)		December 31, 2011
Residential Real Estate (owner occupied)	$	959,628	$	1,447,084
Residential Construction		0		0
Land		113,500		115,000
Total	$	1,073,128	$	1,562,084

With respect to the three owner-occupied one-to-four family residential troubled debt restructured loans, they had outstanding balances of $263,000, $260,000 and $437,000 at March 31, 2012. The borrower on the loan with an outstanding balance of $263,000 was having temporary financial difficulty, and we agreed to modify the loan to allow the borrower to make interest only payments for a period of seven months. No principal or interest was forgiven and no change in the interest rate was made. The borrower resumed making fully amortizing payments in March and as this is an adjustable rate mortgage, the principal and interest payment will be adjusted at each rate change to fully amortize the loan by the original maturity date. This loan has never been nonaccrual. The interest for the three months ended March 31, 2012 on this loan was $2,548, all of which was recognized as income. The borrower complied with the temporary payment as agreed.

The borrower on the $260,000 loan was having temporary financial difficulty, and we agreed to modify the loan by allowing a temporary payment plan. The borrower complied with the temporary payment plan. At the conclusion of the temporary payment plan, we agreed to defer the payment of the then accrued interest of $4,000 until the loan was paid off. No principal or interest was forgiven and no change in the interest rate was made. Due to employment issues the borrower defaulted on the loan again. The borrower has now secured additional employment and after a review of the borrower’s current and projected income we have agreed to a new re-payment schedule that covers a 45 month period of time which became effective January 2012. The borrower has made all payments as agreed under the plan. This loan remains classified as substandard and is a non-accrual loan. Until the borrower demonstrates a willingness and ability to repay the loan payments received from the borrower under the payment plan will be credited towards the principal balance and the escrow account for future payments of taxes and insurance. If all payments required under the repayment plan are received on time it is anticipated that we will not recognize income on this loan for a period of 15 months. We have not forgiven principal or interest nor made a concession in the interest rate or extended the maturity date.

The borrower on the $437,000 loan was having temporary financial difficulty, and we agreed to modify the loan by allowing a temporary payment plan. The borrower complied with the temporary payment arrangement. At the conclusion of the temporary payment plan, we agreed to defer the payment of the then accrued interest of $16,000 until the loan was paid off. No principal or interest was forgiven and no change in the interest rate was made. The borrower had moved out of the property and rented it with the anticipation that the rental income would cover the mortgage payment. The borrower defaulted again and we initiated foreclosure action. This loan remains classified as substandard and is a non-accrual loan. We have reached an agreement that allows the borrower to try and sell the property now that the tenant has vacated the property. This agreement expired at the end of March and the sale of the house did not take place, and we have moved forward with the foreclosure process.

15

With respect to our one land loan classified as a troubled debt restructuring as of March 31, 2012 totaling $113,500, we agreed to accept a short sale of the property plus a promissory note of $30,000 that requires monthly payments of $500. To date, the borrower has made the required $500 monthly payments. The short sale agreement has been extended through the end of September, 2012. This loan remains classified as substandard and is a non-accrual loan.

If a loan is in nonaccrual status at the time we restructure it and classify the restructure as a troubled debt restructuring, it is our policy to maintain the loan as nonaccrual until we receive six payments under the restructured terms, unless, we have adequate collateral valuations or other analyses to support maintaining the loan on accrual status.

All of the above loans were classified as impaired and measured for loss in accordance with Accounting Standards Codification 310-10-35. The land loan was measured using the fair value of collateral less disposition costs method, and the other three loans were initially measured using the present value of discounted cash flows method. Subsequently, the $260,000 loan and the $437,000 loan were measured using the fair value of collateral method. The discount rate used was the original note rate, which in each of these instances is equal to the modified terms rate. The other significant assumptions used in our discounted cash flow model to determine the fair value of the loans were the schedule of cash flows produced under the modified terms.

Interest income that would have been recorded for the three month period ended March 31, 2012 and the year ended December 31, 2011 had nonaccrual loans been current according to their original terms, amounted to approximately $56,500 and $212,300, respectively.

16

The following tables show credit quality indicators, the aging of receivables, and disaggregated balances of loans receivable and the allowance for loan losses as of March 31, 2012 and December 31, 2011:

Credit Risk Analysis of Loans Receivable

As of March 31, 2012 (unaudited)

	Owner		Non Owner
	Occupied		Occupied
	1-4 Family		1-4 Family		Home Equity		Commercial
	Residential		Residential		Lines of Credit		Real Estate		Construction		Land		Consumer		Commercial		Total
Pass	$	69,561,794	$	12,093,008	$	9,490,580	$	9,934,137	$	1,598,959	$	2,267,722	$	48,042	$	18,755	$	105,012,997
Special Mention		3,846,013		526,751		163,252		1,200,362		0		0		0		0		5,736,378
Substandard		1,198,175		474,858		323,809		0		1,565,198		307,522		0		0		3,869,562
Total	$	74,605,982	$	13,094,617	$	9,977,641	$	11,134,499	$	3,164,157	$	2,575,244	$	48,042	$	18,755	$	114,618,937
Credit risk profile based on payment activity:
Performing	$	73,407,807	$	12,619,759	$	9,625,509	$	11,134,499	$	1,598,959	$	2,267,722	$	48,042	$	18,755	$	110,721,052
Nonperforming		1,198,175		474,858		352,132		0		1,565,198		307,522		0		0		3,897,885
Total	$	74,605,982	$	13,094,617	$	9,977,641	$	11,134,499	$	3,164,157	$	2,575,244	$	48,042	$	18,755	$	114,618,937

17

Credit Risk Analysis of Loans Receivable

As of December 31, 2011

	Owner		Non Owner
	Occupied		Occupied
	1-4 Family Residential		1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
Pass	$	70,944,566	$	10,929,017	$	9,045,770	$	8,835,392	$	1,523,776	$	2,275,454	$	50,486	$	17,818	$	103,622,279
Special Mention		3,618,817		924,975		362,614		1,204,999		0		0		0		0		6,111,405
Substandard		1,394,950		78,821		93,309		0		1,565,198		309,022		0		0		3,441,300
Total	$	75,958,333	$	11,932,813	$	9,501,693	$	10,040,391	$	3,088,974	$	2,584,476	$	50,486	$	17,818	$	113,174,984
Credit risk profile based on payment activity:
Performing	$	74,563,383	$	11,457,241	$	9,408,384	$	10,040,391	$	1,523,776	$	2,275,454	$	50,486	$	17,818	$	109,336,933
Nonperforming		1,394,950		475,572		93,309		0		1,565,198		309,022		0		0		3,838,051
Total	$	75,958,333	$	11,932,813	$	9,501,693	$	10,040,391	$	3,088,974	$	2,584,476	$	50,486	$	17,818	$	113,174,984

18

Aged Analysis of Past Due Loans Receivable

As of March 31, 2012 (unaudited)

	Owner		Non Owner
	Occupied		Occupied
	1-4 Family		1-4 Family		Home Equity		Commercial
	Residential		Residential		Lines of Credit		Real Estate		Construction		Land		Consumer		Commercial		Total
30-59 Days Past Due	$	255,950	$	0	$	226,540	$	0	$	0	$	0	$	0	$	0	$	482,490
60-89 Days Past Due		3,257		0		230,864		0		0		0		0		0		234,121
Greater Than 90 Days Past Due		828,696		78,821		69,528		0		1,565,198		307,522		0		0		2,849,765
Total Past Due		1,087,903		78,821		526,932		0		1,565,198		307,522		0		0		3,566,376
Current		73,518,079		13,015,796		9,450,709		11,134,499		1,598,959		2,267,722		48,042		18,755		111,052,561
Total Loans Receivable	$	74,605,982	$	13,094,617	$	9,977,641	$	11,134,499	$	3,164,157	$	2,575,244	$	48,042	$	18,755	$	114,618,937
Recorded Investment > 90 Days and Accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

19

Aged Analysis of Past Due Loans Receivable

As of December 31, 2011

	Owner		Non Owner
	Occupied		Occupied
	1-4 Family Residential		1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
30-59 Days Past Due	$	40,965	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	40,965
60-89 Days Past Due		3,273		0		29,557		0		0		0		0		0		32,830
Greater Than 90 Days Past Due		1,299,668		78,821		69,528		0		1,565,198		309,022		0		0		3,322,237
Total Past Due		1,343,906		78,821		99,085		0		1,565,198		309,022		0		0		3,396,032
Current		74,614,427		11,853,992		9,402,608		10,040,391		1,523,776		2,275,454		50,486		17,818		109,778,952
Total Loans Receivable	$	75,958,333	$	11,932,813	$	9,501,693	$	10,040,391	$	3,088,974	$	2,584,476	$	50,486	$	17,818	$	113,174,984
Recorded Investment > 90 Days and Accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

20

Allowance for Loan Losses and Recorded Investment in Loans Receivable

For the Three Months Ended March 31, 2012 (unaudited)

	Owner Occupied 1-4 Family Residential			Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit			Commercial Real Estate			Construction			Land			Consumer			Commercial			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	495,271		$	77,051	$	145,830		$	190,767		$	28,952		$	120,372		$	2,858		$	1,008		$	187,891		$	1,250,000
Charge-offs		(83,715	)		0		0			0			0			0			0			0			0			(83,715	)
Recoveries		9,697			0		999			0			0			0			0			0			0			10,696
Provision		227,184			81,681		(74,638	)		(23,750	)		(12,962	)		(92,025	)		(1,835	)		(738	)		(29,898	)		73,019
Ending Balance	$	648,437		$	158,732	$	72,191		$	167,017		$	15,990		$	28,347		$	1,023		$	270		$	157,993		$	1,250,000
Ending Balance Individually evaluated for impairment	$	0		$	0	$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
Ending Balance Collectively evaluated for impairment	$	648,437		$	158,732	$	72,191		$	167,017		$	15,990		$	28,347		$	1,023		$	270		$	157,993		$	1,250,000
Loans Receivable:
Ending Balance	$	74,605,982		$	13,094,617	$	9,977,641		$	11,134,499		$	3,164,157		$	2,575,244		$	48,042		$	18,755		$	0		$	114,618,937
Ending Balance Individually evaluated for impairment	$	1,539,815		$	396,037	$	352,132		$	0		$	1,565,198		$	307,522		$	0		$	0		$	0		$	4,160,704
Ending Balance Collectively evaluated for impairment	$	73,066,167		$	12,698,580	$	9,625,509		$	11,134,499		$	1,598,959		$	2,267,722		$	48,042		$	18,755		$	0		$	110,458,233

21

Allowance for Loan Losses and Recorded Investment in Loans Receivable

For the Three Months Ended March 31, 2011 (unaudited)

	Owner Occupied 1-4 Family Residential			Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit			Commercial Real Estate			Construction		Land			Consumer		Commercial		Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	536,549		$	0	$	407,352		$	75,473		$	80,789	$	173,024		$	3,259	$	0	$	23,554		$	1,300,000
Charge-offs		0			0		0			0			0		(75,718	)		0		0		0			(75,718	)
Recoveries		0			0		660			0			0		0			0		0		0			660
Provision		(120,235	)		105,317		(22,060	)		(289	)		11,652		106,397			104		0		(20,828	)		60,058
Ending Balance	$	416,314		$	105,317	$	385,952		$	75,184		$	92,441	$	203,703		$	3,363	$	0	$	2,726		$	1,285,000
Ending Balance Individually evaluated for impairment	$	0		$	0	$	0		$	0		$	0	$	0		$	0	$	0	$	0		$	0
Ending Balance Collectively evaluated for impairment	$	416,314		$	105,317	$	385,952		$	75,184		$	92,441	$	203,703		$	3,363	$	0	$	2,726		$	1,285,000
Loans Receivable:
Ending Balance	$	73,049,662		$	11,337,191	$	12,136,854		$	3,954,055		$	6,453,534	$	2,650,353		$	50,262	$	18,613	$	0		$	109,650,524
Ending Balance Individually evaluated for impairment	$	1,629,356		$	0	$	94,382		$	0		$	1,565,198	$	311,022		$	0	$	0	$	0		$	3,599,958
Ending Balance Collectively evaluated for impairment	$	71,420,306		$	11,337,191	$	12,042,472		$	3,954,055		$	4,888,336	$	2,339,331		$	50,262	$	18,613	$	0		$	106,050,566

22

Management reviews and identifies loans and investments that require designation as nonperforming assets and troubled debt restructurings. Nonperforming assets include loans accounted for on a non-accrual basis, loans past due by 90 days or more but still accruing, and other real estate owned. Troubled debt restructurings include loans in which the borrower was having financial difficulty, and we agreed to modify the loan. Information with respect to nonperforming assets and troubled debt restructurings at March 31, 2012 and December 31, 2011 is as follows:

	March 31, 2012 (unaudited)			December 31, 2011
Non-Accrual Loans	$	3,897,885		$	3,838,051
Other Real Estate Owned, net		0			0
Loans 90 days or more past due and still accruing		0			0
Total Nonperforming Assets	$	3,897,885		$	3,838,051
Troubled Debt Restructurings	$	1,073,128		$	1,562,084
Troubled Debt Restructurings included In Non-Accrual Loans		(810,309	)		(1,298,347	)
Troubled Debt Restructurings and	$	4,160,704		$	4,101,788
Total Nonperforming Assets

23

Loans Receivable on Nonaccrual Status

As of March 31, 2012 (unaudited)

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
Unpaid Principal Balance	$	1,198,175	$	474,858	$	352,132	$	0	$	1,565,198	$	307,522	$	0	$	0	$	3,897,885

Loans Receivable on Nonaccrual Status

As of December 31, 2011

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
Unpaid Principal Balance	$	1,394,950	$	475,572	$	93,309	$	0	$	1,565,198	$	309,022	$	0	$	0	$	3,838,051

24

Troubled Debt Restructurings

As of March 31, 2012 (unaudited)

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
Number of Loans		3		0		0		0		0		1		0		0		4
Pre-Modification Principal Balance	$	971,948	$	0	$	0	$	0	$	0	$	116,500	$	0	$	0	$	1,088,448
Post-Modification Principal Balance	$	959,628	$	0	$	0	$	0	$	0	$	113,500	$	0	$	0	$	1,073,128
Troubled Debt Restructurings that Subsequently Defaulted:
Number of Loans		1		0		0		0		0		0		0		0		1
Current Principal Balance	$	436,823	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	436,823

25

Troubled Debt Restructurings

As of December 31, 2011

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
Number of Loans		4		0		0		0		0		1		0		0		5
Pre-Modification Principal Balance	$	1,513,885	$	0	$	0	$	0	$	0	$	116,500	$	0	$	0	$	1,630,385
Post-Modification Principal Balance	$	1,447,084	$	0	$	0	$	0	$	0	$	116,500	$	0	$	0	$	1,562,084
Troubled Debt Restructurings that Subsequently Defaulted:
Number of Loans		3		0		0		0		0		0		0		0		3
Current Principal Balance	$	1,183,347	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	1,183,347

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Impaired Loans

As of and for the Three Months Ended March 31, 2012 (unaudited)

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
Loans With A Valuation Allowance:
Unpaid Principal Balance	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Related Allowance for Loan Losses		0		0		0		0		0		0		0		0		0
Average Recorded Investment		0		0		0		0		0		0		0		0		0
Interest Income Recognized		0		0		0		0		0		0		0		0		0
Loans Without a Valuation Allowance:
Unpaid Principal Balance	$	1,460,994	$	474,858	$	352,132	$	0	$	1,565,198	$	307,522	$	0	$	0	$	4,160,704
Average Recorded Investment		1,559,840		475,215		222,721		0		1,565,198		308,272		0		0		4,131,246
Interest Income Recognized		4,999		4,438		410		0		0		0		0		0		9,847
Totals:
Unpaid Principal Balance	$	1,460,994	$	474,858	$	352,132	$	0	$	1,565,198	$	307,522	$	0	$	0	$	4,160,704
Average Recorded Investment		1,559,840		475,215		222,721		0		1,565,198		308,272		0		0		4,131,246
Interest Income Recognized		4,999		4,438		410		0		0		0		0		0		9,847

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Impaired Loans

As of and for the Three Months Ended March 31, 2011 (unaudited)

	Owner Occupied 1-4 Family Residential		Non Owner Occupied 1-4 Family Residential		Home Equity Lines of Credit		Commercial Real Estate		Construction		Land		Consumer		Commercial		Total
Loans with a Valuation Allowance:
Unpaid Principal Balance	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Related Allowance for Loan Losses		0		0		0		0		0		0		0		0		0
Average Recorded Investment		0		0		0		0		0		0		0		0		0
Interest Income Recognized		0		0		0		0		0		0		0		0		0
Loans Without a Valuation Allowance:
Unpaid Principal Balance	$	1,629,356	$	0	$	94,382	$	0	$	1,565,198	$	311,022	$	0	$	0	$	3,599,958
Average Recorded Investment		1,630,171		0		47,191		0		1,071,424		428,253		0		0		3,177,039
Interest Income Recognized		3,684		0		0		0		0		0		0		0		3,684
Totals:
Unpaid Principal Balance	$	1,629,356	$	0	$	94,382	$	0	$	1,565,198	$	311,022	$	0	$	0	$	3,599,958
Average Recorded Investment		1,630,171		0		47,191		0		1,071,424		428,253		0		0		3,177,039
Interest Income Recognized		3,684		0		0		0		0		0		0		0		3,684

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4. EMPLOYEE STOCK OWNERSHIP PLAN

In connection with the conversion to stock form, the Company established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in an amount sufficient to purchase 126,960 shares, or 8% of the Common Stock issued in the offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first and the remainder will be applied to principal. The loan is expected to be repaid over a period of 12 years.

Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation, of all active participants. Participants will vest their accrued benefits under the employee stock ownership plan at the rate of 33.33% per year beginning in year two. Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation of service, or termination of the ESOP.

The debt of the ESOP, in accordance with generally accepted accounting principles, is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense for the three months ended March 31, 2012 and 2011 was $23,858 and $0, respectively.

A summary of ESOP shares at March 31, 2012 is as follows:

Shares committed for release		13,225
Unearned shares		113,735
Total ESOP shares		126,960
Fair Value of unearned shares	$	1,154,410

5. REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of the Comptroller of the Currency (OCC). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined), and tangible capital to adjusted total assets (as defined).

As of March 31, 2012 and December 31, 2011 (the most recent notification from the OCC), the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. Nothing has come to management’s attention since the institution’s most recent notification of being classified as “well capitalized” that would cause such classification to change. The following table details the Bank’s capital position:

	Actual					For Capital Adequacy Purposes and to be Adequately Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(dollars in thousands)					(dollars in thousands)
As of March 31, 2012 (unaudited):
Fraternity Federal Savings & Loan Association
Total Risk-Based Capital (to risk-weighted assets)	$	24,873		26.59	%	$	7,484		8.0	%
Tier I Capital (to risk-weighted assets)	$	23,703		25.34	%	$	3,742		4.0	%
Tier I Capital (to adjusted total assets)	$	23,703		13.58	%	$	5,236		3.0	%
Tangible Capital (to adjusted total assets)	$	23,703		13.58	%	$	2,618		1.5	%

	Actual					For Capital Adequacy Purposes and to be Adequately Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(dollars in thousands)					(dollars in thousands)
As of December 31, 2011:
Fraternity Federal Savings & Loan Association
Total Risk-Based Capital (to risk-weighted assets)	$	24,827		26.46	%	$	7,506		8.0	%
Tier I Capital (to risk-weighted assets)	$	23,654		25.21	%	$	3,753		4.0	%
Tier I Capital (to adjusted total assets)	$	23,654		13.50	%	$	5,256		3.0	%
Tangible Capital (to adjusted total assets)	$	23,654		13.50	%	$	2,628		1.5	%

6. FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted FASB guidance on Fair Value Measurements which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This guidance applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

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Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The following table presents the Bank’s assets measured at fair value on a recurring basis:

	Fair Value at March 31, 2012		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(unaudited)		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Bank Notes and Corporate Bonds	$	2,519,985	$	0	$	2,519,985	$	0
Obligations of U.S. Government agencies		6,770,628		0		6,770,628		0
FNMA		8,907,843		0		8,907,843		0
GNMA		7,737,664		0		7,737,664		0
FHLMC		2,218,665		0		2,218,665		0
FNMA CMO		2,551,845		0		2,551,845		0
Private label CMO		565,469		0		565,469		0
	$	31,272,099	$	0	$	31,272,099	$	0
Total assets measured at fair value	$	31,272,099	$	0	$	31,272,099	$	0

	Fair Value at December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Bank Notes and Corporate Bonds	$	2,486,435	$	0	$	2,486,435	$	0
Obligations of U.S. Government agencies		6,822,738		0		6,822,738		0
FNMA		9,489,166		0		9,489,166		0
GNMA		7,009,215		0		7,009,215		0
FHLMC		2,324,338		0		2,324,338		0
FNMA CMO		2,703,191		0		2,703,191		0
Private label CMO		584,273		0		584,273		0
	$	31,419,356	$	0	$	31,419,356	$	0
Total assets measured at fair value	$	31,419,356	$	0	$	31,419,356	$	0

Securities classified as available-for-sale are reported at fair value utilizing Level 2 Inputs. For these securities, the Bank obtains fair values from an external pricing service or bid quotations received from securities dealers. The observable data may include dealer quotes, cash flows, U.S. Treasury yield curve, trading levels, credit information, and the terms and conditions of the security, among other things.

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Financial Instruments Measured on a Nonrecurring Basis

The Bank may be required, from time to time, to measure certain other financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

For assets measured at fair value on a nonrecurring basis as of March 31, 2012 and December 31, 2011, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the assets:

	Fair Value at March 31, 2012 (unaudited)		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Construction	$	1,565,198	$	0	$	1,565,198	$	0
Owner occupied 1-4 Family		1,460,994		0		1,460,994		0
Non owner occupied 1-4 Family		474,858		0		474,858		0
Home Equity Lines of Credit		352,132		0		352,132		0
Land		307,522		0		307,522		0
	$	4,160,704	$	0	$	4,160,704	$	0

	Fair Value at December 31, 2011		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Construction	$	1,565,198	$	0	$	1,565,198	$	0
Owner occupied 1-4 Family		1,658,687		0		1,658,687		0
Non owner occupied 1-4 Family		475,572		0		475,572		0
Home Equity Lines of Credit		93,309		0		93,309		0
Land		309,022		0		309,022		0
	$	4,101,788	$	0	$	4,101,788	$	0

Loans for which it is probable that the Bank will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with FASB guidance. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method. In our determination of fair value, we have categorized both methods of valuation as estimates based on Level 2 inputs.

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If the impaired loan is identified as collateral dependent, then the fair value method measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal or utilizing some other method of valuation for the collateral and applying a discount factor to the value based on our loan review policy and procedures.

If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums, or discounts existing at origination or acquisition of the loan.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates, methods, and assumptions are set forth below for the Bank’s financial instruments as of March 31, 2012 and December 31, 2011.

	March 31, 2012 (unaudited)
	Estimated Fair Value
	Carrying Value		Level One		Level Two		Level Three		Total
Assets:
Cash and cash equivalents	$	12,796,142	$	12,796,142	$	0	$	0	$	12,796,142
Securities - available-for-sale		31,272,099		0		31,272,099		0		31,272,099
Securities - held-to-maturity		7,729,237		0		7,886,089		0		7,886,089
Loans, gross		114,618,937		0		4,160,704		115,317,314		119,478,018
Federal Home Loan Bank stock		1,306,500		0		1,306,500		0		1,306,500
Bank stock		60,600		0		60,600		0		60,600
Investment in bank-owned life insurance		4,396,163		4,396,163		0		0		4,396,163
Liabilities:
Deposit accounts and advances by borrowers		121,077,486		0		122,026,896		0		122,026,896
Advances from the FHLB		22,500,000		0		23,225,111		0		23,225,111

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	December 31, 2011
	Estimated Fair Value
	Carrying Value		Level One		Level Two		Level Three		Total
Assets:
Cash and cash equivalents	$	14,923,142	$	14,923,142	$	0	$	0	$	14,923,142
Securities - available-for-sale		31,419,356		0		31,419,356		0		31,419,356
Securities - held-to-maturity		7,837,293		0		7,970,403		0		7,970,403
Loans, gross		113,174,984		0		4,101,788		112,732,563		116,834,351
Federal Home Loan Bank stock		1,306,500		0		1,306,500		0		1,306,500
Bank stock		60,600		0		60,600		0		60,600
Investment in bank-owned life insurance		4,354,252		4,354,252		0		0		4,354,252
Liabilities:
Deposit accounts and advances by borrowers		122,031,508		0		122,998,429		0		122,998,429
Advances from the FHLB		22,500,000		0		23,223,703		0		23,223,703

	March 31, 2012 (unaudited)		December 31, 2011
Off-Balance Sheet Instruments:
Commitments to extend credit	$	0	$	0
Unused lines of credit	$	11,713,999	$	12,006,256

(a)Cash and Cash Equivalents - The carrying amount for cash on hand and in banks approximates fair value due to the short maturity of these instruments.

(b)Securities - The fair value of securities excluding Federal Home Loan Bank stock, is based on bid prices received from an external pricing service or bid quotations received from securities dealers.

(c)Loans - Loans were segmented into portfolios with similar financial characteristics. Loans were also segmented by type such as residential, multifamily and non-residential, construction and land, second mortgage loans, commercial, and consumer. Each loan category was further segmented by fixed and adjustable rate interest terms and performing and nonperforming categories. The fair value of residential loans was calculated by discounting anticipated cash flows based on weighted-average contractual maturity, weighted-average coupon, and discount rate.

The fair value for nonperforming loans was determined by reducing the carrying value of nonperforming loans by the Company’s historical loss percentage for each specific loan category.

(d)Federal Home Loan Bank Stock - The fair value of Federal Home Loan Bank stock approximates its carrying value based on the redemption provisions of the Federal Home Loan Bank.

(e)Bank Stock - The fair value of Bank stock approximates its carrying value based on the redemption provisions of CBB Bank.

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(f)Investments in Bank-Owned Life Insurance - The fair value of the insurance contracts approximates the carrying value.

(g)Deposits and Advances by Borrowers - The fair value of deposits with no stated maturity, such as noninterest bearing deposits, interest-bearing NOW accounts, money market and statement savings accounts, is deemed to be equal to the carrying amounts. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate for certificates of deposit was estimated using the rate currently offered for deposits of similar remaining maturities.

(h)Advances from the FHLB - Fair values are estimated by discounting carrying values using a cash flow approach based on market rates as of March 31, 2012 and December 31, 2011.

(i)Off-Balance Sheet Financial Instruments - The Company’s adjustable rate commitments to extend credit move with market rates and are not subject to interest rate risk. The rates and terms of the Company’s fixed rate commitments to extend credit are competitive with others in the various markets in which the Company operates. The fair values of these instruments are immaterial.

(j)Limitations - Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates.

8. RECENT ACCOUNTING PRONOUNCEMENTS

All pending but not yet effective accounting standards updates were evaluated and only those listed below could have a material impact on the Company’s financial condition or results of operations.

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 became effective for the Company on January1, 2012; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12 “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” as further discussed below. In connection with the application of ASU 2011-05, the Company’s financial statements now include separate statements of comprehensive income.

35

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 became effective for the Company on January 1, 2012 and, aside from new disclosures included in Note 7 - Fair Value of Financial Instruments, did not have a significant impact on the Company’s financial statements.

ASU 2011-12 “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 became effective for the Company on January 1, 2012 and did not have a significant impact on the Company’s financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

When used in this Report, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “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 changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, competition and information provided by third-party vendors and the matters described herein under “Part II, Item 1A. Risk Factors” that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which 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.

General

Fraternity Community Bancorp, Inc. (the “Company”) is a Maryland corporation incorporated on October 12, 2010 by Fraternity Federal Savings and Loan Association (the “Bank”) to be its holding company following the Bank’s conversion from the mutual to the stock form of organization (the “Conversion”). The Conversion was completed on March 31, 2011 and also on that date, the Company completed its public stock offering and issued 1,587,000 shares of its common stock for aggregate proceeds of $15,870,000, and net proceeds of $14,968,600. The Company’s business is the ownership of the outstanding capital stock of the Bank. The Company does not own or lease any property but instead uses the premises, equipment and other property of the Bank with payment of appropriate rental fees as required by applicable law and regulations, under the terms of an expense allocation agreement between the Company and the Bank.

Founded in 1913, the Bank is a community-oriented financial institution, dedicated to serving the financial service needs of customers and businesses within its market area, which consists of Baltimore City and Baltimore, Carroll and Howard Counties in Maryland. We offer a variety of deposit products and provide loans secured by real estate located in our market area. Our real estate loans consist primarily of one- to four-family mortgage loans, as well as commercial real estate loans, land loans, home equity lines of credit and residential construction loans. We also offer consumer loans and, to a limited extent, commercial business loans. We currently operate out of our corporate headquarters and main office in Baltimore and full-service branch offices located in Cockeysville, Ellicott City and Hampstead, Maryland. We are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, our primary federal regulator, and the Federal Deposit Insurance Corporation, our deposit insurer.

The Company and the Bank maintain an Internet website athttp://www.fraternityfed.com. Information on our website should not be considered a part of this Quarterly Report on Form 10-Q.

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Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

Assets. At March 31, 2012, total assets decreased by $762,000 to $174.6 million at March 31, 2012 from $175.3 million at December 31, 2011. The decrease in assets for the three months ended March 31, 2012 was due mainly to a $2.1 million decrease in cash and cash equivalents from $14.9 million at December 31, 2011 to $12.8 million at March 31, 2012, offset, in part, by a $1.4 million increase in loans receivable. Owner occupied one- to four-family loans decreased to $74.6 million at March 31, 2012 from $76.0 million at December 31, 2011; non-owner occupied one- to four-family loans increased to $13.1 million at March 31, 2012 from $11.9 million at December 31, 2011; commercial real estate loans increased to $11.1 million at March 31, 2012 from $10.0 million at December 31, 2011; residential construction loans increased to $3.2 million at March 31, 2012 from $3.1 million at December 31, 2011; and lines of credit, all of which are secured by one- to four-family residential properties, totaled $10.0 million at March 31, 2012 compared to $9.5 million at December 31, 2011.

At March 31, 2012, we had $31.3 million of securities available-for-sale compared to $31.4 million at December 31, 2011, and we had $7.7 million of securities held-to-maturity compared to $7.8 million at December 31, 2011.

Results of Operations for the Three Months Ended March 31, 2012 and 2011 (unaudited)

Overview. We had net income of $52,200 for the three months ended March 31, 2012, as compared to a net loss of $80,600 for the three months ended March 31, 2011. The increase in net income between the periods was primarily due to an increase in net interest income of $341,300 or 43.6%. This was due to a large decrease in interest expense on savings and Federal Home Loan Bank advances, as we were able to take advantage of declining interest rates to reprice maturing certificates of deposit at lower rates. Noninterest income increased by $18,100, or 32.9% from $55,100 for the three months ended March 31, 2011 to $73,200 for the three months ended March 31, 2012. Noninterest expense increased by $123,000 or 13.1% from $940,100 for the three months ended March 31, 2011 to $1,063,100 for the three months ended March 31, 2012. Provision for loan and lease losses increased by $13,000, or 21.6% from $60,100 for the three months ended March 31, 2011 to $73,000 for the three months ended March 31, 2012. Provision for income taxes increased by $90,700, or 112.2%, from an income tax benefit of $80,900 for the three months ended March 31, 2011 to an income tax expense of $9,800 for the three months ended March 31, 2012.

Net Interest Income. Net interest income increased by $341,300, or 43.6%, from $783,600 for the three months ended March 31, 2011 to $1.1 million for the three months ended March 31, 2012. The increase in net interest income is primarily attributable to a decrease in interest expense as interest rates continue to decline due to current economic conditions and an increase in interest and dividends on investments and bank deposits.

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Interest on loans receivable, net increased by $6,100, or 0.4%, from $1.462 million for the three months ended March 31, 2011 to $1.468 million for the three months ended March 31, 2012, due to a $3.2 million, or 2.9%, increase in the average balance of loans, offset in part by a 13 basis point decrease in the average yield. The increase in the average balance of loans reflects our decision to originate more commercial real estate loans during the three months ended March 31, 2012. The decrease in the average yield on loans was attributable to market rates remaining at a low level.

Interest on investment securities available-for-sale increased by $10,100, or 5.3%, for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011, as a $782,700, or 2.6%, increase in the average balance of investment securities available-for-sale and a 6 basis point increase in the average yield is the result of our decision to purchase investment securities due to low loan demand.

Interest on cash and cash equivalents remained low by historical standards during the three months ended March 31, 2012 and 2011 due to the historically low prevailing market rates during those periods.

During the three months ended March 31, 2012, we were able to reduce interest paid on deposits primarily as the result of time deposits being rolled over at lower rates in response to general declines in market interest rates and decreases in the cost of other deposits due to a decline in market rates. Interest on time deposits decreased by $178,400, or 28.9%, from $617,100 for the three months ended March 31, 2011, to $438,700 for the three months ended March 31, 2012, due to a 48 basis point decrease in the average cost of time deposits and a $10.9 million, or 10.4%, decrease in the average balance of time deposits. During the three months ended March 31, 2012, we were able to take advantage of declining interest rates to reprice maturing certificates of deposit at lower rates. Interest on brokered deposits decreased by $19,900, or 80.6%, from $24,700 for the three months ended March 31, 2011, to $4,800 for the three months ended March 31, 2012, as both the average balance of, and average rate paid on, brokered deposits decreased. Interest on NOW and money market accounts remained stable during the three months ended March 31, 2012 as compared to the three months ended March 31, 2011, even with an 18.7% increase in the average balance of NOW and money market accounts. Interest on passbook accounts decreased by $8,700, or 37.1%, from $23,400 for the three months ended March 31, 2011 to $14,700 for the three months ended March 31, 2012, due primarily to a 26 basis point decrease in the average cost of passbook accounts. The average balance of passbook accounts increased during the three months ended March 31, 2012, from $15.5 million as of March 31, 2011 to $17.0 million as of March 31, 2012.

Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank of Atlanta advances, decreased by $51,500, or 23.3%, for three months ended March 31, 2012 as compared to the three months ended March 31, 2011, due to a decrease of 91 basis points in the average cost of these other interest-bearing liabilities. At March 31, 2012 and December 31, 2011, we had $22.5 million of Federal Home Loan Bank of Atlanta advances.

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Average Balances and Yields.The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances, and nonaccrual loans are included in average balances only. Amortization of net deferred loan fees are included in interest income on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccruing loans have been included in the table as loans carrying a zero yield.

	Three Months Ended March 31,
	2012							2011
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
Assets:
Interest-bearing deposits in other banks	$	13,144,863	$	8,214		.25	%	$	21,786,836	$	3,697		.07	%
Loans receivable, net (3)		112,603,600		1,468,472		5.22			109,426,840		1,462,407		5.35
Investment securities available-for-sale (1)		31,353,213		201,792		2.57			30,570,541		191,688		2.51
Investment securities held-to-maturity (2)		7,765,724		61,862		3.19			0		0		.00
Other interest-earning assets		2,222,096		15,731		2.83			2,256,676		14,965		2.65
Total interest-earning assets		167,089,496		1,756,071		4.20			164,040,893		1,672,757		4.08
Noninterest-earning assets		7,257,768							9,595,742
Total assets	$	174,347,264						$	173,636,635
Liabilities and equity:
Time deposits	$	94,024,168	$	438,723		1.87		$	104,921,383	$	617,144		2.35
NOW and money market		5,922,055		3,528		.24			4,990,255		3,058		.25
Passbook		17,030,501		14,746		.35			15,491,675		23,449		.61
Brokered deposits		1,792,207		4,779		1.07			2,326,995		24,640		4.24
Federal Home Loan Bank advances		22,500,000		169,353		3.01			22,527,778		220,876		3.92
Total interest-bearing liabilities		141,268,931		631,129		1.79			150,258,086		889,167		2.37
Noninterest-bearing liabilities		2,866,093							2,760,717
Total liabilities		144,135,024							153,018,803
Total equity		30,212,240							20,617,832
Total liabilities and equity	$	174,347,264						$	173,636,635
Net interest income			$	1,124,942						$	783,590
Interest rate spread						2.41	%						1.71	%
Net interest margin						2.69	%						1.91	%
Ratio of average interest-earning assets to average interest-bearing liabilities						118.28	%						109.17	%

(1) Investment securities available-for-sale are presented at fair market value.

(2) Investment securities held-to-maturity are presented at amortized cost.

(3) Loans placed on non-accrual status are included in average assets.

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Noninterest Income. Total noninterest income increased by $18,100, or 32.9%, from $55,100 for the three months ended March 31, 2011 compared to $73,200 for the three months ended March 31, 2012. The increase was due to an $18,900 gain on sale of loans during the three months ended March 31, 2012 compared to no gain on sale of loans during the three months ended March 31, 2011.

Noninterest Expenses. Total noninterest expenses increased by $123,000, or 13.1%, from $940,110 for the three months ended March 31, 2011 to $1.1 million for the three months ended March 31, 2012. The increase primarily was attributable to salaries and employee benefits, relating to a new commercial loan officer and compensation expenses related to our ESOP. Also contributing to the increase were additional expenses as a result of being a public company for the three month period ended March 31, 2012.

Income Tax Expense. We recognized income tax expense of $9,800 during the three months ended March 31, 2012. For the three months ended March 31, 2011, we had an income tax benefit of $80,900, due to our incurring a net loss during that period.

Analysis of Nonperforming and Classified Assets

We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent, at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against interest income. Typically, payments received on a nonaccrual loan are first applied to the outstanding principal balance.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure. Any holding costs and declines in fair value after acquisition of the property result in charges against income.

Provision for Loan Losses. We maintain an allowance at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns. Management has identified commercial real estate loans as an area for expected increased lending. Such loans carry a higher degree of credit risk than our historical single-family lending.

Our provision for loan losses was $73,000 for the three months ended March 31, 2012 compared to $60,100 for the three months ended March 31, 2011. At March 31, 2012 and December 31, 2011, the allowance for loan losses was $1.25 million, or 1.1%, of the total loan portfolio.

Management also reviews individual loans for which full collectability may not be reasonably assured and considers, among other matters, the estimated fair value of the underlying collateral. This evaluation is ongoing and results in variations in our provision for loan losses.

Nonaccrual loans totaled $3.9 million at March 31, 2012 compared to $3.8 million at December 31, 2011. Net loan charge-offs amounted to $73,000 during the three months ended March 31, 2012, compared to $75,100 during the three months ended March 31, 2011. As of December 31, 2011, nonaccrual loans included two lot loans totaling $309,000, one speculative construction loan totaling $1.6 million, two home equity lines of credit totaling $93,300 and thirteen one-to-four family residential loans totaling $1.9 million. During the three months ended March 31, 2012 we received principal payments on one of the lot loans totaling $1,500. Also during this period we received deed in lieu of foreclosure on one of the one-to-four family residential loans totaling $486,500. This loan was insured by a private mortgage insurance company and previous evaluations had included receiving 100% of the insurance proceeds for this loan. At the same time we received deed in lieu of foreclosure on this property, we were informed by the private mortgage insurer that due to an administrative supervision action taken by the North Carolina Department of Insurance they would only be able to pay fifty percent of the claim payment with the other half deferred and credited to a temporary surplus account on the books of the insurer. We were also able to sell and settle on this property during the three months ended March 31, 2012. Since we do not currently know if or when we may receive the other fifty percent of our claim, we assumed it to be a loss which resulted in a charge-off on this loan of $83,700. As of March 31, 2012, nonaccrual loans included two lot loans totaling $307,500, one speculative construction loan totaling $1.6 million, seventeen one- to- four family residential loans totaling $1.7 million and three home equity lines of credit totaling $323,800.

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The following table provides information with respect to our nonperforming assets at the dates indicated.

	At
	March 31, 2012			December 31, 2011
	(unaudited)
Nonaccrual loans:
Real estate loans:
Owner occupied one-to four-family	$	1,198,175		$	1,394,950
Non-owner occupied one-to four-family		474,858			475,572
Lines of credit		352,132			93,309
Commercial		0			0
Residential construction		1,565,198			1,565,198
Land		307,522			309,022
Commercial		0			0
Consumer		0			0
Total	$	3,897,885		$	3,838,051
Accruing loans past due 90 days or more:
Real estate loans:
One-to four-family		0			0
Lines of credit		0			0
Commercial		0			0
Residential construction		0			0
Land		0			0
Commercial		0			0
Consumer		0			0
Total	$	0		$	0
Total of nonaccrual loans and accruing loans 90 days Or more past due	$	3,897,885		$	3,838,051
Assets acquired through foreclosure		0			0
Total nonperforming assets	$	3,897,885		$	3,838,051
Troubled debt restructurings	$	1,073,128		$	1,562,084
Troubled debt restructurings included in non-accrual loans	$	(810,309	)	$	(1,298,347	)
Troubled debt restructurings and total nonperforming assets	$	4,160,704		$	4,101,788
Total of nonaccrual loans and accruing loans past due 90 days Or more to total loans		3.40	%		3.39	%
Total of nonaccrual loans and accruing loans past due 90 days Or more to total assets		2.23	%		2.19	%
Total nonperforming assets to total assets		2.23	%		2.19	%

For further information regarding the composition of our non-accrual loans, see “ - Results of Operations for the Three Months Ended March 31, 2012 and 2011 - Provision for Loan Losses.”

We occasionally modify loans to extend the term or make other concessions to help borrowers stay current on their loan and to avoid foreclosure. At March 31, 2012 and December 31, 2011, we had $1.1 million and $1.6 million, respectively, in modified loans, which are also referred to as troubled debt restructurings. Included in troubled debt restructurings at March 31, 2012 were three loans secured by one-to-four family residential owner occupied properties totaling $959,600 and one lot loan totaling $113,500. Two of the three one-to-four family residential loans totaling $522,800 are performing under their current agreements. The other one-to-four family residential loan totaling $436,800 was not performing under their agreement. The one lot loan totaling $113,500 was performing under its current agreement. All but one of these loans totaling $262,800 are nonaccrual as of March 31, 2012 and classified as substandard. One loan totaling $262,800, a one-to-four family residential owner-occupied loan, has performed under its current agreement for greater than six months, and so it is neither nonaccrual nor substandard at March 31, 2012.

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With respect to the three owner-occupied one-to-four family residential troubled debt restructured loans, they had outstanding balances of $263,000, $260,000 and $437,000 at March 31, 2012. The borrower on the loan with an outstanding balance of $263,000 was having temporary financial difficulty, and we agreed to modify the loan to allow the borrower to make interest only payments for a period of seven months. No principal or interest was forgiven and no change in the interest rate was made. The borrower resumed making fully amortizing payments in March and as this is an adjustable rate mortgage, the principal and interest payment will be adjusted at each rate change to fully amortize the loan by the original maturity date. This loan has never been nonaccrual. The interest for the three months ended March 31, 2012 on this loan was $2,548, all of which was recognized as income. The borrower complied with the temporary payment as agreed.

The borrower on the $260,000 loan was having temporary financial difficulty, and we agreed to modify the loan by allowing a temporary payment plan. The borrower complied with the temporary payment plan. At the conclusion of the temporary payment plan, we agreed to defer the payment of the then accrued interest of $4,000 until the loan was paid off. No principal or interest was forgiven and no change in the interest rate was made. Due to employment issues the borrower defaulted on the loan again. The borrower has now secured additional employment and after a review of the borrower’s current and projected income we have agreed to a new re-payment schedule that covers a 45 month period of time which became effective January 2012. The borrower has made all payments as agreed under the plan. This loan remains classified as substandard and is a non-accrual loan. Until the borrower demonstrates a willingness and ability to repay, the loan payments received from the borrower under the payment plan will be credited towards the principal balance and the escrow account for future payments of taxes and insurance. If all payments required under the repayment plan are received on time it is anticipated that we will not recognize income on this loan for a period of 15 months. We have not forgiven principal or interest nor made a concession in the interest rate or extended the maturity date.

The borrower on the $437,000 loan was having temporary financial difficulty, and we agreed to modify the loan by allowing a temporary payment plan. The borrower complied with the temporary payment arrangement. At the conclusion of the temporary payment plan, we agreed to defer the payment of the then accrued interest of $16,000 until the loan was paid off. No principal or interest was forgiven and no change in the interest rate was made. The borrower had moved out of the property and rented it with the anticipation that the rental income would cover the mortgage payment. The borrower defaulted again and we initiated foreclosure action. This loan remains classified as substandard and is a non-accrual loan. We have reached an agreement that allows the borrower to try and sell the property now that the tenant has vacated the property. This agreement expired at the end of March and the sale of the house did not take place, and we have moved forward with the foreclosure process.

With respect to our one lot loan classified as a troubled debt restructuring as of March 31, 2012 totaling $113,500, we agreed to accept a short sale of the property plus a promissory note of $30,000 that requires monthly payments of $500. To date, the borrower has made the required $500 monthly payments. The short sale agreement has been extended through the end of September, 2012. This loan remains classified as substandard and is a non-accrual loan.

If a loan is in nonaccrual status at the time we restructure it and classify the restructure as a troubled debt restructuring, it is our policy to maintain the loan as nonaccrual until we receive six payments under the restructured terms, unless, we have adequate collateral valuations or other analyses to support maintaining the loan on accrual status.

All of the above loans were classified as impaired and measured for loss in accordance with Accounting Standards Codification 310-10-35. The lot loan was measured using the fair value of collateral less disposition costs method, and the other four loans were initially measured using the present value of discounted cash flows method. Subsequently, the $260,000 loan and the $487,000 loan were measured using the fair value of collateral method. The discount rate used was the original note rate, which in each of these instances is equal to the modified terms rate. The other significant assumptions used in our discounted cash flow model to determine the fair value of the loans were the schedule of cash flows produced under the modified terms.

At March 31, 2012, we did not have any other real estate owned.

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Analysis and Determination of the Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a monthly basis, and any adjustments must be approved quarterly by the Board. When additional allowances are necessary, a provision for loan losses is charged to earnings. Our methodology for assessing the appropriateness of the allowance for loan losses is reviewed periodically by the board of directors. The board of directors also reviews the allowance for loan losses established on a quarterly basis.

General Valuation Allowance.We establish a general valuation allowance for loans that should be adequate to reserve for the estimated credit losses inherent in each segment of our loan portfolio, given the facts and circumstances as of the valuation date for all loans in the portfolio that have not been classified. The allowance is based on our average annual rate of net charge offs experienced over the previous four quarters on each segment of the portfolio and is adjusted for current qualitative factors. If historical loss data is not available for a segment, the estimates used will be based on various components such as industry averages. For purposes of determining the estimated credit losses, the loan portfolio is segmented as follows: (i) one- to four-family owner occupied first mortgage real estate loans;(ii) one- to four-family non-owner occupied first mortgage real estate loans; (iii) one- to four-family second mortgage real estate loans; (iv) one- to four-family home equity lines of credit; (v) commercial real estate loans; (vi) speculative construction loans; (vii) other construction loans; (vii) land loans; (viii) consumer loans and (ix) commercial loans. Qualitative factors that are considered in determining the adequacy of the allowance for loan losses are as follows: (i) trends of delinquent and nonaccrual loans; (ii) economic factors; (iii) concentrations of credit; (iv)changes in the nature and volume of the loan portfolio; and (v) changes in lending staff and loan policies. We do not record allowances for impaired loans in our general allowance; however, the balances of impaired loans are included in the other categories of our allowance for loan losses if there was no loss on the impaired loan when measured individually.

Specific Valuation Allowance.All adversely classified loans meeting the following loan balance thresholds are individually reviewed: (i) speculative construction loans; (ii) commercial loans greater than $500,000; (iii) land loans greater than $500,000; (iv) all other loans greater than $1.5 million; and (v) any other nonperforming loans. Any portion of the recorded investment in excess of the fair value of the collateral less the disposition costs is charged off against the allowance for loan losses. It has been our policy to not maintain specific reserves against impaired loans. Impaired loans are measured for loss using the fair value of collateral less disposition costs method for collateral dependent loans, and the present value of discounted cash flows method for other loans. It has been our policy to directly charge off any loss determined on impaired loans using these methods, and we do not foresee maintaining specific reserves for these loans.

We charge off 100% of the assets or portions thereof classified as loss. The amount of the loss will be the excess of the recorded investment in the loan over the fair value of collateral less disposition costs estimated on the date that a probable loss is identified. Management obtains updated appraisals with respect to loans secured by real estate.

All other adversely classified loans as well as special mention and watch loans are reviewed monthly. Our historical loss experience in each category of loans is utilized in determining the allowance for that group. The determined loss factor in each loan category may be adjusted for qualitative factors as determined by management.

Unallocated Valuation Allowance.Our allowance for loan losses methodology also includes an unallocated component to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.

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The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

	At
	March 31, 2012 (unaudited)								December 31, 2011
	Amount		% of Allowance to Total Allowance			% of Loans in Category to Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category to Total Loans
Real estate loans:
Owner occupied one-to four- family	$	648,437		51.87	%		65.09	%	$	495,329		39.62	%		67.12	%
Non-owner occupied one-to four-family		158,732		12.70			11.42			76,993		6.16			10.54
Lines of credit		72,191		5.78			8.71			145,830		11.67			8.40
Commercial		167,017		13.36			9.71			190,767		15.26			8.87
Residential construction		15,990		1.28			2.76			28,952		2.32			2.73
Land		28,347		2.27			2.25			120,372		9.63			2.28
Consumer		1,023		.08			.04			2,858		.23			.04
Commercial		270		.02			.02			1,008		.08			.02
Unallocated		157,993		12.64			.00			187,891		15.03			.00
Total	$	1,250,000		100.00	%		100.00	%	$	1,250,000		100.00	%		100.00	%

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that the Office of the Comptroller of the Currency, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. The Office of the Comptroller of the Currency may require us to increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operation.

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Analysis of Loan Loss Experience.The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

	Three Months Ended March 31,
	2012			2011
Allowance for loan losses at beginning of period	$	1,250,000		$	1,300,000
Charge-offs:
Real estate loans:
Owner occupied one-to four-family		83,715			0
Non-owner occupied one-to four-family		0			0
Lines of credit		0			0
Commercial		0			0
Residential construction		0			0
Land		0			75,718
Commercial		0			0
Consumer		0			0
Total charge-offs		83,715			75,718
Recoveries		10,696			660
Net charge-offs		73,019			75,058
Provision for loan losses		73,019			60,058
Allowance at end of period	$	1,250,000		$	1,285,000
Allowance for loan losses to total loans at the end of the period		1.09	%		1.17	%
Net charge-offs to average loans outstanding during the period		.06	%		.07	%

Loans are considered impaired when, based on available information, it is probable that we will not collect all principal and interest payments according to contractual terms. Generally, loans are considered impaired once principal and interest payments are past due and they are placed on nonaccrual. Management also considers the financial condition of the borrower, cash flows of the loan and the value of the related collateral. Impaired loans do not include large groups of smaller balance homogeneous credits such as residential real estate, consumer installment loans, and commercial leases, which are evaluated collectively for impairment. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (usually 90 days or less), provided eventual collection of all amounts due is expected. The impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided by the collateral. Generally, we measure impairment on such loans by reference to the fair value of the collateral. Fair value of the collateral is generally determined using third party appraisals that are reviewed by management for propriety and reasonableness. Third party appraisals are conducted at least annually. Additionally, internal evaluations of collateral value are conducted quarterly to ensure any further deterioration of the collateral value is recognized on a timely basis. Once a loss is determined to have occurred, the loan is charged down to the fair value of the collateral, net of any disposal costs, or net realizable value. Income on impaired loans is recognized in a manner similar to the method followed on nonaccrual loans.

We have classified as impaired, loans that are 90 days or more delinquent, troubled debt restructurings and other loans we have put on nonaccrual status. The amount of impaired loans of $4,160,700 as of March 31, 2012 was comprised of thirteen loans totaling $2,876,400 that were all 90 days or more delinquent, ten loans totaling $1,021,500 we have placed on nonaccrual status that were not 90 days or more delinquent, and one loan totaling $262,800 that is a trouble loan debt restructuring secured by an owner-occupied one-to-four family residential property that is not on nonaccrual status and is performing per the terms of their agreement. Included in the thirteen loans totaling $2,876,400 that were 90 days or more delinquent are three troubled debt restructurings totaling $810,300 on one-to-four family residential owner-occupied properties. Of the remaining ten loans that were 90 days or more delinquent four are small balance loans totaling $27,700 on one-to-four-family residential owner-occupied properties, one is secured by a speculative residential construction loan totaling $1.6 million, another one is secured by a speculative building lot to the same builder totaling $194,000, two are home equity lines of credit totaling $92,900, one is secured by a one-to-four family residential owner-occupied property totaling $107,500 and one is secured by a non-owner occupied one-to-four family residential property totaling $78,800. Of the ten loans that we have placed on nonaccrual that are not 90 days or more delinquent totaling $1,021,500, two are home equity lines of credit totaling $259,200, three are secured by owner-occupied one-to-four family residential properties totaling $366,200 and five are secured by non-owner occupied one-to-four residential properties totaling $396,100.

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We measure an impaired loan for loss in the following ways:

• Collateral dependent loans are measured for loss at the point the loan becomes 60 or more days delinquent or at maturity if an extension is requested. We obtain a third party appraisal to determine the fair market value of the collateral. We measure these loans for loss by using the fair value of collateral less disposition costs method and if any loss is determined it is charged off directly. Subsequently, these loans are re-evaluated at least annually by obtaining an updated third party appraisal to determine if there should be any further loss recognition.

• Non-collateral dependent loans are measured for loss at the point the loan becomes 90 to 120 days delinquent. If there are no work-out arrangements, we will treat the loan as a collateral dependent loan and measure for loss as stated above. If there is a work-out arrangement, the loan will be measured for loss using the present value of discounted cash flows method. If any loss is determined, it is our policy to charge off this loss directly. As long as the borrower performs under the terms of the work-out arrangement, no further measurement for loss is performed. If the borrower would fail to perform under the work-out arrangement, we will treat the loan as a collateral dependent loan and measure for loss as stated above.

We have not experienced any significant time lapses between the time a third party appraisal is ordered and the time it is received and used to evaluate if any loss has been incurred and subsequently recognized, if applicable. We have not charged off an amount different from what was determined after evaluating a collateral dependent loan for loss using the fair value of collateral less disposition costs method.

Liquidity Management.Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds available to meet short-term liquidity needs consist of deposit inflows, loan repayments and maturities and sales of investment securities. 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.

We regularly adjust our investments in liquid assets available to meet short-term liquidity needs 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 policy. We do not have long-term debt or other financial obligations that would create long-term liquidity concerns.

Our most liquid assets are cash and cash equivalents. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At March 31, 2012, cash and cash equivalents totaled $12.8 million. Securities classified as available-for-sale, amounting to $31.3 million at March 31, 2012, provides an additional source of liquidity. In addition, at March 31, 2012, we had the ability to borrow a total of approximately $52.6 million from the Federal Home Loan Bank of Atlanta and had $22.5 million in Federal Home Loan Bank advances outstanding. For additional liquidity, if needed, we have a $3 million line of credit with another bank, on which we had no outstanding balance at March 31, 2012.

Certificates of deposit due within one year of March 31, 2012 totaled $39.2 million, or 41.8%, of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressures. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2013. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Management.We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2012, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

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Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit. For the three months ended March 31, 2012, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable as the Company is a smaller reporting company.

Item 4. Controls and Procedures

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as that term is defined in Rule 13a-5(e). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 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

Periodically, there may be various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see the section entitled“Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission on March 26, 2012. As of the date of this filing, the risk factors of the Company have not changed materially from those reported in the Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

No.	Description
3.1	Articles of Incorporation of Fraternity Community Bancorp, Inc. (1)
3.2	Bylaws of Fraternity Community Bancorp, Inc. (1)
31.0	Rule 13a-14(a) Certification of Chief Executive Officer and Chief Financial Officer
32.0	Section 1350 Certifications
101.0*	The following materials from Fraternity Community Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Changes in Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (v) the related Notes, tagged as blocks of text.

(1) Incorporated herein by reference to the Company’s Registration Statement on Form S-1, as amended (File No. 333-170215).

* Furnished, not filed.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	FRATERNITY COMMUNITY BANCORP, INC.
May 15, 2012
	By:	/s/ Thomas K. Sterner
		Thomas K. Sterner
		Chairman of the Board, Chief Executive Officerand Chief Financial Officer

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