Fraternity Community Bancorp (FRTR) 10-Q 2012 Q2 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 June 30, 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 August 9, 2012, the registrant had 1,585,500 shares of common stock issued and outstanding.

INDEX

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Statements of Financial Condition as of June 30, 2012 (unaudited) and December 31, 2011		1
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)		2
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)		3
	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011 (unaudited)		4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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		35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		47
Item 4.	Controls and Procedures		47
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		48
Item 1A.	Risk Factors		48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 3.	Defaults Upon Senior Securities		48
Item 4.	Mine Safety Disclosures		48
Item 5.	Other Information		48
Item 6.	Exhibits		48
SIGNATURES

i

PART I.FINANCIAL INFORMATION

Item 1. Financial Statements

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	June 30,			December 31,
	2012			2011
	(unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	729,267		$	1,033,637
Interest-bearing deposits in other banks		19,815,286			13,889,505
Total cash and cash equivalents		20,544,553			14,923,142
Investment securities:
Available-for-sale - at fair value		25,749,399			31,419,356
Held-to-maturity - at amortized cost (fair value approximates $7,685,383 and $7,970,403, respectively)		7,405,173			7,837,293
Loans—net of allowance for loan losses of $1,250,000 (2012 and 2011)		110,105,690			111,924,984
Other real estate owned		1,693,676			0
Property and equipment, net		778,967			740,501
Federal Home Loan Bank stock—at cost—restricted		1,282,600			1,306,500
Ground rents—net of valuation allowance of $45,500 (2012 and 2011)		850,746			854,996
Accrued interest receivable		575,755			605,197
Investment in bank-owned life insurance		4,438,999			4,354,252
Deferred income taxes		648,529			630,908
Other assets		753,641			733,956
TOTAL ASSETS	$	174,827,728		$	175,331,085
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	119,733,719		$	121,200,060
Advances from the Federal Home Loan Bank		22,500,000			22,500,000
Advances by borrowers for taxes and insurance		1,666,532			831,448
Other liabilities		648,204			682,888
Total liabilities		144,548,455			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, 1,585,500 shares at June 30, 2012, 1,587,000 shares at December 31, 2011		15,855			15,870
Additional paid in capital		14,927,785			14,944,647
Retained earnings — substantially restricted		16,325,251			16,170,684
Unearned ESOP shares		(1,110,900	)		(1,163,800	)
Accumulated other comprehensive income		121,282			149,288
Total stockholders’ equity		30,279,273			30,116,689
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	174,827,728		$	175,331,085

See accompanying notes.

1

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
INTEREST INCOME:
Interest and fees on loans:
Real estate loans	$	1,441,905	$	1,464,351		$	2,909,201	$	2,925,503
Other loans		1,102		1,217			2,281		2,472
Interest and dividends on investments and bank deposits		258,785		271,216			534,740		469,433
Income from ground rents owned		14,233		12,601			25,876		24,734
Total interest income		1,716,025		1,749,385			3,472,098		3,422,142
INTEREST EXPENSE:
Interest on deposits		444,937		622,831			906,713		1,291,122
Interest on borrowings		170,574		223,140			339,928		444,016
Total interest expense		615,511		845,971			1,246,641		1,735,138
NET INTEREST INCOME		1,100,514		903,414			2,225,457		1,687,004
PROVISION FOR LOAN LOSSES		105,234		458			178,254		60,516
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		995,280		902,956			2,047,203		1,626,488
NON-INTEREST INCOME:
Gain on sale of investments		114,134		47,694			114,134		47,694
Income on bank-owned life insurance		42,835		45,363			84,747		89,144
Gain on sale of loans		7,848		0			26,789		0
Other income		10,102		10,833			22,400		22,113
Total non-interest income		174,919		103,890			248,070		158,951
NON-INTEREST EXPENSES:
Salaries and employee benefits		539,994		527,717			1,113,182		1,034,256
Occupancy expenses		120,539		120,016			246,855		249,678
Legal fees		74,227		29,289			120,178		37,872
Federal Deposit Insurance premiums		32,974		37,368			68,532		77,510
Accounting and auditing expense		35,519		29,240			67,230		58,991
Data processing expense		99,167		104,963			208,701		204,264
Directors fees		22,232		25,317			48,711		50,134
Other general and administrative expenses		107,161		122,421			221,511		223,746
Total non-interest expenses		1,031,813		996,331			2,094,900		1,936,451
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)		138,386		10,515			200,373		(151,012	)
INCOME TAX EXPENSE (BENEFIT)		35,975		(13,041	)		45,806		(93,941	)
NET INCOME (LOSS)	$	102,411	$	23,556		$	154,567	$	(57,071	)
EARNINGS (LOSS) PER COMMON SHARE - BASIC	$	0.07	$	0.02		$	0.10	$	(0.04	)
EARNINGS (LOSS) PER COMMON SHARE - DILUTED	$	0.07	$	0.02		$	0.10	$	(0.04	)

See accompanying notes.

2

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
NET INCOME (LOSS)	$	102,411		$	23,556		$	154,567		$	(57,071	)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period		(698	)		556,988			67,458			615,293
Less: income taxes on unrealized gains (losses) arising during the period		279			(222,795	)		(26,983	)		(246,117	)
		(419	)		334,193			40,475			369,176
Less: Reclassification adjustment for realized gains		(114,134	)		(47,694	)		(114,134	)		(47,695	)
Income taxes on reclassification adjustment		45,653			19,078			45,653			19,078
		(68,481	)		(28,616	)		(68,481	)		(28,617	)
OTHER COMPREHENSIVE INCOME (LOSS)		(68,900	)		305,577			(28,006	)		340,559
COMPREHENSIVE INCOME (LOSS)	$	33,511		$	329,133		$	126,561		$	283,488

See accompanying notes.

3

Fraternity Community Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Six Months Ended June 30, 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			(57,071	)		0			0			(57,071	)
Other Comprehensive Income		0			0			0			0			340,559			340,559
Acquisition of unearned ESOP shares		0			0			0			(1,269,600	)		0			(1,269,600	)
Issuance of Common Stock		15,870			14,949,545			0			0			0			14,965,415
Balance, June 30, 2011	$	15,870		$	14,949,545		$	16,089,714		$	(1,269,600	)	$	180,349		$	29,965,878
Balance, December 31, 2011	$	15,870		$	14,944,647		$	16,170,684		$	(1,163,800	)	$	149,288		$	30,116,689
Net Income		0			0			154,567			0			0			154,567
Other Comprehensive Income		0			0			0			0			(28,006	)		(28,006	)
Common shares repurchased		(15	)		(16,466	)		0			0			0			(16,481	)
ESOP shares released or committed for release		0			(396	)		0			52,900			0			52,504
Balance, June 30, 2012	$	15,855		$	14,927,785		$	16,325,251		$	(1,110,900	)	$	121,282		$	30,279,273

See accompanying notes.

4

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Six Months Ended			Six Months Ended
	June 30, 2012			June 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	154,567		$	(57,071	)
Adjustments to reconcile net income (loss) provided by operating activities:
Depreciation		43,155			43,319
Gain on sale of available-for-sale securities		(114,134	)		(47,694	)
Gain on sale of loans		(26,789	)		0
Origination of loans held for sale		(1,827,000	)		0
Proceeds from sale of loans held for sale		1,853,789			0
Amortization/accretion of premium/discount		376,441			154,164
Increase in value of bank-owned life insurance		(84,747	)		(89,144	)
Stock based compensation (ESOP)		52,504			0
Provision for loan losses		178,254			60,516
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		(1,683,919	)		1,276,640
Other liabilities		(34,684	)		155,710
Net cash (used in) provided by operating activities		(1,112,563	)		1,496,440
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans		1,306,937			941,064
Redemption of ground rents		4,250			0
Acquisition of property and equipment		(81,621	)		(53,737	)
Purchase of:
Investment securities available-for-sale		(7,101,050	)		(19,227,443	)
Proceeds from:
Sales and maturities of investment securities available-for-sale		10,187,699			3,528,310
Principal paydowns on investment securities available-for-sale		2,314,836			2,058,680
Principal paydowns on investment securities held-to-maturity		392,658			0
Sale of Federal Home Loan Bank stock		23,900			44,200
Sale of other real estate owned		334,103			0
Net cash provided by (used in) investing activities		7,381,712			(12,708,926	)

5

Fraternity Community Bancorp, Inc.

Consolidated Statements of Cash Flows (Continued)

	Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(1,466,341	)		(5,216,884	)
Repayments of Federal Home Loan Bank borrowings		0			(83,333	)
Acquisition of ESOP Shares		0			(1,269,600	)
Repurchase of common shares		(16,481	)		0
Proceeds from issuance of Common Stock, net		0			14,965,415
Increase in advances by borrowers for taxes and insurance		835,084			1,090,535
Net cash (used in) provided by financing activities		(647,738	)		9,486,133
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		5,621,411			(1,726,353	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		14,923,142			25,881,831
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	20,544,553		$	24,155,478
Cash paid for interest	$	1,246,820		$	1,735,170
Cash paid for taxes	$	0		$	0
Transfer of loans to other real estate owned	$	2,027,779		$	1,167,936

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. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FRATERNITY COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTH PERIODS

ENDED JUNE 30, 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 and Loan Association (the “Bank”), a federally chartered savings association. 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 six months ended June 30, 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 or six month periods ended June 30, 2012 or 2011.

	Three Months Ended June 30, 2012		Three Months Ended June 30, 2011		Six Months Ended June 30, 2012		Six Months Ended June 30, 2011
Net Income (Loss)	$	102,411	$	23,556	$	154,567	$	(57,071	)
Weighted average common shares outstanding		1,473,547		1,460,040		1,472,524		1,460,040
Basic and diluted earnings (loss) per share	$	.07	$	.02	$	.10	$	(.04	)

2. INVESTMENT SECURITIES

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

	June 30, 2012 (unaudited)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Bank Notes and Corporate Bonds	$	2,497,105	$	25,055	$	4,395	$	2,517,765
Obligations of U.S. Government Agencies		3,999,000		11,420		920		4,009,500
Mortgage-backed securities:
FNMA		4,805,506		101,953		136		4,907,323
GNMA		10,082,381		85,147		5,921		10,161,607
FHLMC		1,315,009		7,079		0		1,322,088
FNMA CMO		2,517,078		1,201		5,128		2,513,151
Private Label CMO		335,727		0		17,762		317,965
	$	25,551,806	$	231,855	$	34,262	$	25,749,399

8

	June 30, 2012 (unaudited)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Municipal Bonds	$	547,671	$	27,059	$	0	$	574,730
SBA Pools		1,963,906		19,243		5,661		1,977,488
Mortgage-backed securities:
FNMA		4,893,596		239,569		0		5,133,165
	$	7,405,173	$	285,871	$	5,661	$	7,685,383

	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
FHLMC		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

	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 June 30, 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.

	June 30, 2012 Available-for-Sale (unaudited)
	Amortized Cost		Fair Value
Due in one year through five years	$	2,502,029	$	2,522,621
Due in five years through ten years		1,414,472		1,436,303
Due after ten years		21,635,305		21,790,475
	$	25,551,806	$	25,749,399

	June 30, 2012 Held-to-Maturity (unaudited)
	Amortized Cost		Fair Value
Due in one year through five years	$	916,703	$	911,041
Due in five years through ten years		4,893,596		5,133,165
Due after ten years		1,594,874		1,641,177
	$	7,405,173	$	7,685,383

	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 $124,019 and $47,694 for the six months ended June 30, 2012 and 2011, respectively. The Bank recognized gross losses on sales of available-for-sale securities of $9,885 and $0 for the six months ended June 30, 2012 and 2011, respectively.

Securities with unrealized losses, segregated by length of impairment, as of June 30, 2012 and December 31, 2011 were as follows:

	Less than 12 Months				More than 12 Months				Total
June 30, 2012 (unaudited)	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Available-for-sale:
Bank Notes and Corporate Bonds	$	1,495,605	$	4,395	$	0	$	0	$	1,495,605	$	4,395
Obligation of U.S. Government Agencies		1,998,080		920		0		0		1,998,080		920
Mortgage-backed securities:
FNMA		33,843		35		6,270		101		40,113		136
GNMA		1,457,944		5,921		0		0		1,457,944		5,921
FHLMC		0		0		0		0		0		0
Private Label CMO		1,492,849		5,128		317,965		17,762		1,810,814		22,890
	$	6,478,321	$	16,399	$	324,235	$	17,863	$	6,802,556	$	34,262
Held-to-Maturity:	$	1,977,488	$	5,661	$	0	$	0	$	1,977,488	$	5,661

	Less than 12 Months				More than 12 Months					Total
December 31, 2011	Estimated Fair Value		Unrealized Losses		Estimated Fair Value			Unrealized Losses		Estimated Fair Value		Unrealized Losses
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 June 30, 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 June 30, 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:

	June 30, 2012 (unaudited)			December 31, 2011
Real Estate Loans:
Owner Occupied One-to-four family	$	70,438,333		$	75,958,333
Non Owner Occupied One-to-four family		13,108,316			11,932,813
Home Equity Lines of Credit		9,775,591			9,501,693
Commercial Real Estate		12,745,220			10,040,391
Residential Construction		3,296,760			3,088,974
Land		1,927,105			2,584,476
Total Real Estate Loans		111,291,325			113,106,680
Consumer Loans		46,859			50,486
Commercial Loans		17,506			17,818
Total Loans		111,355,690			113,174,984
Less:
Allowance for loan losses		(1,250,000	)		(1,250,000	)
Total loans and allowance for loan losses	$	110,105,690		$	111,924,984

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

12

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.

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

13

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 $2,848,522 and $4,101,788 as of June 30, 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 $2,586,529 and $3,838,051 at June 30, 2012 and December 31, 2011, respectively. Accruing loans past due more than 90 days totaled $0 at June 30, 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.

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 June 30, 2012 there are five loans totaling $1,278,880 classified as troubled debt restructurings.

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 June 30, 2012 and December 31, 2011:

14

Credit Risk Analysis of Loans Receivable

As of June 30, 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
Pass	$	66,274,449	$	12,108,772	$	9,416,512	$	11,547,941	$	3,296,760	$	1,815,105	$	46,859	$	17,506	$	104,523,904
Special Mention		2,487,175		525,250		35,553		1,197,279		0		0		0		0		4,245,257
Substandard		1,676,709		474,294		323,526		0		0		112,000		0		0		2,586,529
Total	$	70,438,333	$	13,108,316	$	9,775,591	$	12,745,220	$	3,296,760	$	1,927,105	$	46,859	$	17,506	$	111,355,690
Credit risk profile based on payment activity:
Performing	$	68,761,624	$	12,634,022	$	9,452,065	$	12,745,220	$	3,296,760	$	1,815,105	$	46,859	$	17,506	$	108,769,161
Nonperforming		1,676,709		474,294		323,526		0		0		112,000		0		0		2,586,529
Total	$	70,438,333	$	13,108,316	$	9,775,591	$	12,745,220	$	3,296,760	$	1,927,105	$	46,859	$	17,506	$	111,355,690

15

Credit Risk Analysis of Loans Receivable

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
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

16

Aged Analysis of Past Due Loans Receivable

As of June 30, 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
30-59 Days Past Due	$	2,210,919	$	307,338	$	65,887	$	0	$	0	$	0	$	0	$	0	$	2,584,144
60-89 Days Past Due		207,038		0		465,627		0		0		0		0		0		672,665
Greater Than 90 Days Past Due		1,583,712		166,956		92,663		0		0		112,000		0		0		1,955,331
Total Past Due		4,001,669		474,294		624,177		0		0		112,000		0		0		5,212,140
Current		66,436,664		12,634,022		9,151,414		12,745,220		3,296,760		1,815,105		46,859		17,506		106,143,550
Total Loans Receivable	$	70,438,333	$	13,108,316	$	9,775,591	$	12,745,220	$	3,296,760	$	1,927,105	$	46,859	$	17,506	$	111,355,690
Recorded Investment > 90 Days and Accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

17

Aged Analysis of Past Due Loans Receivable

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
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

18

The following table details activity in the allowance for loan and lease losses by portfolio segment for the periods indicated:

	Six Months Ended June 30, 2012 (unaudited)			Three Months Ended June 30, 2012 (unaudited)
Allowance at beginning of period	$	1,250,000		$	1,250,000
Charge-offs:
Real estate loans:
Owner Occupied one-to-four Family		133,065			49,350
Non Owner Occupied one-to-four Family		0			0
Lines of Credit		0			0
Commercial		0			0
Residential Construction		44,940			44,940
Land		20,585			20,585
Commercial Loans:
Consumer		0			0
Total Charge-offs	$	198,590		$	114,875
Recoveries		20,336			9,640
Net Charge-offs		178,254			105,235
Provision for Loan Losses		178,254			105,235
Allowance at end of period	$	1,250,000		$	1,250,000
Allowance for loan losses to total loans at the end of the period		1.12	%		1.12	%
Net Charge-offs to average loans outstanding during period		0.16	%		0.09	%

19

The following tables represent the allocation of the allowance for loan and lease losses and the related loans by portfolio segment at June 30, 2012 and December 31, 2011:

Allowance for Loan Losses and Recorded Investment in Loans Receivable

As of June 30, 2012

	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			Impaired		Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	495,271		$	77,051	$	145,830		$	190,767	$	28,952		$	120,372		$	2,858		$	1,008		$	0	$	187,891		$	1,250,000
Charge-offs		(133,065	)		0		0			0		(44,940	)		(20,585	)		0			0			0		0			(198,590	)
Recoveries		18,338			0		1,998			0		0			0			0			0			0		0			20,336
Provision		222,903			86,803		(76,938	)		411		48,956			(62,577	)		(1,855	)		(756	)		42,728		(81,421	)		178,254
Ending Balance	$	603,447		$	163,854	$	70,890		$	191,178	$	32,968		$	37,210		$	1,003		$	252		$	42,728	$	106,470		$	1,250,000
Ending Balance Individually evaluated for impairment	$	0		$	0	$	0		$	0	$	0		$	0		$	0		$	0		$	0	$	0		$	0
Ending Balance Collectively evaluated for impairment	$	603,447		$	163,854	$	70,890		$	191,178	$	32,968		$	37,210		$	1,003		$	252		$	42,728	$	106,470		$	1,250,000
Loans Receivable:
Ending Balance	$	70,438,333		$	13,108,316	$	9,775,591		$	12,745,220	$	3,296,760		$	1,927,105		$	46,859		$	17,506				$	0		$	111,355,690
Ending Balance Individually evaluated for impairment	$	2,412,996		$	0	$	323,526		$	0	$	0		$	112,000		$	0		$	0				$	0		$	2,848,522
Ending Balance Collectively evaluated for impairment	$	68,025,337		$	13,108,316	$	9,452,065		$	12,745,220	$	3,296,760		$	1,815,105		$	46,859		$	17,506				$	0		$	108,507,168

20

Allowance for Loan Losses and Recorded Investment in Loans Receivable

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		Impaired		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	536,549		$	0	$	407,352		$	75,473	$	80,789		$	173,024		$	3,259		$	0	$	0	$	23,554	$	1,300,000
Charge-offs		(61,929	)		0		0			0		0			(75,718	)		(440	)		0		0		0		(138,087	)
Recoveries		850			0		21,685			0		0			0			0			0		0		0		22,535
Provision		19,801			77,051		(283,207	)		115,294		(51,837	)		23,066			39			1,008		0		164,337		65,552
Ending Balance	$	495,271		$	77,051	$	145,830		$	190,767	$	28,952		$	120,372		$	2,858		$	1,008	$	0	$	187,891	$	1,250,000
Ending Balance Individually evaluated for impairment	$	0		$	0	$	0		$	0	$	0		$	0		$	0		$	0	$	0	$	0	$	0
Ending Balance Collectively evaluated for impairment	$	495,271		$	77,051	$	145,830		$	190,767	$	28,952		$	120,372		$	2,858		$	1,008	$	0	$	187,891	$	1,250,000
Loans Receivable:
Ending Balance	$	75,958,333		$	11,932,813	$	9,501,693		$	10,040,391	$	3,088,974		$	2,584,476		$	50,486		$	17,818			$	0	$	113,174,984
Ending Balance Individually evaluated for impairment	$	1,658,687		$	475,572	$	93,309		$	0	$	1,565,198		$	309,022		$	0		$	0			$	0	$	4,101,788
Ending Balance Collectively evaluated for impairment	$	74,299,646		$	11,457,241	$	9,408,384		$	10,040,391	$	1,523,776		$	3,799,230		$	50,486		$	17,818			$	0	$	109,073,196

21

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 June 30, 2012 and December 31, 2011 is as follows:

	June 30, 2012			December 31,
	(unaudited)			2011
Non-Accrual Loans	$	2,586,529		$	3,838,051
Other Real Estate Owned, net		1,693,676			0
Loans 90 days or more past due and still accruing		0			0
Total Nonperforming Assets	$	4,280,205		$	3,838,051
Troubled Debt Restructurings	$	1,278,880		$	1,562,084
Troubled Debt Restructurings included In Non-Accrual Loans	$	(1,016,887	)	$	(1,298,347	)
Troubled Debt Restructurings and Total Nonperforming Assets	$	4,542,198		$	4,101,788

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The following table is a summary of the recorded investment in non-accrual loans by loan class as of the dates indicated:

	June 30, 2012		December 31,
	(unaudited)		2011
Real estate Loans:
Owner-occupied one-to-four family	$	1,676,709	$	1,394,950
Non owner-occupied one-to-four family		474,294		475,572
Lines of credit		323,526		93,309
Commercial		0		0
Residential Construction		0		1,565,198
Land		112,000		309,022
Total Real Estate Loans	$	2,586,529	$	3,838,051
Commercial and consumer loans :
Commercial	$	0	$	0
Consumer		0		0
Total commercial and consumer	$	0	$	0
Total Loans	$	2,586,529	$	3,838,051

At June 30, 2012 and December 31, 2011, there were no loans 90 days past due or more and still accruing interest. At June 30, 2012, the Company had twenty three loans on non-accrual status with foregone interest in the amount of $129,045. At December 31, 2011, the Company had eighteen loans on non-accrual status with foregone interest of $249,839.

23

Impaired Loans

As of and for the Six Months Ended June 30, 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	$	1,938,702	$	474,294	$	323,526	$	0	$	0	$	112,000	$	0	$	0	$	2,848,522
Average Recorded Investment		1,686,128		474,908		256,322		0		1,043,466		242,848		0		0		3,703,672
Interest Income recognized		12,796		8,128		7,029		0		0		0		0		0		27,953
Totals:
Unpaid Principal Balance	$	1,938,702	$	474,294	$	323,526	$	0	$	0	$	112,000	$	0	$	0	$	2,848,522
Average Recorded Investment		1,686,128		474,908		256,322		0		1,043,466		242,848		0		0		3,703,672
Interest Income recognized		12,796		8,128		7,029		0		0		0		0		0		27,953

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Impaired Loans

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
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	$	1,658,688	$	475,572	$	93,309	$	0	$	1,565,198	$	309,022	$	0	$	0	$	4,101,789
Average Recorded Investment		1,634,963		138,598		94,114		0		1,565,198		310,397		110		0		3,743,380
Interest Income recognized		19,081		28,520		554		0		0		0		0		0		48,155
Totals:
Unpaid Principal Balance	$	1,658,688	$	475,572	$	93,309	$	0	$	1,565,198	$	309,022	$	0	$	0	$	4,101,789
Average Recorded Investment		1,634,963		138,598		94,114		0		1,565,198		310,397		110		0		3,743,380
Interest Income recognized		19,081		28,520		554		0		0		0		0		0		48,155

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Loans may be periodically modified in a troubled debt restructuring (TDR), where the Company will make concessions to a borrower having financial difficulty to help the borrower remain current on the loan and/or to avoid foreclosure. When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans. If we determine that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a charge-off through the allowance. At June 30, 2012, we had five loans that were restructured totaling $1,278,880. Three loans, totaling $936,016 were secured by owner-occupied one-to-four family residential properties, one loan totaling $112,000 is secured by a residential lot, and one loan totaling $230,864 is a home equity line of credit. At December 31, 2011, we had five loans totaling $1,562,084 that were restructured. Four loans, totaling $1,447,084 were secured by owner-occupied one-to-four family residential properties, and one loan totaling $115,000 was secured by a residential lot.

The following table is a summary of impaired loans that were modified due to a TDR by class for the three and six months ending June 30, 2012. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts immediately after the modification:

Modifications for the Six Months Ending June 30, 2012

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Lines of Credit		1	$	230,864	$	230,864

Modifications for the Three Months Ending June 30, 2012

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Lines of Credit		1	$	230,864	$	230,864

The following table presents loans by loan class modified as TDR’s within the previous twelve months from, and for which there was a payment default (90 days or more past due) during the three and six months ended June 30, 2012:

Three Months Ended 6/30/2012				Six Months Ended 6/30/2012
Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	0	$	0		0	$	0

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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 six months ended June 30, 2012 and 2011 was $52,504 and $0, respectively.

A summary of ESOP shares at June 30, 2012 is as follows:

Shares released or committed for release		15,870
Unearned shares		111,090
Total ESOP shares		126,960
Fair Value of unearned shares	$	1,227,545

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 June 30, 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 June 30, 2012 (unaudited):
Total Risk-Based Capital (to risk-weighted assets)	$	25,034		25.51	%	$	7,851		8.0	%
Tier I Capital (to risk-weighted assets)	$	23,807		24.26	%	$	3,925		4.0	%
Tier I Capital (to adjusted total assets)	$	23,807		13.63	%	$	5,240		3.0	%

	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:
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	%

On May 24, 2012, the Company authorized the repurchase of up to 158,700 shares of its common stock. Repurchases, if any, by the Company pursuant to this authorization are expected to enable the Company to repurchase its shares at an attractive price, and to provide a source of liquidity for the Company’s shares. As of June 30, 2012, there have been 1,500 shares repurchased by the Company, for an aggregate expenditure totaling $16,500, at an average price of $10.99.

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:

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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.

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 June 30, 2012 (unaudited)		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	$	2,517,765	$	0	$	2,517,765	$	0
Obligations of U.S. Government agencies		4,009,500		0		4,009,500		0
FNMA		4,907,323		0		4,907,323		0
GNMA		10,161,607		0		10,161,607		0
FHLMC		1,322,088		0		1,322,088		0
FNMA CMO		2,513,151		0		2,513,151		0
Private label CMO		317,965		0		317,965		0
	$	25,749,399	$	0	$	25,749,399	$	0
Total assets measured at fair value	$	25,749,399	$	0	$	25,749,399	$	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

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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.

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 June 30, 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 June 30, 2012 (unaudited)		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:	$	0	$	0	$	0	$	0
Construction		1,938,702		0		1,938,702		0
Owner occupied one-to-four Family		474,294		0		474,294		0
Non owner occupied one-to-four Family		323,526		0		323,526		0
Home Equity Lines of Credit		112,000		0		112,000		0
Land	$	2,848,522	$	0	$	2,848,522	$	0
Other real estate owned:	$	1,693,676	$	0	$	1,693,676	$	0
	Fair Value at December 31, 2011		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:	$	1,565,198	$	0	$	1,565,198	$	0
Construction		1,658,687		0		1,658,687		0
Owner occupied one-to-four Family		475,572		0		475,572		0
Non owner occupied one-to-four Family		93,309		0		93,309		0
Home Equity Lines of Credit		309,022		0		309,022		0
Land	$	4,101,788	$	0	$	4,101,788	$	0
Other real estate owned:	$	0	$	0	$	0	$	0

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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.

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.

Other Real Estate Owned

We record our other real estate owned at the lower of cost or estimated fair value less estimated selling costs. Estimated fair value is generally based upon an independent appraisal of the collateral. We consider these collateral values to be estimated using Level 2 inputs.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates, methods, and assumptions are set forth below for the Bank’s financial instruments as of June 30, 2012 and December 31, 2011.

	June 30, 2012 (unaudited)
	Carrying Value		Estimated Fair Value
			Level One		Level Two		Level Three		Total
Assets:
Cash and cash equivalents	$	20,544,553	$	20,544,553	$	0	$	0	$	20,544,553
Securities—available-for-sale		25,749,399		0		25,749,399		0		25,749,399
Securities—held-to-maturity		7,405,173		0		7,685,383		0		7,685,383
Loans, gross		111,355,690		0		2,848,522		113,582,923		116,431,445
Federal Home Loan Bank stock		1,282,600		0		1,282,600		0		1,282,600
Investment in bank-owned life insurance		4,438,999		4,438,999		0		0		4,438,999
Liabilities:
Deposit accounts and advances by borrowers		121,400,251		0		122,276,074		0		122,276,074
Advances from the FHLB		22,500,000		0		23,335,687		0		23,335,687

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	December 31, 2011
	Carrying Value		Estimated Fair 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
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

	June 30, 2012		December 31,
	(unaudited)		2011
Off-Balance Sheet Instruments:
Commitments to extend credit	$	2,335,700	$	0
Unused lines of credit	$	11,332,465	$	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.

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

(f)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.

(g)Advances from the FHLB—Fair values are estimated by discounting carrying values using a cash flow approach based on market rates as of June 30, 2012 and December 31, 2011.

(h)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.

(i)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.

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

33

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.

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:

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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 June 30, 2012 and December 31, 2011

Assets. At June 30, 2012, total assets decreased by $503,000 to $174.8 million at June 30, 2012 from $175.3 million at December 31, 2011. The decrease in assets for the six months ended June 30, 2012 was due mainly to a $6.1 million decrease in our investment portfolio from $39.3 million at December 31, 2011 to $33.2 million at June 30, 2012, offset, in part, by a $5.6 million increase in cash and cash equivalents from $14.9 million at December 31, 2011 to $20.5 million at June 30, 2012. In addition, loans receivable, net, decreased $1.8 million, from $111.9 million at December 31, 2011 to $110.1 million at June 30, 2012. Other real estate owned increased from $0 at December 31, 2011 to $1.7 million at June 30, 2012.

Loans.Net loans receivable decreased by $1.8 million, or 1.6%, from $111.9 million at December 31, 2011 to $110.1 million at June 30, 2012, primarily as a result of transferring $2.0 million from loans receivable to other real estate owned.

Cash and Cash Equivalents.Cash and cash equivalents increased by $5.6 million, or 37.7%, from $14.9 million at December 31, 2011 to $20.5 million at June 30, 2012 primarily as a result of a decrease in our available for sale investment portfolio due to sales, principal receipts and a security being called.

Securities.Our available for sale securities decreased by $5.7 million, or 18.0%, from $31.4 million at December 31, 2011 to $25.7 million at June 30, 2012. During the six months ended June 30, 2012 we sold securities totaling $8.5 million, had one security totaling $1.5 million called, purchased securities totaling $7.1 million, and had principal payments of $2.3 million on our securities.

Deposits.Total deposits decreased by $1.5 million, from $121.2 million at December 31, 2011, to $119.7 million at June 30, 2012, primarily as a result of a decrease in brokered deposits of $1.5 million.

Borrowings.Total borrowings remained constant at $22.5 million as of June 30, 2012, the same as December 31, 2011.

Results of Operations for the Three Months Ended June 30, 2012 and 2011 (unaudited)

Overview. We had net income of $102,400 for the three months ended June 30, 2012, as compared to a net income of $23,600 for the three months ended June 30, 2011. The increase in net income between the periods was primarily due to an increase in net interest income of $197,100 or 21.8%. This was due to a large decrease in interest expense, due to the combination of lower average balances of interest bearing liabilities and the fact we were able to take advantage of declining interest rates to reprice maturing certificates of deposit and Federal Home Loan Bank advances at lower rates. Noninterest income increased by $71,000, or 68.4% from $103,900 for the three months ended June 30, 2011 to $174,900 for the three months ended June 30, 2012. Noninterest expense increased by $35,500 or 3.6% from $996,300 for the three months ended June 30, 2011 to $1,031,800 for the three months

36

ended June 30, 2012. Provision for loan and lease losses increased by $104,700, from $500 for the three months ended June 30, 2011 to $105,200 for the three months ended June 30, 2012. Provision for income taxes increased by $49,000, from an income tax benefit of $13,000 for the three months ended June 30, 2011 to an income tax expense of $36,000 for the three months ended June 30, 2012.

Net Interest Income. Net interest income increased by $197,100, or 21.8%, from $903,400 for the three months ended June 30, 2011 to $1.1 million for the three months ended June 30, 2012. The increase in net interest income is primarily attributable to the combination of lower average balances of interest bearing liabilities and the fact we were able to take advantage of declining interest rates to reprice maturing certificates of deposit and Federal Home Loan Bank advances at lower rates.

Interest on loans receivable, net decreased by $22,600, or 1.5%, from $1.46 million for the three months ended June 30, 2011 to $1.44 million for the three months ended June 30, 2012, due to a 13 basis point decrease in the average yield. The decrease in the average yield on loans was attributable to market rates remaining at an historically low level. The average balance of loans receivable, net increased by $922,700, or .8%, from $109.1 million at June 30, 2011 to $110.0 million at June 30, 2012.

Interest on investment securities available-for-sale decreased by $78,800, or 30.0%, for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011, as the result of an $8.0 million, or 22.9%, decrease in the average balance of investment securities available-for-sale and a 28 basis point decrease in the average yield.

Interest on cash and cash equivalents remained low by historical standards during the three months ended June 30, 2012 and 2011 due to the historically low prevailing market rates during those periods.

During the three months ended June 30, 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, lower average balances of these time deposits and decreases in the cost of other deposits due to a decline in market rates. Interest on time deposits decreased by $149,400, or 26.2%, from $571,100 for the three months ended June 30, 2011, to $421,700 for the three months ended June 30, 2012, due to a 47 basis point decrease in the average cost of time deposits and a $6.7 million, or 6.7%, decrease in the average balance of time deposits. Interest on brokered deposits decreased by $20,300, or 80.9%, from $25,100 for the three months ended June 30, 2011, to $4,800 for the three months ended June 30, 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 June 30, 2012 as compared to the three months ended June 30, 2011, even with a 15.3% increase in the average balance of NOW and money market accounts. Interest on passbook accounts decreased by $8,500, or 36.6%, from $23,300 for the three months ended June 30, 2011 to $14,800 for the three months ended June 30, 2012, due primarily to a 20 basis point decrease in the average cost of passbook accounts. The average balance of passbook accounts increased during the three months ended June 30, 2012, from $17.0 million as of June 30, 2011 to $17.1 million as of June 30, 2012.

Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank advances, decreased by $52,600, or 23.6%, for three months ended June 30, 2012 as compared to the three months ended June 30, 2011, due to a decrease of 94 basis points in the average cost of these other interest-bearing liabilities. At June 30, 2012 and December 31, 2011, we had $22.5 million of Federal Home Loan Bank advances.

37

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 non-accrual 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 June 30,
	2012							2011
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
Assets:
Interest-bearing deposits in other banks	$	19,521,337	$	9,333		.19	%	$	26,460,067	$	6,272		.09	%
Loans receivable, net (3)		109,985,155		1,443,007		5.25			109,062,473		1,465,568		5.38
Investment securities available-for-sale (1)		26,888,408		183,406		2.73			34,863,167		262,156		3.01
Investment securities held-to-maturity (2)		7,530,421		61,141		3.25			0		0		.00
Other interest-earning assets		2,199,379		19,138		3.48			2,228,075		15,389		2.76
Total interest-earning assets		166,124,700		1,716,025		4.13			172,613,782		1,749,385		4.05
Noninterest-earning assets		8,874,354							8,344,481
Total assets	$	174,999,054						$	180,958,263
Liabilities and equity:
Time deposits	$	94,257,540	$	421,736		1.79		$	100,990,765	$	571,098		2.26
NOW and money market		6,137,111		3,615		.24			5,322,669		3,301		.25
Passbook		17,087,598		14,807		.35			17,012,859		23,347		.55
Brokered deposits		1,305,047		4,779		1.46			2,335,828		25,085		4.30
Federal Home Loan Bank advances		22,500,000		170,574		3.03			22,500,000		223,140		3.97
Total interest-bearing liabilities		141,287,296		615,511		1.74			148,162,121		845,971		2.28
Noninterest-bearing liabilities		3,409,844							2,863,043
Total liabilities		144,697,140							151,025,164
Total equity		30,301,914							29,933,099
Total liabilities and equity	$	174,999,054						$	180,958,263
Net interest income			$	1,100,514						$	903,414
Interest rate spread						2.39	%						1.77	%
Net interest margin						2.65	%						2.09	%
Ratio of average interest-earning assets to average interest-bearing liabilities						117.58	%						116.50	%

(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.

38

Provision and Allowance 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 increased by $104,700 to $105,200 for the three months ended June 30, 2012 from $500 for the three months ended June 30, 2011. At June 30, 2012 and December 31, 2011, the allowance for loan losses was $1.25 million, or 1.12%, and 1.10% respectively, of the total loan portfolio.

Non-accrual loans totaled $2.6 million at June 30, 2012 compared to $3.8 million at December 31, 2011. Net loan charge-offs amounted to $105,200 during the three months ended June 30, 2012, compared to $35,500 during the three months ended June 30, 2011. As of December 31, 2011, non-accrual loans included two land 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. As of June 30, 2012, nonaccrual loans included one lot loan totaling $112,000, thirteen owner-occupied one-to-four family residential loans totaling $1.7 million, six non-owner-occupied one-to-four family residential loans totaling $474,300 and three home equity lines of credit totaling $323,500.

Impaired loans totaled $2.8 million at June 30, 2012 compared to $4.1 million at December 31, 2011. As of December 31, 2011, impaired loans included eight one-to-four family owner-occupied residential loans totaling $1.7 million, six one-to-four family residential non-owner-occupied residential loans totaling $475,600, two home equity line of credit loans totaling $93,300, two land loans totaling $309,000, and one speculative construction loan totaling $1.6 million. As of June 30, 2012, impaired loans included fourteen one-to-four family owner-occupied residential loans totaling $1.9 million, six one-to-four family non-owner-occupied residential loans totaling $$474,300, three home equity line of credit loans totaling $323,500, and one land loan totaling $112,000.

Other real estate owned totaled $1.7 million at June 30, 2012 compared to $0 at December 31, 2011. This was as a result of one speculative construction loan and one speculative land loan previously reported as non-accrual loans being foreclosed upon during the quarter.

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.

39

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

	At
	June 30, 2012			December 31, 2011
	(unaudited)
Nonaccrual loans:
Real estate loans:
Owner occupied one-to four-family	$	1,907,573		$	1,394,950
Non-owner occupied one-to four-family		474,294			475,572
Lines of credit		92,662			93,309
Commercial		0			0
Residential construction		0			1,565,198
Land		112,000			309,022
Commercial		0			0
Consumer		0			0
Total	$	2,586,529		$	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	$	2,586,529		$	3,838,051
Other real estate owned		1,693,676			0
Total nonperforming assets	$	4,280,205		$	3,838,051
Troubled debt restructurings	$	1,278,880		$	1,562,084
Troubled debt restructurings included in non-accrual loans	$	(1,016,887	)	$	(1,298,347	)
Troubled debt restructurings and total nonperforming assets	$	4,542,198		$	4,101,788
Total of nonaccrual loans and accruing loans past due 90 days Or more to total loans		2.32	%		3.39	%
Total of nonaccrual loans and accruing loans past due 90 days Or more to total assets		1.48	%		2.19	%
Total nonperforming assets to total assets		2.45	%		2.19	%

40

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 June 30,
	2012			2011
Allowance for loan losses at beginning of period	$	1,250,000		$	1,285,000
Charge-offs:
Real estate loans:
Owner occupied one-to four-family		49,350			36,474
Non-owner occupied one-to four-family		0			0
Lines of credit		0			0
Commercial		0			0
Residential construction		44,940			0
Land		20,585			0
Commercial		0			0
Consumer		0			0
Total charge-offs		114,875			36,474
Recoveries		9,641			1,016
Net charge-offs		105,234			35,458
Provision for loan losses		105,234			458
Allowance at end of period		1,250,000			1,250,000
Allowance for loan losses to total loans at the end of the period		1.12	%		1.13	%
Net charge-offs to average loans outstanding during the period		.10	%		.03	%

Noninterest Income. Total noninterest income increased by $71,000, or 68.4%, from $103,900 for the three months ended June 30, 2011 compared to $174,900 for the three months ended June 30, 2012. The increase was primarily due to an increase of $66,400, or 139.3%, in the gain on sale of investments during the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Noninterest Expenses. Total noninterest expenses increased by $35,500, or 3.6%, from $996,300 for the three months ended June 30, 2011 to $1.0 million for the three months ended June 30, 2012. The increase primarily was attributable to an increase in legal fees and salaries and employee benefits.

Income Tax Expense. We recognized income tax expense of $36,000 during the three months ended June 30, 2012. For the three months ended June 30, 2011, we had an income tax benefit of $13,000.

Results of Operations for the Six Months Ended June 30, 2012 and 2011 (unaudited)

Overview. We had net income of $154,600 for the six months ended June 30, 2012, as compared to a net loss of $57,100 for the six months ended June 30, 2011. The increase in net income between the periods was primarily due to an increase in net interest income of $538,500 or 31.9%. This was due to a large decrease in interest expense, due to the combination of lower average balances of interest bearing liabilities and the fact we were able to take advantage of declining interest rates to reprice maturing certificates of deposit and Federal Home Loan Bank advances at lower rates. Noninterest income increased by $89,100, or 56.1% from $159,000 for the six months ended June 30, 2011 to $248,100 for the six months ended June 30, 2012. Noninterest expense increased by $158,400 or 8.2% from $1.9 million for the six months ended June 30, 2011 to $2.1 million for the six months ended June 30, 2012. Provision for loan and lease losses increased by $117,700, or 194.6% from $60,500 for the six months ended June 30, 2011 to $178,200 for the six months ended June 30, 2012. Provision for income taxes increased by $139,700, from an income tax benefit of $93,900 for the six months ended June 30, 2011 to an income tax expense of $45,800 for the six months ended June 30, 2012.

41

Net Interest Income. Net interest income increased by $538,500, or 31.9%, from $1.7 million for the six months ended June 30, 2011 to $2.2 million for the six months ended June 30, 2012. The increase in net interest income is primarily attributable to the combination of lower average balances of interest bearing liabilities and the fact we were able to take advantage of declining interest rates to reprice maturing certificates of deposit and Federal Home Loan Bank advances at lower rates.

Interest on loans receivable, net decreased by $16,500, or .6%, from $2.93 million for the six months ended June 30, 2011 to $2.91 million for the six months ended June 30, 2012, due to a 13 basis point decrease in the average yield. The decrease in the average yield on loans was attributable to market rates remaining at an historically low level. The average balance of loans receivable, net increased by $2.0 million, or 1.9%, from $109.3 million at June 30, 2011 to $111.3 million at June 30, 2012.

Interest on investment securities available-for-sale decreased by $68,600, or 15.1%, for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011, as the result of a $3.6 million , or 11.0%, decrease in the average balance of investment securities available-for-sale and a 12 basis point decrease in the average yield.

Interest on cash and cash equivalents remained low by historical standards during the six months ended June 30, 2012 and 2011 due to the historically low prevailing market rates during those periods.

During the six months ended June 30, 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, lower average balances of these time deposits and decreases in the cost of other deposits due to a decline in market rates. Interest on time deposits decreased by $327,800, or 27.6%, from $1.2 million for the six months ended June 30, 2011, to $860,500 for the six months ended June 30, 2012, due to a 48 basis point decrease in the average cost of time deposits and an $8.8 million, or 8.6%, decrease in the average balance of time deposits. Interest on brokered deposits decreased by $40,200, or 80.8%, from $49,700 for the six months ended June 30, 2011, to $9,500 for the six months ended June 30, 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 six months ended June 30, 2012 as compared to the six months ended June 30, 2011, even with a 16.9% increase in the average balance of NOW and money market accounts. Interest on passbook accounts decreased by $17,200, or 36.8%, from $46,800 for the six months ended June 30, 2011 to $29,600 for the six months ended June 30, 2012, due primarily to a 23 basis point decrease in the average cost of passbook accounts. The average balance of passbook accounts increased during the six months ended June 30, 2012, from $16.3 million as of June 30, 2011 to $17.1 million as of June 30, 2012.

Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank advances, decreased by $104,100, or 23.4%, for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011, due to a decrease of 92 basis points in the average cost of these other interest-bearing liabilities. At June 30, 2012 and December 31, 2011, we had $22.5 million of Federal Home Loan Bank advances.

42

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 non-accrual 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.

	Six Months Ended June 30,
	2012							2011
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
Assets:
Interest-bearing deposits in other banks	$	16,333,100	$	17,547		.21	%	$	24,123,452	$	9,969		.08	%
Loans receivable, net (3)		111,294,378		2,911,480		5.23			109,244,656		2,927,975		5.36
Investment securities available-for-sale (1)		29,120,810		385,198		2.65			32,716,854		453,844		2.77
Investment securities held-to-maturity (2)		7,648,073		123,003		3.22			0		0		.00
Other interest-earning assets		2,210,737		34,869		3.15			2,242,375		30,354		2.71
Total interest-earning assets		166,607,098		3,472,097		4.17			168,327,337		3,422,142		4.07
Noninterest-earning assets		8,066,061							8,970,112
Total assets	$	174,673,159						$	177,297,449
Liabilities and equity:
Time deposits	$	94,140,854	$	860,459		1.83		$	102,956,074	$	1,188,242		2.31
NOW and money market		6,029,583		7,143		.24			5,156,462		6,360		.25
Passbook		17,059,050		29,553		.35			16,252,267		46,796		.58
Brokered deposits		1,548,627		9,558		1.23			2,331,412		49,724		4.27
Federal Home Loan Bank advances		22,500,000		339,928		3.02			22,513,889		444,016		3.94
Total interest-bearing liabilities		141,278,114		1,246,641		1.76			149,210,104		1,735,138		2.33
Noninterest-bearing liabilities		3,137,968							2,811,880
Total liabilities		144,416,082							152,021,984
Total equity		30,257,077							25,275,465
Total liabilities and equity	$	174,673,159						$	177,297,449
Net interest income			$	2,225,456						$	1,687,004
Interest rate spread						2.40	%						1.74	%
Net interest margin						2.67	%						2.00	%
Ratio of average interest-earning assets to average interest-bearing liabilities						117.93	%						112.81	%

(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.

43

Provision and Allowance 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 increased by $117,700 to $178,200 for the six months ended June 30, 2012 from $60,500 for the six months ended June 30, 2011. At June 30, 2012 and December 31, 2011, the allowance for loan losses was $1.25 million, or 1.12%, and 1.10% respectively, of the total loan portfolio.

Non-accrual loans totaled $2.6 million at June 30, 2012 compared to $3.8 million at December 31, 2011. Net loan charge-offs amounted to $178,300 during the six months ended June 30, 2012, compared to $110,500 during the six months ended June 30, 2011. As of December 31, 2011, non-accrual 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. As of June 30, 2012, non-accrual loans included one lot loan totaling $112,000, thirteen owner-occupied one-to-four family residential loans totaling $1.7 million, six non-owner-occupied one-to-four family residential loans totaling $474,300 and three home equity lines of credit totaling $323,500.

Impaired loans totaled $2.8 million at June 30, 2012 compared to $4.1 million at December 31, 2011. As of December 31, 2011, impaired loans included eight one-to-four family owner-occupied residential loans totaling $1.7 million, six one-to-four family residential non-owner-occupied residential loans totaling $475,600, two home equity line of credit loans totaling $93,300, two land loans totaling $309,000, and one speculative construction loan totaling $1.6 million. As of June 30, 2012, impaired loans included fourteen one-to-four family owner-occupied residential loans totaling $1.9 million, six one-to-four family non-owner-occupied residential loans totaling $$474,300, three home equity line of credit loans totaling $323,500, and one land loan totaling $112,000.

Other real estate owned totaled $1.7 million at June 30, 2012 compared to $0 at December 31, 2011. This was as a result of one speculative construction loan and one speculative land loan previously reported as non-accrual loans being foreclosed upon during the quarter.

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.

44

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

	At
	June 30, 2012			December 31, 2011
	(unaudited)
Nonaccrual loans:
Real estate loans:
Owner occupied one-to four-family	$	1,907,573		$	1,394,950
Non-owner occupied one-to four-family		474,294			475,572
Lines of credit		92,662			93,309
Commercial		0			0
Residential construction		0			1,565,198
Land		112,000			309,022
Commercial		0			0
Consumer		0			0
Total	$	2,586,529		$	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	$	2,586,529		$	3,838,051
Other real estate owned		1,693,676			0
Total nonperforming assets	$	4,280,205		$	3,838,051
Troubled debt restructurings	$	1,278,880		$	1,562,084
Troubled debt restructurings included in non-accrual loans	$	(1,016,887	)	$	(1,298,347	)
Troubled debt restructurings and total nonperforming assets	$	4,542,198		$	4,101,788
Total of nonaccrual loans and accruing loans past due 90 days Or more to total loans		2.32	%		3.39	%
Total of nonaccrual loans and accruing loans past due 90 days Or more to total assets		1.48	%		2.19	%
Total nonperforming assets to total assets		2.45	%		2.19	%

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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.

	Six Months Ended June 30,
	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		133,065			36,474
Non-owner occupied one-to four-family		0			0
Lines of credit		0			0
Commercial		0			0
Residential construction		44,940			0
Land		20,585			75,718
Commercial		0			0
Consumer		0			0
Total charge-offs		198,590			112,192
Recoveries		20,336			1,676
Net charge-offs		178,254			110,516
Provision for loan losses		178,254			60,516
Allowance at end of period		1,250,000			1,250,000
Allowance for loan losses to total loans at the end of the period		1.12	%		1.13	%
Net charge-offs to average loans outstanding during the period		.16	%		.10	%

Noninterest Income. Total noninterest income increased by $89,100, or 56.1%, from $159,000 for the six months ended June 30, 2011 compared to $248,100 for the six months ended June 30, 2012. The increase was primarily due to an increase of $66,400, or 139.3%, in the gain on sale of investments during the six months ended June 30, 2012 compared to the three months ended June 30, 2011.

Noninterest Expenses. Total noninterest expenses increased by $158,400, or 8.2%, from $1.9 million for the six months ended June 30, 2011 to $2.1 million for the six months ended June 30, 2012. The increase primarily was attributable to an increase in legal fees and salaries and employee benefits.

Income Tax Expense. We recognized income tax expense of $45,800 during the six months ended June 30, 2012. For the six months ended June 30, 2011, we had an income tax benefit of $93,900.

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 June 30, 2012, cash and cash equivalents totaled $20.5 million. Securities classified as available-for-sale, amounting to $25.7 million at June 30, 2012, provides an additional source of liquidity. In addition, at June 30, 2012, we had the ability to borrow a total of approximately $52.4 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 June 30, 2012.

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Certificates of deposit due within one year of June 30, 2012 totaled $42.4 million, or 44.8%, 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 June 30, 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 June 30, 2012, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

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 six months ended June 30, 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.

47

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)
10.0	Fraternity Community Bancorp, Inc. 2012 Equity Incentive Plan (2)
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 June 30, 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.

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

(2) Incorporated herein by reference to the Company’s definitive proxy statement for the 2012 annual meeting of stockholders, filed with the SEC on April 11, 2012 (File No. 0-54271).

* Furnished, not filed.

48

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.
August 9, 2012
	By:	/s/ Thomas K. Sterner
		Thomas K. Sterner
		Chairman of the Board, Chief Executive Officer and Chief Financial Officer