Fraternity Community Bancorp (FRTR) 10-Q 2013 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarter ended March 31, 2013

OR

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

For the transition period from                    to                    

Commission file number:0-54271

FRATERNITY COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

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

As of May 10, 2013, the registrant had 1,447,100 shares of common stock issued and outstanding.

INDEX

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements		1
	Consolidated Statements of Financial Condition as of March 31, 2013 and December 31, 2012 (unaudited)		1
	Consolidated Statements of Income for the Three Months Ended March 31, 2013 and 2012 (unaudited)		2
	Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2013 and 2012 (unaudited)		3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2013 and 2012 (unaudited)		4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (unaudited)		5
	Notes to Consolidated Financial Statements (unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		42
Item 4.	Controls and Procedures		43
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		43
Item 1A.	Risk Factors		43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3.	Defaults Upon Senior Securities		44
Item 4.	Mine Safety Disclosures		44
Item 5.	Other Information		44
Item 6.	Exhibits		44
SIGNATURES

i

PART I.FINANCIAL INFORMATION

Item 1. Financial Statements

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	March 31, 2013			December 31, 2012
	(unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	587,399		$	332,300
Interest-bearing deposits in other banks		15,250,721			17,845,981
Total cash and cash equivalents		15,838,120			18,178,281
Investment securities:
Available-for-sale - at fair value		19,228,805			18,574,693
Held-to-maturity - at amortized cost (fair value approximates $7,806,374 and $8,017,510, respectively)		7,480,293			7,645,942
Loans - net of allowance for loan losses of $1,350,000 (2013) and $1,395,000 (2012)		112,916,243			114,247,837
Other real estate owned		1,759,663			1,660,364
Property and equipment, net		820,155			809,602
Federal Home Loan Bank stock - at cost - restricted		1,103,700			1,163,000
Ground rents - net of valuation allowance of $44,703 (2013 and 2012)		844,743			844,743
Accrued interest receivable		574,226			529,117
Investment in bank-owned life insurance		4,566,787			4,526,979
Deferred income taxes		866,740			825,063
Other assets		717,851			697,618
TOTAL ASSETS	$	166,717,326		$	169,703,239
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	116,029,676		$	118,981,316
Advances from the Federal Home Loan Bank		20,000,000			20,000,000
Advances by borrowers for taxes and insurance		1,106,010			706,124
Other liabilities		711,215			733,132
Total liabilities		137,846,901			140,420,572
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, 1,472,100 shares at March 31, 2013, 1,506,100 shares at December 31, 2012		14,721			15,061
Additional paid in capital		13,528,032			13,965,375
Retained earnings - substantially restricted		16,351,160			16,285,930
Unearned ESOP shares		(1,031,550	)		(1,058,000	)
Accumulated other comprehensive income		8,062			74,301
Total stockholders’ equity		28,870,425			29,282,667
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	166,717,326		$	169,703,239

See accompanying notes.

1

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended March 31,
	2013		2012
INTEREST INCOME:
Interest and fees on loans:
Real estate loans	$	1,407,762	$	1,467,294
Other loans		1,265		1,178
Interest and dividends on investments and bank deposits		179,032		275,955
Income from ground rents owned		11,495		11,644
Total interest income		1,599,554		1,756,071
INTEREST EXPENSE:
Interest on deposits		374,520		461,776
Interest on borrowings - short term		3,175		22,805
Interest on borrowings - long term		144,938		146,548
Total interest expense		522,633		631,129
NET INTEREST INCOME		1,076,921		1,124,942
PROVISION FOR LOAN LOSSES		20,944		73,019
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,055,977		1,051,923
NON-INTEREST INCOME:
Gain on sale of investment securities		43,335		—
Income on bank-owned life insurance		39,808		41,912
Gain on sale of loans		35,779		18,941
Other income		5,795		12,298
Total non-interest income		124,717		73,151
NON-INTEREST EXPENSES:
Salaries and employee benefits		571,528		573,188
Occupancy expenses		136,565		126,316
Legal fees		25,814		45,950
Federal Deposit Insurance premiums		35,434		35,559
Accounting and auditing expense		44,367		31,711
Data processing expense		108,615		109,534
Directors fees		24,655		26,479
Other general and administrative expenses		157,706		114,350
Total non-interest expenses		1,104,684		1,063,087
INCOME BEFORE INCOME TAX EXPENSE		76,010		61,987
INCOME TAX EXPENSE		10,780		9,831
NET INCOME	$	65,230	$	52,156
EARNINGS PER COMMON SHARE - BASIC AND DILUTED	$	0.05	$	0.04

See accompanying notes.

2

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

	Three Months Ended March 31,
	2013			2012
NET INCOME	$	65,230		$	52,156
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized gains on available-for-sale securities:
Unrealized holding (losses) gains arising during the period		(67,063	)		68,156
Less: income taxes on unrealized (losses) gains arising		26,825			(27,262	)
during the period		(40,238	)		40,894
Less: Reclassification adjustment for realized (gains)		(43,335	)		0
Income taxes on reclassification adjustment		17,334			0
		(26,001	)		0
OTHER COMPREHENSIVE (LOSS) INCOME		(66,239	)		40,894
COMPREHENSIVE (LOSS) INCOME	$	(1,009	)	$	93,050

See accompanying notes.

3

Fraternity Community Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(UNAUDITED)

	Common Stock			Additional Paid In Capital			Retained Earnings		Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, January 1, 2012	$	15,870		$	14,944,647		$	16,170,684	$	(1,163,800	)	$	149,288		$	30,116,689
Net Income		0			0			52,156		0			0			52,156
Other Comprehensive Income		0			0			0		0			40,894			40,894
Common shares repurchased		0			0			0		0			0			—
ESOP shares released or committed for release		0			(2,592	)		0		26,450			0			23,858
Balance, March 31, 2012	$	15,870		$	14,942,055		$	16,222,840	$	(1,137,350	)	$	190,182		$	30,233,597
Balance, January 1, 2013	$	15,061		$	13,965,375		$	16,285,930	$	(1,058,000	)	$	74,301		$	29,282,667
Net Income		0			0			65,230		0			0			65,230
Other Comprehensive Loss		0			0			0		0			(66,239	)		(66,239	)
Common shares repurchased		(340	)		(446,785	)		0		0			0			(447,125	)
ESOP shares released or committed for release		0			9,442			0		26,450			0			35,892
Balance, March 31, 2013	$	14,721		$	13,528,032		$	16,351,160	$	(1,031,550	)	$	8,062		$	28,870,425

See accompanying notes.

4

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	65,230		$	52,156
Adjustments to reconcile net income (used in) provided by operating activities:
Depreciation		23,505			21,480
Gain on sale of available-for-sale securities		(43,335	)		0
Gain on sale of loans		(35,779	)		(18,941	)
Origination of loans held for sale		(1,870,884	)		(1,173,000	)
Proceeds from sale of loans held for sale		1,906,663			1,191,941
Amortization/accretion of premium/discount		(217,015	)		90,246
Increase in value of bank-owned life insurance		(39,808	)		(41,912	)
Stock based compensation (ESOP)		35,892			23,858
Provision for loan losses		20,944			73,019
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		(65,342	)		(148,838	)
Other liabilities		(21,917	)		75,219
Net cash (used in) provided by operating activities		(241,846	)		145,228
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans		1,310,651			(1,851,075	)
Acquisition of property and equipment		(34,058	)		(32,925	)
Increase in value of other real estate owned		(99,299	)		0
Purchase of:
Investment securities available-for-sale		(5,503,794	)		(1,029,051	)
Proceeds from:
Sales and maturities of investment securities available-for-sale		4,136,072			0
Principal paydowns on investment securities available-for-sale		887,433			1,172,417
Principal paydowns on investment securities held-to-maturity		144,259			88,325
Sale of Federal Home Loan Bank stock		59,300			0
Sale of other real estate owned		0			334,103
Net cash provided by (used in) investing activities		900,564			(1,318,206	)

5

Fraternity Community Bancorp, Inc.

Consolidated Statements of Cash Flows (Continued)

	Three Months Ended March 31,
	2013			2012
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(2,951,640	)		(1,295,080	)
Repurchase of common shares		(447,125	)		0
Increase in advances by borrowers for taxes and insurance		399,886			341,058
Net cash used in financing activities		(2,998,879	)		(954,022	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(2,340,161	)		(2,127,000	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		18,178,281			14,923,142
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	15,838,120		$	12,796,142
Cash paid for interest	$	522,867		$	631,198
Cash paid for taxes	$	0		$	0
Transfer of loans to other real estate owned	$	0		$	334,103

See accompanying notes.

6

FRATERNITY COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIODS

ENDED MARCH 31, 2013 AND 2012

(UNAUDITED)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Fraternity Community Bancorp, Inc. (the “Company”) was incorporated on October 12, 2010 to serve as the holding company for Fraternity Federal Savings & Loan Association (the “Bank”), a federally chartered savings bank. On March 31, 2011, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a federal mutual savings bank to a federal stock savings bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 1,587,000 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of $14,968,610, net of offering expenses of $901,390. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 126,960 shares of common stock sold in the offering. All material intercompany accounts and transactions have been eliminated in consolidation.

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, 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, 2012. Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation.

7

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.

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 or anti-dilutive potential common shares for the three month periods ended March 31, 2013 or 2012.

	Three Months Ended March 31, 2013		Three Months Ended March 31, 2012
Net Income	$	65,230	$	52,156
Weighted average common shares outstanding		1,378,182		1,471,502
Basic and diluted earnings per share	$	.05	$	.04

2. INVESTMENT SECURITIES

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

	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Bank Notes and Corporate Bonds	$	2,499,473	$	5,107	$	3,555	$	2,501,025
Obligations of U.S. Government Agencies		5,997,486		2,369		19,635		5,980,220
Mortgage-backed securities:
FNMA		6,701,718		46,174		13,840		6,734,052
GNMA		1,706,489		10,444		783		1,716,150
FHLMC		992,984		9,257		0		1,002,241
Federal Agency CMO		1,008,899		0		14,592		994,307
Private Label CMO		308,621		0		7,811		300,810
	$	19,215,670	$	73,351	$	60,216	$	19,228,805

8

	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Municipal Bonds	$	1,056,181	$	31,416	$	1,579	$	1,086,018
SBA Pools		1,602,703		15,201		26,592		1,591,312
Mortgage-backed securities:
FNMA		4,821,409		307,635		0		5,129,044
	$	7,480,293	$	354,252	$	28,171	$	7,806,374

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
Bank Notes and Corporate Bonds	$	2,498,684	$	14,426	$	4,140	$	2,508,970
Obligations of U.S. Government Agencies		4,499,056		6,344		23,720		4,481,680
Mortgage-backed securities:
FNMA		3,559,558		70,278		131		3,629,705
GNMA		4,035,379		51,846		0		4,087,225
FHLMC		1,089,203		12,170		0		1,101,373
Federal Agency CMO		2,462,680		13,422		10,379		2,465,723
Private Label CMO		309,081		0		9,064		300,017
	$	18,453,641	$	168,486	$	47,434	$	18,574,693

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Municipal Bonds	$	1,059,606	$	35,745	$	6,122	$	1,089,229
SBA Pools		1,740,011		19,718		22,375		1,737,354
Mortgage-backed securities:
FNMA		4,846,325		344,602		0		5,190,927
	$	7,645,942	$	400,065	$	28,497	$	8,017,510

The amortized cost and fair value of debt securities at March 31, 2013 and December 31, 2012 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.

9

	March 31, 2013
	Available-for-Sale
	Amortized Cost		Fair Value
Due in less than one year	$	999,473	$	1,004,580
Due in one year through five years		1,511,136		1,507,623
Due in five years through ten years		1,037,307		1,058,320
Due after ten years		15,667,754		15,658,282
	$	19,215,670	$	19,228,805

	March 31, 2013
	Held-to-Maturity
	Amortized Cost		Fair Value
Due in one year through five years	$	639,822	$	613,230
Due in five years through ten years		5,335,216		5,641,272
Due after ten years		1,505,255		1,551,872
	$	7,480,293	$	7,806,374

	December 31, 2012
	Available-for-Sale
	Amortized Cost		Fair Value
Due in less than one year	$	998,684	$	1,013,110
Due in one year through five years		1,503,651		1,499,464
Due in five years through ten years		1,159,145		1,183,221
Due after ten years		14,792,161		14,878,898
	$	18,453,641	$	18,574,693

	December 31, 2012
	Held-to-Maturity
	Amortized Cost		Fair Value
Due in one year through five years	$	775,143	$	752,769
Due in five years through ten years		5,361,792		5,700,271
Due after ten years		1,509,007		1,564,470
	$	7,645,942	$	8,017,510

The Bank recognized gross gains on sales of available-for-sale securities of $43,335 and $0 for the three months ended March 31, 2013 and 2012, respectively. The Bank recognized gross losses on sales of available-for-sale securities of $0 for the three months ended March 31, 2013 and 2012.

10

Securities with unrealized losses, segregated by length of impairment, as of March 31, 2013 and December 31, 2012 were as follows:

	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
March 31, 2013
Available-for-sale:
Bank Notes and Corporate Bonds	$	0	$	0	$	1,496,445	$	3,555	$	1,496,445	$	3,555
Obligations of U.S. Government Agencies		2,978,790		19,635		0		0		2,978,790		19,635
Mortgage-backed securities:
FNMA		4,378,110		13,761		4,180		79		4,382,290		13,840
GNMA		1,641,657		783		0		0		1,641,657		783
FHLMC		0		0		0		0		0		0
Federal Agency CMO		994,307		14,592		0		0		994,307		14,592
Private Label CMO		300,810		7,811		0		0		300,810		7,811
	$	10,293,674	$	56,582	$	1,500,625	$	3,634	$	11,794,299	$	60,216
Held-to-Maturity:
Municipal Bonds	$	512,228	$	1,579	$	0	$	0	$	512,228	$	1,579
SBA Pools		613,230		26,592		0		0		613,230		26,592
	$	1,125,458	$	28,171	$	0	$	0	$	1,125,458	$	28,171

	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
December 31, 2012
Available-for-sale:
Bank Notes and Corporate Bonds	$	0	$	0	$	1,495,860	$	4,140	$	1,495,860	$	4,140
Obligations of U.S. Government Agencies		2,476,280		23,720		0		0		2,476,280		23,720
Mortgage-backed securities:
FNMA		29,275		47		4,978		84		34,253		131
GNMA		0		0		0		0		0		0
FHLMC		0		0		0		0		0		0
Federal Agency CMO		1,016,189		10,379		0		0		1,016,189		10,379
Private Label CMO		300,017		9,064		0		0		300,017		9,064
	$	3,821,761	$	43,210	$	1,500,838	$	4,224	$	5,322,599	$	47,434
Held-to-Maturity:
Municipal Bonds	$	509,344	$	6,122	$	0	$	0	$	509,344	$	6,122
SBA Pools		752,769		22,375		0		0		752,769		22,375
	$	1,262,113	$	28,497	$	0	$	0	$	1,262,113	$	28,497

11

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

Furthermore, as of March 31, 2013, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes that it is more likely than not that the Bank will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2013, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Bank’s consolidated income statement.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans and allowance for loan losses consisted of the following:

	March 31, 2013			December 31, 2012
Real Estate Loans:
Owner Occupied One-to-four family	$	77,493,426		$	74,318,470
Non Owner Occupied One-to-four family		11,715,093			12,350,230
Home Equity Lines of Credit		9,197,849			10,292,388
Commercial Real Estate		13,805,699			13,668,391
Residential Construction		739,904			3,694,508
Land		1,235,240			1,241,019
Total Real Estate Loans		114,187,211			115,565,006
Consumer Loans		64,213			61,152
Commercial Loans		14,819			16,679
Total Loans		114,266,243			115,642,837
Less:
Allowance for loan losses		(1,350,000	)		(1,395,000	)
Total loans and allowance for loan losses	$	112,916,243		$	114,247,837

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

12

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

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

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

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

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

Land Loans. 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

13

residential mortgage loans because of their higher risk. Collections are highly dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In the case where collateral may be present, repossessed collateral for a defaulted loan may not provide an adequate source of repayment as a result of damage, loss or depreciation.

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

The balance of impaired loans was $5,670,115 and $5,112,266 as of March 31, 2013 and December 31, 2012, respectively. A loan is impaired when it is not likely the lender will collect the full value of the loan because the creditworthiness of a borrower has deteriorated. All of our impaired loans are either a troubled debt restructuring or are on nonaccrual status.

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 $2,894,505 and $4,852,783 at March 31, 2013 and December 31, 2012, respectively. There were no accruing loans that were more than 90 days past due at March 31, 2013 and December 31, 2012.

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 owner occupied one-to-four family residential, non owner occupied one-to-four family residential, home equity lines of credit (“HELOC”), commercial real estate, residential construction, land, 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 the previous four quarters history. This rolling history is utilized so that we have the most current and relevant charge-off trend data. These charge-offs are segregated by loan segment and compared to their respective loan segment average balances for the same period in order to calculate the charge-off percentage. That calculation determines the required allowance for loan loss level. The Company then applies additional loss multipliers to the different segments of loans to reflect various environmental factors. For individually evaluated loans (impaired loans), we do additional analyses to determine the impairment. 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 Company’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient enough to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

14

Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal or interest payments. As of March 31, 2013 there are seven loans totaling $3,519,788 classified as troubled debt restructurings. As of December 31, 2012, there are seven loans totaling $3,532,094 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 March 31, 2013 and December 31, 2012.

15

Credit Risk Analysis of Loans Receivable

As of March 31, 2013

	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	$	75,079,952	$	10,898,307	$	9,106,025	$	12,624,651	$	739,904	$	1,142,240	$	64,213	$	14,819	$	109,670,111
Special Mention		0		520,579		0		0		0		0		0		0		520,579
Substandard		2,413,474		296,207		91,824		1,181,048		0		93,000		0		0		4,075,553
Total	$	77,493,426	$	11,715,093	$	9,197,849	$	13,805,699	$	739,904	$	1,235,240	$	64,213	$	14,819	$	114,266,243
Credit risk profile based on payment activity:
Performing	$	75,079,952	$	11,418,886	$	9,106,025	$	13,805,699	$	739,904	$	1,142,240	$	64,213	$	14,819	$	111,371,738
Nonperforming		2,413,474		296,207		91,824		0		0		93,000		0		0		2,894,505
Total	$	77,493,426	$	11,715,093	$	9,197,849	$	13,805,699	$	739,904	$	1,235,240	$	64,213	$	14,819	$	114,266,243

16

Credit Risk Analysis of Loans Receivable

As of December 31, 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		Total
Pass	$	70,246,078	$	11,460,323	$	9,974,239	$	12,480,780	$	3,694,508	$	1,146,519	$	61,152	$	16,679	$	109,080,278
Special Mention		0		522,164		0		0		0		0		0		0		522,164
Substandard		4,072,392		367,743		318,149		1,187,611		0		94,500		0		0		6,040,395
Total	$	74,318,470	$	12,350,230	$	10,292,388	$	13,668,391	$	3,694,508	$	1,241,019	$	61,152	$	16,679	$	115,642,837
Credit risk profile based on payment activity:
Performing	$	70,246,079	$	11,982,487	$	9,974,239	$	13,668,391	$	3,694,508	$	1,146,519	$	61,152	$	16,679	$	110,790,054
Nonperforming		4,072,391		367,743		318,149		0		0		94,500		0		0		4,852,783
Total	$	74,318,470	$	12,350,230	$	10,292,388	$	13,668,391	$	3,694,508	$	1,241,019	$	61,152	$	16,679	$	115,642,837

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Aged Analysis of Past Due Loans Receivable

As of March 31, 2013

	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	$	249,971	$	0	$	465,624	$	0	$	0	$	0	$	0	$	0	$	715,595
60-89 Days Past Due		0		36,976		199,704		0		0		0		0		0		236,680
Greater Than 90 Days Past Due		1,676,941		296,207		91,824		0		0		93,000		0		0		2,157,972
Total Past Due		1,926,912		333,183		757,152		0		0		93,000		0		0		3,110,247
Current		75,566,514		11,381,910		8,440,697		13,805,699		739,904		1,142,240		64,213		14,819		111,155,996
Total Loans Receivable	$	77,493,426	$	11,715,093	$	9,197,849	$	13,805,699	$	739,904	$	1,235,240	$	64,213	$	14,819	$	114,266,243
Recorded Investment > 90 Days and Accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

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Aged Analysis of Past Due Loans Receivable

As of December 31, 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		Total
30-59 Days Past Due	$	158,522	$	0	$	90,192	$	0	$	0	$	0	$	0	$	0	$	248,714
60-89 Days Past Due		10,160		0		492,475		0		0		0		0		0		502,635
Greater Than 90 Days Past Due		1,040,634		367,743		92,109		0		0		94,500		0		0		1,594,986
Total Past Due		1,209,316		367,743		674,776		0		0		94,500		0		0		2,346,335
Current		73,109,154		11,982,487		9,617,612		13,668,391		3,694,508		1,146,519		61,152		16,679		113,296,502
Total Loans Receivable	$	74,318,470	$	12,350,230	$	10,292,388	$	13,668,391	$	3,694,508	$	1,241,019	$	61,152	$	16,679	$	115,642,837
Recorded Investment > 90 Days and Accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

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The following tables represent the allocation of the allowance for loan and lease losses and the related loans by portfolio segment for the three months ended March 31, 2013 and 2012:

Allowance for Loan Losses and Recorded Investment in Loans Receivable

For The Three Months Ended March 31, 2013

	Owner Occupied 1-4 Family Residential			Non Owner Occupied 1-4 Family Residential			Home Equity Lines of Credit			Commercial Real Estate		Construction			Land		Consumer		Commercial			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	810,892		$	206,099		$	74,807		$	191,357	$	36,945		$	32,217	$	868	$	240		$	41,575		$	1,395,000
Charge-offs		(2,364	)		(66,079	)		0			0		0			0		0		0			0			(68,443	)
Recoveries		1,500			0			999			0		0			0		0		0			0			2,499
Provision		(46,900	)		114,621			(9,171	)		1,923		(29,546	)		2,964		37		(27	)		(12,957	)		20,944
Ending Balance	$	763,128		$	254,641		$	66,635		$	193,280	$	7,399		$	35,181	$	905	$	213		$	28,618		$	1,350,000
Ending balance of allowance individually evaluated for impairment	$	189,862		$	0		$	0		$	0	$	0		$	0	$	0	$	0		$	0		$	189,862
Ending balance of allowance collectively evaluated for impairment	$	573,266		$	254,641		$	66,635		$	193,280	$	7,399		$	35,181	$	905	$	213		$	28,618		$	1,160,138
Loans Receivable:
Ending Balance	$	77,493,426		$	11,715,093		$	9,197,849		$	13,805,699	$	739,904		$	1,235,240	$	64,213	$	14,819		$	0		$	114,266,243
Ending balance of loans individually evaluated for impairment	$	4,967,786		$	296,207		$	313,122		$	0	$	0		$	93,000	$	0	$	0		$	0		$	5,670,115
Ending balance of loans collectively evaluated for impairment	$	72,525,640		$	11,418,886		$	8,884,727		$	13,805,699	$	739,904		$	1,142,240	$	64,213	$	14,819		$	0		$	108,596,128

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Allowance for Loan Losses and Recorded Investment in Loans Receivable

For The Three Months Ended March 31, 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			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	495,271		$	77,051	$	145,830		$	190,767		$	28,952		$	120,372		$	2,858		$	1,008		$	187,891		$	1,250,000
Charge-offs		(83,715	)		0		0			0			0			0			0			0			0			(83,715	)
Recoveries		9,697			0		999			0			0			0			0			0			0			10,696
Provision		227,184			81,681		(74,638	)		(23,750	)		(12,962	)		(92,025	)		(1,835	)		(738	)		(29,898	)		73,019
Ending Balance	$	648,437		$	158,732	$	72,191		$	167,017		$	15,990		$	28,347		$	1,023		$	270		$	157,993		$	1,250,000
Ending balance of allowance individually evaluated for impairment	$	0		$	0	$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
Ending balance of allowance collectively evaluated for impairment	$	648,437		$	158,732	$	72,191		$	167,017		$	15,990		$	28,347		$	1,023		$	270		$	157,993		$	1,250,000
Loans Receivable:
Ending Balance	$	74,605,982		$	13,094,617	$	9,977,641		$	11,134,499		$	3,164,157		$	2,575,244		$	48,042		$	18,755		$	0		$	114,618,937
Ending balance of loans individually evaluated for impairment	$	1,539,815		$	396,037	$	352,132		$	0		$	1,565,198		$	307,522		$	0		$	0		$	0		$	4,160,704
Ending balance of loans collectively evaluated for impairment	$	73,066,167		$	12,698,580	$	9,625,509		$	11,134,499		$	1,598,959		$	2,267,722		$	48,042		$	18,755		$	0		$	110,458,233

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Management reviews and identifies loans and investments that require designation as nonperforming assets and troubled debt restructurings. Nonperforming assets include loans accounted for on a non-accrual basis, loans past due by 90 days or more but still accruing, and other real estate owned. Troubled debt restructurings include loans in which the borrower was having financial difficulty, and we agreed to modify the loan. Information with respect to nonperforming assets and troubled debt restructurings at March 31, 2013 and December 31, 2012 is as follows:

	March 31, 2013			December 31, 2012
Non-Accrual Loans:
Owner-occupied one-to-four family	$	2,413,474		$	4,072,391
Non owner-occupied one-to-four family		296,207			367,743
Home Equity Lines of credit		91,824			318,149
Land		93,000			94,500
Total Non-Accrual Loans		2,894,505			4,852,783
Other Real Estate Owned, net		1,759,663			1,660,364
Loans 90 days or more past due and still accruing		0			0
Total Nonperforming Assets	$	4,654,168		$	6,513,147
Troubled Debt Restructurings	$	3,519,788		$	3,532,094
Troubled Debt Restructurings included In Non-Accrual Loans	$	(744,177	)	$	(3,272,611	)
Troubled Debt Restructurings and Total Nonperforming Assets	$	7,429,779		$	6,772,630

At March 31, 2013 and December 31, 2012, there were no loans 90 days past due or more and still accruing interest. At March 31, 2013, the Company had twenty seven loans on non-accrual status with foregone interest in the amount of $176,753. At December 31, 2012, the Company had twenty nine loans on non-accrual status with foregone interest of $157,571.

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Information on impaired loans for the three months ended March 31, 2013 and December 31, 2012 is as follows:

	As of March 31, 2013						As of December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no allowance recorded:
Owner Occupied one-to-four family residential	$	2,671,673	$	2,671,673	$	0	$	2,035,761	$	2,035,761	$	0
Non Owner Occupied one-to-four family residential		296,207		296,207		0		367,743		367,743		0
Home Equity Lines of Credit		313,122		313,122		0		318,149		318,149		0
Construction		0		0		0		0		0		0
Land		93,000		93,000		0		94,500		94,500		0
Total with no allowance	$	3,374,002	$	3,374,002	$	0	$	2,816,153	$	2,816,153	$	0
With an allowance recorded:
Owner Occupied one-to-four family residential	$	2,106,251	$	2,296,113	$	189,862	$	2,106,251	$	2,296,113	$	189,862
Total with an allowance	$	2,106,251	$	2,296,113	$	189,862	$	2,106,251	$	2,296,113	$	189,862
Grand total:
Owner Occupied one-to-four family residential	$	4,777,924	$	4,967,786	$	189,862	$	4,142,012	$	4,331,874	$	189,862
Non Owner Occupied one-to-four family residential		296,207		296,207		0		367,743		367,743		0
Home Equity Lines of Credit		313,122		313,122		0		318,149		318,149		0
Construction		0		0		0		0		0		0
Land		93,000		93,000		0		94,500		94,500		0
Grand total	$	5,480,253	$	5,670,115	$	189,862	$	4,922,404	$	5,112,266	$	189,862

23

Information on impaired loans for the three months ended March 31, 2013 and 2012 is as follows:

	For the Three Months Ended				For the Three Months Ended
	March 31, 2013				March 31, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Owner Occupied one-to-four family residential	$	2,353,717	$	15,286	$	1,559,840	$	5,409
Non Owner Occupied one-to-four family residential		331,975		0		475,215		4,438
Home Equity Lines of Credit		315,636		3,340		222,721		0
Construction		0		0		1,565,198		0
Land		93,750		0		308,272		0
Consumer		0		0		0		0
Total with no allowance	$	3,095,078	$	18,626	$	4,131,246	$	9,847
With an allowance recorded:
Owner Occupied one-to-four family residential	$	2,106,251	$	24,485	$	0	$	0
Total with an allowance	$	2,106,251	$	24,485	$	0	$	0
Grand total:
Owner Occupied one-to-four family residential	$	4,459,968	$	39,771	$	1,559,840	$	5,409
Non Owner Occupied one-to-four family residential		331,975		0		475,215		4,438
Home Equity Lines of Credit		315,636		3,340		222,721		0
Construction		0		0		1,565,198		0
Land		93,750		0		308,272		0
Consumer		0		0		0		0
Grand total	$	5,201,329	$	43,111	$	4,131,246	$	9,847

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The following table reflects impaired loans as of March 31, 2013 and December 31, 2012. A loan is impaired when it is not likely the lender will collect the full value of the loan because the creditworthiness of a borrower has deteriorated.

	March 31, 2013		December 31, 2012
Impaired performing loans:
Owner occupied one-to-four family	$	0	$	0
Non owner occupied one-to-four family		0		0
Home equity lines of credit		0		0
Commercial		0		0
Construction		0		0
Land		0		0
Troubled debt restructurings:
Owner occupied one-to-four family		2,554,312		259,483
Non owner occupied one-to-four family		0		0
Home equity lines of credit		221,298		0
Commercial		0		0
Construction		0		0
Land		0		0
Total impaired performing loans		2,775,610		259,483
Impaired nonperforming loans (nonaccrual):
Owner occupied one-to-four family		1,762,297		1,120,320
Non owner occupied one-to-four family		296,207		367,743
Home equity lines of credit		91,824		92,109
Commercial		0		0
Construction		0		0
Land		0		0
Troubled debt restructurings:
Owner occupied one-to-four family		651,177		2,952,071
Non owner occupied one-to-four family		0		0
Home equity lines of credit		0		226,040
Commercial		0		0
Construction		0		0
Land		93,000		94,500
Total impaired nonperforming loans (nonaccrual)		2,894,505		4,852,783
Total impaired loans	$	5,670,115	$	5,112,266

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 generally recognized through a charge-off through the allowance, however, if a specific reserve has been established, impairment is recognized through the provision for loan losses. At March 31, 2013, we had seven loans that were restructured totaling $3,519,788. Five loans, totaling

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$3,205,489 were secured by owner-occupied one-to-four family residential properties, one loan totaling $93,000 is secured by a residential lot, and one loan totaling $221,299 is a home equity line of credit. At December 31, 2012, we had seven loans totaling $3,532,094 that were restructured. Five loans, totaling $3,211,554 were secured by owner-occupied one-to-four family residential properties, one loan totaling $94,500 is secured by a residential lot, and one loan totaling $226,040 is a home equity line of credit.

The following table is a summary of impaired loans that were modified due to a TDR by class for the three months ended March 31, 2013 and 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 Three Months Ended March 31, 2013

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Owner occupied one-to-four family residential		0	$	0	$	0
Home Equity Line of Credit		0		0		0
Total		0	$	0	$	0

Modifications for the Three Months Ended March 31, 2012

	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Land		0	$	0	$	0

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 months ended March 31, 2013 and 2012:

Three Months Ended March 31, 2013				Three Months Ended March 31, 2012
Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	0	$	0		0	$	0

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4. EMPLOYEE RETIREMENT PLANS

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

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

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

The debt of the ESOP, in accordance with generally accepted accounting principles, is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense for the three months ended March 31, 2013 and 2012 was $35,892 and $23,858, respectively.

A summary of ESOP shares at March 31, 2013 and 2012 is as follows:

	2013		2012
Shares committed for release		23,805		13,225
Unearned shares		103,155		113,735
Total ESOP shares		126,960		126,960
Fair Value of unearned shares	$	1,439,012	$	1,154,410

5. REGULATORY MATTERS

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

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

As of March 31, 2013 and December 31, 2012 (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 Well Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(dollars in thousands)					(dollars in thousands)
As of March 31, 2013:
Total Risk-Based Capital (to risk-weighted assets)	$	25,002		27.16	%	$	9,205		10.0	%
Tier I Capital (to risk-weighted assets)	$	23,849		25.91	%	$	5,523		6.0	%
Tier I Capital (to adjusted total assets)	$	23,849		14.31	%	$	8,333		5.0	%

	Actual					For Capital Adequacy Purposes and to be Well Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio
	(dollars in thousands)					(dollars in thousands)
As of December 31, 2012:
Total Risk-Based Capital (to risk-weighted assets)	$	24,982		25.95	%	$	9,627		10.0	%
Tier I Capital (to risk-weighted assets)	$	23,776		24.70	%	$	5,776		6.0	%
Tier I Capital (to adjusted total assets)	$	23,776		14.02	%	$	8,479		5.0	%

On May 8, 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 March 31, 2013, there have been 114,900 shares repurchased by the Company, for an aggregate expenditure totaling $1,437,337, at an average price of $12.51.

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6. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents the changes in each component of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2013:

	Net Unrealized Gain and Losses on Investment Securities
January 1, 2013	$	74,301
Other Comprehensive Loss Before Reclassifications		(40,238	)
Amounts Reclassified from Accumulated Other Comprehensive Loss		(26,001	)
Net Current Period Other Comprehensive Loss		(66,239	)
March 31, 2013	$	8,062

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income for the three months ended March 31, 2013:

	Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income Is Presented
Reclassification adjustment for realized gains	$	(43,335	)	Non-Interest Income
		17,334		Income Tax Expense
Total Reclassification for the Period	$	(26,001	)	Net of Tax

7. FAIR VALUE MEASUREMENTS

The authoritative accounting guidance for fair value measurements defines fair value, establishes a framework for measuring fair value and defines 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 guidance, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

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

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.

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

	Fair Value at March 31, 2013		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	$	2,501,025	$	0	$	2,501,025	$	0
Obligations of U.S. Government agencies		5,980,220		0		5,980,220		0
FNMA		6,734,052		0		6,734,052		0
GNMA		1,716,150		0		1,716,150		0
FHLMC		1,002,241		0		1,002,241		0
Federal Agency CMO		994,307		0		994,307		0
Private label CMO		300,810		0		300,810		0
	$	19,228,805	$	0	$	19,228,805	$	0
Total assets measured at fair value	$	19,228,805	$	0	$	19,228,805	$	0

	Fair Value at December 31, 2012		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	$	2,508,970	$	0	$	2,508,970	$	0
Obligations of U.S. Government agencies		4,481,680		0		4,481,680		0
FNMA		3,629,705		0		3,629,705		0
GNMA		4,087,225		0		4,087,225		0
FHLMC		1,101,373		0		1,101,373		0
Federal Agency CMO		2,465,723		0		2,465,723		0
Private label CMO		300,017		0		300,017		0
	$	18,574,693	$	0	$	18,574,693	$	0
Total assets measured at fair value	$	18,574,693	$	0	$	18,574,693	$	0

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

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Financial Instruments Measured on a Nonrecurring Basis

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

For assets measured at fair value on a nonrecurring basis as of March 31, 2013 and December 31, 2012, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the assets:

	Fair Value at   March 31, 2013		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Owner occupied one-to-four family	$	4,777,924	$	0	$	4,777,924	$	0
Non owner occupied one-to-four family		296,207		0		296,207		0
Home Equity Lines of Credit		313,122		0		313,122		0
Land		93,000		0		93,000		0
	$	5,480,253	$	0	$	5,480,253	$	0
Other real estate owned:	$	1,759,663	$	0	$	1,759,663	$	0

	Fair Value at December 31, 2012		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Owner occupied one-to-four family	$	4,142,012	$	0	$	4,142,012	$	0
Non owner occupied one-to-four family		367,743		0		367,743		0
Home Equity Lines of Credit		318,149		0		318,149		0
Land		94,500		0		94,500		0
	$	4,922,404	$	0	$	4,922,404	$	0
Other real estate owned:	$	1,660,364	$	0	$	1,660,364	$	0

Loans for which it is probable that the Company 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.

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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.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments as of March 31, 2013 and December 31, 2012.

	March 31, 2013
			Estimated Fair Value
	Carrying Value		Level One		Level Two		Level Three		Total
Assets:
Cash and cash equivalents	$	15,838,120	$	15,838,120	$	0	$	0	$	15,838,120
Securities - available-for-sale		19,228,805		0		19,228,805		0		19,228,805
Securities - held-to-maturity		7,480,293		0		7,806,374		0		7,806,374
Loans, net of allowance		112,916,243		0		5,480,253		112,963,783		118,444,036
Federal Home Loan Bank stock		1,103,700		0		1,103,700		0		1,103,700
Investment in bank-owned life insurance		4,566,787		4,566,787		0		0		4,566,787
Liabilities:
Deposit accounts and advances by borrowers		117,135,686		0		0		117,765,454		117,765,454
Advances from the FHLB		20,000,000		0		0		20,807,429		20,807,429

	December 31, 2012
			Estimated Fair Value
	Carrying Value		Level One		Level Two		Level Three		Total
Assets:
Cash and cash equivalents	$	18,178,281	$	18,178,281	$	0	$	0	$	18,178,281
Securities - available-for-sale		18,574,693		0		18,574,693		0		18,574,693
Securities - held-to-maturity		7,645,942		0		8,017,510		0		8,017,510
Loans, net of allowance		114,247,837		0		4,922,404		114,602,043		119,524,447
Federal Home Loan Bank stock		1,163,000		0		1,163,000		0		1,163,000
Investment in bank-owned life insurance		4,526,979		4,526,979		0		0		4,526,979

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	December 31, 2012
			Estimated Fair Value
	Carrying Value		Level One		Level Two		Level Three		Total
Liabilities:
Deposit accounts and advances by borrowers		119,687,440		0		0		120,305,935		120,305,935
Advances from the FHLB		20,000,000		0		0		20,805,808		20,805,808

	March 31, 2013		December 31, 2012
Off-Balance Sheet Instruments:
Commitments to extend credit	$	500,000	$	1,093,450
Unused lines of credit	$	10,407,444	$	10,191,076

(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 loan category. Each loan category was further segmented by fixed and adjustable rate interest terms and performing and nonperforming categories. The fair value of residential loans was calculated by discounting anticipated cash flows based on weighted-average contractual maturity, weighted-average coupon, and discount rate.

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

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

(e)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 March 31, 2013 and December 31, 2012.

(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.

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(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.

9. 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.

Accounting Standards Update No. 2013-01 - Balance Sheet (Topic 210).On January 31, 2013, FASB released ASU 2013-01. The objective of this Update is to clarify that the scope of Accounting Standards Update No. 2011-11,Disclosures about Offsetting Assets and Liabilities,would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar agreement. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2012-250- Balance Sheet (Topic 210) which has been deleted.

An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of Update 2011-11. The Company has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations.

Accounting Standards Update No. 2013-02 - Other Comprehensive Income (Topic 220). On February 5, 2013, FASB issued ASU 2013-02. The amendments in this Update supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. The amendments would require an entity to provide additional information about reclassifications out of accumulated other comprehensive income.

This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2012-240 - Comprehensive Income (Topic 220) which has been deleted. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations.

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Accounting Standards Update No. 2013-04 - Liabilities (Topic 405). On February 28, 2013, FASB issued ASU 2013-04. The amendments in this Update provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP.

The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF12D - Liabilities (Topic 405) which has been deleted.

The amendments in this Update are effective for fiscal years beginning after December 31, 2013. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

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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 under “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 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 $14,968,610. 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:

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

36

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

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Assets. At March 31, 2013, total assets decreased by $3.0 million to $166.7 million at March 31, 2013 from $169.7 million at December 31, 2012. The decrease in assets for the three months ended March 31, 2013 was due mainly to a $2.3 million decrease in cash and cash equivalents from $18.1 million at December 31, 2012 to $15.8 million at March 31, 2013. In addition, loans receivable, net, decreased $1.3 million from $114.2 million at December 31, 2012 to $112.9 million at March 31, 2013. Other real estate owned increased from $1.7 million at December 31, 2012 to $1.8 million at March 31, 2013.

Loans.Net loans receivable decreased by $1.3 million, or 1.2%, from $114.2 million at December 31, 2012 to $112.9 million at March 31, 2013, primarily as a result of loans in our portfolio refinancing to take advantage of historically low interest rates. Owner occupied one-to-four family loans increased by $3.2 million, or 4.3%, from $74.3 million at December 31, 2012 to $77.5 million at March 31, 2013 and residential construction loans decreased by $3.0 million, or 80.0%, from $3.7 million at December 31, 2012 to $740,000 at March 31, 2013 due to five residential construction loans totaling $3.3 million converting to owner occupied one-to-four family loans during the period.

Cash and Cash Equivalents.Cash and cash equivalents decreased by $2.3 million, or 12.9%, from $18.1 million at December 31, 2012 to $15.8 million at March 31, 2013 primarily as a result of a decrease in our deposits of $3.0 million.

Securities.Our available-for-sale securities increased by $654,100, or 3.5%, from $18.6 million at December 31, 2012 to $19.2 million at March 31, 2013. During the three months ended March 31, 2013 we sold securities totaling $4.1 million, purchased securities totaling $5.5 million, and had principal payments of $800,800 on our securities. Our held-to-maturity securities decreased by $165,600, or 2.2%, from $7.6 million at December 31, 2012 to $7.5 million at March 31, 2013.

Deposits.Total deposits decreased by $3.0 million, from $119.0 million at December 31, 2012, to $116.0 million at March 31, 2013, primarily as a result of certificates of deposits maturing that had carried much higher interest rates, and depositors looking for a higher yield elsewhere than the current low interest rates we are offering on those products currently.

Borrowings.Total borrowings remained stable at $20.0 million at March 31, 2013 and December 31, 2012.

Results of Operations for the Three Months Ended March 31, 2013 and 2012 (unaudited)

Overview. We had net income of $65,200 for the three months ended March 31, 2013, as compared to net income of $52,200 for the three months ended March 31, 2012. Net interest income decreased for the three months ended March 31, 2013 by $48,000, or 4.3%, from $1,124,900 for the three months ended March 31, 2012 to $1,076,900 for the three months ended March 31, 2013. Our provision for loan losses decreased by $52,100, or 71.3%, from $73,000 for the three months ended March 31, 2012 to $20,900 for the three months ended March 31, 2013. Non-interest income increased $51,500, or 70.5%, for the three months ended March 31, 2013, from $73,200 for the three months ended March 31, 2012 to $124,700 for the three months ended March 31, 2013. Non-interest

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expense increased by $41,600, or 3.9%, for the three months ended March 31, 2013, from $1,063,100 for the three months ended March 31, 2012 to $1,104,700 for the three months ended March 31, 2013. Income tax expense increased by $900, or 9.7%, from $9,800 for the three months ended March 31, 2012 to $10,800 for the three months ended March 31, 2013.

Net Interest Income. Net interest income decreased by $48,000, or 4.3%, from $1,124,900 for the three months ended March 31, 2012 to $1,076,900 for the three months ended March 31, 2013. The decrease in net interest income is primarily attributable to our loans and investments repricing at a greater pace than our deposits during a time of historically low interest rates.

Interest on loans receivable, net decreased by $59,400, or 4.0%, from $1.5 million for the three months ended March 31, 2012 to $1.4 million for the three months ended March 31, 2013, due to a 23 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 $424,700, or .4%, from $112.6 million at March 31, 2012 to $113.0 million at March 31, 2013.

Interest on investment securities available-for-sale decreased by $96,800, or 48.0%, for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, as the result of a $12.4 million, or 39.6%, decrease in the average balance of investment securities available-for-sale and a 35 basis point decrease in the average yield. Interest on investment securities held-to-maturity decreased by $7,300, or 11.8%, for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, as the result of a $229,500, or 3.0%, decrease in the average balance of investment securities held-to-maturity and a 29 basis point decrease in the average yield.

Interest on cash and cash equivalents remained low by historical standards during the three months ended March 31, 2013 and 2012 due to the historically low prevailing market rates during those periods.

During the three months ended March 31, 2013, 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 $80,900, or 18.4%, from $438,700 for the three months ended March 31, 2012, to $357,800 for the three months ended March 31, 2013, due to a 33 basis point decrease in the average cost of time deposits and a $932,300, or 1.0%, decrease in the average balance of time deposits. Interest on brokered deposits decreased by $1,100, or 23.0%, from $4,800 for the three months ended March 31, 2012, to $3,700 for the three months ended March 31, 2013, as the average balance of brokered deposits decreased from $1.8 million for the three months ended March 31, 2012 to $332,100 for the three months ended March 31, 2013. Interest on NOW and money market accounts decreased by $1,200, or 35.5%, from $3,500 for the three months ended March 31, 2012, to $2,300 for the three months ended March 31, 2013, due to an 8 basis point decrease in the average cost of NOW and money markets and a $116,500, or 2.0%, decrease in the average balance of NOW and money market accounts. Interest on passbook accounts decreased by $4,000, or 27.3%, from $14,700 for the three months ended March 31, 2012 to $10,700 for the three months ended March 31, 2013, due primarily to a 9 basis point decrease in the average cost of passbook accounts. The average balance of passbook accounts decreased during the three months ended March 31, 2013, from $17.0 million as of March 31, 2012 to $16.5 million as of March 31, 2013.

Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank advances, decreased by $21,200, or 12.5%, from $169,300 for three months ended March 31, 2012 to $148,100 for the three months ended March 31, 2013, due to a decrease of 5 basis points in the average cost of these other interest-bearing liabilities and a $2.5 million, or 11.1%, decrease in the average balance of other interest-bearing liabilities. At March 31, 2013 and December 31, 2012, we had $20.0 million of Federal Home Loan Bank advances, of which $15.0 million are long-term advances that carry large prepayment penalties.

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

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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 March 31,
	2013							2012
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
Assets:
Interest-bearing deposits in other banks	$	17,078,741	$	9,757		.23	%	$	13,144,863	$	8,214		.25	%
Loans receivable, net (3)		113,028,334		1,409,027		4.99			112,603,600		1,468,472		5.22
Investment securities available-for-sale (1)		18,926,260		104,944		2.22			31,353,213		201,792		2.57
Investment securities held-to-maturity (2)		7,536,220		54,584		2.90			7,765,724		61,862		3.19
Other interest-earning assets		2,048,546		21,242		4.15			2,222,096		15,731		2.83
Total interest-earning assets		158,618,101		1,599,554		4.03			167,089,496		1,756,071		4.20
Noninterest-earning assets		9,176,957							7,257,768
Total assets	$	167,795,058						$	174,347,264
Liabilities and equity:
Time deposits	$	93,091,906	$	357,841		1.54	%	$	94,024,168	$	438,723		1.87	%
NOW and money market		5,805,582		2,275		.16			5,922,055		3,528		.24
Passbook		16,542,808		10,722		.26			17,030,501		14,746		.35
Brokered deposits		332,095		3,682		4.43			1,792,207		4,779		1.07
Federal Home Loan Bank advances		20,000,000		148,113		2.96			22,500,000		169,353		3.01
Total interest-bearing liabilities		135,772,391		522,633		1.54			141,268,931		631,129		1.79
Noninterest-bearing liabilities		3,029,252							2,866,093
Total liabilities		138,801,643							144,135,024
Total equity		28,993,415							30,212,240
Total liabilities and equity	$	167,795,058						$	174,347,264
Net interest income			$	1,076,921						$	1,124,942
Interest rate spread						2.49	%						2.41	%
Net interest margin						2.72	%						2.69	%
Ratio of average interest-earning assets to average interest-bearing liabilities						116.83	%						118.28	%

(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 nonaccrual status are included in average assets.

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 decreased by $52,100 to $20,900 for the three months ended March 31, 2013 from $73,000 for the three months ended March 31, 2012. At March 31, 2013, the allowance for loan losses was $1.35 million, or 1.18%, of the total loan portfolio, as compared to $1.395 million, or 1.21%, of the total loan portfolio at December 31, 2012.

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Non-accrual loans totaled $2.9 million at March 31, 2013 compared to $4.9 million at December 31, 2012. Net loan charge-offs amounted to $65,900 during the three months ended March 31, 2013, compared to $73,000 during the three months ended March 31, 2012. As of March 31, 2013, non-accrual loans included three troubled debt restructured loans totaling $744,200, seventeen owner occupied one-to four-family residential loans totaling $1.8 million, five non-owner occupied one-to-four family residential loans totaling $296,200 and two home equity lines of credit totaling $91,800. As of December 31, 2012, non-accrual loans included six troubled debt restructured loans totaling $3.3 million, twenty-one one-to four-family residential loans totaling $1.5 million and two home equity lines of credit totaling $92,100. The total decrease of $2.0 million in non-accrual loans is primarily due to three troubled debt restructured loans that had previously been on non-accrual status but are now accruing interest due to the borrowers abiding by the payment terms of the restructured loan for more than six months.

Impaired loans totaled $5.7 million at March 31, 2013 compared to $5.1 million at December 31, 2012. As of March 31, 2013, impaired loans included twenty-two one-to-four family owner-occupied residential loans totaling $5.0 million, five non-owner-occupied one-to-four family residential loans totaling $296,200, three home equity line of credit loans totaling $313,100 and one land loan totaling $93,000. Included in these are seven troubled debt restructured loans totaling $3.5 million. Of these seven troubled debt restructured loans, four loans totaling $2.8 million are on accrual status, while three loans totaling $744,200 are on non-accrual status. As of December 31, 2012, impaired loans included twenty one one-to-four family owner-occupied residential loans totaling $4.3 million, five non-owner-occupied one-to-four family residential loans totaling $367,700, four home equity line of credit loans totaling $318,100, and one land loan totaling $94,500. Included in these are seven troubled debt restructured loans totaling $3.5 million, all of which are on non-accrual status.

Other real estate owned totaled $1.8 million at March 31, 2013 compared to $1.7 million at December 31, 2012. Other real estate owned at March 31, 2013 and December 31, 2012 consisted of one luxury residential property that was a speculative construction loan (totaling $1.7 million at March 31, 2013 and $1.6 million at December 31, 2012) and one non-owner occupied property totaling $49,600.

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.

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

	At
	March 31, 2013			December 31, 2012
	(unaudited)
Nonaccrual loans:
Real estate loans:
Owner occupied one-to four-family	$	2,413,474		$	4,072,391
Non-owner occupied one-to four-family		296,207			367,743
Lines of credit		91,824			318,149
Commercial		0			0
Residential construction		0			0
Land		93,000			94,500
Commercial		0			0
Consumer		0			0
Total	$	2,894,505		$	4,852,783
Accruing loans past due 90 days or more	$	0		$	0
Total of nonaccrual loans and accruing loans 90 days Or more past due	$	2,894,505		$	4,852,783
Other real estate owned		1,759,663			1,660,364
Total nonperforming assets	$	4,654,168		$	6,513,147
Troubled debt restructurings	$	3,519,788		$	3,532,094
Troubled debt restructurings included in non-accrual loans	$	(744,177	)	$	(3,272,611	)
Troubled debt restructurings and total nonperforming assets	$	7,429,779		$	6,772,630
Total of nonaccrual loans and accruing loans past due 90 days or more to total loans		2.53	%		4.20	%
Total of nonaccrual loans and accruing loans past due 90 days or more to total assets		1.74	%		2.86	%
Total nonperforming assets to total assets		2.79	%		3.84	%

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

	Three Months Ended March 31,
	2013			2012
Allowance for loan losses at beginning of period	$	1,395,000		$	1,250,000
Charge-offs:
Real estate loans:
Owner occupied one-to four-family		2,364			83,715
Non-owner occupied one-to four-family		66,079			0
Lines of credit		0			0
Commercial		0			0
Residential construction		0			0
Land		0			0
Commercial		0			0
Consumer		0			0
Total charge-offs		68,443			83,715
Recoveries		2,499			10,696
Net charge-offs		65,944			73,019
Provision for loan losses		20,944			73,019
Allowance at end of period	$	1,350,000		$	1,250,000
Allowance for loan losses to total loans at the end of the period		1.18	%		1.09	%
Net charge-offs to average loans outstanding during the period		.06	%		.06	%

Noninterest Income. Total noninterest income increased by $51,500, or 70.5%, from $73,200 for the three months ended March 31, 2012 to $124,700 for the three months ended March 31, 2013. The increase was primarily due to an increase of $43,300, or 100.0%, in the gain on sale of investments.

Noninterest Expenses. Total noninterest expenses increased by $41,600, or 3.9%, from $1,063,100 for the three months ended March 31, 2012 to $1,104,700 for the three months ended March 31, 2013. The increase primarily was attributable to an increase in other general and administrative expenses of $43,400, or 37.9%.

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Income Tax Expense. We recognized an income tax expense of $10,800 during the three months ended March 31, 2013, as compared to an income tax expense of $9,800 for the three months ended March 31, 2012.

Liquidity Management.Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds available to meet short-term liquidity needs consist of deposit inflows, loan repayments and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets available to meet short-term liquidity needs based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities and (iv) the objectives of our asset/liability management policy. We do not have long-term debt or other financial obligations that would create long-term liquidity concerns.

Our most liquid assets are cash and cash equivalents. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At March 31, 2013, cash and cash equivalents totaled $15.8 million. Securities classified as available-for-sale, amounting to $19.2 million at March 31, 2013, provides an additional source of liquidity. In addition, at March 31, 2013, we had the ability to borrow a total of approximately $50.9 million from the Federal Home Loan Bank of Atlanta and had $20.0 million in Federal Home Loan Bank advances outstanding. For additional liquidity, if needed, we have a $3.0 million line of credit with another bank, on which we had no outstanding balance at March 31, 2013.

Certificates of deposit due within one year of March 31, 2013 totaled $49.7 million, or 53.9%, of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressures. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2014. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Management.We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2013, 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 three months ended March 31, 2013, 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.

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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.

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, 2012 filed with the Securities and Exchange Commission on March 29, 2013. 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

The following table sets forth information regarding stock repurchases during the periods indicated:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased As Part of a Publicly Announced Repurchase Program (1)		Maximum Number of Shares That May Yet Be Purchased Under the Repurchase Program (1)
January 1-31, 2013		17,500	$	12.35		17,500		60,300
February 1-28, 2013		0		0		0		60,300
March 1-31, 2013		16,500		14.00		16,500		43,800
TOTAL		34,000

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(1) On May 8, 2012, Fraternity Community Bancorp, Inc. announced that it had approved a stock repurchase program to acquire up to 158,700 shares, or 10%, of the Company’s outstanding common stock.

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)
4.0	Form of Common Stock Certificate of Fraternity Community Bancorp, Inc. (1)
31.0	Rule 13a-14(a) Certification of Chief Executive Officer and Chief Financial Officer
32.0	Section 1350 Certifications
101.0*	The following materials from Fraternity Community Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the related Notes.

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

* Furnished, not filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FRATERNITY COMMUNITY BANCORP, INC.
May 10, 2013
	By:	/s/ Thomas K. Sterner
		Thomas K. Sterner
		Chairman of the Board, Chief Executive Officer and Chief Financial Officer