Filed
Pursuant to Rule 424(b)(3)
Registration
No.
333-141380
Prospectus
Supplement
Interests
in
FAIRPORT
SAVINGS BANK 401(k) SAVINGS PLAN
Offering
of Participation Interests in up to 281,276 Shares of
FSB
COMMUNITY BANKSHARES, INC.
Common
Stock
In
connection with the adoption of a stock issuance plan, FSB Community Bankshares,
Inc. is allowing participants in the Fairport Savings Bank 401(k) Savings Plan
(the “Plan”) to invest all or a portion of their accounts in common stock of FSB
Community Bankshares, Inc. (the “Common Stock”).
FSB
Community Bankshares, Inc. has registered a number of participation interests
through the Plan in order to enable the trustee of the Plan to purchase up
to
281,276 shares of Common Stock, based upon the value of the Plan assets at
April
30, 2007, and assuming a purchase price of $10.00 per share. This prospectus
supplement relates to the initial election of Plan participants to direct the
trustee of the Plan to invest all or a portion of their Plan accounts in Common
Stock at the time of the stock offering.
FSB
Community Bankshares, Inc.’s prospectus has been provided to you separately. It
contains detailed information regarding the offering of Common Stock and the
financial condition, results of operations and business of Fairport Savings
Bank. This prospectus supplement provides information regarding the Plan. You
should read this prospectus supplement together with the prospectus to which
it
is attached and keep both for future reference.
________________________________
For
a discussion of investment risks that you should consider, see “Risk Factors”
beginning on page 20 of the prospectus.
The
interests in the Plan and the offering of the Common Stock have not been
approved or disapproved by the Office of Thrift Supervision, the Securities
and
Exchange Commission or any other federal or state agency. Any representation
to
the contrary is a criminal offense.
The
securities offered in this prospectus supplement and in the prospectus are
not
deposits or accounts and are not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
This
prospectus supplement may be used only in connection with offers and sales
by
FSB Community Bankshares, Inc., in the stock offering, of Common Stock. No
one
may use this prospectus supplement to reoffer or resell interests in shares
of
Common Stock acquired through the Plan.
You
should rely only on the information contained in this prospectus supplement
and
the attached prospectus. FSB Community Bankshares, Inc., Fairport Savings Bank
and the Plan have not authorized anyone to provide you with information that
is
different.
This
prospectus supplement does not constitute an offer to sell or solicitation
of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make an offer or solicitation in that jurisdiction. Neither the
delivery of this prospectus supplement and the prospectus nor any sale of Common
Stock shall under any circumstances imply that there has been no change in
the
affairs of Fairport Savings Bank or the Plan since the date of this prospectus
supplement, or that the information contained in this prospectus supplement
or
incorporated by reference is correct as of any time after the date of this
prospectus supplement.
The
date
of this prospectus supplement is May 18, 2007.
TABLE
OF CONTENTS
|
THE
OFFERING
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4
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|
Securities
Offered
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4
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Purchase
Priorities
|
4
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|
Allocation
of Common Stock
|
6
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|
Value
of Plan Assets
|
7
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|
Election
to Purchase Common Stock in the Stock Offering
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7
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|
How
to Order Stock in the Offering Using 401(k) Plan Funds
|
8
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|
Election
Form Delivery
|
8
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|
Irrevocability
of Transfer Direction
|
8
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|
Voting
Rights of Common Stock
|
9
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|
Questions?
|
9
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|
DESCRIPTION
OF THE PLAN
|
10
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|
Introduction
|
10
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|
Eligibility
and Participation
|
10
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|
Contributions
under the Plan
|
10
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|
Limitations
on Contributions
|
11
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Benefits
Under the Plan
|
12
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|
Withdrawals
and Distributions from the Plan
|
12
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|
Investment
of Contributions and Account Balances
|
13
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|
Performance
History
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14
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Investment
in Common Stock of FSB Community Bankshares, Inc.
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19
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|
Notice
of Investment Diversification Rights
|
19
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|
Administration
of the Plan
|
20
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|
Amendment
and Termination
|
21
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|
Merger,
Consolidation or Transfer
|
21
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|
Federal
Income Tax Consequences
|
21
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|
Additional
Employee Retirement Income Security Act (“ERISA”)
Considerations
|
23
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Securities
and Exchange Commission Reporting and Short-Swing Profit
Liability
|
24
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Financial
Information Regarding Plan Assets
|
24
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LEGAL
OPINION
|
24
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THE
OFFERING
|
Securities
Offered
|
The
securities offered in this offering are shares of FSB Community
Bankshares, Inc. Common Stock (“Common Stock”) which may be purchased by
participants in the Fairport Savings Bank 401(k) Savings Plan
(“Plan”).
|
|
Given
the purchase price of $10 per share in the stock offering, the Plan
may
acquire up to 281,276 shares of Common Stock in the stock offering.
Only
employees of Fairport Savings Bank may become participants in the
Plan and
only participants may purchase Common
Stock under
the Plan. Your investment in Common
Stock is
subject to the purchase priorities contained in the FSB Community
Bankshares, Inc. Stock Issuance Plan (the “Stock Issuance
Plan”).
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|
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Information
with regard to the Plan is contained in this prospectus supplement
and
information with regard to the financial condition, results of operations
and business of FSB Community Bankshares, Inc. is contained in the
attached prospectus. The address of the principal executive office
of FSB
Community Bankshares, Inc. and Fairport Savings Bank is 45 South
Main
Street, Fairport, NY 14450.
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Purchase
Priorities
|
In
connection with the stock offering, you may elect to transfer all
or part
of your account balances in the Plan to purchase Common
Stock.
The manner in which you make this election and transfer is discussed
below
under “Election to Purchase Common Stock in the Stock Offering.” All Plan
participants are eligible to direct a transfer of funds to purchase
Common
Stock.
However, such directions are subject to the purchase priorities in
the
Stock Issuance Plan. The purchase priorities in the subscription
offering
are as follows:
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|
(1)
Eligible
Account Holders,
who are depositors with a deposit account(s) totaling $50.00 or more
as of
the close of business on December 31, 2005. This group has “Category One”
purchase priority.
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(2)
Tax-Qualified
Employee Benefit Plans of Fairport Savings Bank,
including the 401(k) Plan and a new employee stock ownership plan
(“ESOP”). This group has “Category Two” purchase priority. Category Two
purchasers are permitted to purchase in the stock offering up to
4.9% of
FSB Community Bankshares, Inc.’s outstanding shares of common stock upon
completion of the stock offering. However, it is expected that the
employee stock ownership plan will purchase 3.92% of the outstanding
shares of common stock upon completion of the stock offering (including
shares issued to FSB Community Bankshares, MHC), which leaves up
to
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4
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approximately
1% of the outstanding shares of common stock upon completion of the
stock
offering available for purchase by the 401(k) Plan. The 401(k) Plan
will
purchase as many shares of Common Stock as the Plan receives directions
to
purchase from participants, subject to this overall limit. Plan
participants may purchase shares of Common Stock in the stock offering
by
timely directing the investment of their 401(k) Plan account into
Common
Stock using
the “Special Investment Election Form” that accompanies this Prospectus
Supplement. See the instructions on the Special Investment Election
Form
for more information.
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(3)
Supplemental
Eligible Account Holders,
who are depositors with deposit account(s) totaling $50.00 or more
as of
the close of business on March 31, 2007. This group has “Category Three”
purchase priority.
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(4)
Other
Members,
who are (i) depositors whose deposit account(s) totaled $50 or more
on
April 30, 2007, and (ii) borrowers of the Bank as of January 14,
2005 who
maintain such borrowings as of the close of business on April 30,
2007).
This group has “Category Four” purchase priority.
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If
you meet the requirements of subscription offering Categories
One, Three or Four, you have rights to purchase stock in the offering
separate from any rights that you have to purchase stock in the offering
as a participant in the 401(k) Plan under Category Two. In other
words,
you may have rights to purchase under both
Category Two and
under Category One, Category Three and/or Category Four. Note that
you may
use your Category One, Category Three and/or Category Four priority
to
place an order to purchase stock in the offering, but the money to
fund
your purchase could come from your 401(k) Plan account. If you elect
to
purchase in that manner, the Common Stock that you purchase in the
offering will be held inside the 401(k) Plan. Your purchase rights
under
Categories One, Three and Four are in addition to (and separate from)
your
right to purchase under Category Two.
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|
If
you are ineligible to purchase through Categories One, Three or Four,
you
still may purchase Common Stock in the offering by using your 401(k)
Plan
account to purchase Common
Stock under
Category Two. If you choose not to direct the investment of your
401(k)
Plan account balances towards the purchase of Common
Stock,
your account balances will remain in the investment funds of the
Plan as
previously directed by you.
|
|
|
If
you are eligible to subscribe for stock in the subscription offering
through Categories One, Three or Four, you will receive a
separate
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5
|
mailing,
including a Stock Order Form. In addition to, or instead of, subscribing
for Common
Stock as
a Plan participant, you may subscribe for stock outside of the Plan
by
completing the Stock Order Form and submitting it to the Stock Information
Center by the deadline on the Stock Order Form.
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Allocation
of Common Stock
|
The
trustee of the 401(k) Plan will subscribe for Common Stock in the
stock
offering in accordance with your directions. No later than the end
of the
offering period, June 14, 2007, the amount that you have designated
on the
Special Investment Election Form for the purchase of Common
Stock will
be removed from the various Plan investment accounts and transferred
to a
stable value fund, pending the consummation of the stock
offering.
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|
If
the offering is oversubscribed (i.e.,
there are more orders for Common Stock than shares available for
sale in
the offering), you may not receive all of your order. In that case,
if you
have so elected on the Special Investment Election Form, the amount
that
cannot be invested in Common Stock in the offering will be used to
purchase Common Stock on the open market immediately after the offering.
Otherwise, any amount that remains will be held in cash in the stable
value fund until you reallocate it to other Plan investments. As
noted
above, Category Two is permitted to purchase up to 4.9% of FSB Community
Bankshares, Inc.’s outstanding shares of common stock upon completion of
the stock offering (i.e., 102,900 shares at the midpoint of the offering
range, or up to 136,085 shares at the supermaximum of the offering
range),
but 3.92% out of that 4.9% limit (i.e., 82,320 shares at the midpoint
of
the offering range, or up to 108,868 shares at the supermaximum of
the
offering range) is expected to be purchased by the new Employee Stock
Ownership Plan (ESOP). That leaves up to approximately 1% of the
Category
Two limit (i.e., no more than 20,580 shares at the midpoint of the
offering range, or up to 27,217 shares at the supermaximum of the
offering
range) available for purchase by 401(k) Plan participant accounts
in
Category Two. As noted above, stock purchased through the 401(k)
Plan
using priority purchase Categories One, Three or Four count against
the
limits of those categories (as described in the Stock Issuance Plan)
and
do not count against the Category Two limit.
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|
|
In
the event Plan participants purchasing through Category Two subscribe
for
more shares than the total number of shares available for purchase
by the
Plan under Category Two, the Plan trustee will allocate the total
number
of available shares among the Plan participants who subscribed to
purchase
Common
Stock using
an allocation formula. The formula may allocate a uniform number
of shares
to each participant who submits a purchase order, with
any
|
6
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remaining
shares allocated based on a ratio, where the numerator is the dollar
value
of the unfilled subscribing participant’s Plan account balance as of April
30, 2007 and the denominator is the dollar value of all unfilled
subscribing participants’ Plan account balances as of April 30, 2007. That
fraction would be multiplied by the total number of shares that remain
available under Category Two if a uniform number of shares has been
allocated to all participants who placed a stock purchase order under
Category Two. The number of shares received by each participant would
be
the lesser of the calculated amount or the unfilled participant’s
remaining unfilled subscription Category Two order.
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|
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If
a participant subscribes to purchase Common Stock in the offering
partly
through his or her Category One status and partly through his or
her
Category Two status, any share subscribed for through his or her
Category
One status shall be subject to the allocation rules applicable to
oversubscription of Category One and any shares subscribed for through
his
or her Category Two status shall be subject to the Category Two allocation
rules described above.
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To
the extent a participant subscribes to purchase Common Stock in the
stock
offering entirely through Category One, but he or she is funding
such
Category One purchase through his or her 401(k) Plan account, the
oversubscription of Category Two will have no effect on the individual
because he or she is not purchasing Common Stock through Category
Two. Any
shares subscribed for through his or her Category One status shall
be
subject to the allocation rules applicable to oversubscription of
Category
One.
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Value
of Plan Assets
|
As
of April 30, 2007, the market value of the assets of the Plan eligible
to
purchase Common Stock in the offering is approximately $2,750,000.
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Election
to Purchase
Common
Stock
in
the Stock Offering
|
In
connection with the stock offering, the Plan will permit you to direct
the
trustee to transfer all or part of the funds which represent your
current
beneficial interest in the assets of the Plan to Common
Stock.
The amount that you wish to invest in Common
Stock will
be transferred from the various Plan investment alternatives to a
stable
value fund pursuant to your direction on the Special Investment Election
Form. The trustee of the Plan will subscribe for FSB Community Bankshares,
Inc. Common Stock offered for sale in connection with the stock offering,
in accordance with each participant’s direction. The prospectus describes
maximum purchase limits for investors in the stock offering. See
the
prospectus section entitled “The Stock Offering,” which describes
|
7
|
the
maximum purchase limit pertaining to the aggregate of orders placed
by an
investor in the offering through and outside of the Plan. The trustee
will
pay $10.00 per stock unit, which will be the same price paid by all
other
persons who purchase shares in the subscription and community
offerings.
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How
to Order Stock in the
Offering
Using 401(k) Plan
Funds
|
Enclosed
is a Special Investment Election Form on which you can elect to transfer
all or a portion of your account balance in the Plan to a stable
value
fund for the purchase of Common
Stock in
connection with the stock offering. If you wish to use all or part
of your
account balance in the Plan to purchase Common Stock issued in the
stock
offering, you should indicate that decision on the Special Investment
Election Form. In order to direct the Trustee to purchase Common
Stock in
the offering, you may complete your Special Investment Election Form,
indicating the dollar amount that you wish to have transferred from
the
various Plan investment funds into a stable value fund. Please note
that
you need not invest all the amounts that you have invested in the
Plan in
the Common
Stock.
You
will file the Special Investment Election Form with Leslie Zornow,
at
Fairport Savings Bank. You must file the Special Investment Election
Form
to be received no later than 5:00 p.m., Eastern Time (ET), on Thursday,
June 7, 2007. If
you do not wish to make an election, you should check the box on
the Stock
Offering Memorandum and return the Stock Offering Memorandum to Leslie
Zornow as indicated above.
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Election
Form Delivery
|
To
purchase shares using Plan funds, you may return your Special Investment
Election Form to Leslie Zornow by hand delivery, mail or by faxing
it to
(585) 223-8365, so long as it is received by the time specified.
This
return date is earlier than the deadline for purchases made outside
of the
Plan. In order to purchase shares outside
the Plan, you must complete and return a Stock Order Form along with
payment by check or by authorizing withdrawal from your Fairport
Savings
Bank deposit account(s) to the Stock Information Center no later
than 5:00
p.m., Eastern Time, on Thursday, June 14, 2007.
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Irrevocability
of Transfer Direction
|
You
may not change your election to transfer amounts to the stable value
fund
in connection with the stock offering.
Your election is irrevocable. You will, however, continue to have
the
ability to transfer amounts not directed towards the purchase of
Common
Stock among
all of the other investment funds on a daily
basis.
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8
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Voting
Rights of Common Stock
|
The
Plan provides that, after the offering, you may direct the trustee
how to
vote any shares of FSB Community Bankshares, Inc. Common Stock held
by the
401(k) Plan. If
the trustee does not receive your voting instructions, then the trustee
will vote your shares in the same proportion as those shares for
which the
trustee received proper directions. All voting instructions will
be kept
confidential.
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Questions?
|
If
you have questions about placing an order using the Special Investment
Election Form, contact Leslie Zornow, at (585) 223-9080, ext. 217.
If you
have questions about the stock offering, contact the Stock Information
Center at (866) 818-9961.
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9
DESCRIPTION
OF THE PLAN
Introduction
Fairport
Savings Bank adopted the Fairport Savings Bank 401(k) Plan effective August
1,
1973 (the “Plan”). The Plan is a tax-qualified plan, with a cash or deferred
arrangement, established in accordance with the requirements under Sections
401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the
“Code”).
Fairport
Savings Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. Fairport
Savings Bank will adopt any amendments to the Plan that may be necessary to
ensure the continuing qualified status of the Plan under the Code and applicable
Treasury Regulations.
Employee
Retirement Income Security Act (“ERISA”).
The Plan
is an “individual account plan” other than a “money purchase pension plan”
within the meaning of ERISA. As such, the Plan is subject to all of the
provisions of Title I (Protection of Employee Benefit Rights) and Title II
(Amendments to the Code Relating to Retirement Plans) of ERISA, except to the
funding requirements contained in Part 3 of Title I of ERISA which, by their
terms, do not apply to an individual account plan (other than a money purchase
plan). The Plan is not subject to Title IV (Plan Termination Insurance) of
ERISA. The funding requirements contained in Title IV of ERISA are not
applicable to participants or beneficiaries under the Plan.
Reference
to Full Text of Plan. The
following portions of this prospectus supplement summarize certain provisions
of
the Plan. They are not complete and are qualified in their entirety by the
full
text of the Plan. Copies of the Plan are available to all employees by filing
a
request with the Plan Administrator at Fairport Savings Bank, 45 South Main
Street, Fairport, NY 14450. You are urged to read carefully the full text of
the
Plan.
Eligibility
and Participation
Employees
who are at least 21 years old and have completed at least six months of
employment with Fairport Savings Bank are eligible to enter the Plan on the
earliest date coincident with or next following the date on which the employee
meets the age and employment requirements. Leased employees and independent
contractors (or employees of independent contractors) are not eligible to
participate in the Plan. The Plan year is the calendar year (the “Plan Year”).
As
of
April 30, 2007, there were approximately 35 employees and former employees
eligible to participate in the Plan.
Contributions
under the Plan
401(k)
Plan Contributions. You
are
permitted to defer on a pre-tax basis either a flat dollar amount or between
1%
and 100% of your compensation
(expressed in terms of whole percentages) for each payroll period, subject
to
certain restrictions imposed by the Code, and to have that amount contributed
to
the Plan on your behalf. For purposes of the Plan,
10
“compensation”
means wages, salaries and fees for professional services and other amounts
received for personal services rendered in the course of employment to the
extent such amounts are included in gross income, but excludes employer
contributions to deferred compensation plans, distributions from deferred
compensation plans, amounts realized upon the exercise of a non-statutory stock
option or the vesting of restricted stock, or other amounts that receive special
tax benefits. In 2007, the annual compensation of each participant taken into
account under the Plan is limited to $225,000. Limits established by the
Internal Revenue Service (“IRS”) are subject to increase pursuant to an annual
cost-of-living adjustment, as permitted by the Code. You may elect to modify
the
amount contributed to the Plan on a monthly basis by filing a new elective
deferral agreement with the Plan administrator.
Roth
Elective Deferral Contributions.
You are
permitted under the 401(k) Plan to make “Roth elective deferral contributions”
which are contributions that are made on an after-tax basis rather than a
before-tax basis. Roth contributions will be accounted for separately under
the
401(k) Plan from your before-tax salary reduction contributions, and are
generally included in your taxable income in the year of contribution.
Employer
Safe Harbor Contributions. The
Plan
is intended to be a “safe harbor” 401(k) Plan with respect to automatically
satisfying certain IRS rules relating to nondiscrimination in the amount of
contributions for highly compensated employees compared to nonhighly compensated
employees. Accordingly, Fairport
Savings Bank
will
make a qualified non-elective contribution to the Plan in an amount equal to
3%
of the Participant’s Compensation.
Employer
Discretionary Profit Sharing Contributions.
Fairport Savings Bank may make a discretionary employer contribution to the
401(k) Plan each year. For 2006, Fairport Savings Bank made a contribution
to
the 401(k) Plan equal to 7% of each Participant’s compensation.
Limitations
on Contributions
Limitations
on Employee Salary Deferrals. For
the
Plan Year beginning January 1, 2007, the amount of your before-tax contributions
may not exceed $15,500 per calendar year. This amount may be adjusted
periodically by law, based on changes in the cost of living. In addition, if
you
are age 50 or older in 2007, you will be able to make a “catch-up” contribution
of up to $5,000, in addition to the $15,500 limit. The “catch-up” contribution
limit may be adjusted periodically by law, based on changes in the cost of
living. Contributions in excess of these limits, as applicable to you, are
known
as excess deferrals. If you defer amounts in excess of these limitations, as
applicable to you, your gross income for federal income tax purposes will
include the excess in the year of the deferral. In addition, unless the excess
deferral is distributed before April 15 of the following year, it will be taxed
again in the year distributed. Income on the excess deferral distributed by
April 15 of the immediately succeeding year will be treated, for federal income
tax purposes, as earned and received by you in the tax year in which the
contribution is made.
Limitation
on Plan Contributions for Highly Compensated Employees. Special
provisions of the Code limit the amount of elective deferrals and employer
non-matching contributions that may be made to the Plan in any year on behalf
of
highly compensated employees, in relation to the amount of elective deferrals
and employer non-matching contributions made by or on behalf
11
of
all
other employees eligible to participate in the Plan. A highly
compensated employee includes any employee who (1) was a 5% owner of FSB
Community Bankshares, Inc. at any time during the current or preceding year,
or
(2) had compensation for the preceding year of more than $100,000. The dollar
amounts in the foregoing sentence may be adjusted annually to reflect increases
in the cost of living. If these limitations are exceeded, the level of deferrals
by highly compensated employees may have to be adjusted.
Benefits
Under the Plan
Vesting.
At
all
times, you have a fully vested, nonforfeitable interest in the elective
deferrals you have made under the Plan and to the 3% employer “safe harbor”
contribution. Discretionary employer contributions credited to your account
are
subject to a 5-year graded vesting schedule pursuant to which such amounts
vest
in 20% increments after each completed year of service, beginning upon the
completion of the first year of service, until a participant becomes 100% vested
upon completion of 5 years of service. In addition, you will also become 100%
vested in the employer contributions and earnings credited to your account
upon
your death, disability, early retirement (i.e., age 55 with 5 years of service)
or normal retirement upon attainment of age 65.
Withdrawals
and Distributions from the Plan
In-service
withdrawals from your Plan account are not permitted under the Plan until you
attain age 59½. Hardship withdrawals and loans are permitted under the Plan in
special circumstances.
Withdrawal
upon Termination of Employment. You
may
make withdrawals from your accounts at any time after you terminate
employment.
If your
vested account balance as of the date of your termination is less than $1,000,
distribution will be made in a lump sum. If your accounts are equal to or more
than $1,000 but do not exceed $5,000, and you have not made any payment
election, the Plan administrator will pay the distribution in a direct rollover
to an individual retirement plan with an affiliate of Principal Life Insurance
Company designated by the Plan administrator.
Distribution
Due to Disability, Death or Retirement. If
your
termination of employment is due to normal, early or late retirement, death
or
disability, and your accounts exceed $5,000, distribution generally will be
made
upon your attainment of age 65 (or, if earlier, upon your early retirement
date
at age 55 with 5 years of service, or your disability), unless you elect to
defer distribution to your late retirement date. Unless you elect an alternative
form of distribution described below, your account generally will be distributed
to you and your spouse in the form of a qualified joint and survivor annuity
(QJSA), or if you are unmarried at the time distributions commence under the
401(k) Plan, distributions will be made to you in the form of a single life
annuity with installment refund. In the event of your death before distributions
commence, and you have been married during the one-year period ending on the
date of your death, your account will be distributed to your surviving spouse
in
the form of a qualified pre-retirement survivor annuity (QPSA). With your
spouse’s consent, you may elect to waive the QPSA or name somebody other than
your spouse as beneficiary. Similarly, your spouse may waive the QPSA
requirement and elect to have the benefits distributed under any of the optional
forms of benefit described below. If you are not married at the time of your
death or your spouse is not entitled to a QPSA, your account will be distributed
in a single sum payment.
12
Alternatively,
you may elect under the 401(k) Plan to receive your distribution in any of
the
following forms: (i) a straight life annuity; (ii) a single life annuity with
a
period certain of 5, 10 or 15 years; (iii) a single life annuity with
installment refund; (iv) a survivorship life annuity with installment refund
and
survivor percentages of 50%, 66-2/3%, or 100%; (v) a fixed period annuity for
any number of whole months not less than 60, and which does exceed your life
expectancy based on IRS tables, and where the life expectancy is not
recalculated; (vi) a full flexibility option (e.g., an optional form of benefit
under which you receive a distribution each calendar year in an amount that
you
select of at least $1,000, and which is also subject to certain limitations
under the tax laws; and (vii) a single sum payment. In the event of your death,
you may also elect a distribution to your beneficiary as a single sum payment
or
in any of the foregoing optional forms of distribution, provided, however,
that
the full flexibility option is not available if your beneficiary is not your
surviving spouse.
Investment
of Contributions and Account Balances
All
amounts credited to your accounts under the Plan are either held in a group
annuity contract, or in the Plan trust (the “Trust”) which is administered by
the trustee appointed by Fairport
Savings Bank’s
Board of
Directors.
Prior
to
the effective date of the offering, you were provided the opportunity to direct
the investment of your account into one or more of the following
options:
| · |
Large-Cap
Value Separate Account-Stnd (AllianceBernstein
LLP)
|
| · |
Large-Cap
Stock Index Separate Account-Stnd (Principal Global
Investors)
|
| · |
Large-Cap
Blend Separate Account-Stnd (T. Rowe Price Associates,
Inc.)
|
| · |
Large-Cap
Growth II Separate Account-Stnd (American Century Inv.
Mgmt.)
|
| · |
Large-Cap
Growth I Separate Account-Stnd (T. Rowe Price Associates,
Inc.)
|
| · |
Mid-Cap
Value Separate Account-Stnd (Neuberger Berman/Jacobs
Levy)
|
| · |
Mid-Cap
Stock Index Separate Account-Stnd (Principal Global
Investors)
|
| · |
Mid-Cap
Growth Separate Account-Stnd (Turner Investment
Partners)
|
| · |
Small-Cap
Value Separate Account-Stnd (Ark Asset Mgmt/LA Capital
Mgmt)
|
| · |
Small-Cap
Value II Separate Account-Stnd (Dimensional/Vaughan
Nelson)
|
| · |
Small-Cap
Stock Index Separate Account-Stnd (Principal Global
Investors)
|
| · |
Small-Cap
Growth II Separate Account-Stnd
(UBS/Emerald/Essex)
|
13
| · |
Diversified
International Separate Account-Stnd (Principal Global
Investors)
|
| · |
Real
Estate Securities Separate Account-Stnd (Principal Global
Investors)
|
| · |
Russell
LifePoints®
Cons
Strategy Sep Acct-Standard (Russell Investment
Group)
|
| · |
Russell
LifePoints®
Moderate
Strategy Sep Acct-Standard (Russell Investment
Group)
|
| · |
Russell
LifePoints®
Balanced
Strategy Sep Acct-Standard (Russell Investment
Group)
|
| · |
Russell
LifePoints®
Growth
Strategy Sep Acct-Standard (Russell Investment
Group)
|
| · |
Russell
LifePoints®
Equity
Growth Strat Sep Acct-Stnd (Russell Investment
Group)
|
| · |
Stable
Value Fund (Morley Financial Services,
Inc.)
|
| · |
Bond
and Mortgage Separate Account-Stnd (Principal Global
Investors)
|
In
connection with the offering, the Plan now provides that in addition to the
funds specified above, you may direct the trustee, to invest all or a portion
of
your account in the FSB Community Bankshares, Inc. Stock Fund. You may elect
to
have both past contributions and earnings, as well as future contributions
to
your account invested among the funds listed above. If you fail to provide
an
effective investment direction in connection with the stock offering, your
contributions will be invested in the various investment alternatives that
you
designated until such time as you change your investment directions. You may
apply different investment instructions to amounts already accumulated as
opposed to future contributions. You may change your investment directions
at
any time by telephone or electronic medium.
Performance
History
The
following table provides performance data with respect to the investment funds
available under the Plan through February 28, 2007:
Performance
As
of February 28, 2007
|
Stock
Accounts
|
3
Month
|
1
Year
|
3
Year
|
5
Year
|
10
Year
|
Since
Inception
|
|
Large-Cap
Value Separate Account-Stnd
(AllianceBernstein
LP)
|
1.63%
|
15.62%
|
10.94%
|
9.40%
|
N/A
|
8.63%
|
|
Large-Cap
Stock Index Separate Account-Stnd
(Principal
Global Investors)
|
0.84%
|
11.64%
|
8.76%
|
6.46%
|
7.24%
|
N/A
|
|
Large-Cap
Blend Separate Account-Stnd
(T.
Rowe Price Associates, Inc.)
|
0.87%
|
12.47%
|
8.99%
|
6.67%
|
N/A
|
4.12%
|
14
|
Stock
Accounts
|
3
Month
|
1
Year
|
3
Year
|
5
Year
|
10
Year
|
Since
Inception
|
|
Large-Cap
Growth II Separate Account-Stnd
(American
Century Inv. Mgmt.)
|
-0.03%
|
5.78%
|
6.14%
|
3.64%
|
N/A
|
-0.94%
|
|
Large-Cap
Growth I Separate Account-Stnd
(T.
Rowe Price Associates, Inc.)
|
1.61%
|
5.15%
|
6.96%
|
3.50%
|
N/A
|
-0.69%
|
|
Mid-Cap
Value Separate Account-Stnd
(Neuberger
Berman/Jacobs Levy)
|
3.42%
|
13.29%
|
14.52%`
|
13.77%
|
N/A
|
10.99%
|
|
Mid-Cap
Stock Index Separate Account-Stnd
(Principal
Global Investors)
|
3.80%
|
9.41%
|
12.64%
|
11.50%
|
N/A
|
11.17%
|
|
Mid-Cap
Growth Separate Account-Stnd
(Turner
Investment Partners)
|
2.11%
|
1.47%
|
9.40%
|
9.09%
|
N/A
|
3.83%
|
|
Small-Cap
Value Separate Account-Stnd
(Ark
Asset Mgmt/LA Capital Mgmt)
|
2.02%
|
8.81%
|
11.39%
|
11.29%
|
N/A
|
13.66%
|
|
Small-Cap
Value II Separate Account-Stnd
(Dimensional/Vaughan
Nelson)
|
3.25%
|
13.35%
|
N/A
|
N/A
|
N/A
|
16.78%
|
|
Small-Cap
Stock Index Separate Account-Stnd
(Principal
Global Investors)
|
1.40%
|
8.34%
|
13.37%
|
12.62%
|
N/A
|
12.03%
|
|
Small-Cap
Growth II Separate Account-Stnd
(UBS/Emerald/Essex)
|
2.20%
|
3.13%
|
9.27%
|
10.21%
|
N/A
|
2.39%
|
|
Diversified
International Separate Account-Stnd
(Principal
Global Investors)
|
3.96%
|
20.12%
|
23.04%
|
18.09%
|
8.63%
|
N/A
|
|
Real
Estate Securities Separate Account-Stnd
(Principal
Global Investors)
|
4.17%
|
31.22%
|
27.60%
|
N/A
|
N/A
|
30.72%
|
|
Russell
LifePoints® Cons Strategy Sep Acct-Standard
(Russell
Investment Group)
|
1.02%
|
6.17%
|
4.12%
|
4.53%
|
N/A
|
4.66%
|
|
Russell
LifePoints® Moderate Strategy Sep Acct-Standard
(Russell
Investment Group)
|
1.39%
|
8.17%
|
6.50%
|
6.50%
|
N/A
|
5.19%
|
|
Russell
LifePoints® Balanced Strategy Sep Acct-Stnd
(Russell
Investment Group)
|
1.71%
|
10.26%
|
9.23%
|
8.73%
|
N/A
|
5.85%
|
|
Russell
LifePoints® Growth Strategy Sep Acct-Standard
(Russell
Investment Group)
|
1.95%
|
11.76%
|
11.07%
|
9.73%
|
N/A
|
5.60%
|
15
|
Stock
Accounts
|
3
Month
|
1
Year
|
3
Year
|
5
Year
|
10
Year
|
Since
Inception
|
|
Russell
LifePoints® Equity Growth Strat Sep Acct-Stnd
(Russell
Investment Group)
|
2.18%
|
13.44%
|
12.97%
|
10.68%
|
N/A
|
5.54%
|
|
Stable
Value Fund
(Morley
Financial Services, Inc.)
|
1.01%
|
3.91%
|
3.58%
|
3.80%
|
N/A
|
4.73%
|
|
Bond
and Mortgage Separate Account-Stnd
(Principal
Global Investors)
|
0.99%
|
5.75%
|
3.88%
|
5.31%
|
6.47%
|
N/A
|
The
following is a description of each of the Plan’s investment options (excerpted
from each option’s own description):
Large-Cap
Value Separate Account-Stnd (AllianceBernstein LP).
The
investment seeks long-term growth of capital. The fund normally invests at
least
80% of assets in companies with large market capitalizations (with market
capitalizations similar to companies in the Russell 1000 Value index (as of
December 31, 2006, this range was between approximately $1.3 billion and $446.9
billion)) at the time or purchase. It may invest up to 25% of its assets in
securities of foreign companies.
Large-Cap
Stock Index Separate Account-Stnd (Principal Global
Investors).
The
investment option normally invests the majority of assets in common stocks
of
companies that compose the S&P 500 Index. Management attempts to mirror the
investment performance of the index by allocating assets in approximately the
same weightings as the S&P 500 Index. Over the long-term, management seeks a
very close correlation between the performance of the Separate Account before
expenses and that of the S&P 500 Index.
Large-Cap
Blend Separate Account-Stnd (T. Rowe Price Associates,
Inc.).
The
investment seeks long-term growth of capital. The fund normally invests at
least
80% of assets in common stocks of companies with large market capitalizations
with market capitalizations within the range of companies in the S&P 500
index (as of December 31, 2006 this range was between approximately $1.4 billion
and $446.9 billion)) at the time of purchase.
Large-Cap
Growth II Separate Account-Stnd (American Century Inv.
Mgmt.).
The
investment seeks long-term growth of capital. The fund normally invests at
least
80% of assets in equity securities of companies with large market
capitalizations (with market capitalizations similar to companies in the Russell
1000 Growth index (as of December 31, 2006, the range was between approximately
$1.2 billion and $446.9 billion)) at the time of purchase. It also may invest
up
to 25% of total assets in foreign companies.
Large-Cap
Growth I Separate Account-Stnd (T. Rowe Price Associates,
Inc.).
The
investment seeks long-term grown of capital. The fund normally invests at least
80% of assets in equity securities of companies with market capitalizations
within the range of companies in the Russell 1000 Growth index (as of December
31,2006, this range was between approximately $1.2 billion and $446.9 billion))
at the time of purchase. It invests less than 25% of total assets in foreign
companies. The fund may also purchase futures and options.
16
Mid-Cap
Value Separate Account-Stnd (Neuberger Berman/Jacobs Levy).
The
investment seeks long-term growth of capital. The fund normally invests at
least
80% of assets in common stocks of companies with a medium market capitalization
(whose market capitalizations similar to companies in the Russell Midcap Value
index (as of December 31, 2006, this range was between approximately $1.3
billion and $19.3 billion) at the time of purchase. It may invest up to 25%
of
assets in securities of foreign companies.
Mid-Cap
Stock Index Separate Account-Stnd (Principal Global
Investors).
The
investment option normally invests the majority of assets in common stocks
of
companies that compose the S&P MidCap 400 Index. Management attempts to
mirror the investment performance of the index by allocating assets in
approximately the same weightings as the S&P Index. Over the long-term,
management seeks a very close correlation between the performance of the
Separate Account before expenses and that of the S&P 400 Index.
Mid-Cap
Growth Separate Account-Stnd (Turner Investment Partners).
The
investment seeks long-term growth of capital. The fund invests primarily in
common stocks and other equity securities of U.S. companies with strong
earnings-growth potential. It normally invests at least 80% of assets in
companies with market capitalizations similar to those of companies in the
Russell MidCap Growth index. It may invest in securities of companies that
are
diversified across economic sectors. The fund may invest up to 25% of assets
in
foreign securities.
Small-Cap
Value Separate Account-Stnd (Ark Asset Mgmt/LA Capital
Mgmt).
The
investment seeks long-term capital growth. The fund invests primarily in common
stocks of small-capitalization companies. It normally invests at least 80%
of
assets in companies with market capitalizations similar to companies in the
Russell 2000 Value index or $2 billion, whichever is greater, at the time of
purchase. The fund may invest up to 25% of assets in foreign
securities.
Small-Cap
Value II Separate Account-Stnd (Dimensional/Vaughan Nelson).
The
investment seeks long-term growth of capital. The fund primarily invests at
least 80% of net assets in equity securities of such small companies; those
with
market capitalizations similar to companies in the Russell 2000 Value index.
The
fund also invests up to 25% of assets in foreign securities. In selecting
investments, Vaughan Nelson generally employ the value driven investment
philosophy.
Small-Cap
Stock Index Separate Account-Stnd (Principal Global
Investors).
The
investment seeks long-term growth of capital and normally invests the majority
of assets in common stocks of companies that compose the S&P SmallCap 600
Index. Management attempts to mirror the investment performance of the index
by
allocating assets in approximately the same weightings as the S&P 600 Index.
Over the long-term, management seeks a very close correlation between the
performance of the Separate Account before expenses and that of the S&P 600
Index.
Small-Cap
Growth II Separate Account-Stnd (UBS/Emerald/Essex).
The
investment seeks long-term growth of capital. The fund normally invests at
least
80% of assets in common stocks of companies with small market capitalizations
(whose market capitalizations are equal to or smaller than the greater of $2.5
billion or the highest market capitalization of the companies in the Russell
2000 Growth index (as of December 31, 2006, this range was between approximately
$39 million and $3.1 billion)) at the time of purchase. It may invest up to
25%
of assets in securities of foreign companies.
17
Diversified
International Separate Account-Stnd (Principal Global
Investors).
The
investment option normally invests the majority of assets in companies in at
least three different countries. It invests in securities of companies with
their principal place of business or principal office outside of the United
States; companies for which the principal securities trade on a foreign
exchange; and companies, regardless of where their securities are traded, that
derive 50% or more of their total revenue from goods or services produced or
sold outside of the United States. The Separate Account may invest securities
of
companies with small to medium market capitalizations.
Real
Estate Securities Separate Account-Stnd (Principal Global
Investors).
The
investment seeks to generate a total return. The fund normally invests at least
80% of net assets in equity securities of companies principally engaged in
the
real estate industry. A real estate company has at least 50% of assets, income
or profits derived from products or services related to the real estate
industry. Real estate companies include real estate investment trusts and
companies with substantial real estate holdings such as paper, lumber, hotel
and
entertainment companies.
Russell
LifePoints® Cons Strategy Sep Acct-Standard (Russell Investment
Group).
The
investment seeks high levels of current income and low long-term capital
appreciation. The fund is a fund of funds, and diversifies assets by investing
in class S shares of several other Frank Russell Investment Company funds.
The
management may modify the asset allocation and the selection of underlying
funds
from time to time. While the investment is nondiversified, it invests in
diversified underlying holdings.
Russell
LifePoints® Moderate Strategy Sep Acct-Standard (Russell Investment
Group).
The
investment seeks high current income and moderate long-term capital
appreciation. The fund is a fund of funds, and diversifies assets by investing
in class S shares of several other Frank Russell Investment Company funds.
The
management may modify the asset allocation and the selection of underlying
funds
from time to time. While the investment is nondiversified, it invests in
diversified underlying holdings.
Russell
LifePoints® Balanced Strategy Sep Acct-Standard (Russell Investment
Group).
The
investment seeks to provide above average capital appreciation and a moderate
level of current income. The fund is a fund of funds, and diversifies assets
by
investing in class S shares of several other Frank Russell Investment Company
funds. The management may modify the asset allocation and the selection of
underlying funds from time to time. While the investment is nondiversified,
it
invests in diversified underlying holdings.
Russell
LifePoints® Growth Strategy Sep Acct-Standard (Russell Investment
Group).
The
investment seeks high long term capital appreciation and low current income.
The
fund is a fund of funds, and diversifies assets by investing in class S shares
of several other Frank Russell Investment Company funds. The management may
modify the asset allocation and the selection of underlying funds from time
to
time. While the investment is nondiversified, it invests in diversified
underlying holdings.
18
Russell
LifePoints® Equity Growth Strat Sep Acct-Stnd (Russell Investment
Group).
The
investment seeks high long term capital appreciation. The fund is a fund of
funds, and diversifies assets by investing in class S shares of several other
Frank Russell Investment Company funds. It normally invests at least 80% of
assets in shares of equity underlying funds. The management may modify the
asset
allocation and the selection of underlying funds from time to time. While the
investment is nondiversified, it invests in diversified underlying
holdings.
Stable
Value Fund (Morley Financial Services, Inc.).
The
Principal Stable Value Fund seeks current income by investing primarily in
insurance contracts issued by insurance companies, and investments from other
financial institutions which offer stability of principal. It holds multiple
duration securities with an average quality rating of AAA.
Bond
and Mortgage Separate Account-Stnd (Principal Global
Investors).
The
investment option invests primarily in intermediate-term, fixed-income
investments such a public and private corporate bonds, commercial and
residential mortgages, asset-backed securities and US government and
agency-backed securities. Value is added primarily through sector allocation
and
security selection. The Separate Account may enter into reverse repurchase
agreements to attempt to enhance portfolio return and income.
Investment
in Common Stock of FSB Community Bankshares, Inc.
In
connection with the stock offering, the Plan will make a one-time offer of
the
Common Stock as an additional choice to these investments options. In connection
with the offering, you may direct the trustee to invest up to 100% of your
Plan
account in Common Stock as a one-time special election.
As
of the
date of this prospectus supplement, none of the shares of Common Stock have
been
issued or are outstanding and there is no established market for the Common
Stock. Accordingly, there is no record of the historical performance of the
Common Stock. Performance of the Common Stock depends on a number of factors,
including the financial condition and profitability of FSB Community Bankshares,
Inc. and Fairport Savings Bank and market conditions for the Common Stock
generally.
Investments
in the Common Stock involve special risks that are common to investments in
the
common stock.
For
a
discussion of material
risks you should consider, see “Risk Factors” beginning on page 20 of the
attached prospectus.
Notice
of Investment Diversification Rights
The
following notice
is
provided to you pursuant to applicable law.
Notice
of Your Rights Concerning Employer Securities.
This
notice informs you of an important change in federal law that provides specific
rights concerning investments in Common Stock. Because you may now invest in
Common Stock under the Plan, you should take the time to read this notice
carefully.
19
Your
Rights Concerning Employer Securities. The
Plan
must allow you to elect to move any portion of your account that is invested
in
Common
Stock from
that
investment into other investment alternatives under the Plan. This right extends
to all of the Common Stock held under the Plan. You may contact the person
identified below for specific information regarding this legal right, including
how to make this election. In deciding whether to exercise this right, you
will
want to give careful consideration to the information below that describes
the
importance of diversification. All of the investment options under the Plan
are
available to you if you decide to diversify out of Common
Stock.
The
Importance of Diversifying Your Retirement Savings. To
help
achieve long-term retirement security, you should give careful consideration
to
the benefits of a well-balanced and diversified investment portfolio. Spreading
your assets among different types of investments can help you achieve a
favorable rate of return, while minimizing your overall risk of losing money.
This is because market or other economic conditions that cause one category
of
assets, or one particular security, to perform very well often cause another
asset category, or another particular security, to perform poorly. If you invest
more than 20% of your retirement savings in any one company or industry, your
savings may not be properly diversified. Although diversification is not a
guarantee against loss, it is an effective strategy to help you manage
investment risk.
In
deciding how to invest your retirement savings, you should take into account
all
of your assets, including any retirement savings outside of the Plan. No single
approach is right for everyone because, among other factors, individuals have
different financial goals, different time horizons for meeting their goals,
and
different tolerances for risk. Therefore, you should carefully consider the
rights described in this notice and how these rights affect the amount of money
that you invest in Common Stock through the Plan.
It
is
also important to periodically review your investment portfolio, your investment
objectives, and the investment options under the Plan to help ensure that your
retirement savings will meet your retirement goals.
For
More Information.
If
you
have any questions about your rights under this new law, including how to make
this election, contact Kevin Maroney, Fairport Savings Bank, Telephone: (585)
377-8970, extension 334. For more information on investing and diversification
of retirement plan assets, please go to the Employee Benefits Security
Administration website, which is located at http://www.dol.gov/ebsa/investing.html.
The
Trustee and Custodian. Plan
assets other than the Common Stock are held in a group annuity contract, so
those assets are not required to be held in a trust. Common
Stock will
not
be held as part of the group annuity contract and the Plan has retained
Principal Financial Group to serve as trustee for the Common
Stock.
20
Plan
Administrator.
Pursuant
to the terms of the Plan, the Plan is administered by the Plan Administrator,
Fairport Savings Bank. The address of the Plan Administrator is Fairport Savings
Bank, Attn: Kevin Maroney, 45 South Main Street, Fairport, NY 14450; telephone:
(585) 377-8970, extension 334. The Plan Administrator is responsible for the
administration of the Plan, interpretation of the provisions of the Plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the Plan, maintenance of Plan records,
books of account and all other data necessary for the proper administration
of
the Plan, preparation and filing of all returns and reports relating to the
Plan
which are required to be filed with the U.S. Department of Labor and the IRS,
and for all disclosures required to be made to participants, beneficiaries
and
others under ERISA Sections 104 and 105.
Reports
to Plan Participants.
The
Plan Administrator will furnish you a statement at least quarterly showing
the
balance in your account as of the end of that period, the amount of
contributions allocated to your account for that period, and any adjustments
to
your account to reflect earnings or losses (if any).
Amendment
and Termination
It
is the
intention of Fairport Savings Bank to continue the Plan indefinitely.
Nevertheless, Fairport Savings Bank may terminate the Plan at any time. If
the
Plan is terminated in whole or in part, then regardless of other provisions
in
the Plan, you will have a fully vested interest in your accounts. Fairport
Savings Bank reserves the right to make any amendment or amendments to the
Plan
which do not cause any part of the trust to be used for, or diverted to, any
purpose other than the exclusive benefit of participants or their beneficiaries;
provided, however, that Fairport Savings Bank may make any amendment it
determines necessary or desirable, with or without retroactive effect, to comply
with ERISA.
Merger,
Consolidation or Transfer
In
the
event of the merger or consolidation of the Plan with another plan, or the
transfer of the trust assets to another plan, the Plan requires that you would,
if either the Plan or the other plan terminates, receive a benefit immediately
after the merger, consolidation or transfer that is equal to the benefit that
you would have been entitled to receive immediately before the merger,
consolidation or transfer.
Federal
Income Tax Consequences
The
following is a brief summary of the material federal income tax aspects of
the
Plan. You should not rely on this summary as a complete or definitive
description of the material federal income tax consequences relating to the
Plan. Statutory provisions change, as do their interpretations, and their
application may vary in individual circumstances. Finally, the consequences
under applicable state and local income tax laws may not be the same as under
the federal income tax laws. Please consult your tax advisor with respect to
any
distribution from the Plan and transactions involving the Plan.
21
As
a
“tax-qualified retirement plan,” the Code affords the Plan special tax
treatment, including:
(1)
the
sponsoring employer is allowed an immediate tax deduction for the amount
contributed to the Plan each year;
(2)
participants pay no current income tax on amounts contributed by the employer
on
their behalf; and
(3)
earnings of the Plan are tax-deferred, thereby permitting the tax-free
accumulation of income and gains on investments.
Fairport
Savings Bank will administer the Plan to comply with the requirements of the
Code as of the applicable effective date of any change in the law.
Distributions
of Roth Elective Deferral Contributions.
A
distribution from your Roth contribution account in the 401(k) Plan generally
is
not taxable to you provided that such distribution is made after the Roth
elective contributions have been in the 401(k) Plan for at least 5 years, and
the distribution is made after you reach age 59-1/2, or following your death
or
disability.
Lump-Sum
Distribution.
A
distribution from the Plan to a participant or the beneficiary of a participant
will qualify as a lump-sum distribution if it is made within one taxable year,
on account of the participant’s death, disability or separation from service, or
after the participant attains age 59 ½, and consists of the balance credited to
the participant under the Plan. The portion of any lump-sum distribution
required to be included in your taxable income for federal income tax purposes
consists of the entire amount of the lump-sum distribution you have made to
this
Plan.
FSB
Community Bankshares, Inc. Common Stock Included in Lump-Sum
Distribution.
If a
lump-sum distribution includes Common Stock, the distribution generally will
be
taxed in the manner described above, except that the total taxable amount may
be
reduced by the amount of any net unrealized appreciation with respect to the
Common Stock; that is, the excess of the value of the Common Stock at the time
of the distribution over its cost of the securities to the trust. The tax basis
of the Common Stock, for purposes of computing gain or loss on its subsequent
sale, equals the value of the Common Stock at the time of distribution, less
the
amount of net unrealized appreciation. Any gain on a subsequent sale or other
taxable disposition of the Common Stock, to the extent of the amount of net
unrealized appreciation at the time of distribution, will constitute long-term
capital gain, regardless of the holding period of the Common Stock. Any gain
on
a subsequent sale or other taxable disposition of the Common Stock, in excess
of
the amount of net unrealized appreciation at the time of distribution, will
be
considered long-term capital gain. The recipient of a distribution may elect
to
include the amount of any net unrealized appreciation in the total taxable
amount of the distribution, to the extent allowed by the IRS.
22
Distributions:
Rollovers and Direct Transfers to Another Qualified Plan or to an
IRA.
You may
roll over virtually all distributions from the Plan to another qualified plan
or
to an individual retirement account in accordance with the terms of the other
plan or account.
Other
Distributions.
If you
elect an annuity form of distribution under the 401(k) Plan, you will be taxed
on the distribution in the year in which you receive the distribution. Assuming
that you have not made any after-tax contributions to the 401(k) Plan, each
payment is ordinary income in the year received. To the extent that you have
made after-tax contributions to the 401(k) Plan, you may be able to exclude
a
portion of each payment from current income.
Additional
Employee Retirement Income Security Act (“ERISA”)
Considerations
As
noted
above, the Plan is subject to certain provisions of ERISA, including special
provisions relating to control over the Plan’s assets by participants and
beneficiaries. The Plan’s feature that allows you to direct the investment of
your account balances is intended to satisfy the requirements of section 404(c)
of ERISA relating to control over plan assets by a participant or beneficiary.
The effect of this is two-fold. First, you will not be deemed a “fiduciary”
because of your exercise of investment discretion. Second, no person who
otherwise is a fiduciary, such as Fairport Savings Bank, the Plan Administrator,
or the Plan’s trustee is liable under the fiduciary responsibility provision of
ERISA for any loss which results from your exercise of control over the assets
in your Plan account.
Because
you will be entitled to invest all or a portion of your account balance in
the
Plan in Common Stock, the regulations under ERISA section 404(c) require that
the Plan establish procedures that ensure the confidentiality of your decision
to purchase, hold, or sell employer securities, except to the extent that
disclosure of such information is necessary to comply with federal or state
laws
not preempted by ERISA. These regulations also require that your exercise of
voting and similar rights with respect to the Common Stock be conducted in
a way
that ensures the confidentiality of your exercise of these rights.
23
Securities
and Exchange Commission Reporting and Short-Swing Profit
Liability
Section
16 of the Securities Exchange Act of 1934 imposes reporting and liability
requirements on officers, directors, and persons beneficially owning more than
10% of public companies such as FSB Community Bankshares, Inc. Section 16(a)
of
the Securities Exchange Act of 1934 requires the filing of reports of beneficial
ownership. Within 10 days of becoming an officer, director or person
beneficially owning more than 10% of the shares of FSB Community Bankshares,
Inc., a Form 3 reporting initial beneficial ownership must be filed with the
Securities and Exchange Commission. Changes in beneficial ownership, such as
purchases, sales and gifts generally must be reported on a Form 4 within 2
business days after the change occurs. Insiders must file a Form 5 to report
any
transactions that should have been reported earlier on a Form 4 or were eligible
for deferred reporting. If a Form 5 must be filed, it is due 45 days after
the
end of FSB Community Bankshares, Inc.’s fiscal year. Discretionary transactions
in and beneficial ownership of the Common Stock in the Plan by officers,
directors and persons beneficially owning more than 10% of the Common Stock
of
FSB Community Bankshares, Inc. generally must be reported to the Securities
and
Exchange Commission by such individuals.
In
addition to the reporting requirements described above, section 16(b) of the
Securities Exchange Act of 1934 provides for the recovery by FSB Community
Bankshares, Inc. of profits realized by an officer, director or any person
beneficially owning more than 10% of Common Stock resulting from non-exempt
purchases and sales of Common Stock within any six-month period.
The
Securities and Exchange Commission has adopted rules that provide exemptions
from the profit recovery provisions of section 16(b) for all transactions in
employer securities within an employee benefit plan, provided certain
requirements are met. These requirements generally involve restrictions upon
the
timing of elections to acquire or dispose of employer securities for the
accounts of section 16(b) persons. Except
for distributions of Common Stock due to death, disability, retirement,
termination of employment or under a qualified domestic relations order, persons
affected by section 16(b) are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution and are
prohibited from directing additional purchases of Common
Stock for
six
months after receiving such a distribution.
Financial
Information Regarding Plan Assets
Audited
financial information regarding the net assets available for benefits for the
year ended December 31, 2006 is available upon written request to the Plan
Administrator at the address shown above.
LEGAL
OPINION
The
validity of the issuance of the Common Stock has been passed upon by Luse Gorman
Pomerenk & Schick, P.C., Washington, D.C., which firm acted as special
counsel to Fairport Savings Bank in connection with FSB Community Bankshares,
Inc.’s stock offering.
24
PROSPECTUS
FSB
Community
Bankshares, Inc.
the
holding Company for Fairport Savings Bank
1,135,050
Shares of Common Stock
FSB
Community Bankshares, Inc., a federally chartered corporation, is offering
for
sale 1,135,050 shares of its common stock, $0.10 par value, on a best efforts
basis. The shares being offered represent 47.0% of our shares of common stock
that will be outstanding upon completion of the stock offering. Upon completion
of the stock offering, 53.0% of our outstanding shares of common stock will
be
owned by FSB Community Bankshares, MHC, our federally chartered mutual holding
company parent. We intend to have our common stock quoted on the OTC Bulletin
Board. However, we do not expect an active or liquid trading market to develop
due to the small size of the offering.
We
must
sell a minimum of 838,950 shares in order to complete the stock offering, and
we
will terminate the stock offering if we do not sell the minimum number of
shares. We may sell up to 1,305,308 shares because of changes in market
conditions, without resoliciting subscribers. The stock offering is scheduled
to
terminate at 5:00 p.m., Eastern time, on June 14, 2007. We may extend the
termination date without notice to you, until August 13, 2007, unless the Office
of Thrift Supervision approves a later date, which may not be beyond May 14,
2009.
Depositors
of Fairport Savings Bank with aggregate deposit account balances of $50 or
more
as of December 31, 2005 will have first priority rights to subscribe for our
shares of common stock. The minimum purchase is 25 shares of common stock.
Generally, the maximum purchase that an individual may make in the subscription
offering is 15,000 shares ($150,000), and no person by himself, or with an
associate or group of persons acting in concert, may purchase more than 20,000
shares ($200,000) in the entire stock offering. For further information
concerning the limitations on purchases of shares of common stock, see “The
Stock Offering—Limitations on Purchase of Shares.” Once submitted, orders are
irrevocable unless the stock offering is terminated or extended beyond August
13, 2007. If the stock offering is extended beyond August 13, 2007, subscribers
will have the right to modify or rescind their purchase orders. Funds received
prior to the completion of the stock offering up to the minimum of the offering
range will be held by Fairport Savings Bank. Funds received in excess of the
minimum of the offering range may be maintained at Fairport Savings Bank or,
at
our discretion, at another federally insured depository institution. However,
in
no event will we maintain more than one escrow account. All subscriptions
received will bear interest at Fairport Savings Bank’s passbook savings rate,
which is currently 0.75% per annum. If the stock offering is terminated,
subscribers will have their funds returned promptly in full without reduction,
with interest.
Sandler
O’Neill & Partners, L.P. will use its best efforts to assist us in selling
our shares of common stock, but is not obligated to purchase any of the shares
of common stock that are being offered for sale. Subscribers will not pay any
commissions to purchase shares of common stock in the stock offering. There
is
currently no public market for the shares of common stock. Sandler O’Neill &
Partners, L.P. has advised us that it intends to make a market in our shares
of
common stock, but is under no obligation to do so.
This
investment involves risk, including the possible loss of
principal.
Please
read the “Risk Factors” beginning on page 20.
OFFERING
SUMMARY
Price:
$10.00 per share
|
Minimum
|
Midpoint
|
Maximum
|
Adjusted
Maximum
|
||||||||||
|
Number
of shares
|
838,950
|
987,000
|
1,135,050
|
1,305,308
|
|||||||||
|
Gross
proceeds of offering
|
$
|
8,389,500
|
$
|
9,870,000
|
$
|
11,350,500
|
$
|
13,053,080
|
|||||
|
Estimated
stock offering expenses excluding selling agent commissions and
expenses
|
$
|
644,600
|
$
|
644,600
|
$
|
644,600
|
$
|
644,600
|
|||||
|
Selling
agent commissions and expenses (1)
|
$
|
210,000
|
$
|
210,000
|
$
|
210,000
|
$
|
210,000
|
|||||
|
Net
proceeds
|
$
|
7,534,900
|
$
|
9,015,400
|
$
|
10,495,900
|
$
|
12,198,480
|
|||||
|
Net
proceeds per share
|
$
|
8.98
|
$
|
9.13
|
$
|
9.25
|
$
|
9.35
|
|||||
|
(1)
|
Fixed
fee of $150,000 plus estimated $60,000 of expenses. See “The Stock
Offering - Marketing Arrangements” for a discussion of Sandler O’Neill
& Partners, L.P.’s compensation for this offering.
|
These
securities are not deposits or savings accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither
the Securities and Exchange Commission, the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation, nor any state securities commission
has
approved or disapproved these securities or determined if this prospectus is
accurate or complete. Any representation to the contrary is a criminal
offense.
SANDLER
O’NEILL + PARTNERS, L.P.
The
date of this prospectus is May 14, 2007
TABLE
OF CONTENTS
|
1
|
|
|
20
|
|
|
30
|
|
|
32
|
|
|
37
|
|
|
38
|
|
|
40
|
|
|
41
|
|
|
42
|
|
|
44
|
|
|
45
|
|
|
50
|
|
|
67
|
|
|
67
|
|
|
88
|
|
|
90
|
|
|
102
|
|
|
114
|
|
|
137
|
|
|
139
|
|
|
141
|
|
|
141
|
|
|
141
|
|
|
142
|
|
|
142
|
|
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-1
|
i
The
following summarizes material information regarding the offering of shares
of
common stock by FSB Community Bankshares, Inc. and the business of FSB Community
Bankshares, Inc. and Fairport Savings Bank. However, this summary may not
contain all the information that may be important to you. For additional
information, you should read this entire prospectus carefully, including the
consolidated financial statements and the notes to the consolidated financial
statements of FSB Community Bankshares, Inc.
Our
Companies
In
January 2005, Fairport Savings Bank reorganized into the two-tier mutual holding
company structure. As part of the reorganization,
Fairport Savings Bank formed FSB Community Bankshares, Inc. and FSB Community
Bankshares, MHC, a federally chartered mid-tier stock holding company and mutual
holding company, respectively. As a result of the reorganization, Fairport
Savings Bank became a federally chartered capital stock savings bank and a
wholly-owned subsidiary of FSB Community Bankshares, Inc., and FSB Community
Bankshares, Inc. became the wholly-owned subsidiary of FSB Community Bankshares,
MHC. The same directors and officers who manage Fairport Savings Bank manage
FSB
Community Bankshares, Inc. and FSB Community Bankshares, MHC. The executive
offices of FSB Community Bankshares, MHC, FSB Community Bankshares, Inc. and
Fairport Savings Bank are located at 45 South Main Street, Fairport, New York
14450, and their telephone number is (585) 223-9080.
Our
website address is www.fairportsavingsbank.com.
Information on our website should not be considered a part of this prospectus.
Our
current ownership structure is as follows:
FSB
Community Bankshares, MHC. FSB
Community Bankshares, MHC is a federally chartered mutual holding company and
currently owns 100% of the outstanding common stock of FSB Community Bankshares,
Inc. FSB Community Bankshares, MHC has not engaged in any significant business
activity other than owning the common stock of FSB Community Bankshares, Inc.,
and does not intend to expand its business activities after the stock offering.
Upon completion of the stock offering, FSB Community Bankshares, MHC is expected
to own 53.0% of the outstanding shares of common stock of FSB Community
Bankshares, Inc. So long as FSB Community Bankshares, MHC exists, it is required
to own a majority of the voting stock of FSB Community Bankshares, Inc.
FSB
Community Bankshares, MHC is subject to regulation and examination by the Office
of Thrift Supervision.
1
FSB
Community Bankshares, Inc.
FSB
Community Bankshares, Inc. was chartered under federal law on January 14, 2005
in connection with the mutual holding company reorganization of Fairport Savings
Bank. FSB Community Bankshares, Inc. is a
federal
mid-tier stock holding company that currently owns 100%
of
the outstanding common stock of Fairport Savings Bank. At December 31, 2006,
FSB
Community Bankshares, Inc. had consolidated assets of $152.8 million, deposits
of $108.6 million and consolidated stockholder’s equity of $13.9 million. Its
consolidated net income for the year ended December 31, 2006 was $233,000.
The
shares being offering in this offering comprise 47.0% of the shares of common
stock of FSB Community Bankshares, Inc. that will be outstanding following
completion of the offering, with the remaining 53.0% being held by FSB Community
Bankshares, MHC. FSB Community Bankshares, Inc. is subject to regulation and
examination by the Office of Thrift Supervision.
Fairport
Savings Bank. Fairport
Savings Bank is a federally chartered savings bank that conducts business from
its main office in Fairport, New York, and two branch offices located in
Penfield and Irondequoit, New York. Fairport Savings Bank’s principal business
consists of originating one- to four-family residential real estate mortgage
loans and home equity lines of credit. Fairport Savings Bank also offers
commercial real estate, multi-family, construction and other loans (consisting
of automobile, passbook, overdraft protection and unsecured loans). To a lesser
extent, Fairport Savings Bank also invests in mortgage-backed securities, U.S.
Government and federal agency obligations, and state and municipal securities.
Deposits are Fairport Savings Bank’s primary source of funds for its lending and
investing activities. Fairport Savings Bank offers a variety of deposit
accounts, including certificates of deposit, individual retirement accounts,
NOW
accounts, money market accounts and passbook savings accounts. Fairport Savings
Bank also may borrow from the Federal Home Loan Bank of New York to fund loan
originations and investments. Through its wholly owned subsidiary, Oakleaf
Services Corporation, Fairport Savings Bank offers non-deposit investment
products, consisting of annuities, insurance products and mutual
funds.
Business
Strategy
Our
business strategy is to:
|
·
|
Operate
as a community-oriented retail financial institution in Monroe County,
New
York;
|
|
·
|
Manage
our interest rate risk;
|
|
·
|
Continue
to emphasize the origination of residential real estate loans;
and
|
|
·
|
Maintain
high asset quality.
|
2
See
“Business of Fairport Savings Bank” beginning on page 67 of this prospectus for
a full description of our products and services. See also “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Business Strategy” beginning on page 53 of this prospectus for a
discussion of our business strategy.
Our
Ownership Structure Following The Stock Offering
Federal
regulations require that as long as FSB Community Bankshares, MHC exists, it
must own a majority of our outstanding shares of common stock. Accordingly,
the
shares that we are permitted to sell in the stock offering must represent a
minority of our outstanding shares of common stock. Based on these restrictions,
our board of directors has decided to offer 47.0% of our shares of common stock
for sale in the stock offering. Our remaining outstanding shares of common
stock
will be held by FSB Community Bankshares, MHC.
Our
ownership structure after the completion of the stock offering will be as
follows:
FSB
Community Bankshares, MHC has no plans, understandings or agreements, whether
written or oral, to sell or otherwise dispose of its shares of common stock
of
FSB Community Bankshares, Inc. FSB Community Bankshares, MHC may convert to
stock form in the future by offering its interest in FSB Community Bankshares,
Inc. for sale to depositors and others in a subscription offering. However,
FSB
Community Bankshares, MHC has no current plans to convert to stock
form.
Reasons
for the Stock Offering
The
primary reasons for our decision to conduct the stock offering and raise capital
are to:
|
·
|
support
our internal growth through lending in the communities we serve or
may
serve in the future;
|
|
·
|
support
the expansion of our branch
network;
|
3
|
·
|
enable
us to compete more effectively in the financial services marketplace
and
increase profitability; and
|
|
·
|
offer
our depositors, employees, management and directors an equity ownership
interest in FSB Community Bankshares, Inc. and thereby obtain an
economic
interest in any future success that we may
have.
|
Our
board
of directors determined to undertake the stock offering at this time because
it
concluded that additional capital was needed in order to support future growth
and increase profitability. The board believes that current market conditions
offer an opportunity to raise sufficient capital to support such growth. The
flat and inverted yield curve environment of recent years has reduced our
interest rate spread and profitability. The proceeds from the stock offering
will increase the amount of funds available for lending and investment purposes
and, initially, will allow us to invest in shorter-term investments that will
generate additional interest income and help moderate our interest rate risk.
Proceeds from the stock offering will also be used to support the additional
expense of our Irondequoit branch, which opened in January 2007. Additionally,
as select opportunities present themselves, we will consider opening one or
two
new branches during the next three years, although we have no current plans
to
open any branches at this time.
The
stock
offering also will allow us to establish stock benefit plans for management
and
employees, which will help us to attract and retain qualified
personnel.
Terms
of the Stock Offering
We
are
offering between 838,950 and 1,135,050 shares of common stock to qualified
depositors and borrowers, our tax-qualified employee plans and to the public,
to
the extent shares remain available. The maximum number of shares that we sell
in
the stock offering may increase to up to 1,305,308 shares as a result of
positive changes in financial markets in general and financial institution
stocks in particular. Unless our estimated pro forma fully converted market
value decreases below $17.9 million or increases above $27.8 million, you will
not have the opportunity to change or cancel your stock order. The term “fully
converted” means that our independent appraisal firm assumed that 100% of our
common stock had been sold to the public, rather than the 47% that will be
sold
in connection with this offering.
The
offering price of the shares of common stock is $10.00 per share. Sandler
O’Neill & Partners, L.P., our marketing agent in connection with the stock
offering, will use its best efforts to assist us in selling our shares of common
stock, but Sandler O’Neill & Partners, L.P. is not obligated to purchase any
shares in the stock offering.
Persons
Who May Order Stock in the Stock Offering
We
are
offering the shares of common stock in a subscription offering in the following
descending order of priority:
| (1) |
Depositors
who had accounts at Fairport Savings Bank with aggregate balances
of at
least $50 as of the close of business on December 31,
2005;
|
4
| (2) |
The
tax-qualified employee benefit plans of Fairport Savings Bank (including
our employee stock ownership plan and 401(k)
plan);
|
| (3) |
Depositors
who had accounts at Fairport Savings Bank with aggregate balances
of at
least $50 as of the close of business on March 31, 2007;
and
|
| (4) |
Depositors
who had accounts at Fairport Savings Bank with aggregate balances
of at
least $50 as of the close of business on April 30, 2007 and borrowers
from
Fairport Savings Bank as of January 14, 2005 who maintained such
borrowings as of the close of business on April 30, 2007.
|
If
any
shares of our common stock remain unsold in the subscription offering, we will
offer such shares for sale in a community offering. Natural persons residing
in
the New York counties of Livingston, Monroe, Ontario, Orleans and Wayne will
have a purchase preference in any community offering. Shares also may be offered
to the general public. The community offering, if any, may commence concurrently
with, during or promptly after the subscription offering. We also may offer
shares of common stock not purchased in the subscription offering or the
community offering through a syndicate of brokers in what is referred to as
a
syndicated community offering. The syndicated community offering, if necessary,
would be managed by Sandler O’Neill & Partners, L.P. We have the right to
accept or reject, in our sole discretion, any orders received in the community
offering or the syndicated community offering.
To
ensure
a proper allocation of stock, each eligible account holder must list on his
or
her stock order form all deposit accounts in which he or she had an ownership
interest at December 31, 2005, March 31, 2007 or April 30, 2007, as applicable.
Failure to list an account, or providing incorrect information, could result
in
the loss of all or part of a subscriber’s stock allocation. Our interpretation
of the terms and conditions of the stock issuance plan and of the acceptability
of the order forms will be final.
How
We Determined to Offer Between 838,950 Shares and 1,135,050 Shares and the
$10.00 Price Per Share
The
decision to offer between 838,950 shares and 1,135,050 shares, subject to
adjustment, which is our offering range, is based on an independent appraisal
of
our pro forma market value prepared by RP Financial, LC, a firm experienced
in
appraisals of financial institutions. RP Financial, LC is of the opinion that
as
of February 23, 2007, the estimated pro forma market value of the shares of
common stock of FSB Community Bankshares, Inc. on a fully converted basis was
between $17.9 million and $24.2 million, with a midpoint of $21.0 million.
The
term “fully converted” assumes that 100% of our common stock had been sold to
the public, as opposed to the 47.0% that will be sold in the stock
offering.
Consistent
with the Office of Thrift Supervision appraisal guidelines and regulatory
guidance, the appraisal applied three primary methodologies: the pro forma
price-to-book value approach applied to reported and tangible book value; the
pro forma price-to-earnings approach applied to reported and core earnings;
and
the pro forma price-to-assets approach. The market value ratios applied in
the
three methodologies were based upon the current market valuations of the peer
group companies identified by RP Financial, LC, subject to valuation adjustments
applied by RP Financial, LC to account for differences between FSB Community
Bankshares, Inc. and the peer group. The peer group was comprised of ten
publicly-traded institutions operating as subsidiaries of mutual holding
companies. The valuation considered market value ratios for FSB Community
Bankshares, Inc. and the peer group on both a fully-converted basis and a
non-fully converted basis.
5
In
preparing its appraisal, RP Financial, LC considered the information contained
in this prospectus, including our consolidated financial statements. RP
Financial, LC also considered the following factors, among others:
|
·
|
our
present and projected operating results and financial condition,
including
the reductions in earnings we have experienced in recent periods
and the
anticipated increased costs resulting from opening our new Irondequoit
branch office;
|
|
·
|
the
economic and demographic conditions in our market
areas;
|
|
·
|
historical
financial and other information relating to FSB Community Bankshares,
Inc.
and Fairport Savings Bank;
|
|
·
|
a
comparative evaluation of our operating and financial statistics
with
those of other similarly situated publicly traded thrifts and mutual
holding companies;
|
|
·
|
the
impact of the stock offering on our stockholder’s equity and earnings
potential;
|
|
·
|
our
proposed dividend policy; and
|
|
·
|
the
trading market for securities of comparable institutions and general
conditions in the market for such
securities.
|
In
preparing the valuation, RP Financial, LC applied downward valuation adjustments
relative to the peer group for financial condition, profitability, growth and
viability of earnings, dividends, and liquidity of the shares. The primary
factors leading to the adjustments were the lower historical earnings of
Fairport Savings Bank as compared to the peer group, recent reductions in net
interest income and increased branching-related expenses, and the anticipated
lower level of liquidity in the common stock relative to the peer group
companies. In reviewing the appraisal prepared by RP Financial, LC, the board
of
directors considered the methodologies and the appropriateness of the
assumptions used by RP Financial, LC in addition to the factors listed above,
and the board of directors believes that these assumptions are
reasonable.
The
board
of directors determined that the common stock should be sold at $10.00 per
share, that 47.0% of the shares of common stock should be offered for sale
in
the stock offering and 53.0% should be held by FSB Community Bankshares, MHC.
Based on the estimated valuation range and the purchase price, the number of
shares of common stock that will be outstanding upon completion of the stock
offering will range from 1,785,000 to 2,415,000 (subject
to adjustment to 2,777,250
shares), and the number of shares of common stock that will be sold in the
stock
offering will range from 838,950 shares to 1,135,050 shares (subject to
adjustment up to 1,305,308
shares), with a midpoint of 987,000 shares. The number of shares that FSB
Community Bankshares, MHC will own after the stock offering will range from
946,050 to 1,279,950 (subject to adjustment to 1,471,942 shares). The estimated
valuation range may be amended with the approval of the Office of Thrift
Supervision, or if necessitated by subsequent developments in the financial
condition of Fairport Savings Bank or market conditions generally.
6
The
appraisal will be updated before we complete the stock offering. If the
estimated pro forma fully converted market value of the shares of common stock
at that time is either below $17.9 million or above $27.8 million, then we
may,
after consulting with the Office of Thrift Supervision:
|
·
|
terminate
the stock offering and return all funds promptly with
interest;
|
|
·
|
establish
a new offering range and commence a resolicitation of subscribers;
or
|
|
·
|
take
such other actions as may be permitted by the Office of Thrift
Supervision.
|
Under
such circumstances, we will notify you, and you will have the opportunity to
change or cancel your order within a specified time period. In any event, the
stock offering must be completed by no later than May 14, 2009.
Two
measures investors use to evaluate an issuer’s stock are the market value ratios
of pro forma price-to-tangible book value per share of the common stock and
pro
forma price-to-earnings per share. RP Financial, LC considered these ratios,
among other factors, in preparing its appraisal. The following table presents
the pro forma non-fully converted price-to-tangible book value ratios and the
pro forma non-fully converted price-to-earnings ratios for the period indicated.
See “Pro Forma Data” for a description of the assumptions used in making these
calculations.
|
At
and For the Year Ended December 31, 2006
|
|||||||||||||
|
838,950
Shares
Sold
at
$10.00
Per
Share
|
987,000
Shares
Sold
at
$10.00
Per
Share
|
1,135,050
Shares
Sold
at
$10.00
Per
Share
|
1,305,308
Shares
Sold
at
$10.00
Per
Share
|
||||||||||
|
Pro
forma price-to- tangible book value ratio
|
87.72
|
%
|
96.99
|
%
|
105.26
|
%
|
113.64
|
%
|
|||||
|
Pro
forma price-to-earnings ratio
|
55.56
|
x |
62.50
|
x |
66.67
|
x |
71.43
|
x | |||||
7
The
following table compares our pricing ratios to the pricing ratios of our
peer
group companies on a non-fully converted basis, each at or for the twelve
months
ended December 31, 2006. Compared to the median pricing ratios of the peer
group, our pro forma pricing ratios at the maximum of the offering range
indicated a premium of 174% on a price-to-core earnings basis and a discount
of
39% on a price-to-tangible book basis. The pricing ratios result from our
generally having higher levels of equity and lower earnings on a pro forma
basis
than the companies in our peer group. The appraisal did not consider just
one
valuation approach in reaching the valuation conclusion. Instead, the appraisal
concluded that the ranges of values presented in the tables below represented
the appropriate balance of the approaches to valuing FSB Community Bankshares,
Inc. and the number of shares to be sold, in comparison to the identified
peer
group institutions. Specifically, in approving the valuation, the board believed
that FSB Community Bankshares, Inc. would not be able to sell its shares
at a
price-to-tangible book value ratio that was in line with the peer group without
unreasonably exceeding the peer group on a price-to earnings basis.
|
Non-Fully
Converted
Pro
Forma
Price-to-Core
Earnings
Multiple
|
Non-Fully
Converted
Pro
Forma
Price-to-Tangible
Book Value Ratio
|
||||||
|
FSB
Community Bankshares, Inc.
|
|||||||
|
Maximum
|
66.67
|
x |
105.26
|
%
|
|||
|
Minimum
|
55.56
|
x |
87.72
|
%
|
|||
|
Valuation
of peer group companies
|
|||||||
|
as
of February 23, 2007
|
|||||||
|
Averages
|
24.31
|
x |
176.48
|
%
|
|||
|
Medians
|
24.32
|
x |
173.59
|
%
|
|||
The
following table presents a summary of selected pricing ratios for the peer
group
companies and for us, each at or for the twelve months ended December 31, 2006,
with the ratios adjusted to the hypothetical case of our being a fully converted
stock holding company. Compared to the median fully converted pricing ratios
of
the peer group, our pro forma fully converted pricing ratios at the maximum
of
the offering range indicated a premium of 78.7% on a price-to-core earnings
basis and a discount of 25.2% on a price-to-tangible book value basis.
|
Fully
Converted
Equivalent
Pro Forma
Price-to-Core
Earnings
Multiple
|
|
Fully
Converted
Equivalent
Pro Forma
Price-to-Tangible
Book
Value
Ratio
|
|||||
|
FSB
Community Bankshares, Inc.
|
|||||||
|
Maximum
|
44.86
|
x |
70.48
|
%
|
|||
|
Minimum
|
39.54
|
x |
62.14
|
%
|
|||
|
Valuation
of peer group companies
|
|||||||
|
as
of February 23, 2007
|
|||||||
|
Averages
|
24.19
|
x |
94.59
|
%
|
|||
|
Medians
|
22.01
|
x |
94.30
|
%
|
|||
The
pro
forma fully converted calculations for the peer group companies include the
following assumptions:
|
·
|
8.0%
of the shares sold in a second-step stock offering would be purchased
by
an employee stock ownership plan, with the expense to be amortized
over 30
years;
|
|
·
|
4.0%
of the shares sold in a second-step stock offering would be purchased
by a
stock-based benefit plan, with the expense to be amortized over five
years;
|
|
·
|
Options
equal to 10% of the shares sold in a second-step stock offering would
be
granted under a stock-based benefit plan, with expense of $3.81 per
option
to be amortized over five years;
and
|
|
·
|
stock
offering expenses would equal approximately 4.0% of the stock offering
amount at the midpoint valuation.
|
8
With
respect to FSB Community Bankshares, Inc., the pro forma fully converted
calculations use the same assumptions as applied to the peer group companies,
except that the expense of the employee stock ownership plan will be amortized
over 20 years.
The
independent appraisal does not indicate after-market trading value. Do not
assume or expect that the valuation as indicated above means that our shares
of
common stock will trade at or above the $10.00 purchase price after the stock
offering.
After-Market
Performance Information
The
following table presents stock price performance information for all mutual
holding company initial public offerings completed between January 1, 2006
and
February 23, 2007, with the most recent offerings appearing first.
|
Price
Performance from Initial Trading Date
|
|||||||||||||||||||
|
Transaction
|
Offering
Size
|
Date
of
IPO
|
One
Day
Percentage
Change
|
One
Week Percentage
Change
|
One
Month Percentage
Change
|
Percentage
Change
Through
2/23/07
|
|||||||||||||
|
(In
Millions)
|
|||||||||||||||||||
|
Oritani
Financial Corp. (NADSAQ: ORIT)
|
$
|
121.7
|
1/24/07
|
59.7
|
%
|
53.5
|
%
|
54.8
|
%
|
55.0
|
%
|
||||||||
|
Polonia
Bancorp (OTCBB: PBCP)
|
14.9
|
1/16/07
|
1.0
|
0.1
|
1.0
|
2.0
|
|||||||||||||
|
MSB
Financial Corp. (NASDAQ: MSBF)
|
25.3
|
1/5/07
|
23.0
|
21.0
|
19.3
|
17.5
|
|||||||||||||
|
Mainstreet
Financial Corp. (OTCBB: MSFN)
|
3.6
|
12/27/06
|
10.0
|
10.0
|
(2.5
|
)
|
(1.5
|
)
|
|||||||||||
|
Ben
Franklin Financial, Inc. (OTCBB: BFFI)
|
8.9
|
10/19/06
|
7.0
|
5.7
|
6.5
|
10.0
|
|||||||||||||
|
ViewPoint
Financial Group (NASDAQ: VPFG)
|
116.0
|
10/3/06
|
49.9
|
50.7
|
54.0
|
72.3
|
|||||||||||||
|
Fox
Chase Bancorp, Inc. (NASDAQ: FXCB)
|
64.0
|
10/2/06
|
29.5
|
28.1
|
29.4
|
42.6
|
|||||||||||||
|
Roma
Financial Corp. (NASDAQ: ROMA)
|
98.2
|
7/12/06
|
41.0
|
42.4
|
44.5
|
53.5
|
|||||||||||||
|
Seneca-Cayuga
Bancorp, Inc. (OTCBB: SCAY)
|
10.7
|
7/12/06
|
0.0
|
(4.0
|
)
|
(7.0
|
)
|
(6.5
|
)
|
||||||||||
|
Northeast
Community Bancorp, Inc. (NASDAQ: NECB)
|
59.5
|
7/6/06
|
10.0
|
12.8
|
11.5
|
23.9
|
|||||||||||||
|
Mutual
Federal Bancorp, Inc. (OTCBB: MFDB)
|
10.9
|
4/6/06
|
11.3
|
10.0
|
14.0
|
44.1
|
|||||||||||||
|
Lake
Shore Bancorp, Inc. (NASDAQ: LSBK)
|
29.8
|
4/4/06
|
7.0
|
4.8
|
2.8
|
24.5
|
|||||||||||||
|
United
Community Bancorp (NASDAQ: UCBA)
|
36.5
|
3/31/06
|
8.0
|
7.0
|
5.5
|
21.5
|
|||||||||||||
|
Magyar
Bancorp, Inc. (NASDAQ: MGYR)
|
26.2
|
1/24/06
|
6.5
|
5.5
|
6.0
|
47.5
|
|||||||||||||
|
Greenville
Federal Financial Corporation (OTCBB: GVFF)
|
10.3
|
1/10/06
|
2.5
|
0.0
|
0.0
|
4.5
|
|||||||||||||
|
Average
|
17.8
|
16.5
|
16.0
|
27.4
|
|||||||||||||||
|
Median
|
10.0
|
10.0
|
6.5
|
23.9
|
|||||||||||||||
The
table
above presents only short-term historical information on stock price
performance, which may not be indicative of the longer-term performance of
such
stock prices. The data presented in the table are not intended to predict how
our shares of common stock may perform following the stock offering. The
historical information in the table may not be meaningful to you because the
data were calculated using a small sample.
The
market price of any particular company’s stock is subject to various factors,
including the amount of proceeds a company raises and management’s ability to
deploy proceeds (such as through investments, the acquisition of other financial
institutions or other businesses, the payment of dividends and common stock
repurchases). In addition, stock prices may be affected by general market
conditions, market interest rates, the market for financial institutions, merger
or takeover transactions, the presence of professional and other investors
who
purchase stock on speculation, as well as other unforeseeable events not
necessarily within the control of management or the board of
directors.
9
RP
Financial, LC advised the board of directors that the appraisal was prepared
in
conformance with the regulatory appraisal methodology. That methodology requires
a valuation based on an analysis of the trading prices of comparable public
companies whose stocks have traded for at least one year prior to the valuation
date. RP Financial, LC also advised the board of directors that the aftermarket
trading experience of recent transactions was considered in the appraisal as
a
general indicator of current market conditions, but was not relied upon as
a
primary valuation methodology.
Our
board
of directors carefully reviewed the information provided by RP Financial, LC
in
its appraisal, but did not make any determination regarding whether prior mutual
holding company stock offerings have been valued fairly, nor did the board
draw
any conclusions regarding how the historical data reflected above may affect
the
appraisal. Instead, the board of directors engaged RP Financial, LC to help
it
understand the regulatory process as it applies to the appraisal and to advise
the board of directors how much capital would need to be raised under the
regulatory appraisal guidelines.
There
can be no assurance that our stock price will not trade below $10.00 per share.
As noted in the above table, two of the 15 initial public mutual holding company
stock offerings since January 1, 2006 referenced in the table traded below
their
initial offering price at the dates indicated. Before you make an investment
decision, we urge you to carefully read this prospectus, including the section
entitled “Risk Factors.”
Our
Officers, Directors and Employees Will Receive Additional Compensation and
Benefit Plans After the Stock Offering
Fairport
Savings Bank has established an employee stock ownership plan, and we intend
to
implement one or more stock-based benefit plans that will provide for grants
of
stock options and shares of common stock. Our tax-qualified employee benefit
plans, including our employee stock ownership plan and our 401(k) savings plan,
may purchase in the stock offering up to 4.9% of our outstanding shares of
common stock upon completion of the stock offering. It is expected that our
employee stock ownership plan will subscribe for 3.92% of our outstanding shares
of common stock upon completion of the stock offering (including shares issued
to FSB Community Bankshares, MHC) and our 401(k) savings plan will subscribe
for
all or part of the remaining 1%.
The
employee stock ownership plan and the stock-based benefit plan will increase
our
future compensation costs, thereby reducing our earnings. Public companies
are
required to expense the grant-date fair value of stock options and other stock
awards granted to officers, directors and employees. Any additional compensation
expense due to variances in actual vesting or stock price experience compared
to
assumptions in the table below will increase our compensation costs over the
vesting period of the options. Additionally, shareholders will experience a
reduction in their ownership interest if newly issued shares of common stock
are
used to fund stock options and stock awards. See “Risk Factors—Our Stock-Based
Benefit Plans Will Increase Our Costs, Which Will Reduce Our Income,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Anticipated Increase in Non-Interest Expense” and “Management—Stock
Benefit Plans.”
10
The
following three tables summarize the stock benefits that our officers, directors
and employees may receive following the stock offering at the maximum of the
offering range, assuming that we initially implement a stock-based benefit
plan
granting options to purchase 4.90% of the shares outstanding at the completion
of the stock offering and awarding shares of common stock equal to 1.96% of
the
shares outstanding at the completion of the stock offering. Proposed Office
of
Thrift Supervision regulations would clarify that the amount of stock options
and stock awards available for grant under one or more stock-based benefit
plans
may be greater than the amounts set forth in the following three tables,
provided shares used to fund the stock-based benefit plans in excess of these
amounts are obtained through stock repurchases.
In
the
table below, it is assumed that at the maximum of the offering range, a total
of
1,135,050 shares will be sold to the public, and a total of 1,279,950 shares
will be issued to FSB Community Bankshares, MHC. This table assumes that
Fairport Savings Bank’s tangible capital ratio is 10% or more following the
stock offering.
|
Plan/Awards
|
Individuals
Eligible
to Receive
Awards
|
Number
of
Shares
|
Percent
of
Outstanding
Shares
(1)
|
Percent
of
Shares
Sold
|
Value
of Benefits Based on
Maximum
of
Offering
Range
(2)
|
|||||||||||
|
Employee
stock ownership plan
|
All
officers and employees
|
94,668
|
3.92
|
%
|
8.34
|
%
|
$
|
946,680
|
||||||||
|
Stock
awards
|
Directors,
officers and employees
|
47,334
|
1.96
|
4.17
|
473,340
|
|||||||||||
|
Stock
options
|
Directors,
officers and employees
|
118,335
|
4.90
|
10.43
|
450,856
|
|||||||||||
|
260,337
|
10.78
|
%
|
22.94
|
%
|
$
|
1,870,876
|
||||||||||
______________
|
(1)
|
Amounts
are based on current Office of Thrift Supervision regulations and
policy,
exclusive of shares acquired in the secondary market to fund stock
awards
and stock options. Proposed Office of Thrift Supervision regulations
would
clarify that the amount of stock options and stock awards available
for
grant under the stock-based benefit plans may be greater than the
amounts
set forth in the table, provided shares used to fund the stock-based
benefit plans in excess of these amounts are obtained through stock
repurchases.
|
|
(2)
|
The
actual value of the stock awards will be determined based on their
fair
value as of the date the grants are made. For purposes of this table,
fair
value is assumed to be the offering price of $10.00 per share. The
fair
value of stock options has been estimated at $3.81 per option using
the
Black-Scholes option pricing model with the following assumptions:
a
grant-date share price and option exercise price of $10.00; dividend
yield
of 0%; expected option life of 10 years; risk-free interest rate
of 4.71%;
and a volatility rate of 9.39% based on an index of publicly traded
mutual
holding company institutions. The actual expense of the stock options
will
be determined by the grant-date fair value of the options, which
will
depend on a number of factors, including the valuation assumptions
used in
the option pricing model ultimately
adopted.
|
The
value
of the shares of common stock will be based on the price per share of our common
stock at the time those shares are granted, which cannot occur until at least
six months after the stock offering. The following table presents the total
value of all shares of common stock to be available for award and issuance
under
the stock-based benefit plan, assuming the stock-based benefit plan awards
shares of common stock equal to 1.96% of the outstanding shares after the stock
offering and the shares for the plan are purchased or issued in a range of
market prices from $8.00 per share to $16.00 per share.
11
|
Share
Price
|
34,986
Shares Awarded
at
Minimum of Offering
Range
|
41,160
Shares Awarded
at
Midpoint of Offering
Range
|
47,334 Shares
Awarded a
t
Maximum of Offering
Range
|
54,434 Shares
Awarded
at
Maximum of Offering
Range,
As Adjusted
|
|||||||||
|
$8.00
|
$279,888
|
$329,280
|
$378,672
|
$435,473
|
|||||||||
|
$10.00
|
$349,860
|
$411,600
|
$473,340
|
$544,341
|
|||||||||
|
$12.00
|
$419,832
|
$493,920
|
$568,008
|
$653,209
|
|||||||||
|
$14.00
|
$489,804
|
$576,240
|
$662,676
|
$762,077
|
|||||||||
|
$16.00
|
$559,776
|
$658,560
|
$757,344
|
$870,946
|
|||||||||
The
grant-date fair value of the options granted under the stock-based benefit
plan
will be based in part on the price per share of our common stock at the time
the
options are granted, which cannot occur until at least six months after the
stock offering. The value will also depend on the various assumptions used
in
the option pricing model ultimately adopted. The following table presents the
total estimated value of the options to be available for grant under the
stock-based benefit plan, assuming the stock-based benefit plan awards options
equal to 4.9% of the outstanding shares after the stock offering, the market
price and exercise price for the stock options are equal and the range of market
prices for the shares are $8.00 per share to $16.00 per share.
|
Market/Exercise
Price
|
Grant-Date
Fair
Value
Per Option
|
87,465
Options at
Minimum
of
Offering
Range
|
102,900
Options at
Midpoint
of
Offering
Range
|
118,335
Options at
Maximum
of
Offering
Range
|
136,085
Options at
Maximum
of
Offering
Range, As
Adjusted
|
|||||||||||
|
$8.00
|
$3.05
|
$266,768
|
$313,845
|
$360,922
|
$415,060
|
|||||||||||
|
$10.00
|
$3.81
|
$333,242
|
$392,049
|
$450,856
|
$518,485
|
|||||||||||
|
$12.00
|
$4.57
|
$399,715
|
$470,253
|
$540,791
|
$621,910
|
|||||||||||
|
$14.00
|
$5.34
|
$467,063
|
$549,486
|
$631,909
|
$726,695
|
|||||||||||
|
$16.00
|
$6.10
|
$533,537
|
$627,690
|
$721,844
|
$830,120
|
|||||||||||
Under
current Office of Thrift Supervision regulations, the number of options granted
or shares of common stock awarded under a stock-based benefit plan may not
exceed 4.90% and 1.96%, respectively, of our total outstanding shares, including
shares issued to FSB Community Bankshares, MHC. The number of options granted
or
shares awarded under the stock-based benefit plan, when aggregated with any
subsequently adopted stock-based benefit plans (exclusive of any shares held
by
any employee stock ownership plan), may not exceed 25% of the shares of common
stock held by persons other than FSB Community Bankshares, MHC.
The
stock-based benefit plan would comply with all applicable regulations of the
Office of Thrift Supervision in effect at the time such plan is adopted. The
stock-based benefit plan cannot be established sooner than six months after
the
stock offering under Office of Thrift Supervision regulations and would require
the approval of a majority of the total votes eligible to be cast (excluding
votes eligible to be cast by FSB Community Bankshares, MHC) under Office of
Thrift Supervision regulations, unless we obtain a waiver from the Office of
Thrift Supervision that would allow the stock-based benefit plan to be approved
by a majority of votes cast by our shareholders (excluding shares voted by
FSB
Community Bankshares, MHC). We currently intend to seek such a waiver from
the
Office of Thrift Supervision. Unless a waiver is obtained from the Office of
Thrift Supervision, the following additional Office of Thrift Supervision
restrictions would apply to our stock-based benefit plan:
|
·
|
non-employee
directors in the aggregate may not receive more than 30% of the
options
and stock awards authorized under the
plan;
|
12
|
·
|
any
one non-employee director may not receive more than 5% of the options
and
stock awards authorized under the
plan;
|
|
·
|
any
officer or employee may not receive more than 25% of the options
or stock
awards authorized under the plan;
|
|
·
|
the
options and stock awards may not vest more rapidly than 20% per year,
beginning on the first anniversary of shareholder approval of the
plan;
and
|
|
·
|
accelerated
vesting of awards is not permitted except for death, disability or
upon a
change in control of Fairport Savings Bank or FSB Community Bankshares,
Inc.
|
We
may
obtain the shares needed for this plan by issuing additional shares of common
stock from authorized but unissued shares or through stock
repurchases.
The
Office of Thrift Supervision has proposed amendments to its existing regulations
regarding stock-based benefit plans that are intended to clarify and simplify
such regulations. Specifically, the amendments would clarify that we may grant
options and award shares of common stock under one or more stock-based benefit
plans in excess of 4.90% and 1.96%, respectively, of our total outstanding
shares if the stock-based benefit plans are adopted more than one year following
the stock offering, provided shares used to fund the plans in excess of these
amounts are obtained through stock repurchases. The proposed amendments would
also require that, if the stock-based benefit plans are adopted less than one
year following the stock offering, the stock-based benefit plans must be
approved by a majority of the votes of FSB Community Bankshares, Inc.
shareholders cast at an annual or special meeting of shareholders, excluding
votes eligible to be cast by FSB Community Bankshares, MHC. Under the proposed
amendments, there would be no separate vote required of minority shareholders
if
the stock-based benefit plans are adopted more than one year following the
stock
offering. The proposed amendments would further clarify that the current
regulatory restrictions set forth above regarding the amount of individual
and
group awards, and restrictions on accelerated vesting of awards, would not
apply
if the stock-based benefit plans are adopted more than one year following the
stock offering.
In
the event the Office of Thrift Supervision adopts these regulations as proposed,
or otherwise changes its existing regulations or policies, we may implement
stock-based benefit plans that exceed the current limits applicable to the
overall size of such plans and individual awards thereunder, and otherwise
grant
awards with terms that are different than those required by current Office
of
Thrift Supervision regulations and policy. Moreover, to the extent that any
new
regulations or policies contain a more flexible voting standard for shareholder
approval than that currently required, we intend to use the more flexible voting
standard, which could result in the vote of FSB Community Bankshares, MHC
controlling the outcome of a shareholder vote on stock-based benefit
plans.
13
Our
Policy Regarding Dividends
Following
completion of the stock offering, our board of directors will have the authority
to declare dividends on our common stock, subject to statutory and regulatory
requirements. Our board of directors currently does not intend to declare
dividends initially following completion of the stock offering. The payment
and
amount of any future dividend payments will depend upon a number of factors,
including the following:
|
·
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regulatory
capital requirements;
|
|
·
|
our
financial condition and results of
operations;
|
|
·
|
tax
considerations;
|
|
·
|
statutory
and regulatory limitations; and
|
|
·
|
general
economic conditions.
|
If
we pay
dividends to our shareholders, we also will be required to pay dividends to
FSB
Community Bankshares, MHC, unless FSB Community Bankshares, MHC elects to waive
the receipt of dividends. We anticipate that FSB Community Bankshares, MHC
will
waive any dividends we declare. Any decision to waive dividends will be subject
to the non-objection of the Office of Thrift Supervision.
Market
for the Shares of Common Stock
We
anticipate that our common stock will be quoted on the OTC Bulletin Board.
However, we do not expect an active and liquid trading market to develop due
to
the small size of the stock offering. Sandler O’Neill & Partners, L.P.
currently intends to become a market maker in the common stock, but it is under
no obligation to do so. We cannot assure you that other market makers will
be
obtained or, if obtained, will be maintained. After shares of the common stock
begin trading, you may contact a stock broker to buy or sell shares. There
can
be no assurance that persons purchasing the common stock in the offering will
be
able to sell their shares at or above the $10.00 offering price, and
brokerage firms
typically charge commissions related to the purchase or sale of
securities.
How
We Intend to Use the Proceeds We Raise from the Stock
Offering
Assuming
we sell 1,135,050 shares of common stock in the stock offering, and we have
net
proceeds of $10.5 million, we intend to distribute the net proceeds as
follows:
|
·
|
$5.3
million (50.0% of the net proceeds) will be contributed to Fairport
Savings Bank;
|
14
|
·
|
$947,000
(9.0% of the net proceeds) will be loaned to our employee stock ownership
plan to fund its purchase of our shares of common stock; and
|
|
·
|
$4.3
million (41.0% of the net proceeds) will be retained by
us.
|
We
intend
to contribute more than 50% of the net proceeds from the stock offering to
Fairport Savings Bank to the extent that such additional capital would be
required in order for Fairport Savings Bank to have tangible capital of at
least
10% immediately following completion of the stock offering. We may use the
net
proceeds of the stock offering to invest in securities, to deposit funds in
Fairport Savings Bank, to finance the possible acquisition of other financial
institutions or financial service businesses, to pay dividends or for other
general corporate purposes, including repurchasing shares of our common stock.
Fairport Savings Bank may use the proceeds it receives to make loans, to
purchase securities, to expand its banking franchise internally through
branching or through acquisitions, although we have no specific plans to do
so
at the present time, and for general corporate purposes. To the extent that
Fairport Savings Bank uses the proceeds to fund new loans, we have not allocated
specific dollar amounts to any particular area of our portfolio. The amount
of
time it will take to deploy the proceeds of the offering into loans will depend
primarily on the level of loan demand. Initially Fairport Savings Bank intends
to invest a substantial portion of the net proceeds it receives in short-term
investments, agency securities, collateralized mortgage obligations and
mortgage-backed securities. See “How We Intend to Use the Proceeds from the
Stock Offering.” Neither Fairport Savings Bank nor FSB Community Bankshares,
Inc. has any current agreement or understanding to enter into an acquisition
transaction.
Tax
Consequences of the Stock Offering
The
stock
offering will not result in taxable gain or loss to FSB Community Bankshares,
MHC, FSB Community Bankshares, Inc. or Fairport Savings Bank, or to depositors
or borrowers who have a priority right to subscribe for shares of common stock
in the stock offering, or to our employees, officers or directors, except to
the
extent that the nontransferable subscription rights to purchase shares of common
stock in the stock offering may be determined to have value. Luse Gorman
Pomerenk & Schick, P.C. has opined as to federal law that it is more likely
than not that the fair market value of such subscription rights is zero. In
that
case, no taxable gain or loss will need to be recognized by depositors or
eligible borrowers who receive nontransferable subscription rights. See “The
Stock Offering—Tax Effects of the Stock Offering.”
Limits
on Your Purchase of Shares of Common Stock
The
minimum purchase is 25 shares of common stock. Generally, no individual may
purchase more than $150,000 (15,000 shares) of common stock through one or
more
individual and/or joint deposit accounts, and no individuals acting through
a
single account may purchase more than $150,000 (15,000 shares) of common stock.
If any of the following persons purchase shares of common stock, their
purchases, when combined with your purchases, cannot exceed $200,000 (20,000
shares of common stock):
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·
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your
spouse, or relatives of you or your spouse living in your
house;
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15
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·
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companies
or other entities in which you have a 10% or greater equity or substantial
beneficial interest or in which you serve as a senior officer or
partner;
|
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·
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a
trust or other estate if you have a substantial beneficial interest
in the
trust or estate or you are a trustee or fiduciary for the trust or
estate;
or
|
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·
|
other
persons who may be acting together with you (including, but not limited
to, persons who file jointly a Schedule 13G or Schedule 13D Beneficial
Ownership Report with the Securities and Exchange
Commission).
|
A
detailed discussion of the limitations on purchases of common stock by an
individual and persons acting together is set forth under the caption “The Stock
Offering—Limitations on Purchase of Shares.”
Subject
to Office of Thrift Supervision approval, we may increase or decrease the
purchase limitations in the stock offering at any time. In addition, in any
community offering or syndicated community offering, we will first fill orders
for our shares of common stock up to a maximum of 1,000 shares. Thereafter,
we
will allocate any remaining shares of common stock on an equal number of shares
per order basis, until we fill all orders. Our tax-qualified benefit plans,
including our employee stock ownership plan, are authorized to purchase up
to
4.9% of the shares to be outstanding immediately following the stock offering
without regard to these purchase limitations. The employee stock ownership
plan
may purchase shares of common stock in the stock offering, in the open market
following consummation of the stock offering, from authorized but unissued
shares of common stock, or from treasury shares following consummation of the
stock offering.
How
You May Pay for Your Shares
In
the
subscription offering and the community offering you may pay for your shares
only by:
| (1) |
personal
check, bank check or money order;
or
|
| (2) |
authorizing
us to withdraw money from your deposit account(s) maintained with
Fairport
Savings Bank.
|
If
you
wish to use your Fairport Savings Bank individual retirement account to pay
for
your shares, please be aware that federal law requires that such funds first
be
transferred to a self-directed retirement account with a trustee other than
Fairport Savings Bank. The transfer of such funds to a new trustee takes time,
so please make arrangements as soon as possible or contact the Stock Information
Center for further information. Also, please be aware that Fairport Savings
Bank
is not permitted to lend funds to anyone for the purpose of purchasing shares
of
common stock in the stock offering.
You
can
subscribe for shares of common stock in the stock offering by delivering to
the
Stock Information Center, or to the main office of Fairport Savings Bank, a
signed and completed original stock order form, together with full payment,
provided we receive the stock order form before the end of the stock offering.
Stock order forms will not be accepted at any office of Fairport Savings Bank
other than the main office. Funds received prior to the completion of the stock
offering up to the minimum of the offering range will be held by Fairport
Savings Bank. Funds received in excess of the minimum of the offering range
may
be maintained at Fairport Savings Bank, or, at our discretion, at another
federally insured depository institution. However, in no event will we maintain
more than one escrow account. We will pay interest at Fairport Savings Bank’s
passbook rate, currently 0.75% per annum, from the date funds are received
until
completion or termination of the stock offering. Withdrawals from certificates
of deposit at Fairport Savings Bank for the purpose of purchasing shares of
common stock in the stock offering may be made without incurring an early
withdrawal penalty. All funds authorized for withdrawal from deposit accounts
with Fairport Savings Bank must be in the deposit accounts at the time the
stock
order form is received. However, funds will not be withdrawn from the accounts
until the stock offering is completed and will continue to earn interest at
the
applicable deposit account rate until the completion of the stock offering.
A
hold will be placed on those funds when your stock order is received, making
the
designated funds unavailable to you. After we receive an order, the order cannot
be revoked or changed, except with our consent. Payment may not be made by
wire
transfer or any other electronic transfer of funds. In addition, we are not
required to accept copies or facsimiles of order forms.
16
For
a
further discussion regarding the stock ordering procedures, see “The Stock
Offering—Prospectus Delivery and Procedure for Purchasing Shares.”
You
May Not Sell or Transfer Your Subscription Rights
Federal
law prohibits the transfer or sale of subscription rights. If you order shares
of common stock in the subscription offering, you will be required to state
that
you are purchasing the shares of common stock for yourself and that you have
no
agreement or understanding to sell or transfer your subscription rights. We
intend to take legal action, including reporting persons to federal or state
regulatory agencies, against anyone who we believe sells or in any way transfers
his or her subscription rights. We will not accept your stock order if we have
reason to believe that you sold or transferred your subscription rights. With
the exception of IRA and Keogh account stock purchases, shares purchased in
the
subscription offering must be registered in the names of all depositors on
the
qualifying account(s). Deleting names of depositors or adding non-depositors
or
otherwise altering the form of beneficial ownership of a qualifying account
will
result in the loss of your subscription rights.
Deadline
for Orders of Common Stock
If
you
wish to purchase shares of common stock, we must receive, not simply have
post-marked, your properly completed stock order form, together with payment
for
the shares, no later than 5:00 p.m., Eastern time, on June 14, 2007, unless
we
extend this deadline. You may submit your stock order form to the Stock
Information Center either by mail using the return envelope provided or by
overnight courier to the indicated address on the stock order form, or by
bringing the stock order form to the main office of Fairport Savings Bank
located at 45 South Main Street, Fairport, New York. Stock
order forms will not be accepted at any of our offices other than our main
office. A
postmark prior to June 14, 2007 will not entitle you to purchase shares of
common stock unless we receive the envelope by June 14, 2007.
17
Although
we will make reasonable efforts to provide a prospectus and stock offering
materials to holders of subscription rights, the subscription offering and
all
subscription rights will expire at 5:00 p.m., Eastern time, on June 14, 2007,
regardless of whether we have been able to locate each person entitled to
subscription rights.
Termination
of the Stock Offering
The
subscription offering will terminate at 5:00 p.m., Eastern time, on June 14,
2007. We may extend this expiration date without notice to you, until August
13,
2007, unless the Office of Thrift Supervision approves a later date. If the
subscription offering and/or community offerings extend beyond August 13, 2007,
we will be required to resolicit subscriptions before proceeding with the stock
offering. In such event, if you choose not to subscribe for the shares of common
stock, your funds will be promptly returned to you with interest. All further
extensions, in the aggregate, may not last beyond May 14, 2009.
Steps
We May Take If We Do Not Receive Orders for the Minimum Number of
Shares
If
we do
not receive orders for at least 838,950 shares of common stock, we may take
several steps in order to sell the minimum number of shares of common stock
in
the stock offering range. Specifically, we may:
|
(i)
|
increase
the maximum number of shares that may be purchased by any subscriber
(including our subscribing directors and officers);
and/or
|
|
(ii)
|
seek
regulatory approval to extend the stock offering beyond the August
13,
2007 expiration date, provided that any such extension will require
us to
resolicit subscriptions received in the stock offering.
|
Once
Submitted, Your Purchase Order May Not Be Revoked
Unless the Stock Offering is Terminated or Extended Beyond August 13,
2007.
Funds
that you use to purchase shares of our common stock in the stock offering will
be held in an interest-bearing account until the termination or completion
of
the stock offering, including any extension of the expiration date. The Office
of Thrift Supervision approved the stock offering on May 14, 2007; however,
because completion of the stock offering will be subject to an update of the
independent appraisal, among other factors, there may be delays in the
completion of the stock offering. Any orders that you submit to purchase shares
of our common stock in the stock offering are irrevocable, and you will not
have
access to subscription funds unless the stock offering is terminated, or
extended beyond August 13, 2007.
Restrictions
on the Acquisition of FSB Community Bankshares, Inc. and Fairport Savings
Bank
Federal
regulations, as well as provisions contained in the charter and bylaws of
Fairport Savings Bank and FSB Community Bankshares, Inc., restrict the ability
of any person, firm or entity to acquire FSB Community Bankshares, Inc.,
Fairport Savings Bank, or their respective capital stock. These restrictions
include the requirement that
a
potential acquirer obtain the prior approval of the Office of Thrift Supervision
before acquiring in excess of 10% of the stock of FSB Community Bankshares,
Inc.
or Fairport Savings Bank. Because a majority of the outstanding shares of common
stock of FSB Community Bankshares, Inc. must be owned by FSB Community
Bankshares, MHC, any acquisition of FSB Community Bankshares, Inc. must be
approved by FSB Community Bankshares, MHC, and FSB Community Bankshares, MHC
would not be required to pursue or approve a sale of FSB Community Bankshares,
Inc. even if such a sale were favored by a majority of FSB Community Bankshares,
Inc.’s public shareholders.
18
Possible
Conversion of FSB Community Bankshares, MHC to Stock Form
In
the
future, FSB Community Bankshares, MHC may convert from the mutual to capital
stock form of organization in a transaction commonly known as a “second-step
conversion.” In a second-step conversion, eligible depositors and borrowers of
Fairport Savings Bank would have subscription rights to purchase shares of
common stock of FSB Community Bankshares, Inc. or its successor, and our public
shareholders would
be
entitled to exchange their shares of common stock for an equal percentage of
shares of the stock holding company resulting from the conversion. This
percentage may be adjusted to reflect any assets owned by FSB Community
Bankshares, MHC.
Our
board
of directors has no current plan to undertake a second-step conversion
transaction. Any second-step conversion transaction would require the approval
of our shareholders, including, under current regulations of the Office of
Thrift Supervision, the approval of a majority of the shareholders other than
FSB Community Bankshares, MHC, and depositor and borrower members of
FSB
Community Bankshares, MHC.
Proposed
Stock Orders by Management
Our
directors and executive officers and their associates are expected to subscribe
for approximately 26,500 shares of common stock in the stock offering, which
represents 2.7% of the shares to be sold to the public and 1.4% of the total
shares to be outstanding after the stock offering at the midpoint
of the
offering range. Directors and executive officers will pay the same $10.00 per
share price paid by all other persons who purchase shares in the stock offering.
These shares will be counted in determining whether the minimum of the range
of
the stock offering is reached.
How
You May Obtain Additional Information Regarding the Stock
Offering
If
you
have any questions regarding the stock offering, please call the Stock
Information Center at (866) 818-9961, Monday through Friday between 10:00 a.m.
and 4:00 p.m., Eastern time.
19
RISK
FACTORS
You
should consider carefully the following risk factors in evaluating an investment
in our shares of common stock.
Risks
Related to Our Business
Higher
Costs Of Operations And Lower Interest Rate Margins Have Reduced Our
Profitability. If These Conditions Continue, We May Not Be Able To Earn A Profit
Following Completion Of The Stock Offering.
We
had a
net loss of $135,000 for the three months ended March 31, 2007 and we may
continue to have net losses during the periods immediately prior to and
following completion of the stock offering. Our net loss was primarily
attributable to a decrease in our net interest income as a result of a reduction
of our net interest rate spread and margin and an increase in our non-interest
expense. We do not expect our non-interest expense to decrease significantly
in
the near term due to ongoing costs associated with our recently opened
Irondequoit branch. Additionally, we expect our cost of funds to increase during
the second quarter of 2007, as we have $13.9 million of certificates of deposit
at March 31, 2007 that are scheduled to mature during the three months ended
June 30, 2007 that, based on current market rates, could reprice at higher
rates. If interest rates in the future do not change to alleviate the reduction
in our net interest rate spread and margin that we are experiencing, we may
not
be able to achieve profitability from our core operations in the near term.
Our
Lending Activities And Pricing Strategies For Loans And Deposits Provide Us
Lower Rates Of Return Than Financial Institutions That Originate More Commercial
Loans Or Who Are Less Aggressive In Pricing Loan And Deposit
Products.
Our
principal business consists of originating one- to four-family residential
real
estate mortgage loans and home equity lines of credit. As of December 31, 2006,
these loans and lines of credit totaled $116.7 million, or 96.4% of our total
loans as of that date.
Residential
real estate loans generally have lower interest rates than commercial business
loans and commercial real estate loans. As a result, we may generate lower
interest rate spreads and rates of return compared to our competitors who
originate more commercial loans, or who originate residential real estate loans
at higher interest rates than we do or who offer deposit products with lower
interest rates than we do. We believe that within our market area we price
our
loan and deposit products more aggressively than many of our competitors. For
the year ended December 31, 2006, our return on average equity (net income
divided by average equity) was 1.69%, compared to a median return on average
equity of 3.66% for a peer group of publicly traded savings institutions. In
addition, our interest rate spread and net interest margin were 2.21% and 2.57%,
respectively, compared to a median of 3.03% and 2.97%, respectively, for a
peer
group of publicly traded savings institutions during that time period. Each
of
these factors may reduce the value of our shares of common stock.
20
The
Current Interest Rate Environment Has Had And Will Have An Adverse Effect On
Our
Net Interest Income.
Our
net
income largely depends on our net interest income, which may be negatively
affected by changes in interest rates. Net interest income is the difference
between:
|
·
|
the
interest income we earn on our interest-earning assets, such as loans
and
securities; and
|
|
·
|
the
interest we pay on our interest-bearing liabilities, such as deposits
and
borrowings.
|
We
primarily originate fixed-rate mortgage loans with terms of up to 30 years.
Consequently, a substantial percentage of our interest-earning assets have
longer maturities than our interest-bearing liabilities which consist primarily
of certificates of deposit. As a result, our net interest income is adversely
affected if the average cost of our interest-bearing liabilities increases
more
rapidly than the average yield on our interest-earning assets.
Long-term
interest rates are normally higher than short-term interest rates. An “inverted
yield curve” occurs when short-term interest rates are higher than long-term
interest rates. The current inverted yield curve interest rate environment
has
had a negative impact on our net interest rate spread and net interest margin
resulting in lower net interest income. A continuation of an inverted yield
curve will continue to reduce our profitability. Our net interest rate spread
decreased to 2.21% for the year ended December 31, 2006 from 2.68% for the
year
ended December 31, 2005, and our net interest margin decreased to 2.57% for
the
year ended December 31, 2006 from 3.01% for the year ended December 31, 2005.
During 2006, our net interest income was less than our non-interest expense.
For
the quarter ended December 31, 2006, our net interest rate spread and net
interest margin were 1.98% and 2.38%, respectively. We expect that our net
interest rate spread and net interest margin will continue to shrink in the
current interest rate environment, which will have a negative effect on our
profitability in 2007. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Business Strategy—Managing Our Interest Rate
Risk” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Management of Market Risk.”
Our
Operating Expenses Are High As A Percentage Of Our Net Interest Income, Making
It More Difficult To Maintain Profitability.
Like
many
smaller financial institutions, our non-interest expense, which consists
primarily of the costs associated with operating our business, represents a
high
percentage of the income we generate. The cost of generating our income is
measured by our efficiency ratio, which represents non-interest expense divided
by the sum of our net interest income and our non-interest income. The lower
our
efficiency ratio, the more effective our ability to generate income from our
operations. For the years ended December 31, 2006 and 2005, our efficiency
ratios were 91.5% and 82.9%, respectively. Generally, this means that we spent
91.5 cents and 82.9 cents during 2006 and 2005 to generate $1.00 of income.
As a
result of becoming a public company and implementing stock benefit plans, our
efficiency ratio will be adversely affected. Additionally, the expense of
operating our new Irondequoit branch will increase our operating expense and
thereby adversely affect our efficiency ratio. We anticipate that the net
proceeds from the stock offering will allow us to increase our interest earning
assets (such as loans and investments) and our interest income, which should
improve our efficiency ratio.
21
Our
Growth Strategy Will Increase Our Expenses And May Not Be Successful.
Following
the completion of the stock offering, we may attempt to increase the size of
our
franchise by establishing one or more new branch offices, although we have
made
no specific commitments to do so as of this date. Building branch offices and
hiring new employees to staff these offices would significantly increase our
non-interest expense. Moreover, new branch offices are generally unprofitable
for a number of years until they generate sufficient levels of deposit and
loan
growth to offset their cost of operations. For all these reasons, our branching
strategy may have an adverse effect on our earnings.
The
Federal Deposit Insurance Corporation Has Issued New Rules That Will Increase
Our Deposit Insurance Assessments And Reduce Our Net
Income.
Under
prior rules, the Federal Deposit Insurance Corporation did not assess deposit
insurance premiums on financial institutions, such as Fairport Savings Bank,
that were, among other criteria, well-capitalized. On November 2, 2006, the
Federal Deposit Insurance Corporation adopted final regulations that assess
deposit insurance premiums based on risk. As a result, the new regulation will
enable the Federal Deposit Insurance Corporation to more closely tie each
financial institution’s deposit insurance premiums to the risk it poses to the
deposit insurance fund. Under the new rules, the Federal Deposit Insurance
Corporation will evaluate the risk of each financial institution based on its
supervisory rating and its financial ratios, or its long-term debt issuer
rating. The new rates for nearly all financial institutions will vary between
five and seven cents for every $100 of domestic deposits. If this rule were
in
effect during 2006, Fairport Savings Bank would have paid an annual deposit
insurance assessment to the Federal Deposit Insurance Corporation of
approximately $59,000, which would have reduced our pre-tax net income by that
amount.
Because
Most Of Our Borrowers Are Located In The Rochester, New York Metropolitan Area,
A Downturn In The Local Economy Or A Decline In Local Real Estate Values Could
Cause An Increase In Nonperforming Loans, Which Could Reduce Our
Profits.
Substantially
all of the loans in our loan portfolio are secured by real estate located in
our
primary market area. Therefore, to a large extent, our success will reflect
general economic conditions in the Rochester, New York area. Negative conditions
in the local economy or in the real estate markets where collateral for our
mortgage loans are located could adversely affect the ability of our borrowers
to repay their loans and the value of the collateral securing the loans. Real
estate values are affected by various factors, including supply and demand,
changes in general or regional economic conditions, interest rates, governmental
rules or policies and natural disasters.
22
The
Stock Offering Will Reduce Our Return On Average Equity.
Following
the stock offering and after giving effect to the stock-based benefit plans
that
we expect to implement after the stock offering, we expect our consolidated
equity to increase from $13.9 million to between $20.4 million at the minimum
of
the offering range and $24.4 million at the adjusted maximum of the offering
range. Even though our equity will increase as a result of the stock offering,
we expect that our return on equity will decrease since we do not expect that
we
will be able to reinvest and leverage the net proceeds of the stock offering
immediately following completion of the stock offering. If our return on equity
remains below the industry average following the stock offering, this may reduce
the value of our common stock. Our
return on equity will be further reduced by the higher expenses of being a
public company and added expenses associated with our employee stock ownership
plan.
Strong
Competition Within Our Market Areas May Limit Our Growth And
Profitability.
Competition
in the banking and financial services industry is intense. In our market areas,
we compete with commercial banks, savings institutions, mortgage brokerage
firms, credit unions, finance companies, mutual funds, money market funds,
insurance companies, and brokerage and investment banking firms operating
locally and elsewhere. Some of our competitors have greater name recognition
and
market presence that benefit them in attracting business, and offer certain
services that we do not or cannot provide. In addition, larger competitors
may
be able to price loans and deposits more aggressively than we do. Our
profitability depends upon our continued ability to successfully compete in
our
market areas. For additional information see “Business of Fairport Savings
Bank—Competition.”
If
Our Allowance For Loan Losses Is Not Sufficient To Cover Actual Loan Losses,
Our
Earnings Will Decrease.
We
make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of
any
real estate and other assets serving as collateral for the repayment of our
loans. In determining the allowance for loan losses, we review our loans and
our
loss and delinquency experience, and we evaluate economic conditions. If our
assumptions are incorrect, our allowance for loan losses may not be sufficient
to cover losses inherent in our loan portfolio, resulting in additions to our
allowance. Our allowance for loan losses was 0.27% of total loans and 188.3%
of
non-performing loans at December 31, 2006, each of which is lower than the
average for our peer group of financial institutions. Material additions to
our
allowance could materially decrease our net income.
In
addition, bank regulators periodically review our allowance for loan losses
and
may require us to increase our provision for loan losses or recognize additional
loan charge-offs. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory authorities may have a material
adverse effect on our financial condition and results of operations.
23
Risks
Related To The Stock Offering
The
Future Price Of The Shares Of Our Common Stock May Be Less Than The Purchase
Price In The Stock Offering.
We
cannot
assure you that if you purchase shares of common stock in the stock offering
that you will later be able to sell them at or above the purchase price. The
purchase price in the stock offering is determined by an independent,
third-party appraisal, pursuant to federal banking regulations and subject
to
review and approval by the Office of Thrift Supervision as part of that agency’s
review and approval of our application to conduct the stock offering. The
appraisal is not intended, and should not be construed, as a recommendation
of
any kind as to the advisability of purchasing shares of our common stock. In
recent years, the final independent valuation as approved by the Office of
Thrift Supervision typically has been at the adjusted maximum of the offering
range as long as total subscriptions have exceed the adjusted maximum of the
offering range. However, the adjusted maximum of the offering range is
approximately 32% higher than the fair market value of a company as determined
by the independent appraisal. Accordingly, our aggregate pro forma market value
as reflected in the final independent appraisal may exceed the market price
of
our shares of common stock after the completion of the stock offering. After
completion of the stock offering, buyers and sellers in the marketplace will
determine the price of the common stock, which may result in our stock trading
below the initial offering price of $10.00 per share.
Based
on
market trading data in “Summary—After-Market Performance Information,” two of
the 15 mutual holding company initial public offerings that initiated trading
between January 1, 2006 and February 23, 2007 traded below their initial
offering price at the dates indicated.
There
Will Be A Limited Trading Market In Our Shares Of Common Stock, Which Will
Hinder Your Ability To Sell Your Shares Of Common Stock And May Adversely Affect
The Market Price Of The Stock.
We
expect
that our common stock will be quoted on the OTC Bulletin Board. It is highly
unlikely that an active and liquid trading market in shares of our common stock
will develop due to the small size of the stock offering. Persons purchasing
shares may not be able to sell their shares when they desire if a liquid trading
market does not develop or sell them at a price equal to or above the initial
purchase price of $10.00 per share even if a liquid trading market develops.
This limited trading market for our common stock may reduce the market value
of
our common stock and make it difficult to buy or sell our shares on short
notice. For additional information see “Market for the Common
Stock.”
We
Will Need To Implement Additional Finance And Accounting Systems, Procedures
And
Controls In Order To Satisfy Our New Public Company Reporting Requirements,
Which Will Increase Our Operating Expenses.
Upon
completion of the stock offering, we will become a public reporting company.
Federal securities laws and regulations require that we file annual, quarterly
and current reports with the Securities and Exchange Commission and that we
maintain effective disclosure controls and procedures and internal control
over
financial reporting. We expect that the obligations of being a public company,
including substantial public reporting obligations, will require significant
expenditures and place additional demands on our management team. These
obligations will increase our operating expenses and could divert our
management’s attention from our operations. In addition, compliance with the
Sarbanes-Oxley Act and the related rules and regulations of the Securities
and
Exchange Commission will require us to certify as to the adequacy of our
internal controls and procedures, which may require us to upgrade our accounting
systems, which would also increase our operating costs.
24
Our
Stock-Based Benefit Plans Will Increase Our Costs, Which Will Reduce Our
Income.
We
have
established an employee stock ownership plan in connection with the stock
offering, and we intend to implement one or more stock-based benefit plans
that
will provide for grants of stock options and shares of common stock.
In
addition, as
discussed in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and based on certain assumptions discussed therein, we
estimate the annual expense associated with the grant of shares of common stock
and stock options under the stock-based benefit plan would be approximately
$109,000 and $104,000, respectively, on a pre-tax basis, assuming the adjusted
maximum number of shares is sold in the stock offering.
We
anticipate that our employee stock ownership plan will borrow funds from FSB
Community Bankshares, Inc. to purchase 3.92% of our outstanding shares of common
stock immediately following the stock offering. Only employees, including our
officers, are eligible to participate in the employee stock ownership plan.
The
cost of acquiring the shares of common stock for the employee stock ownership
plan will be between $700,000 at the minimum of the offering range and $1.1
million at the adjusted maximum of the offering range. We will record an annual
employee stock ownership plan expense in an amount equal to the fair value
of
shares of common stock committed to be released to employees as a result of
repayment of the loan. As a result, if our common stock appreciates in value
over time, compensation expense relating to the employee stock ownership plan
will increase.
We
also
intend to adopt a stock-based benefit plan after the stock offering that would
award participants shares of our common stock (at no cost to them) and/or
options to purchase shares of our common stock. Our directors, officers and
employees will be eligible to receive awards under this plan. Under current
Office of Thrift Supervision regulations, we may grant shares of common stock
or
stock options under one or more stock-based benefit plans for up to 1.96% and
4.90%, respectively, of our total outstanding shares, provided such grants
do
not exceed 25% of the shares held by persons other than FSB Community
Bankshares, MHC. Proposed Office of Thrift Supervision regulations would clarify
that the amount of stock options and stock awards available for grant under
such
stock-based benefit plans may be greater than these amounts, provided shares
used to fund the stock-based benefit plans in excess of these amounts are
obtained through stock repurchases, which would further increase our
costs.
The
shares of common stock granted under the stock-based benefit plan will be
expensed by us over their vesting period at the fair market value of the shares
on the date they are awarded. As discussed in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and based on certain
assumptions discussed therein, we estimate this annual expense would be
approximately $109,000 on a pre-tax basis, assuming the adjusted maximum number
of shares is sold in the stock offering. If the shares of common stock to be
granted under the stock-based benefit plan are repurchased in the open market
(rather than issued directly from authorized but unissued shares by FSB
Community Bankshares, Inc.) and cost the same as the purchase price in the
stock
offering, the reduction to shareholders’ equity due to the plan would be between
$400,000 at the minimum of the offering range and $500,000 at the adjusted
maximum of the offering range. To the extent we repurchase shares of common
stock in the open market to fund the grants of shares under the plan, and the
price of such shares exceeds the offering price of $10.00 per share, the
reduction to shareholders’ equity would exceed the range described above.
Conversely, to the extent the price of such shares is below the offering price
of $10.00 per share, the reduction to shareholders’ equity would be less than
the range described above.
25
Public
companies must expense the grant-date fair value of stock options. In addition,
public companies must revalue their estimated compensation costs at each
subsequent reporting period and may be required to recognize additional
compensation expense at these dates. When we record an expense for the grant
of
options and other stock awards using the fair value method as described in
the
applicable accounting rules, we will incur significant compensation and benefits
expense.
Proposed
Office Of Thrift Supervision Regulations May Permit Us To Adopt Stock-Based
Benefit Plans That Exceed Limits Applicable Under Current Regulations, And
May
Permit Us To Approve Stock Benefit Plans Without A Separate Vote Of Minority
Shareholders.
The
Office of Thrift Supervision has proposed amendments to its existing regulations
regarding stock-based benefit plans that are intended to clarify or simplify
such regulations. Specifically, the amendments would clarify that we may grant
options and award shares of common stock under one or more stock-based benefit
plans in excess of 4.90% and 1.96%, respectively, of our total outstanding
shares if the stock-based benefit plans are adopted more than one year following
the stock offering, provided shares used to fund the plans in excess of these
amounts are obtained through stock repurchases. The proposed amendments would
also require that, if the stock-based benefit plans are adopted less than one
year following the stock offering, the stock-based benefit plans must be
approved by a majority of the votes of FSB Community Bankshares, Inc.
shareholders, excluding votes eligible to be cast by FSB Community Bankshares,
MHC. Under the proposed amendments, there would be no separate vote required
of
minority shareholders if the stock-based benefit plans are adopted more than
one
year following the stock offering. The proposed amendments would further provide
that the restrictions set forth above regarding the amount of individual and
group awards, and restrictions on accelerated vesting of awards, would not
apply
if the stock-based benefit plans are adopted more than one year following the
stock offering.
In
the event the Office of Thrift Supervision adopts these regulations as proposed,
or otherwise changes its existing regulations or policies, we may implement
stock-based benefit plans that exceed the current limits applicable to the
overall size of such plans and individual awards thereunder, and otherwise
grant
awards with terms that are different than those required by current Office
of
Thrift Supervision regulations and policy. Implementing stock-based benefit
plans that exceed current limits could result in expense that exceeds the
amounts estimated in “—Our Stock-Based Benefit Plans Will Increase Our Costs,
Which Will Reduce Our Income.” However, until we implement our stock-based
benefit-plans, and until the proposed Office of Thrift Supervision regulations
are adopted in final form, we cannot estimate the costs of stock-based benefit
plans that we may adopt in the future.
26
Moreover,
to the extent that any new regulations or policies contain a more flexible
voting standard for shareholder approval than that currently required, we intend
to use the more flexible voting standard, which could result in the vote of
FSB
Community Bankshares, MHC controlling the outcome of a shareholder vote on
stock-based benefit plans.
The
Implementation Of Stock-Based Benefit Plans May Dilute Your Ownership
Interest.
We
intend
to adopt a stock-based benefit plan following the stock offering. This
stock-based benefit plan will be funded through either open market purchases
of
common stock, or from the issuance of authorized but unissued shares of common
stock. Shareholders would experience a reduction in ownership interest
(including shares held by FSB Community Bankshares, MHC) totaling 6.4% in the
event newly issued shares are used to fund stock options or awards of common
stock under the plan in an amount equal to 4.90% and 1.96%, respectively, of
our
total outstanding shares, including shares issued to FSB Community Bankshares,
MHC.
The
Office of Thrift Supervision has proposed amendments to its existing regulations
regarding stock-based benefit plans that would permit us to grant options and
award shares of common stock under one or more stock-based benefit plans in
excess of 4.90% and 1.96%, respectively, of our total outstanding shares if
the
stock-based benefit plans are adopted more than one year following the stock
offering, provided shares used to fund the plans in excess of these amounts
are
obtained through stock repurchases.
We
Have Broad Discretion In Using The Proceeds Of The Stock Offering. Our Failure
To Effectively Use Such Proceeds May Reduce Our Net
Income.
We
will
use a portion of the net proceeds to finance the purchase of shares of common
stock in the stock offering by the employee stock ownership plan and may use
the
remaining net proceeds to pay dividends to shareholders, repurchase shares
of
common stock, purchase investment securities, deposit funds in Fairport Savings
Bank, acquire other financial services companies and financial institutions
or
for other general corporate purposes. Fairport Savings Bank may use the proceeds
it receives to fund new loans, establish or acquire new branches, purchase
investment securities, or for general corporate purposes. We have not, however,
identified specific amounts of proceeds for any of these purposes and we will
have significant flexibility in determining the amount of net proceeds we apply
to different uses and the timing of such applications. Our failure to utilize
these funds effectively could reduce our profitability. We have not established
a timetable for the deployment of the proceeds and we cannot predict how long
it
will take to effectively deploy the proceeds.
27
Persons
Who Purchase Stock In The Stock Offering Will Own A Minority Of Our Shares
Of
Common Stock And Will Not Be Able To Exercise Voting Control Over Most Matters
Put To A Vote Of Shareholders.
Public
shareholders will own a minority of the outstanding shares of our common stock.
As a result, FSB Community Bankshares, MHC will own a majority of our
outstanding shares of common stock after the stock offering and, through its
board of directors, will be able to exercise voting control over
most
matters put to a vote of shareholders. However, under current Office of Thrift
Supervision regulations minority shareholders must approve by a separate vote
certain stock benefit plans and must approve a “second-step conversion.” If a
rule currently proposed by the Office of Thrift Supervision is adopted in its
current form, the voting control of FSB Community Bankshares, MHC will extend
to
stock-based benefit plans presented to shareholders for approval more than
one
year following completion of the stock offering. The same directors and certain
officers who manage FSB Community Bankshares, Inc. and Fairport Savings Bank
also manage FSB Community Bankshares, MHC. In addition, FSB Community
Bankshares, MHC may exercise its voting control to prevent a sale or merger
transaction in which shareholders could receive a premium for their shares.
Our
Stock Value May Be Affected Negatively By Federal Regulations Restricting
Takeovers And Our Mutual Holding Company Structure.
The
Mutual Holding Company Structure Will Impede
Takeovers.
FSB
Community Bankshares, MHC, as our majority shareholder, will be able to control
the outcome of virtually all matters presented to our shareholders for their
approval, including a proposal to acquire us. Accordingly, FSB Community
Bankshares, MHC may prevent the sale of control or merger of FSB Community
Bankshares, Inc. or its subsidiaries even if such a transaction were favored
by
a majority of the public shareholders of FSB Community Bankshares,
Inc.
Federal
Regulations Restricting Takeovers.
For
three years following the stock offering, Office of Thrift Supervision
regulations prohibit any person from acquiring or offering to acquire more
than
10% of our common stock without the prior written approval of the Office of
Thrift Supervision. Moreover, current Office of Thrift Supervision policy
prohibits the acquisition of a mutual holding company subsidiary by any person
or entity other than a mutual holding company or a mutual institution. See
“Restrictions on the Acquisition of FSB Community Bankshares, Inc. and Fairport
Savings Bank” for a discussion of applicable Office of Thrift Supervision
regulations regarding acquisitions.
The
Corporate Governance Provisions In Our Charter And Bylaws May Prevent Or Impede
The Holders Of A Minority Of Our Common Stock From Obtaining Representation
On
Our Board Of Directors.
Provisions
in our charter and bylaws may prevent or impede holders of a minority of our
shares of common stock from obtaining representation on our board of directors.
For example, our charter provides that there will not be cumulative voting
by
shareholders for the election of our directors. This means that FSB Community
Bankshares, MHC, as the holder of a majority of the shares eligible to be voted
at a meeting of shareholders, may elect all of the directors to be elected
at
that meeting. In addition, our board of directors is divided into three
staggered classes. A classified board makes it more difficult for shareholders
to change a majority of the directors because it generally takes at least two
annual elections of directors for this to occur. Our bylaws contain procedures
and timetables for shareholders that wish to make nominations for the election
of directors or propose new business at a meeting of shareholders, the effect
of
which may be to give our management time to solicit their own proxies to defeat
any dissident slate of nominees. All of these provisions may prevent the sale
of
control or merger of FSB Community Bankshares, Inc., even if such transaction
is
favored by a majority of our public shareholders.
28
Office
Of Thrift Supervision Policy On Remutualization Transactions Could Prohibit
The
Acquisition Of FSB Community Bankshares, Inc., Which May Lower Our Stock
Price.
Current
Office of Thrift Supervision regulations permit a mutual holding company
subsidiary to be acquired by a mutual institution or a mutual holding company
in
a so-called “remutualization” transaction. The possibility of a remutualization
transaction and the successful completion of a small number of remutualization
transactions where significant premiums have been paid to minority shareholders
has resulted in some takeover speculation for mutual holding companies, which
may be reflected in the per share price of mutual holding companies’ common
stock. However, the Office of Thrift Supervision has issued a policy statement
indicating that it views remutualization transactions as raising significant
issues concerning disparate treatment of minority shareholders and the mutual
interests of the mutual holding company and the effect on the mutual interests
of the acquiring entity. Under certain circumstances, the Office of Thrift
Supervision intends to give these issues special scrutiny and to reject
applications to complete remutualization transactions unless the applicant
clearly demonstrates that the Office of Thrift Supervision’s concerns are not
warranted in the particular case. Should the Office of Thrift Supervision
prohibit or otherwise restrict these transactions in the future, our stock
price
may be adversely affected.
29
SELECTED
CONSOLIDATED
FINANCIAL AND
OTHER DATA
The
summary information presented below at or for the years ended December 31,
2006
and 2005 is derived in part from our consolidated financial statements. The
following information is only a summary, and should be read in conjunction
with
our consolidated financial statements and notes beginning on page F-1 of this
prospectus.
|
At
December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
(In
thousands)
|
|||||||
|
Selected
Financial Condition Data:
|
|||||||
|
Total
assets
|
$
|
152,823
|
$
|
143,113
|
|||
|
Cash
and cash equivalents
|
2,182
|
4,669
|
|||||
|
Securities
available for sale
|
604
|
576
|
|||||
|
Securities
held to maturity
|
24,191
|
25,651
|
|||||
|
Loans,
net
|
121,137
|
108,435
|
|||||
|
Deposits
|
108,580
|
106,800
|
|||||
|
Federal
Home Loan Bank advances
|
28,024
|
20,658
|
|||||
|
Stockholder’s
equity
|
13,870
|
13,618
|
|||||
|
For
the Years Ended
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
(In
thousands)
|
|||||||
|
Selected
Operating Data:
|
|||||||
|
Interest
and dividend income
|
$
|
8,093
|
$
|
6,816
|
|||
|
Interest
expense
|
4,421
|
2,978
|
|||||
|
Net
interest income
|
3,672
|
3,838
|
|||||
|
Provision
for loan losses
|
—
|
26
|
|||||
|
Net
interest income after provision for loan losses
|
3,672
|
3,812
|
|||||
|
Non-interest
income
|
360
|
319
|
|||||
|
Non-interest
expense
|
3,688
|
3,448
|
|||||
|
Income
before income tax expense
|
344
|
683
|
|||||
|
Income
tax expense
|
111
|
226
|
|||||
|
Net
income
|
$
|
233
|
$
|
457
|
|||
30
|
At
or For the Years
Ended
December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Selected
Financial Ratios and Other Data:
|
|||||||
|
Performance
Ratios:
|
|||||||
|
Return
on average assets
|
0.16
|
%
|
0.35
|
%
|
|||
|
Return
on average equity
|
1.69
|
%
|
3.41
|
%
|
|||
|
Interest
rate spread (1)
|
2.21
|
%
|
2.68
|
%
|
|||
|
Net
interest margin (2)
|
2.57
|
%
|
3.01
|
%
|
|||
|
Efficiency
ratio (3)
|
91.5
|
%
|
82.9
|
%
|
|||
|
Non-interest
income to average total assets
|
0.24
|
%
|
0.24
|
%
|
|||
|
Non-interest
expense to average total assets
|
2.50
|
%
|
2.62
|
%
|
|||
|
Average
interest-earning assets to average interest-bearing
liabilities
|
112
|
%
|
114
|
%
|
|||
|
Asset
Quality Ratios:
|
|||||||
|
Non-performing
assets as a percent of total assets
|
0.11
|
%
|
0.21
|
%
|
|||
|
Non-performing
loans as a percent of total loans
|
0.14
|
%
|
0.06
|
%
|
|||
|
Allowance
for loan losses as a percent of non-performing loans
|
188.30
|
%
|
472.86
|
%
|
|||
|
Allowance
for loan losses as a percent of total loans
|
0.27
|
%
|
0.30
|
%
|
|||
|
Capital
Ratios:
|
|||||||
|
Total
risk-based capital (to risk-weighted assets)
|
19.40
|
%
|
19.95
|
%
|
|||
|
Tier
1 leverage (core) capital (to adjusted tangible assets)
|
8.88
|
%
|
9.32
|
%
|
|||
|
Tangible
capital (to tangible assets)
|
8.88
|
%
|
9.32
|
%
|
|||
|
Tier
1 risk-based capital (to risk-weighted assets)
|
18.94
|
%
|
19.46
|
%
|
|||
|
Average
equity to average total assets
|
9.32
|
%
|
10.20
|
%
|
|||
|
Other
Data:
|
|||||||
|
Number
of full service offices (4)
|
2
|
2
|
|||||
|
(1)
|
The
interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities for the
year.
|
| (2) |
The
net interest margin represents net interest income as a percent of
average
interest-earning assets for the
year.
|
| (3) |
The
efficiency ratio represents non-interest expense divided by the sum
of net
interest income and non-interest
income.
|
| (4) |
In
January 2007, a third branch office was opened in Irondequoit, New
York.
|
31
RECENT
DEVELOPMENTS
The
following tables set forth selected consolidated historical financial and other
data of FSB Community Bankshares, Inc. at the dates and for the periods
indicated. The following information is only a summary, and should be read
in
conjunction with our consolidated financial statements and notes beginning
on
page F-1 of this prospectus. The information at December 31, 2006 is derived
in
part from our audited consolidated financial statements that appear in this
prospectus. The information at March 31, 2007 and for the three months ended
March 31, 2007 and 2006 is unaudited. However, in the opinion of management,
all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial condition and results of operations for the
unaudited periods, have been made. The selected operating data presented below
for the three months ended March 31, 2007, are not necessarily indicative of
the
results that may be expected for the year ending December 31, 2007.
|
At
March
31,
2007
|
At
December
31,
2006
|
||||||
|
(In
thousands)
|
|||||||
|
Selected
Financial Condition Data:
|
|||||||
|
Total
assets
|
$
|
151,135
|
$
|
152,823
|
|||
|
Cash
and cash equivalents
|
3,490
|
2,182
|
|||||
|
Securities
available for sale
|
529
|
604
|
|||||
|
Securities
held to maturity
|
22,504
|
24,191
|
|||||
|
Loans,
net
|
119,564
|
121,137
|
|||||
|
Deposits
|
114,219
|
108,580
|
|||||
|
Federal
Home Loan Bank advances
|
21,642
|
28,024
|
|||||
|
Stockholder’s
equity
|
13,685
|
13,870
|
|||||
|
For
the Three Months Ended
March
31,
|
|||||||
|
2007
|
2006
|
||||||
|
(In
thousands)
|
|||||||
|
Selected
Operating Data:
|
|||||||
|
Interest
and dividend income
|
$
|
2,094
|
$
|
1,921
|
|||
|
Interest
expense
|
1,253
|
962
|
|||||
|
Net
interest income
|
841
|
959
|
|||||
|
Provision
for loan losses
|
―
|
―
|
|||||
|
Net
interest income after provision for loan losses
|
841
|
959
|
|||||
|
Non-interest
income
|
81
|
68
|
|||||
|
Non-interest
expense
|
1,132
|
922
|
|||||
|
(Loss)
income before income tax expense
|
(210
|
)
|
105
|
||||
|
Income
tax (benefit) expense
|
(75
|
)
|
38
|
||||
|
Net
(loss) income
|
$
|
(135
|
)
|
$
|
67
|
||
32
|
At
or For the Three
Months
Ended
March
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Selected
Financial Ratios and Other Data:
|
|||||||
|
Performance
Ratios:*
|
|||||||
|
Return
on average assets
|
(0.36
|
)%
|
0.19
|
%
|
|||
|
Return
on average equity
|
(3.92
|
)%
|
1.96
|
%
|
|||
|
Interest
rate spread (1)
|
1.93
|
%
|
2.39
|
%
|
|||
|
Net
interest margin (2)
|
2.30
|
%
|
2.76
|
%
|
|||
|
Efficiency
ratio (3)
|
122.8
|
%
|
89.8
|
%
|
|||
|
Non-interest
income to average total assets
|
0.21
|
%
|
0.19
|
%
|
|||
|
Non-interest
expense to average total assets
|
3.00
|
%
|
2.59
|
%
|
|||
|
Average
interest-earning assets to average interest-bearing
liabilities
|
1.11
|
%
|
1.13
|
%
|
|||
|
Asset
Quality Ratios:
|
|||||||
|
Non-performing
assets as a percent of total assets
|
0.03
|
%
|
0.03
|
%
|
|||
|
Non-performing
loans as a percent of total loans
|
0.04
|
%
|
0.04
|
%
|
|||
|
Allowance
for loan losses as a percent of non-performing loans
|
700
|
%
|
827.50
|
%
|
|||
|
Allowance
for loan losses as a percent of total loans
|
0.27
|
%
|
0.30
|
%
|
|||
|
Capital
Ratios:
|
|||||||
|
Total
risk-based capital (to risk-weighted assets)
|
19.33
|
%
|
19.79
|
%
|
|||
|
Tier
1 leverage (core) capital (to adjusted tangible assets)
|
8.87
|
%
|
9.34
|
%
|
|||
|
Tangible
capital (to tangible assets)
|
8.87
|
%
|
9.34
|
%
|
|||
|
Tier
1 risk-based capital (to risk-weighted assets)
|
18.88
|
%
|
19.31
|
%
|
|||
|
Average
equity to average total assets
|
9.14
|
%
|
9.58
|
%
|
|||
|
Other
Data:
|
|||||||
|
Number
of full service offices
|
3
|
2
|
|||||
| * |
Ratios
have been annualized where
appropriate.
|
|
(1)
|
Represents
the difference between the weighted-average yield on interest-earning
assets and the weighted-average cost of interest-bearing liabilities
for
the period.
|
| (2) |
Represents
net interest income as a percent of average interest-earning assets
for
the period.
|
| (3) |
Represents
non-interest expense divided by the sum of net interest income and
non-interest income.
|
Comparison
of Financial Condition at March 31, 2007 and December 31,
2006
Total
Assets.
Total
assets decreased by $1.7 million, or 1.1%, to $151.1 million at March 31, 2007
from $152.8 million at December 31, 2006. The decrease in total assets reflects
decreases in the investment securities and loan portfolios as we used proceeds
from maturing investment securities to pay down Federal Home Loan Bank
borrowings and loan origination activity slowed. The decreases in the loan
and
investment portfolios were partially offset by a $1.3 million increase in cash
and cash equivalents as we increased liquidity to mitigate interest rate risk
and take advantage of attractive short-term yields.
Loans
receivable decreased by $1.5 million, or 1.2%, to $119.6 million at March 31,
2007 from $121.1 million at December 31, 2006. The decrease in loans receivable
was the result of loan repayments exceeding loan originations, sales of three
30-year fixed-rate mortgage loans totaling $262,000, and to a lesser extent
principal payments on our consumer loans, primarily home equity lines of
credit.
33
Investment
securities decreased by $1.8 million, or 7.3%, to $23.0 million at March 31,
2007 from $24.8 million at December 31, 2006. The decrease was primarily
attributable to the maturity of $3.3 million of United States Government agency
securities, $436,000 of principal payments received from mortgage-backed
securities, and a $75,000 decrease in the fair value of securities classified
as
available for sale, partially offset by $2.0 million in purchases of United
States Government agency securities.
Deposits
and Borrowings.
Deposits
increased by $5.6 million, or 5.2%, to $114.2 million at March 31, 2007 from
$108.6 million at December 31, 2007. Certificates of deposit, including IRAs,
increased by $4.6 million, and transaction accounts, including checking, money
market and savings accounts, increased by $976,000. All of the net deposit
growth was attributable to the newly opened Irondequoit branch.
Borrowings
decreased by $6.4 million, or 22.9%, to $21.6 million at March 31, 2007 from
$28.0 million on December 31, 2006. We decreased our short-term Federal Home
Loan Bank borrowings by $4.2 million and our long-term Federal Home Loan Bank
borrowings by $2.2 million. These funding sources were replaced by deposits
obtained following the opening of our Irondequoit branch. During the first
quarter, we received approximately $5.9 million in nine-month certificates
of
deposit primarily due to our 5.5% rate promotion.
Stockholder’s
Equity.
Total
stockholder’s equity decreased by $185,000, or 1.3%, to $13.7 million at March
31, 2007 from $13.9 million at December 31, 2006. The decrease resulted from
a
net loss of $135,000 for the three months ended March 31, 2007, and a $50,000
decrease in accumulated other comprehensive income.
Comparison
of Operating Results for the Three Months Ended March 31, 2007 and March 31,
2006
General.
FSB
Community Bankshares, Inc. had a net loss of $135,000 for the three months
ended
March 31, 2007 compared to net income of $67,000 the three months ended March
31, 2006. The decrease was primarily attributable to a decrease in net interest
income as a result of the decrease in our net interest margin in the current
inverted yield curve environment (short-term interest rates on United States
Treasury obligations exceeding long-term rates), and an increase in our
non-interest expense resulting primarily from the additional cost of salaries
and benefits, occupancy and depreciation, and other operating expenses incurred
in connection with the recent opening and operation of our Irondequoit
branch.
34
Interest
and Dividend Income.
Interest
and dividend income increased by $173,000, or 9.1% to $2.1 million for the
three
months ended March 31, 2007 from $1.9 million for the three months ended March
31, 2006. The increase in interest and dividend income resulted primarily from
a
$199,000, or 12.4%, increase in interest income from loans, offset partially
by
a $26,000, or 8.0%, decrease in interest income from investments. Average
interest-earning assets increased by $6.8 million, or 4.9%, to $146.1 million
for the three months ended March 31, 2007 from $139.3 million for the three
months ended March 31, 2006. The yield on interest earning assets increased
by
21 basis points to 5.73% for the three months ended March 31, 2007 compared
to
5.52% for the three months ended March 31, 2006, reflecting modest increases
in
long-term rates.
Interest
Expense.
Interest
expense increased $291,000, or 30.2%, to $1.3 million for the three months
ended
March 31, 2007 from $962,000 for the three months ended March 31, 2006. The
increase in interest expense resulted from an increase in both the average
balance and average cost of interest-bearing liabilities. The average balance
of
interest-bearing liabilities increased $8.7 million, or 7.1%, to $131.9 million
for the three months ended March 31, 2007 compared to $123.2 million for the
three months ended March 31, 2006. The average cost of interest-bearing
liabilities increased by 67 basis points to 3.80% for the three months ended
March 31, 2007 from 3.13% for the three months ended March 31, 2006. The average
cost of deposit accounts increased by 68 basis points to 3.57% for the three
months ended March 31, 2007 compared to 2.89% for the three months ended March
31, 2006. In addition, the average cost of Federal Home Loan Bank advances
increased by 52 basis points to 4.80% for the three months ended March 31,
2007
compared to 4.28% for the three months ended March 31, 2006. The increase in
interest expense reflects a shift in funding from lower cost deposits and
borrowings into higher cost certificates of deposit and borrowings as short-term
interest rates have increased significantly over the last 12 months.
Based
upon current market rates, we expect our cost of funds to increase further
in
the second quarter of 2007 which will create additional pressure on our interest
rate spread and our ability to be profitable from our operations. We have $13.9
million of certificates of deposit that will mature during the second quarter
of
2007 with a weighted average cost of 4.14%. Based on current market rates,
if
these funds remain with Fairport Savings Bank with similar maturities, the
rates
we pay on these deposits would increase.
Net
Interest Income.
Net
interest income decreased $118,000, or 12.3%, to $841,000 for the three months
ended March 31, 2007 from $959,000 for the three months ended March 31, 2006.
The decrease in net interest income was due primarily to a 67 basis point
increase in the average cost of our interest-bearing liabilities, while the
average yield on our interest-earning assets increased by only 21 basis points,
as the inverted yield curve continued to decrease our net interest rate spread
and net interest margin. Our net interest margin decreased 46 basis points
to
2.30% for the three months ended March 31, 2007 from 2.76% for the three months
ended March 31, 2006.
Provision
for Loan Losses.
Based
on
management’s evaluation of the factors that determine the level of the allowance
for loan losses, we recorded no provision for loan losses for the three month
periods ended March 31, 2007 and March 31, 2006. The allowance for loan losses
as of March 31, 2007 was $322,000, or 0.27% of total loans, compared to
$331,000, or 0.30% of total loans as of March 31, 2006. We had non-accrual
loans
totaling $46,000, or 0.04% of total loans receivable as of March 31, 2007
compared to $40,000, or 0.04% of loans in non-accrual status as of March 31,
2006.
35
Non-interest
Income.
Non-interest
income increased $13,000, or 19.1%, to $81,000 for the three months ended March
31, 2007 compared to $68,000 for the three months ended March 31, 2006. The
increase in non-interest income was primarily the result of an $8,000 increase
in insufficient fund fees on checking accounts and $5,000 in network and point
of sale interchange fees on customer debit cards.
Non-interest
Expense.
Non-interest
expense increased $210,000, or 22.8%, to $1.1 million for the three months
ended
March 31, 2007 compared to $922,000 for the three months ended March 31, 2006.
The increase was the result of an additional $92,000 in salaries and benefits
expense primarily due to annual cost of living raises effective January 1 of
each year and staffing of the Irondequoit branch which opened on January 4,
2007, an increase of $40,000 in new occupancy expenses (primarily lease and
depreciation of the Irondequoit branch), an increase of $68,000 in advertising
and marketing expenses and direct mailing expense, and an increase of $10,000
in
miscellaneous other expenses, all of which relate to the Irondequoit branch.
Income
Tax Expense/Benefit.
We
had a
pre-tax loss of $210,000 for the three months ended March 31, 2007 versus a
pre-tax profit of $105,000 for the three months ended March 31, 2006, which
resulted in a $75,000 tax benefit for the three months ended March 31, 2007,
versus a $38,000 tax expense for the three months ended March 31, 2006, a change
of $113,000. The effective tax rate was (35.7%) for the three months ended
March
31, 2007 compared to 36.2% for the three months ended March 31,
2006.
36
FORWARD
LOOKING
STATEMENTS
This
prospectus contains forward-looking statements, which can be identified by
the
use of such words as estimate, project, believe, intend, anticipate, plan,
seek,
expect and similar expressions. These forward-looking statements include:
|
·
|
statements
of our goals, intentions and expectations;
|
|
·
|
statements
regarding our business plans and prospects and growth and operating
strategies;
|
|
·
|
statements
regarding the asset quality of our loan and investment portfolios;
and
|
|
·
|
estimates
of our risks and future costs and benefits.
|
These
forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following important factors
that could affect the actual outcome of future events:
|
·
|
significantly
increased competition among depository and other financial institutions;
|
|
·
|
inflation
and changes in the interest rate environment that reduce our interest
margins or reduce the fair value of financial instruments;
|
|
·
|
general
economic conditions, either nationally or in our market areas, that
are
worse than expected;
|
|
·
|
adverse
changes in the securities markets;
|
|
·
|
legislative
or regulatory changes that adversely affect our business;
|
|
·
|
our
ability to enter new markets successfully and take advantage of growth
opportunities, and the possible short-term dilutive effect of potential
acquisitions or de
novo
branches, if any;
|
|
·
|
changes
in consumer spending, borrowing and savings habits;
|
|
·
|
changes
in accounting policies and practices, as may be adopted by the bank
regulatory agencies and the Financial Accounting Standards
Board;
|
|
·
|
inability
of third-party providers to perform their obligations to us;
and
|
|
·
|
changes
in our organization, compensation and benefit plans.
|
Because
of these and other uncertainties, our actual future results may be materially
different from the results indicated by these forward-looking statements. We
discuss these and other uncertainties in “Risk Factors.”
37
HOW
WE
INTEND TO USE THE PROCEEDS FROM THE STOCK
OFFERING
Although
we will not be able to determine the amount of actual net proceeds we will
receive from the sale of shares of common stock until the stock offering is
completed, based upon the sale of our shares at $10 per share we anticipate
that
the net proceeds will be between $7.5 million and $10.5 million, or
$12.2 million if the stock offering is increased.
We
intend
to distribute the net proceeds from the stock offering as follows:
|
838,950
Shares
at
Minimum of
Offering
Range
|
987,000
Shares at
Midpoint
of
Offering
Range
|
1,135,050
Shares at
Maximum
of
Offering
Range
|
1,305,308
Shares
at
Adjusted Maximum
of
Offering Range (1)
|
||||||||||||||||||||||
|
Amount
|
Percent
of
Net
Proceeds
|
Amount
|
Percent
of
Net
Proceeds
|
Amount
|
Percent
of
Net
Proceeds
|
Amount
|
Percent
of
Net
Proceeds
|
||||||||||||||||||
|
(Dollars
in Thousands)
|
|||||||||||||||||||||||||
|
Stock
offering proceeds
|
$
|
8,390
|
111.3
|
%
|
$
|
9,870
|
109.5
|
%
|
$
|
11,351
|
108.1
|
%
|
$
|
13,053
|
107.0
|
%
|
|||||||||
|
Less:
|
|||||||||||||||||||||||||
|
Stock
offering expenses, excluding sales agent commissions and
expenses
|
(645
|
)
|
(8.5
|
)
|
(645
|
)
|
(7.2
|
)
|
(645
|
)
|
(6.1
|
)
|
(645
|
)
|
(5.3
|
)
|
|||||||||
|
Sales
agent commissions and expenses
|
(210
|
)
|
(2.8
|
)
|
(210
|
)
|
(2.3
|
)
|
(210
|
)
|
(2.0
|
)
|
(210
|
)
|
(1.7
|
)
|
|||||||||
|
Net
stock offering proceeds
|
7,535
|
100.0
|
%
|
9,015
|
100.0
|
%
|
10,496
|
100.0
|
%
|
12,198
|
100.0
|
%
|
|||||||||||||
|
Less:
|
|||||||||||||||||||||||||
|
Proceeds
contributed to Fairport Savings Bank
|
(3,767
|
)
|
(50.0
|
)
|
(4,508
|
)
|
(50.0
|
)
|
(5,248
|
)
|
(50.0
|
)
|
(6,099
|
)
|
(50.0
|
)
|
|||||||||
|
Proceeds
used for loan to employee stock ownership plan
|
(700
|
)
|
(9.3
|
)
|
(823
|
)
|
(9.1
|
)
|
(947
|
)
|
(9.0
|
)
|
(1,089
|
)
|
(8.9
|
)
|
|||||||||
|
Proceeds
retained by FSB Community Bankshares, Inc.
|
$
|
3,068
|
40.7
|
%
|
$
|
3,684
|
40.9
|
%
|
$
|
4,301
|
41.0
|
%
|
$
|
5,010
|
41.1
|
%
|
|||||||||
|
(1)
|
As
adjusted to give effect to an increase in the number of shares of
common
stock outstanding after the stock offering which could occur due
to an
increase in the maximum of the independent valuation as a result
of
regulatory considerations, demand for the shares, or changes in market
conditions or general economic conditions following the commencement
of
the stock offering.
|
The
net
proceeds may vary because total expenses relating to the stock offering may
be
more or less than our estimates. For example, our expenses would increase if
a
syndicated community offering were used to sell shares of common stock not
purchased in the subscription offering and any community offering. Payments
for
shares made through withdrawals from existing deposit accounts will not result
in the receipt of new funds for investment but will result in a reduction of
Fairport Savings Bank’s deposits. In all instances, Fairport Savings Bank will
receive at least 50% of the net proceeds of the stock offering. We intend to
contribute more than 50% of the net proceeds from the stock offering to Fairport
Savings Bank to the extent that such additional capital would be required in
order for Fairport Savings Bank to have at least 10% tangible capital
immediately following completion of the stock offering.
We
are
undertaking the stock offering at this time in order to increase our capital
and
have the capital resources available to expand our business. For further
information, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Business Strategy.” The stock offering proceeds will
increase our capital resources and the amount of funds available to us for
lending and investment purposes. The proceeds will also give us greater
flexibility to expand our branch network and expand the products and services
we
offer to our customers.
38
FSB
Community Bankshares, Inc. may use the proceeds it retains from the stock
offering:
|
·
|
to
finance the purchase of shares of common stock in the stock offering
by
the employee stock ownership plan;
|
|
·
|
to
invest in securities;
|
|
·
|
to
deposit funds in Fairport Savings
Bank;
|
|
·
|
to
repurchase its shares of common
stock;
|
|
·
|
to
pay dividends to our shareholders;
|
|
·
|
to
finance acquisitions of financial institutions or branches and other
financial services businesses, although no material transactions
are being
considered at this time; and
|
|
·
|
for
general corporate purposes.
|
Under
current Office of Thrift Supervision regulations, we may not repurchase shares
of our common stock during the first year following the stock offering, except
to fund equity benefit plans other than stock options or except when
extraordinary circumstances exist and with prior regulatory approval.
Fairport
Savings Bank intends to invest the proceeds it receives from the stock offering
initially in short-term, liquid investments. Over time, Fairport Savings Bank
may use the proceeds that it receives from the stock offering as follows:
|
·
|
to
expand its retail banking franchise by establishing de
novo
branches, by acquiring existing branches, or by acquiring other financial
institutions or other financial services companies, although no material
acquisitions are being considered at this time. The Bank will attempt
to
open one or two new branches in the next three years, depending on
market
conditions and as opportunities present
themselves;
|
|
·
|
to
fund new loans;
|
|
·
|
to
support new products and services;
|
|
·
|
to
invest in securities; and
|
|
·
|
for
general corporate purposes.
|
The
use
of proceeds outlined above may change, based on changes in interest rates,
equity markets, laws and regulations affecting the financial services industry,
our relative position in the financial services industry, the attractiveness
of
potential acquisitions to expand our operations, and overall market conditions.
We expect our return on equity to decrease as compared to our performance in
recent years until we are able to utilize effectively the additional capital
raised in the stock offering. Until we can increase our net interest income
and
non-interest income, we expect our return on equity to be below the industry
average, which may negatively affect the value of our common stock. See “Risk
Factors.”
39
OUR
POLICY
REGARDING DIVIDENDS
Following
completion of the stock offering, our board of directors will have the authority
to declare dividends on our common stock, subject to statutory and regulatory
requirements. Our board of directors currently does not intend to make a
dividend payment following completion of the stock offering. Future dividend
payments will depend upon a number of factors, including capital requirements,
our consolidated financial condition and results of operations, tax
considerations, statutory and regulatory limitations and general economic
conditions. No assurances can be given that any dividends will be paid or that,
if paid, such dividends will not be reduced or eliminated in the future. Special
cash dividends, stock dividends or returns of capital, to the extent permitted
by Office of Thrift Supervision policy and regulations, may be paid in addition
to, or in lieu of, regular cash dividends. We will file a consolidated tax
return with Fairport Savings Bank. Accordingly, it is anticipated that any
cash
distributions made by FSB Community Bankshares, Inc. to its shareholders would
be treated as cash dividends and not as a non-taxable return of capital for
federal and state tax purposes.
Pursuant
to our charter, we are authorized to issue preferred stock. If we issue
preferred stock, the holders thereof may have a priority over the holders of
our
shares of common stock with respect to the payment of dividends. For a further
discussion concerning the payment of dividends on our shares of common stock,
see “Description of Capital Stock of FSB Community Bankshares, Inc.—Common
Stock—Distributions.” Dividends we can declare and pay will depend, in large
part, upon the net proceeds of the stock offering we retain and, to a lesser
extent, on the receipt of dividends from Fairport Savings Bank. Initially,
we
will have no additional sources of income to support dividend payments other
than earnings from the investment of proceeds from the sale of shares of common
stock, and interest payments received in connection with the loan to the
employee stock ownership plan. A regulation of the Office of Thrift Supervision
imposes limitations on “capital distributions” by savings institutions. See
“Supervision and Regulation—Federal Banking Regulation—Capital
Distributions.”
Any
payment of dividends by Fairport Savings Bank to FSB Community Bankshares,
Inc.
that would be deemed to be drawn from Fairport Savings Bank’s bad debt reserves
would require a payment of taxes at the then-current tax rate by Fairport
Savings Bank on the amount of earnings deemed to be removed from the reserves
for such distribution. Fairport Savings Bank does not intend to make any
distribution to FSB Community Bankshares, Inc. that would create such a federal
tax liability. See “Federal and State Taxation.”
Additionally,
pursuant to Office of Thrift Supervision regulations, during the three-year
period following the stock offering, we will not take any action to declare
an
extraordinary dividend to shareholders that would be treated by recipients
as a
tax-free return of capital for federal income tax purposes.
40
If
we pay
dividends to our shareholders, we also will be required to pay dividends to
FSB
Community Bankshares, MHC, unless FSB Community Bankshares, MHC elects to waive
the receipt of dividends. We anticipate that FSB Community Bankshares, MHC
will
waive any dividends we pay. Any decision to waive dividends will be subject
to
regulatory approval. Under Office of Thrift Supervision regulations, public
shareholders
would
not be diluted for any dividends waived by FSB Community Bankshares, MHC in
the
event FSB Community Bankshares, MHC converts to stock form. See “Supervision and
Regulation—Holding Company Regulation.”
MARKET
FOR
THE COMMON STOCK
We
have
never issued common stock to the public, so there is no established market
for
the common stock. We anticipate that our shares of common stock will be quoted
on the OTC Bulletin Board. In order for our common stock to be quoted on the
OTC
Bulletin Board, we must have at least one broker-dealer who will make a market
in our common stock. Sandler O’Neill & Partners, L.P. has advised us that it
intends to make a market in our common stock following the stock offering,
but
it is under no obligation to do so.
The
development of an active trading market depends on the existence of willing
buyers and sellers, the presence of which is not within our control, or that
of
any market maker. The number of active buyers and sellers of our common stock
at
any particular time may be limited. Under such circumstances, you could have
difficulty selling your shares of common stock on short notice and, therefore,
you should not view the purchase of our common stock as a short-term investment.
We cannot assure you that an active trading market for the common stock will
develop or that, if it develops, it will continue. Nor can we assure you that,
if you purchase shares of our common stock, you will be able to sell them at
or
above $10.00 per share.
We do
not expect an active and liquid trading market to develop in our common stock
due to the small size of the stock offering.
41
REGULATORY
CAPITAL
COMPLIANCE
At
December 31, 2006, Fairport Savings Bank exceeded all regulatory capital
requirements. The following table sets forth our compliance, as of December
31,
2006, with the regulatory capital standards, on a historical and pro forma
basis, assuming that the indicated number of shares of common stock were sold
as
of such date at $10.00 per share, Fairport Savings Bank received 50% of the
estimated net proceeds and 50% of the net proceeds were retained by FSB
Community Bankshares, Inc. Accordingly, proceeds received by Fairport Savings
Bank have been assumed to equal $3.8 million, $4.5 million,
$5.2 million and $6.1 million at the minimum, midpoint, maximum and
adjusted maximum of the offering range, respectively. For a discussion of the
applicable capital requirements, see “Supervision and Regulation—Federal Banking
Regulation—Capital Requirements.”
|
Pro
Forma at December 31, 2006, Based Upon the Sale
of
|
|||||||||||||||||||||||||||||||||||
|
Historical
at
December
31, 2006
|
838,950
Shares
at
Minimum of
Offering
Range
|
987,000
Shares at
Midpoint
of
Offering
Range
|
1,135,050
Shares at Maximum of
Offering
Range
|
1,305,308
Shares
at
Adjusted Maximum
of
Offering Range (1)
|
|||||||||||||||||||||||||||||||
|
Amount
|
Percent
of
Assets
(2)
|
Amount
|
Percent
of
Assets
(2)
|
Amount
|
Percent
of
Assets
(2)
|
Amount
|
Percent
of
Assets
(2)
|
Amount
|
Percent
of
Assets
(2)
|
||||||||||||||||||||||||||
|
(Dollars
in Thousands)
|
|||||||||||||||||||||||||||||||||||
|
GAAP
capital
|
$
|
13,870
|
9.08
|
%
|
$
|
16,938
|
10.82
|
%
|
$
|
17,554
|
11.16
|
%
|
$
|
18,171
|
11.50
|
%
|
$
|
18,880
|
11.88
|
%
|
|||||||||||||||
|
Tangible
capital:
|
|||||||||||||||||||||||||||||||||||
|
Tangible
capital (3)(4)(7)
|
$
|
13,515
|
8.88
|
%
|
$
|
16,583
|
10.64
|
%
|
$
|
17,199
|
10.98
|
%
|
$
|
17,816
|
11.32
|
%
|
$
|
18,525
|
11.71
|
%
|
|||||||||||||||
|
Requirement
|
2,282
|
1.50
|
2,339
|
1.50
|
2,350
|
1.50
|
2,361
|
1.50
|
2,374
|
1.50
|
|||||||||||||||||||||||||
|
Excess
|
$
|
11,233
|
7.38
|
%
|
$
|
14,244
|
9.14
|
%
|
$
|
14,849
|
9.48
|
%
|
$
|
15,455
|
9.82
|
%
|
$
|
16,151
|
10.21
|
%
|
|||||||||||||||
|
Core
capital:
|
|||||||||||||||||||||||||||||||||||
|
Core
capital (3)(4)(7)
|
$
|
13,515
|
8.88
|
%
|
$
|
16,583
|
10.64
|
%
|
$
|
17,199
|
10.98
|
%
|
$
|
17,816
|
11.32
|
%
|
$
|
18,525
|
11.71
|
%
|
|||||||||||||||
|
Requirement
(5)
|
6,086
|
4.00
|
6,237
|
4.00
|
6,266
|
4.00
|
6,296
|
4.00
|
6,330
|
4.00
|
|||||||||||||||||||||||||
|
Excess
|
$
|
7,429
|
4.88
|
%
|
$
|
10,346
|
6.64
|
%
|
$
|
10,933
|
6.98
|
%
|
$
|
11,520
|
7.32
|
%
|
$
|
12,195
|
7.71
|
%
|
|||||||||||||||
|
Tier
I risk based capital:
|
|||||||||||||||||||||||||||||||||||
|
Tier
I risk based capital (3)(4)(7)
|
$
|
13,515
|
18.94
|
%
|
$
|
16,583
|
23.00
|
%
|
$
|
17,199
|
23.81
|
%
|
$
|
17,816
|
24.61
|
%
|
$
|
18,525
|
25.23
|
%
|
|||||||||||||||
|
Requirement
(5)
|
2,854
|
4.00
|
2,884
|
4.00
|
2,890
|
4.00
|
2,896
|
4.00
|
2,902
|
4.00
|
|||||||||||||||||||||||||
|
Excess
|
$
|
10,661
|
14.94
|
%
|
$
|
13,699
|
19.00
|
%
|
$
|
14,309
|
19.81
|
%
|
$
|
14,920
|
20.61
|
%
|
$
|
15,623
|
21.53
|
%
|
|||||||||||||||
|
Total
risk-based capital:
|
|||||||||||||||||||||||||||||||||||
|
Total
risk-based capital (4)(6)(7)
|
$
|
13,837
|
19.40
|
%
|
$
|
16,905
|
23.45
|
%
|
$
|
17,521
|
24.25
|
%
|
$
|
18,138
|
25.06
|
%
|
$
|
18,847
|
25.97
|
%
|
|||||||||||||||
|
Requirement
|
5,708
|
8.00
|
5,767
|
8.00
|
5,779
|
8.00
|
5,791
|
8.00
|
5,805
|
8.00
|
|||||||||||||||||||||||||
|
Excess
|
$
|
8,129
|
11.40
|
%
|
$
|
11,138
|
15.45
|
%
|
$
|
11,742
|
16.25
|
%
|
$
|
12,347
|
17.06
|
%
|
$
|
13,042
|
17.97
|
%
|
|||||||||||||||
|
Reconciliation
of capital infused into Fairport Savings Bank:
|
|||||||||||||||||||||||||||||||||||
|
Net
proceeds
|
$
|
7,535
|
$
|
9,015
|
$
|
10,496
|
$
|
12,198
|
|||||||||||||||||||||||||||
|
Less:
|
|||||||||||||||||||||||||||||||||||
|
Contra-account
established for employee stock ownership plan
|
(700
|
)
|
(823
|
)
|
(947
|
)
|
(1,089
|
)
|
|||||||||||||||||||||||||||
|
Proceeds
retained by FSB Community Bankshares, Inc.
|
(3,767
|
)
|
(4,508
|
)
|
(5,248
|
)
|
(6,099
|
)
|
|||||||||||||||||||||||||||
|
Pro
forma increase in GAAP and regulatory capital
|
$
|
3,068
|
$
|
3,684
|
$
|
4,301
|
$
|
5,010
|
|||||||||||||||||||||||||||
(footnotes
on following page)
42
|
(1)
|
As
adjusted to give effect to an increase in the number of shares of
common
stock outstanding after the stock offering which could occur due
to an
increase in the maximum of the independent valuation as a result
of
changes in market conditions following the commencement of the stock
offering.
|
|
(2)
|
Based
on pre-stock offering GAAP assets of $152.8 million, adjusted total
assets
of $152.1 million for the purposes of the tangible and core capital
requirements, and risk-weighted assets of $71.3 million for the purposes
of the risk-based capital
requirement.
|
|
(3)
|
Tangible
capital levels are shown as a percentage of tangible assets. Core
capital
levels are shown as a percentage of total adjusted assets. Total
risk-based capital levels are shown as a percentage of risk-weighted
assets.
|
|
(4)
|
Pro
forma capital levels assume that we fund the stock-based benefit
plan at
the holding company level with no impact to the financial statements
of
Fairport Savings Bank, and that the employee stock ownership plan
purchases 3.92% of the shares of common stock to be outstanding
immediately following the stock offering (including shares issued
to FSB
Community Bankshares, MHC) with funds we lend. Fairport Savings Bank’s pro
forma GAAP and regulatory capital have been reduced by the amount
required
to record a contra-equity account at the bank level to reflect the
obligation to repay the loan to the employee stock ownership plan.
See
“Management” for a discussion of the employee stock ownership plan.
|
|
(5)
|
The
current core capital requirement for savings banks that receive the
highest supervisory rating for safety and soundness is 3% of total
adjusted assets and 4% to 5% of total adjusted assets for all other
savings banks. See “Supervision and Regulation—Federal Banking
Regulation—Standards for Safety and Soundness” and “—Capital
Requirements,” respectively.
|
|
(6)
|
Assumes
net proceeds are invested in assets that carry a 20% risk-weighting.
|
|
(7)
|
Pro
forma capital levels assume receipt by Fairport Savings Bank of 50%
of the
net proceeds from the sale of shares of common stock in the stock
offering. We intend to contribute more than 50% of the net proceeds
from
the stock offering to Fairport Savings Bank to the extent that such
additional capital would be required in order for Fairport Savings
Bank to
have at least 10% tangible capital immediately following completion
of the
stock offering.
|
43
The
following table presents our historical consolidated capitalization at December
31, 2006, and our pro forma consolidated capitalization after giving effect
to
the stock offering, based upon the sale of the number of shares of common stock
indicated in the table. The common stock acquired by the employee stock
ownership plan in the stock offering and the common stock expected to be
acquired by the stock-based benefit plan no earlier than six months after
completion of the stock offering are reflected as reductions to pro forma
stockholders’ equity. Additionally, pro forma stockholders’ equity has been
reduced by estimated offering expenses of $800,000.
|
Pro
Forma Consolidated Capitalization
Based
Upon the Sale for $10.00 Per Share of
|
||||||||||||||||
|
Historical
Consolidated
Capitalization
|
838,950
Shares
at
Minimum
of
Offering
Range
|
987,000
Shares
at
Midpoint
of
Offering
Range
|
1,135,050
Shares
at
Maximum
of
Offering
Range
|
1,305,308
Shares
at
Adjusted
Maximum
of
Offering
Range
(1)
|
||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||
|
Deposits
(2)
|
$
|
108,580
|
$
|
108,580
|
$
|
108,580
|
$
|
108,580
|
$
|
108,580
|
||||||
|
Federal
Home Loan Bank advances (3)
|
28,024
|
28,024
|
28,024
|
28,024
|
28,024
|
|||||||||||
|
Total
deposits and borrowings
|
$
|
136,604
|
$
|
136,604
|
$
|
136,604
|
$
|
136,604
|
$
|
136,604
|
||||||
|
Stockholder’s
equity:
|
||||||||||||||||
|
Preferred
stock, 1,000,000 shares authorized; none to be issued
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
―
|
||||||
|
Common
stock, $0.10 par value per share, 10,000,000 shares
authorized; shares to be issued as reflected`
|
―
|
179
|
210
|
242
|
278
|
|||||||||||
|
Additional
paid-in capital (4)
|
10
|
7,366
|
$
|
8,815
|
$
|
10,264
|
$
|
11,930
|
||||||||
|
Retained
earnings
|
13,505
|
13,505
|
13,505
|
13,505
|
13,505
|
|||||||||||
|
Common
stock acquired by employee stock ownership plan (5)
|
―
|
(700
|
)
|
(823
|
)
|
(947
|
)
|
(1,089
|
)
|
|||||||
|
Common
stock acquired by stock-based benefit plan
(6)
|
―
|
(350
|
)
|
(412
|
)
|
(473
|
)
|
(544
|
)
|
|||||||
|
Accumulated
other comprehensive income
|
355
|
355
|
355
|
355
|
355
|
|||||||||||
|
Total
shareholders’ equity (7)
|
$
|
13,870
|
$
|
20,355
|
$
|
21,650
|
$
|
22,946
|
$
|
24,435
|
||||||
|
Pro
forma shares outstanding:
|
||||||||||||||||
|
Total
shares outstanding (8)
|
―
|
1,785,000
|
2,100,000
|
2,415,000
|
2,777,250
|
|||||||||||
|
Shares
issued to FSB Community Bankshares, MHC (8)
|
―
|
946,050
|
1,113,000
|
1,279,950
|
1,471,942
|
|||||||||||
|
Shares
offered for sale
|
―
|
838,950
|
987,000
|
1,135,050
|
1,305,308
|
|||||||||||
|
Total
stockholders’ equity as a percentage of pro forma total
assets
|
9.08
|
%
|
12.78
|
%
|
13.48
|
%
|
14.17
|
%
|
14.96
|
%
|
||||||
|
(1)
|
As
adjusted to give effect to an increase in the number of shares
of common
stock outstanding after the stock offering which could occur due
to an
increase in the maximum of the independent valuation as a result
of
changes in market conditions following the commencement of the
stock
offering.
|
|
(2)
|
Does
not reflect withdrawals from deposit accounts for the purchase
of shares
of common stock in the stock offering. Such withdrawals would reduce
pro
forma deposits by the amount of such
withdrawals.
|
|
(3)
|
Includes
securities sold under agreements to repurchase. See “Business of Fairport
Savings Bank—Sources of
Funds—Borrowings.”
|
|
(4)
|
The
sum of the par value of the total shares outstanding and additional
paid-in capital equals the net stock offering proceeds. No effect
has been
given to the issuance of additional shares of common stock pursuant
to
stock options granted under the stock-based benefit plan that we
intend to
adopt. The stock issuance plan permits us to adopt one or more
stock
benefit plans, subject to shareholder approval, that may award
stock or
stock options in an aggregate amount up to 25% of the number of
shares of
common stock held by persons other than FSB Community Bankshares,
MHC. The
stock-based benefit plan will not be implemented for at least six
months
after the stock offering and until it has been approved by our
shareholders.
|
(footnotes
continued on next page)
44
(footnotes
continued from previous page)
|
(5)
|
Assumes
that 3.92% of the shares of common stock to be outstanding immediately
following the stock offering (including shares issued to FSB Community
Bankshares, MHC) will be purchased by the employee stock ownership
plan
with funds that we will lend to acquire the shares. The common
stock
acquired by the employee stock ownership plan is reflected as a
reduction
of shareholders’ equity. Fairport Savings Bank will provide the funds to
repay the employee stock ownership plan loan. See “Management—Benefit
Plans.”
|
|
(6)
|
Assumes
that subsequent to the stock offering, 1.96% of the outstanding
shares of
common stock, including shares issued to FSB Community Bankshares,
MHC,
are purchased (with funds we provide) by the stock-based benefit
plan in
the open market at a price equal to the price for which the shares
are
sold in the stock offering. The shares of common stock to be purchased
by
the stock-based benefit plan are reflected as a reduction of shareholders’
equity. See “Pro Forma Data” and “Management.” The stock issuance plan
permits us to adopt one or more stock benefit plans that award
stock or
stock options, in an aggregate amount up to 25% of the number of
shares of
common stock held by persons other than FSB Community Bankshares,
MHC. The
stock-based benefit plan will not be implemented for at least six
months
after the stock offering and until it has been approved by shareholders.
See “Pro Forma Data” for a discussion of the potential dilutive impact of
the award of shares under these plans. The Office of Thrift Supervision
has proposed amendments to its existing regulations regarding stock-based
benefit plans that would clarify that we may award shares of common
stock
under a stock-based benefit plan in excess of 1.96% of our total
outstanding shares if the stock-based benefit plan is adopted more
than
one year following the stock offering, and the shares used to fund
the
plan in excess of these amounts are obtained through stock repurchases.
In
the event the Office of Thrift Supervision adopts these regulations
as
proposed, or otherwise changes its regulations or policies to permit
larger stock-based benefit plans, greater amounts of stock awards
as
compared to stock options or faster acceleration of vesting of
benefits,
we may increase the awards beyond current regulatory restrictions
and
beyond the amounts reflected in this
table.
|
|
(7)
|
Historical
total shareholders’ equity at December 31, 2006 equals GAAP capital.
|
|
(8)
|
We
issued 100 shares of our common stock to FSB Community Bankshares,
MHC in
connection with our mutual holding company reorganization in 2005.
These
shares will continue to be outstanding upon completion of the stock
offering.
|
PRO
FORMA
DATA
We
cannot
determine the actual net proceeds from the sale of the shares of common stock
until the stock offering is completed. However, based upon the following
assumptions, we estimate that net proceeds will be between $7.5 million and
$10.5 million, or $12.2 million if the offering range is increased:
|
|
·
|
we
will sell all shares of common stock in the subscription offering;
|
|
|
·
|
our
employee stock ownership plan will purchase 3.92% of the shares
of common
stock to be outstanding upon the completion of the stock offering
(including shares issued to FSB Community Bankshares, MHC) with
a loan
from FSB Community Bankshares, Inc. Fairport Savings Bank’s total annual
payment of the employee stock ownership plan debt is based upon
equal
annual installments of principal and interest over a term of 20
years;
|
|
|
·
|
expenses
of the stock offering, other than fees to be paid to Sandler O’Neill &
Partners, L.P., are estimated to be $645,000;
and
|
|
|
·
|
Sandler
O’Neill & Partners, L.P. will receive a fixed fee and expenses of
$210,000.
|
We
calculated our pro forma consolidated net income and shareholders’ equity for
the year ended December 31, 2006 as if the shares of common stock had been
sold
at the beginning of the year and the net proceeds had been invested at 4.99%
for
the entire year, which assumes reinvestment of the net proceeds at a rate
equal
to the one year United States Treasury yield for the period. We believe this
rate more accurately reflects a pro forma reinvestment rate than the arithmetic
average method, which assumes reinvestment of the net proceeds at a rate
equal
to the average of the yield on interest-earning assets and the cost of deposits
for these periods. We assumed a tax rate of 35% for the year. This results
in an
annualized after-tax yield of 3.24% for the year ended December 31, 2006.
45
We
calculated historical and pro forma per share amounts by dividing historical
and
pro forma amounts of consolidated net income and shareholders’ equity by the
indicated number of shares of common stock. We adjusted these figures to give
effect to the shares of common stock purchased by the employee stock ownership
plan. We computed per share amounts for the year as if the shares of common
stock were outstanding at the beginning of the year, but we did not adjust
per
share historical or pro forma shareholders’ equity to reflect the earnings on
the estimated net proceeds.
The
pro
forma tables give effect to the implementation of a stock-based benefit plan.
Subject to the receipt of shareholder approval, we have assumed that the
stock-based benefit plan will acquire an amount of shares of common stock equal
to 1.96% of our outstanding shares of common stock, including shares issued
to
FSB Community Bankshares, MHC, at the same price they were sold in the stock
offering. We assume that shares of common stock are granted under the plan
in
awards that vest over a five-year period. The stock issuance plan provides
that
we may grant awards of stock or options under one or more stock benefit plans
in
an aggregate amount up to 25% of the number of shares of common stock held
by
persons other than FSB Community Bankshares, MHC. However, any awards of stock
in excess of 1.96% of the outstanding shares, including shares issued to FSB
Community Bankshares, MHC, would have to be funded through open market
purchases, and may require prior approval of the Office of Thrift
Supervision.
We
have
also assumed that the stock-based benefit plan will grant options to acquire
shares of common stock equal to 4.90% of our outstanding shares of common stock
(including shares of common stock issued to FSB Community Bankshares, MHC).
In
preparing the tables below, we assumed that shareholder approval was obtained,
that the exercise price of the stock options and the market price of the stock
at the date of grant were $10.00 per share and that the stock options had a
term
of ten years and vested over five years. We applied the Black-Scholes option
pricing model to estimate a grant-date fair value of $3.81 for each option.
In
addition to the terms of the options described above, the Black-Scholes option
pricing model incorporated an estimated volatility rate of 9.39% for the shares
of common stock based on an index of publicly traded mutual holding companies,
a
dividend yield of 0%, an expected option life of 10 years and a risk free
interest rate of 4.71%. Finally, we assumed that 25% of the total stock options
were non-qualified options granted to directors, resulting in a tax benefit
(at
an assumed tax rate of 35.0%) for compensation expense equal to the grant-date
fair value of the options. The stock issuance plan provides that we may grant
awards of stock options under one or more stock benefit plans in an amount
up to
25% of the number of shares of common stock held by persons other than FSB
Community Bankshares, MHC. However, any awards of options in excess of 4.90%
of
our outstanding shares, including shares issued to FSB Community Bankshares,
MHC, would require prior approval of the Office of Thrift Supervision. It is
expected that FSB Community Bankshares, Inc. will fund the cost of any proposed
stock-based incentive plan.
The
Office of Thrift Supervision has proposed amendments to its existing regulations
regarding stock-based benefit plans that are intended to clarify and simplify
such regulations. Specifically, the amendments would clarify that we may grant
options and award shares of common stock under a stock-based benefit plan in
excess of 4.90% and 1.96%, respectively, of our total outstanding shares if
the
stock-based benefit plan is adopted more than one year following the stock
offering and shares used to fund the plan are obtained through stock
repurchases. In the event the Office of Thrift Supervision adopts these
regulations as proposed, or otherwise changes its existing regulations or
policies to permit larger stock-based benefit plans, greater amounts of stock
awards as compared to stock options, or faster acceleration of vesting of
benefits, the restrictions described above may not apply to any stock-based
benefit plans that we adopt, and we may exceed the current limits applicable
to
the overall size of such plans and individual awards thereunder, and otherwise
grant awards with terms that are different than those required by current Office
of Thrift Supervision regulations and policy.
46
As
discussed under “How We Intend to Use the Proceeds from the Stock Offering,” we
intend to retain 50% of the net proceeds from the stock offering and contribute
the remaining net proceeds from the stock offering to Fairport Savings Bank.
However, we intend to contribute more than 50% of the net proceeds from the
stock offering to Fairport Savings Bank to the extent that such additional
capital would be required in order for Fairport Savings Bank to have at least
10% tangible capital immediately following completion of the stock offering.
We
will use a portion of the proceeds we retain for the purpose of making a loan
to
the employee stock ownership plan, and retain the rest of the proceeds for
future use.
The
pro
forma table does not give effect to:
|
|
·
|
withdrawals
from deposit accounts for the purpose of purchasing shares of common
stock
in the stock offering;
|
|
|
·
|
our
results of operations after the stock offering;
or
|
|
|
·
|
changes
in the market price of the shares of common stock after the stock
offering.
|
The
following pro forma information may not represent the financial effects of
the
stock offering at the date on which the stock offering actually occurs and
you
should not use the table to indicate future results of operations. Pro forma
shareholders’ equity represents the difference between the stated amount of our
assets and liabilities, computed in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). We did not increase
or decrease shareholders’ equity to reflect the difference between the carrying
value of loans and other assets and their market value. Pro forma shareholders’
equity is not intended to represent the fair market value of the shares of
common stock and may be different than the amounts that would be available
for
distribution to shareholders if we liquidated. Pro forma shareholders’ equity
does not give effect to the impact of intangible assets or tax bad debt reserves
in the event we are liquidated.
47
|
At
or For the Year Ended December 31, 2006
Based
Upon the Sale at $10.00 Per Share of
|
|||||||||||||
|
838,950
Shares
at
Minimum of
Offering
Range
|
987,000
Shares
at
Midpoint
of
Offering
Range
|
1,135,050
Shares
at
Maximum
of
Offering
Range
|
1,305,308
Shares
at
Adjusted
Maximum
of
Offering
Range
(1)
|
||||||||||
|
(Dollars
in Thousands, Except Per Share Amounts)
|
|||||||||||||
|
Gross
proceeds of stock offering
|
$
|
8,390
|
$
|
9,870
|
$
|
11,351
|
$
|
13,053
|
|||||
|
Less:
expenses
|
(855
|
)
|
(855
|
)
|
(855
|
)
|
(855
|
)
|
|||||
|
Estimated
net proceeds
|
7,535
|
9,015
|
10,496
|
12,198
|
|||||||||
|
Less:
|
|||||||||||||
|
Common
stock acquired by employee stock ownership plan (2)
|
(700
|
)
|
(823
|
)
|
(947
|
)
|
(1,089
|
)
|
|||||
|
Common
stock awarded under stock-based benefit plan (3)
|
(350
|
)
|
(412
|
)
|
(473
|
)
|
(544
|
)
|
|||||
|
Estimated
net proceeds after adjustment for stock benefit plans
|
$
|
6,485
|
$
|
7,780
|
$
|
9,076
|
$
|
10,565
|
|||||
|
For
the Year Ended December 31, 2006:
|
|||||||||||||
|
Net
income:
|
|||||||||||||
|
Historical
|
$
|
233
|
$
|
233
|
$
|
233
|
$
|
233
|
|||||
|
Pro
forma adjustments:
|
|||||||||||||
|
Income
on adjusted net proceeds
|
210
|
252
|
294
|
343
|
|||||||||
|
Employee
stock ownership plan (2)
|
(23
|
)
|
(27
|
)
|
(31
|
)
|
(35
|
)
|
|||||
|
Shares
awarded under stock-based benefit plan (3)(4)
|
(46
|
)
|
(54
|
)
|
(61
|
)
|
(71
|
)
|
|||||
|
Options
awarded under stock-based benefit plan (5)
|
(61
|
)
|
(72
|
)
|
(82
|
)
|
(95
|
)
|
|||||
|
Pro
forma net income (6)
|
$
|
313
|
$
|
332
|
$
|
353
|
$
|
375
|
|||||
|
Net
income per share:
|
|||||||||||||
|
Historical
|
$
|
0.14
|
$
|
0.12
|
$
|
0.10
|
$
|
0.09
|
|||||
|
Pro
forma adjustments:
|
|||||||||||||
|
Income
on adjusted net proceeds
|
0.12
|
0.12
|
0.13
|
0.13
|
|||||||||
|
Employee
stock ownership plan (2)
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
|||||
|
Shares
awarded under stock-based benefit plan (3)(4)
|
(0.03
|
)
|
(0.03
|
)
|
(0.03
|
)
|
(0.03
|
)
|
|||||
|
Options
awarded under stock-based benefit plan (5)
|
(0.04
|
)
|
(0.04
|
)
|
(0.04
|
)
|
(0.04
|
)
|
|||||
|
Pro
forma net income per share (2)(3)(4)(5)(6)
|
$
|
0.18
|
$
|
0.16
|
$
|
0.15
|
$
|
0.14
|
|||||
|
Offering
price to pro forma net income per share
|
55.56
|
x |
62.50
|
x |
66.67
|
x |
71.43
|
x | |||||
|
Shares
considered outstanding in calculating pro forma net income per
share
|
1,718,527
|
2,021,796
|
2,325,065
|
2,673,825
|
|||||||||
|
At
December 31, 2006:
|
|||||||||||||
|
Shareholders’
equity:
|
|||||||||||||
|
Historical
|
$
|
13,870
|
$
|
13,870
|
$
|
13,870
|
$
|
13,870
|
|||||
|
Estimated
net proceeds
|
7,535
|
9,015
|
10,496
|
12,198
|
|||||||||
|
Less:
|
|||||||||||||
|
Common
stock acquired by employee stock ownership plan (2)
|
(700
|
)
|
(823
|
)
|
(947
|
)
|
(1,089
|
)
|
|||||
|
Common
stock awarded under stock-based benefit plan (3)(4)
|
(350
|
)
|
(412
|
)
|
(473
|
)
|
(544
|
)
|
|||||
|
Pro
forma shareholders’ equity (6)
|
$
|
20,355
|
$
|
21,650
|
$
|
22,946
|
$
|
24,435
|
|||||
|
Shareholders’
equity per share:
|
|||||||||||||
|
Historical
|
$
|
7.77
|
$
|
6.60
|
$
|
5.74
|
$
|
4.99
|
|||||
|
Estimated
net proceeds
|
4.22
|
4.30
|
4.35
|
4.40
|
|||||||||
|
Less:
|
|||||||||||||
|
Common
stock acquired by employee stock ownership plan (2)
|
(0.39
|
)
|
(0.39
|
)
|
(0.39
|
)
|
(0.39
|
)
|
|||||
|
Common
stock awarded under stock-based benefit plan (3)(4)
|
(0.20
|
)
|
(0.20
|
)
|
(0.20
|
)
|
(0.20
|
)
|
|||||
|
Pro
forma shareholders’ equity per share (3)(4)(5)(6)
|
$
|
11.40
|
$
|
10.31
|
$
|
9.50
|
$
|
8.80
|
|||||
|
Offering
price as percentage of pro forma shareholders’ equity per
share
|
87.72
|
%
|
96.99
|
%
|
105.26
|
%
|
113.64
|
%
|
|||||
|
Shares
considered outstanding in calculating offering price as a percentage
of
pro forma shareholders’ equity per share
|
1,785,000
|
2,100,000
|
2,415,000
|
2,777,250
|
|||||||||
|
Public
ownership
|
47.00
|
%
|
47.00
|
%
|
47.00
|
%
|
47.00
|
%
|
|||||
|
Mutual
holding company ownership
|
53.00
|
%
|
53.00
|
%
|
53.00
|
%
|
53.00
|
%
|
|||||
(footnotes
on following page)
48
| (1) |
As
adjusted to give effect to an increase in the number of shares
outstanding
after the stock offering, which could occur due to an increase
in the
maximum of the independent valuation as a result of changes
in market
conditions following the commencement of the stock offering.
|
|
(2)
|
It
is assumed that 3.92% of the shares to be outstanding upon completion
of
the stock offering (including shares issued to FSB Community Bankshares,
MHC) will be purchased by the employee stock ownership plan. For
purposes
of this table, funds used to acquire such shares are assumed to have
been
borrowed from us by the employee stock ownership plan with a loan
with a
20-year term. The amount to be borrowed is reflected as a reduction
of
shareholders’ equity. Fairport Savings Bank intends to make annual
contributions to the employee stock ownership plan in an amount at
least
equal to the principal and interest requirement of the debt. After
December 31, 2007, Fairport Savings Bank’s total annual payment of the
employee stock ownership plan debt is based upon equal annual installments
of principal and interest based upon the remaining term of the loan.
The
pro forma net income information makes the following
assumptions:
|
|
|
(i)
|
Fairport
Savings Bank’s contribution to the employee stock ownership plan was made
at the end of the period;
|
|
|
(ii)
|
3,499
shares, 4,116 shares, 4,733 shares and 5,443 shares at the minimum,
midpoint, maximum and adjusted maximum of the offering range,
respectively, were committed to be released during the year ended
December
31, 2006, at an average fair value equal to the price for which the
shares
are sold in the stock offering in accordance with Statement of Position
(“SOP”) 93-6; and
|
|
|
(iii)
|
only
the employee stock ownership plan shares committed to be released
were
considered outstanding for purposes of the net income per share
calculations.
|
|
(3)
|
Gives
effect to the stock-based benefit plan expected to be adopted following
the stock offering. We have assumed that this plan acquires a number
of
shares of common stock equal to 1.96% of the outstanding shares,
including
shares issued to FSB Community Bankshares, MHC, through open market
purchases at the beginning of the period presented for a purchase
price
equal to the price the shares are sold in the stock offering, and
that 20%
of the amount contributed was an amortized expense (based upon a
five-year
vesting period) during the year ended December 31, 2006. It is expected
that FSB Community Bankshares, Inc. will contribute the funds used
by the
stock-based benefit plan to purchase the shares. There can be no
assurance
that the actual purchase price of the shares granted under the stock-based
benefit plan will be equal to the $10.00 subscription price. If shares
are
acquired from authorized but unissued shares of common stock or from
treasury shares, our net income per share and shareholders’ equity per
share may decrease. This will also have a dilutive effect of approximately
1.92% (at the maximum of the offering range) of the ownership interest
of
shareholders. The effect on pro forma net income per share and pro
forma
shareholders’ equity per share is not material.
|
The
following table shows pro forma net income per share and pro forma shareholders’
equity per share, assuming all the shares to fund the stock awards are obtained
from authorized but unissued shares.
|
At
or For the Year
Ended
December 31, 2006
|
838,950
Shares
at
Minimum of
Offering
Range
|
987,000
Shares
at
Midpoint of
Offering
Range
|
1,135,050
Shares
at
Maximum
of
Offering
Range
|
1,305,308
Shares
at
Adjusted
Maximum
of
Offering
Range
|
|||||||||
|
Pro
forma net income per share
|
$
|
0.18
|
$
|
0.16
|
$
|
0.15
|
$
|
0.14
|
|||||
|
Pro
forma shareholders’ equity per share
|
11.38
|
10.30
|
9.51
|
8.82
|
|||||||||
|
(4)
|
The
Office of Thrift Supervision has proposed amendments to its existing
regulations regarding stock-based benefit plans that would clarify
that we
may grant options and award shares of common stock under a stock-based
benefit plan in excess of 4.90% and 1.96%, respectively, of our total
outstanding shares if the stock-based benefit plan is adopted more
than
one year following the stock offering, and shares used to fund the
plan in
excess of these amounts are obtained through stock repurchases. In
the
event the Office of Thrift Supervision adopts these regulations as
proposed, or otherwise changes its regulations or policies to permit
larger stock-based benefit plans, greater amounts of stock awards
as
compared to stock options or faster acceleration of vesting of benefits,
we may increase the awards beyond current regulatory restrictions
and
beyond the amounts reflected in this
table.
|
|
(5)
|
Gives
effect to the granting of options pursuant to the stock-based benefit
plan, which is expected to be adopted by FSB Community Bankshares,
Inc.
following the stock offering and presented to shareholders for approval
not earlier than six months after the completion of the stock offering.
We
have assumed that options will be granted to acquire shares of common
stock equal to 4.90% of outstanding shares, including shares issued
to FSB
Community Bankshares, MHC. In calculating the pro forma effect of
the
stock options, it is assumed that the exercise price of the stock
options
and the trading price of the stock at the date of grant were $10.00
per
share, the estimated grant-date fair value pursuant to the application
of
the Black-Scholes option pricing model was $3.81 for each option,
the
aggregate grant-date fair value of the stock options was amortized
to
expense on a straight-line basis over a five-year vesting period
of the
options, and that 25.0% of the amortization expense (or the assumed
portion relating to options granted to directors) resulted in a tax
benefit using an assumed tax rate of 35.0%. Under the above assumptions,
the adoption of the stock-based benefit plan will result in no additional
shares under the treasury stock method for purposes of calculating
earnings per share. There can be no assurance that the actual exercise
price of the stock options will be equal to the $10.00 price per
share. If
a portion of the shares to satisfy the exercise of options under
the
stock-based benefit plan are obtained from the issuance of authorized
but
unissued shares, our net income per share and shareholders’ equity per
share will decrease. This will also have a dilutive effect of up
to 4.7%
on the ownership interest of persons who purchase shares of common
stock
in the stock offering.
|
|
(6)
|
The
retained earnings of Fairport Savings Bank will continue to be
substantially restricted after the stock offering. See “Supervision and
Regulation—Federal Banking
Regulation.”
|
49
MANAGEMENT’S
DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This
section is intended to help potential investors understand our financial
performance through a discussion of the factors affecting our financial
condition at December 31, 2006 and 2005 and our consolidated results of
operations for the years ended December 31, 2006 and 2005. This section should
be read in conjunction with the consolidated financial statements and notes
to
the financial statements that appear elsewhere in this prospectus.
Overview
Our
business has traditionally focused on originating one- to four-family
residential real estate mortgage loans and home equity lines of credit for
retention in our portfolio, and offering retail deposit accounts insured by
the
Federal Deposit Insurance Corporation in our primary market area consisting
of
Monroe County and the surrounding upstate New York counties of Livingston,
Ontario, Orleans and Wayne. During the last several years, the operating
environment for financial institutions, and particularly those that focus on
originating longer-term mortgage loans, has been challenging. Short-term
interest rates, which guide our pricing of deposits, have been rising in
conjunction with the 17 rate increases implemented by the Federal Reserve Board
since 2004, while longer-term interest rates, which guide the pricing of our
loans, have been relatively constant. The U.S. Treasury yield curve has become
inverted and has negatively affected our net interest income. Specifically,
our
average interest rate spread decreased to 2.21% for the year ended December
31,
2006 from 2.68% for the year ended December 31, 2005, and our average net
interest margin decreased to 2.57% for the year ended December 31, 2006 from
3.01% for the year ended December 31, 2005. For the quarter ended December
31,
2006, our interest rate spread and net interest margin were 1.98% and 2.38%,
respectively. We expect the current interest rate environment to continue to
compress our interest rate spread and net interest margin.
Our
total
loans receivable, net increased $12.7 million during 2006 to $121.1 million
at
December 31, 2006 from $108.4 million at December 31, 2005. During the fourth
quarter of 2006, in order to address the interest rate risk associated with
the
inversion of the yield curve and in order to improve our interest rate risk
position, we sold $1.2 million of our 30-year fixed rate residential mortgage
originations on a servicing-retained basis. As market conditions permit, we
intend to continue to sell on a selective basis a portion of our fixed-rate
residential mortgage loans.
Deposits
increased marginally to $108.6 million at December 31, 2006 from $106.8 million
at December 31, 2005. In recent years, our customers have shown a preference
for
shorter-term, higher interest paying certificates of deposit. At December 31,
2006, we had $78.1 million of certificates of deposit, which represented 71.9%
of our total deposits. In order to attract lower cost deposits, in 2006 we
implemented a no fee checking account program, and in conjunction with the
opening of our Irondequoit branch, we offered a promotional savings account
in
an effort to generate deposits at this new branch site.
Our
net
income decreased by $224,000, or 49.0%, to $233,000 for the year ended December
31, 2006, from $457,000 for the year ended December 31, 2005. This decrease
was
attributable to reduced net interest income as a result of the inverted yield
curve during 2006, and an increase in our non-interest expense, which was
partially offset by an increase in non-interest income.
50
Anticipated
Increase in Non-Interest Expense
Following
the completion of the stock offering, we anticipate that our non-interest
expense will increase as a result of the increased costs associated with
operating as a public company and increased compensation expenses associated
with our employee stock ownership plan and our stock-based benefit plan, if
approved by our shareholders.
Assuming
that 1,305,308 shares of common stock are sold in the stock offering (the
adjusted maximum of the offering range):
|
|
·
|
The
employee stock ownership plan will acquire 108,868 shares of common
stock
with a $1,088,680 loan that is expected to be repaid over not more
than 20
years, resulting in an average annual pre-tax expense of approximately
$54,434 (assuming that the common stock maintains a value of $10.00
per
share).
|
|
|
·
|
The
stock-based benefit plan would grant options to purchase shares equal
to
4.90% of the total outstanding shares (including shares issued to
FSB
Community Bankshares, MHC), or 136,085 shares, to eligible
participants, which would result in compensation expense over the
vesting
period of the options. Assuming the market price of the common stock
is
$10.00 per share; the options are granted with an exercise price
of $10.00
per share; the dividend yield on the stock is 0%; the expected option
life
is 10 years; the risk free interest rate is 4.71% (based on the seven-year
Treasury rate) and the volatility rate on the shares of common stock
is
9.39% (based on an index of publicly traded mutual holding companies),
the
estimated grant-date fair value of the options using a Black-Scholes
option pricing analysis is $3.81 per option granted. Assuming this
value
is amortized over the five-year vesting period, the corresponding
annual
pre-tax expense associated with the stock options would be approximately
$103,700.
|
|
|
·
|
The
stock-based benefit plan would award a number of shares of common
stock
equal to 1.96% of the outstanding shares (including shares issued
to FSB
Community Bankshares, MHC), or 54,434 shares, to eligible
participants, which would be expensed as the awards vest. Assuming
that
all shares are awarded under the stock-based benefit plan at a price
of
$10.00 per share, and that the awards vest over a five-year period,
the
corresponding annual pre-tax expense associated with shares awarded
under
the stock-based benefit plan would be approximately
$108,868.
|
The
actual expense that will be recorded for the employee stock ownership plan
will
be determined by the market value of our common stock as shares are released
to
employees over the term of the loan, and whether the loan is repaid faster
than
its contractual term. Accordingly, any increases in our stock price above $10.00
per share will increase the total employee stock ownership plan expense, and
any
accelerated repayment of the loan will increase the annual employee stock
ownership plan expense. Further, the actual expense of the stock awards under
the stock-based benefit plan will be determined by the fair market value of
the
common stock on the grant date, which may be greater than $10.00 per share,
and
the actual expense of stock options under the stock-based benefit plan will
be
based on the grant-date fair value of the options, which will be affected by
a
number of factors, including the market value of our common stock, the term
and
vesting period of the stock options, our dividend yield and other valuation
assumptions contained in the option pricing model that we ultimately use.
51
The
Office of Thrift Supervision has proposed amendments to its existing regulations
regarding stock-based benefit plans that would permit us to grant options and
award shares of common stock under a stock-based benefit plan in excess of
4.90%
and 1.96%, respectively, of our total outstanding shares if the stock-based
benefit plan is adopted more than one year following the stock offering,
provided shares used to fund the plan are obtained through stock repurchases.
In
the event the Office of Thrift Supervision adopts these regulations as proposed,
or otherwise changes its existing regulations or policies regarding stock-based
benefit plans, we may implement stock-based benefit plans that exceed the
current limits applicable to aggregate and/or relative amounts of stock options
or stock awards under current Office of Thrift Supervision regulations which
would further increase our expenses associated with stock-based benefit
plans.
In
January 2007, we opened our Irondequoit branch. In addition, we will attempt
to
open one or two new branch offices in the next three years, depending on market
conditions and as opportunities present themselves. Any additional branch
locations will significantly increase our non-interest expense due to increased
occupancy expense and increases to our salary and employee benefit expense
associated with hiring new employees to staff these offices.
Finally,
regulations adopted by the Federal Deposit Insurance Corporation in November
2006 and effective in 2007 impose new deposit insurance premiums on nearly
all
federally insured depository institutions of between five and seven cents for
every $100 of domestic deposits. Based upon our level of deposits at December
31, 2006, we expect to incur an annual deposit premium of approximately $59,000,
although all of this premium in 2007 and a portion of our 2008 premium will
be
offset by a $96,000 credit we have with the Federal Deposit Insurance
Corporation.
Critical
Accounting Policy
Critical
accounting policies are defined as those that involve significant judgments
and
uncertainties, and could potentially result in materially different results
under different assumptions and conditions. We believe that the most critical
accounting policy upon which our financial condition and results of operation
depend, and which involve the most complex subjective decisions or assessments,
is our policy with respect to our allowance for loan losses.
Allowance
for Loan Losses. The
allowance for loan losses is the amount estimated by management as necessary
to
absorb credit losses incurred in the loan portfolio that are both probable
and
reasonably estimable at the balance sheet date. The amount of the allowance
is
based on significant estimates, and the ultimate losses may vary from such
estimates as more information becomes available or conditions change. The
methodology for determining the allowance for loan losses is considered a
critical accounting policy by management due to the high degree of judgment
involved, the subjectivity of the assumptions used and the potential for changes
in the economic environment that could result in changes to the amount of the
recorded allowance for loan losses.
52
As
a
substantial percentage of our loan portfolio is collateralized by real estate,
appraisals of the underlying value of property securing loans are critical
in
determining the amount of the allowance required for specific loans. Assumptions
are instrumental in determining the value of properties. Overly optimistic
assumptions or negative changes to assumptions could significantly affect the
valuation of a property securing a loan and the related allowance determined.
Management carefully reviews the assumptions supporting such appraisals to
determine that the resulting values reasonably reflect amounts realizable on
the
related loans.
Management
performs a quarterly evaluation of the adequacy of the allowance for loan
losses. We consider a variety of factors in establishing this estimate
including, but not limited to, current economic conditions, delinquency
statistics, geographic concentrations, the adequacy of the underlying
collateral, the financial strength of the borrower, results of internal loan
reviews and other relevant factors. This evaluation is inherently subjective
as
it requires material estimates by management that may be susceptible to
significant change based on changes in economic and real estate market
conditions.
The
evaluation has a specific and general component. The specific component relates
to loans that are delinquent or otherwise identified as a problem loan through
the application of our loan review process and our loan grading system. All
such
loans are evaluated individually, with principal consideration given to the
value of the collateral securing the loan. Specific allowances are established
as required by this analysis. The general component is determined by segregating
the remaining loans by type of loan, risk weighting (if applicable) and payment
history. We also analyze historical loss experience, delinquency trends, general
economic conditions and geographic concentrations. This analysis establishes
factors that are applied to the loan groups to determine the amount of the
general component of the allowance for loan losses.
Actual
loan losses may be significantly more than the allowances we have established
which could have a material negative effect on our financial
results.
Business
Strategy
Our
business strategy is to operate as a well-capitalized community bank that is
dedicated to providing exceptional personal service to our customers. Our
business strategy is to grow and improve our profitability by:
|
|
·
|
Operating
as a community-oriented retail financial institution in Monroe County,
New
York;
|
|
|
·
|
Managing
our interest rate risk;
|
|
|
·
|
Continuing
to emphasize the origination of residential real estate loans;
and
|
|
|
·
|
Maintaining
high asset quality.
|
53
A
full
description of our products and services begins on page 67 of this
prospectus.
We
believe that these strategies will guide our investment of the net proceeds
of
the offering. We intend to continue to pursue our business strategy after the
stock offering, subject to changes necessitated by future market conditions
and
other factors. We also intend to focus on the following:
|
|
·
|
Retail-Oriented
Community Financial Institution.
Fairport Savings Bank was established in Fairport, New York in 1888
and
has been operating continuously since that time. We are committed
to
meeting the financial needs of the communities we serve and we are
dedicated to providing personalized quality service to our customers.
We
believe that we can be more effective than many of our competitors
in
serving our customers because of the ability of our senior management
to
promptly and effectively respond to customer requests and inquiries.
We
intend to use the mutual holding company structure to maintain Fairport
Savings Bank as a community-oriented, independent savings bank. We
have
recently opened our third branch location in Irondequoit and we will
attempt to open one or two new branch offices in Monroe County in
the next
three years, depending on market conditions and as opportunities
present
themselves.
|
|
|
·
|
Managing
Our Interest Rate Risk. Our
assets currently consist primarily of one- to four-family fixed-rate
loans
with terms of up to 30 years, while our liabilities consist of
shorter-term deposits, primarily certificates of deposit which carry
higher interest rates and are more sensitive to changes in interest
rates
than passbook or savings accounts. The composition of our interest-earning
assets and interest-bearing liabilities increases the risk that we
will be
adversely affected by changes in interest rates and the relative
spread
between short-term and long-term interest rates. This risk is particularly
acute when the yield curve is inverted, i.e., short-term interest
rates,
which are used to price deposits, are higher than longer-term interest
rates, which are used to price loans. The prolonged inversion of
the yield
curve in 2006 and 2007 has resulted in a higher interest rate risk
profile
for Fairport Savings Bank than management feels is acceptable.
Consequently, we have adopted strategies to improve our interest
rate
risk. These strategies include reducing our fixed-rate loan originations,
investing a portion of funds received from loan payments and repayments
in
shorter-term, liquid investment securities and mortgage-backed securities,
emphasizing the marketing of our passbook, savings and checking accounts
and increasing the duration of our certificates of deposit. In addition,
we will initially invest the net proceeds from the offering in short-term
investment securities and mortgage-backed securities.
|
Notwithstanding
the foregoing, in the near term we expect that our net interest income will
continue to be adversely affected as our certificates of deposit mature and
reprice at a higher cost to us. We have $43.7 million in certificate of deposit
accounts (including individual retirement accounts) that are scheduled to mature
during 2007. If we wish to retain these deposits it will most likely be at
a
higher cost to us than their current contractual rate.
54
|
|
·
|
Emphasizing
Residential Real Estate Lending.
Historically, we have emphasized the origination of one- to four-
family
residential loans within Monroe County and the surrounding counties
of
Livingston, Ontario, Orleans and Wayne. As of December 31, 2006,
90.6% of
our loan portfolio consisted of one- to four- family residential
loans,
and 99.8% of our loan portfolio consisted of loans secured by real
estate.
We intend to continue to emphasize originating loans secured by
residential real estate. Following the offering, however, we may
seek
opportunities to diversify our loan portfolio by originating commercial
real estate loans.
|
|
|
·
|
Maintaining
High Asset Quality. Our
high asset quality is a result of conservative underwriting standards,
the
diligence of our loan collection personnel and the stability of the
local
economy. At December 31, 2006, our ratio of non-performing loans
to total
loans was 0.14%. At December 31, 2006, our ratio of allowance for
loan
losses to non-performing loans was 188.3% and our ratio of allowance
for
loan losses to total loans was 0.27%. Because 99.8% of our loans
are
secured by real estate, and our level of non-performing loans has
been low
in recent periods, we believe that our allowance for loan losses
is
adequate to absorb the probable losses inherent in our loan portfolio.
|
Comparison
of Financial Condition at December 31, 2006 and 2005
Total
Assets. Total
assets increased $9.7 million, or 6.8%, to $152.8 million at December 31, 2006
from $143.1 million at December 31, 2005, reflecting increases in loans, net,
partially offset by decreased cash and cash equivalents and securities
classified as held to maturity. Loans, net increased $12.7 million to $121.1
million at December 31, 2006, due to new loan originations. One- to four- family
residential mortgage loans increased to $109.8 million at December 31, 2006
from
$96.2 million at December 31, 2005.
Cash
and
cash equivalents decreased to $2.2 million at December 31, 2006 from $4.7
million at December 31, 2005. Securities held to maturity decreased $1.5 million
to $24.2 million at December 31, 2006 from $25.7 million at December 31, 2005,
primarily due to maturities of $1.1 million and $1.9 million of principal
repayments on mortgage-backed securities, net of purchases of $1.5 million.
Premises and equipment, net increased $602,000, or 39.0%, to $2.1 million at
December 31, 2006 from $1.5 million at the year earlier date due to construction
of our new branch office located in Irondequoit, New York that opened for
business in January 2007.
Deposits
and Borrowings.
Total
deposits increased $1.8 million to $108.6 million at December 31, 2006 from
$106.8 million at December 31, 2005. The increase in our deposits reflected
a
$2.1 million increase in our certificates of deposit (including our individual
retirement accounts) to $78.1 million at December 31, 2006 from $76.0 million
at
December 31, 2005, reflecting the competitive rates offered for these types
of
deposits products. Additionally, borrowings from the Federal Home Loan Bank
of
New York increased $7.3 million to $28.0 million at December 31, 2006 from
$20.7
million at December 31, 2005 as an alternative funding source for loan
originations. During the latter part of 2006, we introduced a new no fee
checking account in an attempt to increase our lower cost deposits.
55
Stockholder’s
Equity.
Stockholder’s equity increased $252,000 to $13.9 million at December 31, 2006
from $13.6 million at December 31, 2005, reflecting net income for the year
ended December 31, 2006 of $233,000 and a $19,000 unrealized gain, net of taxes
on securities available for sale.
Comparison
of Operating Results for the Years Ended December 31, 2006 and
2005
General.
Net
income decreased to $233,000 for the year ended December 31, 2006 from $457,000
for the year ended December 31, 2005. The decrease in net income reflected
a
decrease in net interest income and an increase in non-interest expense,
partially offset by higher non-interest income and lower income tax
expense.
Interest
and Dividend Income. Total
interest and dividend income increased $1.3 million, or 19.1%, to $8.1 million
for the year ended December 31, 2006 from $6.8 million for the year ended
December 31, 2005. The increase resulted from a $15.3 million increase in
average interest-earning assets and a 32 basis point increase in the overall
yield on interest earning assets to 5.67% for 2006 from 5.35% for 2005.
Interest
income on loans, including fees, increased $1.0 million, or 17.2%, to $6.8
million for 2006 from $5.8 million for 2005, reflecting an increase in the
average balance of loans to $115.6 million from $101.2 million and a higher
average yield. The average yield on loans increased to 5.88% for 2006 from
5.69%
for 2005, reflecting increases in market interest rates. The average balance
of
federal funds sold remained relatively stable for the year, while the average
yield increased to 4.73% for 2006 from 3.48% for 2005. The average balance
of
investment securities increased $3.0 million, or 18.9%, to $18.9 million from
$15.9 million, while the average yield on investment securities increased to
5.10% from 4.23%. The average balance of mortgage-backed securities decreased
$2.1 million, or 23.3%, to $6.9 million from $9.0 million, and the average
yield
on mortgage-backed securities increased to 3.87% from 3.70%.
Total
Interest Expense.
Total
interest expense increased $1.4 million, or 46.7%, to $4.4 million for the
year
ended December 31, 2006 from $3.0 million for the year ended December 31, 2005.
The increase in total interest expense resulted from a $16.1 million increase
in
the average balance of interest-bearing liabilities and a 79 basis point
increase in the average cost of interest-bearing liabilities to 3.46% for 2006
from 2.67% for 2005, as a result of higher market interest rates paid on
deposits.
Interest
expense on certificates of deposit increased $661,000, or 36.7%, to $2.5 million
for 2006 from $1.8 million for the prior year period. The increase resulted
primarily from a 70 basis points increase to 3.86% in the weighted average
rate
we paid on certificates of deposit for 2006 from 3.16% for 2005. We increased
rates on certificates of deposits in response to increases in market interest
rates. Additionally, the average balance of certificates of deposit increased
to
$64.0 million in 2006 from $57.2 million in 2005.
At
December 31, 2006, we had $43.7 million of certificates of deposits, including
individual retirement accounts, that are scheduled to mature during 2007. Due
to
market interest rates, we expect that the cost of these deposits will increase;
and accordingly we expect our interest expense to increase in 2007.
56
Interest
expense on Federal Home Loan Bank advances increased $562,000, or 124.9%, to
$1.0 million for 2006 from $450,000 for the year ended December 31, 2005. The
increased interest expense was caused by a $10.4 million increase in our average
balance of Federal Home Loan Bank advances to $22.2 million for 2006 from $11.8
million for 2005. The additional deposits and borrowings were used to fund
loan
originations.
Net
Interest Income. Net
interest income decreased $166,000, or 4.3%, to $3.7 million for the year ended
December 31, 2006 from $3.8 million for the year ended December 31, 2005. The
decrease in net interest income was primarily attributable to a 47 basis point
decrease in our interest rate spread to 2.21% for 2006 from 2.68% for 2005,
and
a decrease in our net interest margin of 44 basis points to 2.57% for 2006
from
3.01% for 2005. The decrease in our interest rate spread and net interest margin
were consistent with the inversion of the U.S. Treasury yield curve. From June
30, 2004 to December 31, 2006, the Federal Reserve Board increased its target
for the federal funds rate from 1.0% to 5.25%. While these short-term market
interest rates (which we use as a guide to price our deposits) have increased,
longer-term market interest rates (which we use as a guide to price our
longer-term loans) have not increased to the same degree. If rates on our
deposits and borrowings continue to reprice upwards faster than the rates on
our
long-term loans and investments, we would experience a further reduction of
our
interest rate spread and net interest margin, which would have a negative effect
on our profitability.
Provision
for Loan Losses. We
establish provisions for loan losses, which are charged to operations, in order
to maintain the allowance for loan losses at a level we consider necessary
to
absorb credit losses inherent in the loan portfolio that are both probable
and
reasonably estimable at the balance sheet date. In determining the level of
the
allowance for loan losses, we consider past and current loss experience,
evaluations of real estate collateral, current economic conditions, volume
and
type of lending, adverse situations that may affect a borrower’s ability to
repay a loan and the levels of nonperforming and other classified loans. The
amount of the allowance is based on estimates and the ultimate losses may vary
from such estimates as more information becomes available or conditions change.
We assess the allowance for loan losses on a quarterly basis and make provisions
for loan losses in order to maintain the allowance.
Based
on
our evaluation of the above factors, we recorded no provision for loan losses
for the year ended December 31, 2006 and a provision for loan losses of $26,000
for the year ended December 31, 2005. The allowance for loan losses was
$322,000, or 0.27% of loans outstanding, at December 31, 2006, compared to
$331,000, or 0.30% of loans outstanding, at December 31, 2005.
Other
Income.
Other
income increased by $41,000, or 12.9%, to $360,000 for 2006 from $319,000 for
2005. The increase was primarily attributable to an increase in fee income
from
Oakleaf Services Corporation, our subsidiary that offers non-deposit investment
products such as annuities, insurance and mutual funds to our customers. Income
from Oakleaf Services Corporation increased $55,000, or 52.4%, to $160,000
in
2006 from $105,000 for 2005.
Other
Expense.
Other
expense increased $240,000, or 7.1%, to $3.7 million in 2006 from $3.4 million
in 2005. Increases in salaries and employee benefits of $164,000, advertising
of
$29,000, and mortgage fees and taxes of $47,000 were partially offset by an
$11,000 decrease in directors’ fees and a $10,000 decrease in occupancy expense.
The increase in salaries and employee benefits was the result of cost of living
and merit increases, including bonus compensation, health insurance and other
benefit costs. The increase in advertising was primarily a result of our
implementation and marketing of our new no fee checking account product and
marketing expense associated with the opening of our new Irondequoit branch
in
January 2007.
57
In
2007
we expect our other expense to increase as a result of operating our Irondequoit
branch. The operation of additional new branches, if any, would further increase
our other expense. Additionally, costs associated with operating as a public
company will increase our other expense. Finally, the expense associated with
our employee stock ownership plan, and the stock-based benefit plan that we
expect to adopt following the offering will increase our other
expense.
Income
Tax Expense.
Income
tax expense was $111,000 for 2006, a decrease of $115,000, or 50.9%, compared
to
$226,000 for 2005, due to our lower pre-tax income in 2006 and a slightly lower
effective tax rate. The effective tax rate was 32.3% in 2006 compared to 33.1%
in 2005.
58
Average
balances and yields.
The
following table sets forth average balance sheets, average yields and costs,
and
certain other information at and for the years indicated. All average balances
are daily average balances. Non-accrual loans were included in the computation
of average balances, but have been reflected in the table as loans carrying
a
zero yield. The yields set forth below include the effect of deferred fees,
discounts and premiums that are amortized or accreted to interest income or
interest expense.
|
For
the Years Ended December 31,
|
||||||||||||||||||||||
|
|
2006
|
2005
|
||||||||||||||||||||
|
At
December
31,
2006
|
||||||||||||||||||||||
|
Yield/
Cost
|
Average
Balance
|
Interest
Income/
Expense
|
Yield/
Cost
|
Average
Balance
|
Interest
Income/
Expense
|
Yield/
Cost
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||
|
Loans
|
5.91
|
%
|
$
|
115,601
|
$
|
6,797
|
5.88
|
%
|
$
|
101,228
|
5,762
|
5.69
|
%
|
|||||||||
|
Federal
funds sold
|
4.99
|
1,375
|
65
|
4.73
|
1,349
|
47
|
3.48
|
|||||||||||||||
|
Investment
securities
|
4.84
|
18,897
|
963
|
5.10
|
15,884
|
672
|
4.23
|
|||||||||||||||
|
Mortgage-backed
securities
|
3.97
|
6,933
|
268
|
3.87
|
9,045
|
335
|
3.70
|
|||||||||||||||
|
Total
interest-earning assets
|
5.68
|
142,806
|
8,093
|
5.67
|
127,506
|
6,816
|
5.35
|
|||||||||||||||
|
Noninterest-earning
assets
|
4,928
|
4,042
|
||||||||||||||||||||
|
Total
assets
|
$
|
147,734
|
$
|
131,548
|
||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||
|
NOW
accounts
|
0.34
|
$
|
3,826
|
20
|
0.52
|
$
|
3,257
|
16
|
0.49
|
|||||||||||||
|
Passbook
savings
|
0.80
|
12,041
|
83
|
0.69
|
13,674
|
68
|
0.50
|
|||||||||||||||
|
Money
market savings
|
2.63
|
10,567
|
256
|
2.42
|
11,270
|
126
|
1.12
|
|||||||||||||||
|
Individual
retirement accounts
|
4.16
|
14,900
|
579
|
3.89
|
14,297
|
508
|
3.55
|
|||||||||||||||
|
Certificates
of deposit
|
4.13
|
64,028
|
2,471
|
3.86
|
57,204
|
1,810
|
3.16
|
|||||||||||||||
|
Federal
Home Loan Bank advances
|
4.82
|
22,233
|
1,012
|
4.55
|
11,825
|
450
|
3.81
|
|||||||||||||||
|
Total
interest-bearing liabilities
|
3.59
|
%
|
127,595
|
4,421
|
3.46
|
%
|
111,527
|
2,978
|
2.67
|
%
|
||||||||||||
|
Noninterest-bearing
liabilities:
|
||||||||||||||||||||||
|
Demand
deposits
|
3,887
|
4,008
|
||||||||||||||||||||
|
Other
|
2,488
|
2,594
|
||||||||||||||||||||
|
Total
liabilities
|
133,970
|
118,129
|
||||||||||||||||||||
|
Stockholder’s
equity
|
13,764
|
13,419
|
||||||||||||||||||||
|
Total
liabilities and stockholder’s equity
|
$
|
147,734
|
$
|
131,548
|
||||||||||||||||||
|
Net
interest income
|
$
|
3,672
|
$
|
3,838
|
||||||||||||||||||
|
Interest
rate spread (1)
|
2.21
|
%
|
2.68
|
%
|
||||||||||||||||||
|
Net
interest-earning assets (2)
|
$
|
15,211
|
$
|
15,979
|
||||||||||||||||||
|
Net
interest margin (3)
|
2.57
|
%
|
3.01
|
%
|
||||||||||||||||||
|
Average
interest-earning assets to average interest-bearing
liabilities
|
112
|
%
|
114
|
%
|
||||||||||||||||||
|
(1)
|
Interest
rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
|
|
(2)
|
Net
interest-earning assets represent total interest-earning assets less
total
interest-bearing liabilities.
|
|
(3)
|
Net
interest margin represents net interest income divided by total
interest-earning assets.
|
59
Rate/Volume
Analysis
The
following table presents the effects of changing rates and volumes on our net
interest income for the years indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column represents the sum of the
prior columns. For purposes of this table, changes attributable to both rate
and
volume, which cannot be segregated, have been allocated proportionately, based
on the changes due to rate and the changes due to volume.
|
For
the
Years
Ended December 31,
2006
vs. 2005
|
||||||||||
|
Increase
(Decrease)
Due
to
|
||||||||||
|
Volume
|
Rate
|
Net
|
||||||||
|
(In
thousands)
|
||||||||||
|
Interest-earning
assets:
|
||||||||||
|
Loans
|
$
|
838
|
$
|
197
|
$
|
1,035
|
||||
|
Federal
funds sold
|
1
|
17
|
18
|
|||||||
|
Investment
securities
|
139
|
152
|
291
|
|||||||
|
Mortgage-backed
securities
|
(80
|
)
|
13
|
(67
|
)
|
|||||
|
Total
interest-earning assets
|
898
|
379
|
1,277
|
|||||||
|
Interest-bearing
liabilities:
|
||||||||||
|
NOW
accounts
|
3
|
1
|
4
|
|||||||
|
Passbook
savings
|
(9
|
)
|
24
|
15
|
||||||
|
Money
market savings
|
(9
|
)
|
139
|
130
|
||||||
|
Individual
retirement accounts
|
21
|
50
|
71
|
|||||||
|
Certificates
of deposit
|
233
|
428
|
661
|
|||||||
|
Federal
Home Loan Bank advances
|
460
|
102
|
562
|
|||||||
|
Total
interest-bearing liabilities
|
699
|
744
|
1,443
|
|||||||
|
Net
change in interest income
|
$
|
199
|
$
|
(365
|
)
|
$
|
(166
|
)
|
||
Management
of Market Risk
General.
The
majority of our assets and liabilities are monetary in nature. Consequently,
our
most significant form of market risk is interest rate risk. Our assets,
consisting primarily of mortgage loans, have longer maturities than our
liabilities, consisting primarily of deposits. As a result, a principal part
of
our business strategy is to manage interest rate risk and limit the exposure
of
our net interest income to changes in market interest rates. Accordingly, we
have an asset/liability management committee which is responsible for evaluating
the interest rate risk inherent in our assets and liabilities, for determining
the level of risk that is appropriate, given our business strategy, operating
environment, capital, liquidity and performance objectives, and for managing
this risk consistent with the guidelines approved by the board of directors.
60
During
2006 as we sought to increase our assets, we originated a higher than usual
number of one- to four- family fixed-rate loans with terms of up to 30 years.
The increase in our assets was primarily funded through growth in shorter-term
deposits, primarily certificates of deposit, including individual retirement
accounts. The composition of our interest-earning assets and interest-bearing
liabilities increases the risk that we will be adversely affected by changes
in
interest rates and the relative spread between short-term and long-term interest
rates. This risk is particularly acute when the yield curve is inverted, i.e.,
short-term interest rates, which are used to price deposits, are higher than
longer-term interest rates, which are used to price loans.
The
prolonged inversion of the yield curve in 2006 and 2007 has resulted in a higher
interest rate risk profile for Fairport Savings Bank than management feels
is
acceptable. We intend to manage our interest rate risk in order to control
the
exposure of our earnings and capital to changes in interest rates. As part
of
our ongoing asset-liability management, we intend to use the following
strategies to manage our interest rate risk:
|
|
(i)
|
reducing
our fixed-rate loan originations from 2006
levels;
|
|
|
(ii)
|
investing
in shorter- to medium-term securities;
|
|
|
(iii)
|
emphasizing
the marketing of our passbook, savings and checking accounts and
increasing the duration of our certificates of deposit;
|
|
|
(iv)
|
selling
a portion of our long-term, fixed-rate one- to four-family residential
real estate mortgage loans; and
|
|
(v)
|
maintaining
a strong capital position.
|
In
2006
we sold $1.2 million of our long-term, fixed-rate one- to four-family
residential real estate mortgage loans to improve our interest rate risk
position in the event of continued increases in market interest rates. We intend
to continue to originate and, subject to market conditions, sell a portion
of
our long term fixed-rate one- to four-family residential real estate
loans.
Additionally,
shortening the average maturity of our interest-earning assets by increasing
our
investments in shorter-term loans, as well as loans with variable rates of
interest, helps to better match the maturities and interest rates of our assets
and liabilities, thereby reducing the exposure of our net interest income to
changes in market interest rates. By following these strategies, we believe
that
we are better-positioned to react to changes in market interest rates.
Net
Portfolio Value.
The
Office of Thrift Supervision requires the computation of amounts by which the
net present value of an institution’s cash flow from assets, liabilities and off
balance sheet items (the institution’s net portfolio value or “NPV”) would
change in the event of a range of assumed changes in market interest rates.
The
Office of Thrift Supervision provides all institutions that file a Consolidated
Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report
with
an interest rate sensitivity report of net portfolio value. The Office of Thrift
Supervision simulation model uses a discounted cash flow analysis and an
option-based pricing approach to measuring the interest rate sensitivity of
net
portfolio value. Historically, the Office of Thrift Supervision model estimated
the economic value of each type of asset, liability and off-balance sheet
contract under the assumption that the United States Treasury yield curve
increases or decreases instantaneously by 100 to 300 basis points in 100 basis
point increments. However, given the current relatively low level of market
interest rates, an NPV calculation for an interest rate decrease of greater
than
200 basis points has not been prepared. A basis point equals one-hundredth
of
one percent, and 100 basis points equals one percent. An increase in interest
rates from 3% to 4% would mean, for example, a 100 basis point increase in
the
“Change in Interest Rates” column below. The Office of Thrift Supervision
provides us the results of the interest rate sensitivity model, which is based
on information we provide to the Office of Thrift Supervision to estimate the
sensitivity of our net portfolio value.
61
The
table
below sets forth, as of December 31, 2006, the Office of Thrift Supervision’s
calculation of the estimated changes in our net portfolio value that would
result from the designated instantaneous changes in the United States Treasury
yield curve. Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results.
|
Estimated
Increase
(Decrease)
in NPV
|
NPV
as a Percentage of
Present
Value of Assets (3)
|
|||||||||||||||
|
Change
in
Interest
Rates
(basis
points) (1)
|
Estimated
NPV
(2)
|
Amount
|
Percent
|
NPV
Ratio
(4)
|
Increase
(Decrease)
(basis
points)
|
|||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
+300
|
$
|
8,130
|
$
|
(8,513
|
)
|
(51
|
)%
|
5.74
|
%
|
(502
|
)
|
|||||
|
+200
|
11,324
|
(5,320
|
)
|
(32
|
)
|
7.74
|
(302
|
)
|
||||||||
|
+100
|
14,172
|
(2,472
|
)
|
(15
|
)
|
9.40
|
(135
|
)
|
||||||||
|
—
|
16,644
|
—
|
—
|
10.76
|
—
|
|||||||||||
|
-100
|
17,990
|
1,347
|
8
|
11.40
|
65
|
|||||||||||
|
-200
|
17,961
|
1,317
|
8
|
11.26
|
51
|
|||||||||||
|
(1)
|
Assumes
an instantaneous uniform change in interest rates at all
maturities.
|
|
(2)
|
NPV
is the discounted present value of expected cash flows from assets,
liabilities and off-balance sheet
contracts.
|
|
(3)
|
Present
value of assets represents the discounted present value of incoming
cash
flows on interest-earning assets.
|
|
(4)
|
NPV
Ratio represents NPV divided by the present value of
assets.
|
The
table
above indicates that at December 31, 2006, in the event of a 200 basis point
increase in interest rates, we would experience a 32% decrease in net portfolio
value. In the event of a 100 basis point decrease in interest rates, we would
experience an 8% increase in net portfolio value.
Certain
shortcomings are inherent in the methodologies used in determining interest
rate
risk through changes in net portfolio value. Modeling changes in net portfolio
value require making certain assumptions that may or may not reflect the manner
in which actual yields and costs respond to changes in market interest rates.
In
this regard, the net portfolio value tables presented assume that the
composition of our interest-sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and assume
that a particular change in interest rates is reflected uniformly across the
yield curve regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the net portfolio value tables provide an
indication of our interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast
of
the effect of changes in market interest rates on our net interest income and
will differ from actual results.
62
Additionally,
because the majority of our assets are long-term fixed-rate mortgage loans
that
do not reprice as quickly as our deposits, we would experience a significant
decrease in our net interest income in the event of continued inversion of
the
yield curve. We expect that our net interest income will be adversely affected
as our certificates of deposit mature and reprice at a higher cost to us. We
have $43.7 million in certificates of deposit accounts (including individual
retirement accounts) that are scheduled to mature during 2007. If we wish to
retain these deposits it most likely will be at a higher cost to us than their
current contractual rates.
Liquidity
and Capital Resources
Liquidity
is the ability to meet current and future financial obligations of a short-term
nature. Our primary sources of funds consist of deposit inflows, loan
repayments, advances from the Federal Home Loan Bank of New York, maturities
and
principal repayments of securities, and recently, but to a lesser extent, loan
sales. While maturities and scheduled amortization of loans and securities
are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
Our
asset/liability management committee is responsible for establishing and
monitoring our liquidity targets and strategies in order to ensure that
sufficient liquidity exists for meeting the borrowing needs and deposit
withdrawals of our customers as well as unanticipated contingencies. We seek
to
maintain a liquidity ratio of 4.0% or greater. For the year ended December
31,
2006, our liquidity ratio averaged 3.54% due to significantly above-average
loan
demand and originations. We believe that we have enough sources of liquidity
to
satisfy our short- and long-term liquidity needs as of December 31, 2006. We
anticipate that we will maintain higher liquidity levels following the
completion of the stock offering.
We
regularly adjust our investments in liquid assets based upon our assessment
of:
|
(i)
|
expected
loan demand;
|
|
(ii)
|
expected
deposit flows;
|
|
(iii)
|
yields
available on interest-earning deposits and securities;
and
|
|
(iv)
|
the
objectives of our asset/liability management program.
|
Excess
liquid assets are invested generally in interest-earning deposits, short- and
intermediate-term securities and federal funds sold.
Our
most
liquid assets are cash and cash equivalents. The levels of these assets are
dependent on our operating, financing, lending and investing activities during
any given period. At December 31, 2006, cash and cash equivalents totaled $2.2
million.
Our
cash
flows are derived from operating activities, investing activities and financing
activities as reported in our Consolidated Statements of Cash Flows included
in
our Consolidated Financial Statements.
63
At
December 31, 2006, we had $1.1 million in loan commitments outstanding. In
addition to commitments to originate loans, we had $7.9 million in unused lines
of credit to borrowers. Certificates of deposit, including individual retirement
accounts comprised solely of certificates of deposits, due within one year
of
December 31, 2006 totaled $43.7 million, or 56.0% of our certificates of deposit
and 40.2% of total deposits. If
these
deposits do not remain with us, we will be required to seek other sources of
funds, including loan sales, other deposit products, including certificates
of
deposit, and Federal Home Loan Bank advances. Depending on market conditions,
we
may be required to pay higher rates on such deposits or other borrowings than
we
currently pay on the certificates of deposit due on or before December 31,
2007.
We believe, however, based on past experience that a significant portion of
such
deposits will remain with us. We have the ability to attract and retain deposits
by adjusting the interest rates offered.
Our
primary investing activity is originating loans. During the year ended December
31, 2006, we originated $26.4 million of loans, and during the year ended
December 31, 2005, we originated $21.9 million of loans. We purchased $1.5
million of securities held-to-maturity during the year ended December 31, 2006
as compared to $12.7 million of purchases of securities-held-to-maturity during
the year ended December 31, 2005.
Financing
activities consist primarily of activity in deposit accounts and Federal Home
Loan Bank advances. We experienced a net increase in total deposits of $1.8
million for the year ended December 31, 2006 compared to a net increase of
$5.7
million for the year ended December 31, 2005. Deposit flows are affected by
the
overall level of interest rates, the interest rates and products offered by
us
and our local competitors, and by other factors.
Liquidity
management is both a daily and long-term function of business management. If
we
require funds beyond our ability to generate them internally, borrowing
agreements exist with the Federal Home Loan Bank of New York, which provides
an
additional source of funds. Federal Home Loan Bank advances increased by $7.3
million to $28.0 million for the year ended December 31, 2006, compared to
a net
increase of $11.9 million during the year ended December 31, 2005. Federal
Home
Loan Bank advances have primarily been used to fund loan demand. At December
31,
2006, we had the ability to borrow approximately $76.3 million from the Federal
Home Loan Bank of New York, of which $28.0 million had been advanced.
Fairport
Savings Bank is subject to various regulatory capital requirements, including
a
risk-based capital measure. The risk-based capital guidelines include both
a
definition of capital and a framework for calculating risk-weighted assets
by
assigning balance sheet assets and off-balance sheet items to broad risk
categories. At December 31, 2006, Fairport Savings Bank exceeded all regulatory
capital requirements. Fairport Savings Bank is considered “well capitalized”
under regulatory guidelines. See “Supervision and Regulation—Federal Banking
Regulation—Capital Requirements” and Note 11 of the Notes to the Consolidated
Financial Statements.
The
net
proceeds from the stock offering will significantly increase our liquidity
and
capital resources. Over time, the initial level of liquidity will be reduced
as
net proceeds from the stock offering are used for general corporate purposes,
including the funding of loans. Our financial condition and results of
operations will be enhanced by the net proceeds from the stock offering,
resulting in increased net interest-earning assets and net interest income.
However, due to the increase in equity resulting from the net proceeds raised
in
the stock offering, our return on equity will be adversely affected following
the stock offering.
64
Off-Balance
Sheet Arrangements
In
the
ordinary course of business, Fairport Savings Bank is a party to credit-related
financial instruments with off-balance sheet risk to meet the financing needs
of
our customers. These financial instruments include commitments to extend credit.
We follow the same credit policies in making commitments as we do for on-balance
sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. The commitments for equity lines of credit may expire without being
drawn upon. Therefore, the total commitment amounts do not necessarily represent
future cash requirements. The amount of collateral obtained, if it is deemed
necessary by us, is based on our credit evaluation of the customer.
At
December 31, 2006 and 2005, we had $1.1 million and $3.8 million, respectively,
of commitments to grant loans, and $7.9 million and $6.7 million, respectively,
of unfunded commitments under lines of credit.
For
additional information, see Note 10 of the Notes to our Consolidated Financial
Statements.
Recent
Accounting Pronouncements
In
February 2006, the Financial Accounting Standards Board (the “FASB”) issued SFAS
No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No.
155 amends FASB Statement No. 133 and FASB Statement No. 140, and improves
the
financial reporting of certain hybrid financial instruments by requiring more
consistent accounting that eliminates exemptions and provides a means to
simplify the accounting for these instruments. Specifically, SFAS No. 155
allows financial instruments that have embedded derivatives to be accounted
for
as a whole (eliminating the need to bifurcate the derivative from its host)
if
the holder elects to account for the whole instrument on a fair value
basis. SFAS No. 155 is effective for all financial instruments acquired or
issued after the beginning of an entity’s first fiscal year that begins after
September 15, 2006. We are required to adopt the provisions of SFAS No.
155, as applicable, beginning in fiscal year 2007. Management does not
believe the adoption of SFAS No. 155 will have a material impact on our
financial position and results of operations.
In
March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets - An Amendment of FASB Statement No. 140”
(“SFAS 156”). SFAS 156 requires that all separately recognized
servicing assets and servicing liabilities be initially measured at fair value,
if practicable. The statement permits, but does not require, the subsequent
measurement of servicing assets and servicing liabilities at fair value.
SFAS 156 is effective as of the beginning of an entity’s first fiscal year
that begins after September 15, 2006, which for us is the beginning of
fiscal 2007. We do not believe that the adoption of SFAS 156 will have a
significant effect on our financial statements.
65
In
September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that
require or permit fair value measurements. The new guidance is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and for interim periods within those fiscal years. We are currently
evaluating the potential impact, if any, of the adoption of FASB Statement
No. 157 on our consolidated financial position, results of operations and
cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement
No. 115. SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for us January 1, 2008. We are evaluating the impact that the
adoption of SFAS No. 159 will have on our consolidated financial
statements.
On
September 13, 2006, the Securities and Exchange Commission “SEC” issued
Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a potential current
year
misstatement. Prior to SAB 108, companies might evaluate the materiality of
financial-statement misstatements using either the income statement or balance
sheet approach, with the income statement approach focusing on new misstatements
added in the current year, and the balance sheet approach focusing on the
cumulative amount of misstatement present in a company’s balance sheet.
Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB 108 now requires
that companies view financial statement misstatements as material if they are
material according to either the income statement or balance sheet approach.
We
have analyzed SAB 108 and determined that upon adoption it will have no impact
on the reported results of operations or financial condition.
In
July
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
in
Income Taxes." The interpretation clarifies the accounting for uncertainty
in
income taxes recognized in a company's financial statements in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Specifically, the pronouncement prescribes a recognition threshold
and a
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. The interpretation
also provides guidance on the related derecognition, classification, interest
and penalties, accounting for interim periods, disclosure and transition of
uncertain tax positions. The interpretation is effective for fiscal years
beginning after December 15, 2006. We are evaluating the impact of this new
pronouncement on our consolidated financial statements.
66
Impact
of Inflation and Changing Prices
Our
consolidated financial statements and related notes have been prepared in
accordance with GAAP. GAAP generally requires the measurement of financial
position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost
of
our operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates
have
a greater impact on performance than the effects of inflation.
We
are
the mid-tier stock holding company for Fairport Savings Bank, and our ownership
of Fairport Savings Bank is currently our primary business activity. We will
contribute at least 50% of the net proceeds from the stock offering to Fairport
Savings Bank as additional capital. We will lend a portion of the net proceeds
that we retain to the employee stock ownership plan to fund its purchase of
our
common stock in the stock offering. We intend to invest our capital as discussed
in “How We Intend to Use the Proceeds from the Stock Offering.”
As
the
holding company of Fairport Savings Bank, we are authorized to pursue other
business activities permitted by applicable laws and regulations for mutual
savings and loan holding companies, which include making equity investments
and
the acquisition of banking and financial services companies. We have no plans
for any mergers or acquisitions at the present time.
Our
cash
flow will depend primarily on earnings from the investment of the net proceeds
we retain, and any dividends we receive from Fairport Savings Bank. Our officers
are also officers of Fairport Savings Bank. In addition, we use the support
staff of Fairport Savings Bank from time to time. We may hire additional
employees, as appropriate, to the extent we expand our business in the
future.
General
We
are a
federally chartered savings bank headquartered in Fairport, New York that was
originally organized in 1888. In January 2005, we reorganized into the two-tier
mutual holding company structure. Our principal business consists of originating
one- to four-family residential real estate mortgage loans and home equity
lines
of credit from our main office in Fairport, New York, and our two branch
offices, located in Penfield, New York which opened in 2003 and Irondequoit,
New
York, which opened in January 2007.
We
emphasize the origination of one-to four-family residential loans and home
equity lines of credit. To a lesser extent we will originate commercial real
estate loans, multi-family residential, construction and a variety of consumer
loans with interest rates that are competitive with those of similar products
offered by other financial institutions in our market area. We offer our
customers a variety of deposit products. We intend to continue to pursue this
business strategy following the stock offering. Additionally, we derive a
portion of our non-interest income through Oakleaf Services Corporation, our
subsidiary that offers non-deposit investments such as annuities, insurance
products and mutual funds.
67
We
attract retail deposits from the general public in the areas surrounding our
main office and our branch offices. In addition to one- to four-family
residential real estate mortgage loans and home equity lines of credit, we
also
originate residential construction loans. We retain the majority of the loans
that we originate. Loans that we sell consist of long-term, fixed-rate
residential real estate mortgage loans. We retain the servicing rights on all
loans that we sell. Our loans are sold without recourse. We have not entered
into loan participations in recent years. Our revenues are derived primarily
from interest on loans and, to a much lesser extent, interest on investment
securities and mortgage-backed securities. We also generate revenues from fees
and service charges. Our primary sources of funds are deposits, borrowings,
and
principal and interest payments on loans and securities.
Our
website address is www.fairportsavingsbank.com.
Information on our website is not and should not be considered a part of this
prospectus.
Market
Area
Fairport
Savings Bank considers its market area to consist of Monroe County, New York,
and to a lesser extent, the surrounding counties in Western New York. Monroe
County is a suburban market dominated by the presence of the City of Rochester,
the third largest city in the State of New York. In 2006, Monroe County had
a
population of 746,000. The Monroe County economy is largely dependent on local
businesses and institutions. The University of Rochester and Strong Memorial
Hospital were two of the largest employers in the Rochester area in 2006.
Rochester, however, is also home to a number of international businesses,
including Eastman Kodak, Bausch & Lomb, Constellation Brands and Paychex.
Additionally, Xerox, while no longer headquartered in Rochester, has its
principal offices and manufacturing facilities in Monroe County.
As
of
December 2006, the unemployment rate for Monroe County was 3.8%, as compared
to
a 4.6% rate for the State of New York and the national average of 4.5%. This
compared with a 5.6% unemployment rate for Monroe County in 2003, consistent
with similar declines for the State of New York and the national average during
this time period. Since 2000, the population growth in Monroe County was 0.3%,
which compared with the New York State average of 0.6% and the national average
of 1.5%
Competition
We
face
intense competition in our market areas both in making loans and attracting
deposits. Our market areas have a high concentration of financial institutions,
including large money center and regional banks, community banks and credit
unions. We face additional competition for deposits from money market funds,
brokerage firms, mutual funds and insurance companies. Some of our competitors
offer products and services that we currently do not offer, such as commercial
business loans, trust services and private banking.
68
The
majority of our depositors live and/or work in Monroe County, New York.
At
June
30, 2006, the latest date for which information is available through the Federal
Deposit Insurance Corporation, we held approximately 1.2% of the thrift and
bank
deposits available in Monroe County.
Our
primary strategy for increasing and retaining our customer base is to offer
competitive deposit and loan rates and product features, delivered with
exceptional customer service.
Lending
Activities
Our
principal lending activity is the origination of first mortgage loans to
purchase or refinance one- to four-family residential real estate. We also
originate a significant number of home equity lines of credit, and, to a lesser
extent, multi-family residential, construction, commercial real estate and
other
loans (consisting of automobile, passbook, overdraft protection and unsecured
loans). At December 31, 2006, one- to four-family residential real estate
mortgage loans totaled $109.8 million, or 90.6% of our loan portfolio, home
equity lines of credit totaled
$6.9 million, or 5.7% of our loan portfolio, commercial real estate loans
totaled $2.7 million or 2.3% of our loan portfolio, and other loans totaled
$1.7
million or 1.4% of our loan portfolio.
Loan
Portfolio Composition. The
following table sets forth the composition of our loan portfolio by type of
loan
at the dates indicated, excluding loans held for sale.
|
At
December 31,
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Real
estate loans:
|
|||||||||||||
|
One-
to four-family residential(1)
|
$
|
109,786
|
90.6
|
%
|
$
|
96,205
|
88.6
|
%
|
|||||
|
Home
equity lines of credit
|
6,929
|
5.7
|
7,209
|
6.6
|
|||||||||
|
Multi-family
residential
|
1,040
|
0.9
|
1,110
|
1.0
|
|||||||||
|
Construction(2)
|
380
|
0.3
|
209
|
0.2
|
|||||||||
|
Commercial
|
2,745
|
2.3
|
3,488
|
3.2
|
|||||||||
|
Other
loans
|
241
|
0.2
|
380
|
0.4
|
|||||||||
|
Total
loans receivable
|
121,121
|
100.0
|
%
|
108,601
|
100.0
|
%
|
|||||||
|
Deferred
loan costs (fees)
|
338
|
165
|
|||||||||||
|
Allowance
for loan losses
|
(322
|
)
|
(331
|
)
|
|||||||||
|
Total
loans receivable, net
|
$
|
121,137
|
$
|
108,435
|
|||||||||
|
(1)
|
Includes
$3.9 million and $1.4 million of closed-end home equity loans at
December
31, 2006 and 2005, respectively.
|
|
(2)
|
Represents
amounts disbursed at December 31, 2006 and 2005.
|
Loan
Portfolio Maturities. The
following table summarizes the scheduled repayments of our loan portfolio at
December 31, 2006. Demand loans, loans having no stated repayment schedule
or
maturity, and overdraft loans are reported as being due in the year ending
December 31, 2007. Maturities are based on the final contractual payment date
and do not reflect the impact of prepayments and scheduled principal
amortization.
69
|
One-
to Four-Family Residential Real Estate Loans
|
Home
Equity
Lines
of Credit
|
Multi-Family
Residential Real Estate Loans
|
Construction
Loans
|
Commercial
Real Estate Loans
|
Other
Loans
|
Total
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||
|
Due
During the Years Ending
December 31,
|
||||||||||||||||||||||
|
2007
|
$
|
18
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
152
|
$
|
36
|
$
|
206
|
||||||||
|
2008
|
184
|
—
|
—
|
—
|
—
|
35
|
219
|
|||||||||||||||
|
2009
|
262
|
—
|
—
|
—
|
24
|
83
|
369
|
|||||||||||||||
|
2010
to 2011
|
1,973
|
—
|
84
|
—
|
289
|
87
|
2,433
|
|||||||||||||||
|
2012
to 2016
|
18,979
|
—
|
409
|
—
|
274
|
—
|
19,662
|
|||||||||||||||
|
2017
to 2021
|
33,976
|
—
|
130
|
—
|
1,299
|
—
|
35,405
|
|||||||||||||||
|
2021
and beyond
|
54,394
|
6,929
|
417
|
380
|
707
|
—
|
62,827
|
|||||||||||||||
|
Total
|
$
|
109,786
|
$
|
6,929
|
$
|
1,040
|
$
|
380
|
$
|
2,745
|
$
|
241
|
$
|
121,121
|
||||||||
The
following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at December 31, 2006 that are contractually due after
December 31, 2007.
|
Due
After December 31, 2007
|
||||||||||
|
Fixed
|
Adjustable
|
Total
|
||||||||
|
(In
thousands)
|
||||||||||
|
Real
estate loans:
|
||||||||||
|
One-
to four-family residential
|
$
|
101,424
|
$
|
8,344
|
$
|
109,768
|
||||
|
Home
equity lines of credit
|
—
|
6,929
|
6,929
|
|||||||
|
Multi-family
residential
|
482
|
558
|
1,040
|
|||||||
|
Construction
|
380
|
—
|
380
|
|||||||
|
Commercial
|
883
|
1,710
|
2,593
|
|||||||
|
Other
loans
|
205
|
—
|
205
|
|||||||
|
Total
|
$
|
103,374
|
$
|
17,541
|
$
|
120,915
|
||||
One-
to Four-Family Residential Real Estate Mortgage Loans.
Our
primary lending activity is the origination of one- to four-family residential
real estate mortgage loans. At December 31, 2006, $109.8 million, or 90.6%
of
our total loan portfolio, consisted of one- to four-family residential real
estate mortgage loans. We offer conforming and non-conforming, fixed-rate and
adjustable-rate residential real estate mortgage loans with maturities of up
to
30 years and maximum loan amounts generally of up to $750,000.
We
currently offer fixed-rate conventional mortgage loans with terms of up to
30
years that are fully amortizing with monthly loan payments, and adjustable-rate
mortgage loans that provide an initial fixed interest rate for one, three,
five,
seven or ten years and that amortize over a period of up to 30 years. We
originate fixed-rate mortgage loans with terms of less than 15 years, but at
rates applicable to our 15-year loans. We also offer “interest only” loans,
where the borrower pays interest for an initial period (ten years), after which
the loan converts to a fully amortizing loan.
One-
to
four-family residential real estate mortgage loans are generally underwritten
according to Freddie Mac guidelines, and we refer to loans that conform to
such
guidelines as “conforming loans.” We generally originate both fixed- and
adjustable-rate mortgage loans in amounts up to the maximum conforming loan
limits as established by the Office of Federal Housing Enterprise Oversight,
which is currently $417,000 for single-family homes. We also originate loans
above the lending limit for conforming loans, which we refer to as “jumbo
loans.” We generally underwrite jumbo loans in a manner similar to conforming
loans. These loans are generally eligible for sale to various firms that
specialize in purchasing non-conforming loans. Jumbo loans are not uncommon
in
our market areas. For first mortgage loans with loan-to-value ratios in excess
of 80% we require private mortgage insurance.
70
We
actively monitor our interest rate risk position to determine the desirable
level of investment in fixed-rate mortgages. Depending on market interest rates
and our capital and liquidity position, we may retain all of our newly
originated longer-term fixed-rate residential mortgage loans, or we may sell
all
or a portion of such loans in the secondary mortgage market to government
sponsored entities such as Freddie Mac or other purchasers.
During
periods of low market interest rates, we attempt to sell a portion of our newly
originated fixed-rate residential real estate mortgage loans. Our ability to
sell these fixed-rate loans has been constrained in recent periods by rising
interest rates. During 2006, we sold $1.2 million in loans. For the year ended
December 31, 2006, we received servicing fees of $2,000. As of December 31,
2006, the principal balance of loans serviced for others totaled $1.9 million.
We
currently offer several adjustable-rate mortgage loans secured by residential
properties with interest rates that are fixed for an initial period ranging
from
one year to ten years. After the initial fixed period, the interest rate on
adjustable-rate mortgage loans is generally reset every year based upon a
contractual spread or margin above the average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year, as published weekly
by
the Federal Reserve Board, subject to periodic and lifetime limitations on
interest rate changes. All of our interest-only loans and our traditional
adjustable-rate mortgage loans with initial fixed-rate periods of one, three,
five and ten years have initial and periodic caps of two percentage points
on
interest rate changes, with a cap of six percentage points for the life of
the
loan. Many of the borrowers who select these loans have shorter-term credit
needs than those who select long-term, fixed-rate mortgage loans. We do not
offer “Option ARM” loans, where borrowers can pay less than the interest owed on
their loan, resulting in an increased principal balance during the life of
the
loan.
Adjustable-rate
mortgage loans generally present different credit risks than fixed-rate mortgage
loans primarily because the underlying debt service payments of the borrowers
increase as interest rates increase, thereby increasing the potential for
default. Interest-only loans present different credit risks than fully
amortizing loans, as the principal balance of the loan does not decrease during
the interest-only period. As a result, our exposure to loss of principal in
the
event of default does not decrease during this period.
We
generally require title insurance on all of our one- to four-family residential
real estate mortgage loans, and we also require that borrowers maintain fire
and
extended coverage casualty insurance (and, if appropriate, flood insurance)
in
an amount at least equal to the lesser of the loan balance or the replacement
cost of the improvements. For fixed-rate mortgage loans with terms of fifteen
years or less, we will accept an attorney’s letter in lieu of title insurance. A
majority of our residential real estate mortgage loans have a mortgage escrow
account from which disbursements are made for real estate taxes and flood
insurance. We do not conduct environmental testing on residential real estate
mortgage loans unless specific concerns for hazards are identified by the
appraiser used in connection with the origination of the loan.
71
Home
Equity Lines of Credit.
We also
offer home equity lines of credit, which are primarily secured by a second
mortgage on one- to four-family residences. At December 31, 2006, home equity
lines of credit totaled $6.9 million, or 5.7% of total loans receivable. At
this
date we had an additional $7.9 million of undisbursed home equity lines of
credit.
The
underwriting standards for home equity lines of credit include a determination
of the applicant’s credit history, an assessment of the applicant’s ability to
meet existing obligations and payments on the proposed loan and the value of
the
collateral securing the loan. The combined loan-to-value ratio (first and second
mortgage liens) for home equity lines of credit is generally limited to 90%.
We
originate our home equity lines of credit without application fees or
borrower-paid closing costs. Our home equity lines of credit are offered with
adjustable rates of interest indexed to the prime rate, as reported in
The
Wall Street Journal.
Multi-Family
Residential Loans.
Loans
secured by multi-family real estate totaled approximately $1.0 million, or
0.9%,
of the total loan portfolio at December 31, 2006. Multi-family residential
loans
generally are secured by rental properties. All multi-family residential loans
are secured by properties located within our lending area. At December 31,
2006,
we had seven multi-family loans with an average principal balance of $149,000,
and the largest multi-family real estate loan had a principal balance of
$417,000. All of our loans secured by multi-family real estate loans are
performing in accordance with their terms. Multi-family real estate loans are
offered with fixed and adjustable interest rates. Multi-family real estate
loans
are originated for terms of up to 20 years. Adjustable-rate multi-family real
estate loans are tied to the average yield on U.S. Treasury securities, subject
to periodic and lifetime limitations on interest rate changes.
We
consider a number of factors in originating multi-family real estate loans.
We
evaluate the qualifications and financial condition of the borrower (including
credit history), profitability and expertise, as well as the value and condition
of the mortgaged property securing the loan. When evaluating the qualifications
of the borrower, we consider the financial resources of the borrower, the
borrower’s experience in owning or managing similar property and the borrower’s
payment history with us and other financial institutions. In evaluating the
property securing the loan, the factors we consider include the net operating
income of the mortgaged property before debt service and depreciation, the
debt
service coverage ratio (the ratio of net operating income to debt service)
to
ensure that it is at least 120% of the monthly debt service and the ratio of
the
loan amount to the appraised value of the mortgaged property. Multi-family
real
estate loans are originated in amounts up to 70% of the appraised value of
the
mortgaged property securing the loan. All multi-family loans are appraised
by
outside independent appraisers approved by the board of directors.
Loans
secured by multi-family real estate generally involve a greater degree of credit
risk than one-to four-family residential mortgage loans and carry larger loan
balances. This increased credit risk is a result of several factors, including
the concentration of principal in a limited number of loans and borrowers,
the
effects of general economic conditions on income producing properties, and
the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family real estate
typically depends upon the successful operation of the real estate property
securing the loans. If the cash flow from the project is reduced, the borrower’s
ability to repay the loan may be impaired.
72
Construction
Loans. We
also
originate construction loans for the purchase of developed lots and for the
construction of single-family residences. Construction loans are offered to
individuals for the construction of their personal residences by a qualified
builder (construction/permanent loans). At December 31, 2006, construction
loans
totaled $380,000, or 0.3% of total loans receivable. At December 31, 2006,
the
additional unadvanced portion of these construction loans totaled
$152,000.
Before
making a commitment to fund a construction loan, we require an appraisal of
the
property by an independent licensed appraiser. We generally also review and
inspect each property before disbursement of funds during the term of the
construction loan.
Construction
financing generally involves greater credit risk than long-term financing on
improved, owner-occupied real estate. Risk of loss on a construction loan
depends largely upon the accuracy of the initial estimate of the value of the
property at completion of construction compared to the estimated cost (including
interest) of construction and other assumptions. If the estimate of construction
cost proves to be inaccurate, we may be required to advance additional funds
beyond the amount originally committed in order to protect the value of the
property. Moreover, if the estimated value of the completed project proves
to be
inaccurate, the borrower may hold a property with a value that is insufficient
to assure full repayment of the loan.
Commercial
Real Estate Loans. At
December 31, 2006, $2.7 million, or 2.3% of our total loan portfolio consisted
of commercial real estate loans. Commercial real estate loans are secured by
office buildings, mixed use properties, places of worship and other commercial
properties. We generally originate adjustable-rate commercial real estate loans
with maximum terms of up to 15 years. The maximum loan-to-value ratio of
commercial real estate loans is 70%. At December 31, 2006 , we had 20 commercial
real estate loans with an average outstanding balance of $137,000. At December
31, 2006, our largest loan secured by commercial real estate consisted of a
$554,000 loan secured by an office building/warehouse. At December 31, 2006
this
loan was performing in accordance with its terms. At December 31, 2006 all
of
our loans secured by commercial real estate were performing in accordance with
their terms.
We
consider a number of factors in originating commercial real estate loans. We
evaluate the qualifications and financial condition of the borrower (including
credit history), profitability and expertise, as well as the value and condition
of the mortgaged property securing the loan. When evaluating the qualifications
of the borrower, we consider the financial resources of the borrower, the
borrower’s experience in owning or managing similar property and the borrower’s
payment history with us and other financial institutions. In evaluating the
property securing the loan, the factors we consider include the net operating
income of the mortgaged property before debt service and depreciation, the
debt
service coverage ratio (the ratio of net operating income to debt service)
to
ensure that it is at least 120% of the monthly debt service, and the ratio
of
the loan amount to the appraised value of the mortgaged property. Commercial
real estate loans are originated in amounts up to 70% of the appraised value
of
the mortgaged property securing the loan. All commercial loans are appraised
by
outside independent appraisers approved by the board of directors. Personal
guarantees are generally obtained from commercial real estate borrowers.
73
Loans
secured by commercial real estate generally are larger than one- to four-family
residential loans and involve greater credit risk. Commercial real estate loans
often involve large loan balances to single borrowers or groups of related
borrowers. Repayment of these loans depends to a large degree on the results
of
operations and management of the properties securing the loans or the businesses
conducted on such property, and may be affected to a greater extent by adverse
conditions in the real estate market or the economy in general. Accordingly,
the
nature of these loans makes them more difficult for management to monitor and
evaluate.
Other
Loans.
We
offer a variety of loans secured by property other than real estate. These
loans
include automobile, passbook, overdraft protection and unsecured loans. At
December 31, 2006, these other loans totaled $241,000, or 0.2% of the total
loan
portfolio.
Loan
Originations, Sales, and Servicing. Lending
activities are conducted by our loan personnel operating at our main and branch
office locations and through local mortgage brokers. All loans that we originate
are underwritten pursuant to our policies and procedures, which incorporate
Freddie Mac underwriting guidelines to the extent applicable. We originate
both
adjustable-rate and fixed-rate loans. Our ability to originate fixed- or
adjustable-rate loans is dependent upon the relative customer demand for such
loans, which is affected by current market interest rates as well as anticipated
future market interest rates. Our loan origination and sales activity may be
adversely affected by a rising interest rate environment that typically results
in deceased loan demand. Historically, a majority of our one- to four-family
residential real estate mortgage loan originations have been generated by local
mortgage brokers, as well as our in-house loan representatives. Loans obtained
from brokers are underwritten and funded by us. We also obtain referrals from
existing or past customers and by referrals from local builders and real estate
brokers.
We
sell
our loans without recourse. Historically, we have retained the servicing rights
on all residential real estate mortgage loans that we have sold, and we intend
to continue this practice in the future. At December 31, 2006, we were servicing
loans owned by others with a principal balance of $1.9 million. Loan servicing
includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent borrowers, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance
and
tax payments on behalf of the borrowers and generally administering the loans.
We retain a portion of the interest paid by the borrower on the loans we service
as consideration for our servicing activities. We have not engaged in loan
purchases or entered into loan participations in recent years.
74
The
following table shows our loan originations, sales and repayment activities
for
the years indicated.
|
For
the year ended December 31
|
|||||||
|
2006
|
2005
|
||||||
|
(In
thousands)
|
|||||||
|
Total
loans at beginning of period
|
$
|
108,601
|
$
|
99,301
|
|||
|
Loan
originations:
|
|||||||
|
Real
estate loans:
|
|||||||
|
One-to
four-family residential
|
22,721
|
15,402
|
|||||
|
Home
equity lines of credit
|
2,295
|
3,061
|
|||||
|
Multi-family
residential
|
137
|
374
|
|||||
|
Construction
|
1,115
|
1,656
|
|||||
|
Commercial
|
―
|
1,280
|
|||||
|
Other
loans
|
165
|
127
|
|||||
|
Total
loans originated
|
26,433
|
21,900
|
|||||
|
Sales
and loan principal repayments:
|
|||||||
|
Deduct:
|
|||||||
|
Principal
repayments
|
12,734
|
12,320
|
|||||
|
Loan
sales
|
1,179
|
280
|
|||||
|
Net
loan activity
|
12,520
|
9,300
|
|||||
|
Total
loans at end of period
|
$
|
121,121
|
$
|
108,601
|
|||
Loan
Approval Policy and Authority.
Fairport
Savings Bank’s lending activities follow written, non-discriminatory
underwriting standards and loan origination policies approved by Fairport
Savings Bank’s board of directors. The loan approval process is intended to
assess the borrower’s ability to repay the loan and value of the property that
will secure the loan. To assess the borrower’s ability to repay, we review the
borrower’s employment and credit history and information on the historical and
projected income and expenses of the borrower.
Residential
mortgage loans up to $417,000, home equity loans up to $150,000, lines of
credit, personal loans and unsecured property improvement loans up to $10,000
and automobile loans up to $35,000 may be approved by any senior lending officer
or designee. Residential mortgage loans between $417,000 and $500,000, and
automobile loans in excess of $35,000 may be approved by any two lending
officers. Residential mortgage loans between $500,000 and $750,000 and
commercial mortgage loans up to $500,000 may be approved by any senior lending
officer. Commercial mortgage loans between $500,000 and $750,000 may be approved
by any two senior lending officers with a report to the board of directors.
Residential mortgage loans and commercial mortgage loans exceeding $750,000
must
be approved by any two senior lending officers and the board of
directors.
We
generally require independent third-party appraisals of real property securing
loans. Appraisals are performed by independent licensed appraisers. All
appraisers are approved by the board of directors annually.
75
Loans
to One Borrower.
A
federal
savings bank generally may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of unimpaired capital and surplus.
An additional amount may be loaned, equal to 10% of unimpaired capital and
surplus, if the loan is secured by readily marketable collateral, which
generally does not include real estate. Our loans to one borrower limit under
this regulation is $3.5 million. Our policy provides that loans to one borrower
(or related borrowers) should not exceed $750,000. At December 31, 2006, we
had
one loan exceeding this amount, totaling $987,000 that was secured by the
borrower’s primary residence. This loan was performing in accordance with its
terms. Our next largest lending relationship to one borrower at December 31,
2006 totaled $647,000, and was secured by the borrower’s primary residence. This
loan was performing in accordance with its terms.
Non-Performing
Assets and Delinquent Loans
System-generated
late notices are mailed to borrowers after the late payment “grace period,”
which is 15 days in the case of all loans secured by real estate and 10 days
in
the case of other loans. A second notice will be mailed to borrowers if the
loan
remains past due after 30 days. When a loan is more than 60 days past due,
we
attempt to contact the borrower and develop a plan of repayment. By the
90th
day of
delinquency, we will have our attorneys issue a demand letter. The demand letter
will require the borrowers to bring the loan current within 30 days in order
to
avoid the beginning of foreclosure proceedings for loans secured by real estate.
With respect to automobile loans we will seek to repossess the vehicle if the
loan is 90 days delinquent. A report of all loans 30 days or more past due
is
provided to the board of directors monthly.
Loans
are
generally placed
on
non-accrual status when payment of principal or interest is more than 90 days
delinquent, unless the loans are well-secured and in the process of collection.
Loans are also placed on non-accrual status if collection of principal or
interest in full is in doubt or if the loan has been restructured. At December
31, 2006 and December 31, 2005, we had no restructured loans. When loans are
placed on a non-accrual status, unpaid accrued interest is fully reversed,
and
further income is recognized only to the extent received. The loan may be
returned to accrual status if unpaid principal and interest are repaid so that
the loan is less than 90 days delinquent and a satisfactory payment history
has
been established. Loans not secured by real estate will be charged-off if they
become 120 days past due.
76
Non-Performing
Assets. The
table
below sets forth the amounts and categories of our non-performing assets at
the
dates indicated.
|
At
December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
Non-accrual
loans:
|
|||||||
|
Real
estate loans:
|
|||||||
|
One-
to four-family residential
|
$
|
143
|
$
|
70
|
|||
|
Home
equity lines of credit
|
28
|
—
|
|||||
|
Multi-family
residential
|
—
|
—
|
|||||
|
Construction
|
—
|
—
|
|||||
|
Commercial
|
—
|
—
|
|||||
|
Other
loans
|
—
|
—
|
|||||
|
Total
|
171
|
70
|
|||||
|
Accruing
loans 90 days or more past due:
|
—
|
—
|
|||||
|
Total
non-performing loans
|
171
|
70
|
|||||
|
Foreclosed
real estate
|
—
|
225
|
|||||
|
Other
non-performing assets
|
—
|
—
|
|||||
|
Total
non-performing
assets
|
$
|
171
|
$
|
295
|
|||
|
Ratios:
|
|||||||
|
Total
non-performing loans to total loans
|
0.14
|
%
|
0.06
|
%
|
|||
|
Total
non-performing loans to total assets
|
0.11
|
%
|
0.05
|
%
|
|||
|
Total
non-performing assets to total assets
|
0.11
|
%
|
0.21
|
%
|
|||
For
the
year ended December 31, 2006, gross interest income that would have been
recorded had our non-accruing loans been current in accordance with their
original terms was $2,500. Interest income recognized on such loans for the
year
ended December 31, 2006 was $11,818. See “—Delinquent Loans.”
77
Delinquent
Loans.
The
following table sets forth our loan delinquencies by type, by amount and by
percentage of type at the dates indicated.
|
Loans
Delinquent For
|
Total
|
||||||||||||||||||
|
30-89
Days
|
90
Days and Over
|
||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Number
|
Amount
|
||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
At
December 31, 2006
|
|||||||||||||||||||
|
Real
estate loans:
|
|||||||||||||||||||
|
One-
to four-family residential
|
2
|
$
|
110
|
—
|
$
|
—
|
2
|
$
|
110
|
||||||||||
|
Home
equity lines of credit
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Multi-family
residential
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Construction
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Commercial
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Other
loans
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Total
|
2
|
$
|
110
|
—
|
$
|
—
|
2
|
$
|
110
|
||||||||||
|
At
December 31, 2005
|
|||||||||||||||||||
|
Real
estate loans:
|
|||||||||||||||||||
|
One-
to four-family residential
|
6
|
$
|
229
|
—
|
$
|
—
|
6
|
$
|
229
|
||||||||||
|
Home
equity lines of credit
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Multi-family
residential
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Construction
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Commercial
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Other
loans
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Total
|
6
|
$
|
229
|
—
|
$
|
—
|
6
|
$
|
229
|
||||||||||
Foreclosed Real
Estate.
Real
estate acquired by us as a result of foreclosure or by deed in lieu of
foreclosure is classified as foreclosed real estate until sold. When property
is
acquired it is recorded at the estimated fair market value at the date of
foreclosure, establishing a new cost basis. Estimated fair value generally
represents the sale price a buyer would be willing to pay on the basis of
current market conditions, including normal terms from other financial
institutions, less the estimated costs to sell the property. Holding costs
and
declines in estimated fair market value result in charges to expense after
acquisition. At December 31, 2006, we had no foreclosed real
estate.
Classification
of Assets. Our
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 current 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 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 to warrant classification in one of the aforementioned categories,
but which possess potential weaknesses that deserve our close attention, are
required to be designated as special mention. As of December 31, 2006, we had
no
assets designated as special mention.
When
we
classify assets as either substandard or doubtful, we allocate a portion of
the
related general loss allowances to such assets as we deem prudent. The allowance
for loan losses is the amount estimated by management as necessary to absorb
credit losses incurred in the loan portfolio that are both probable and
reasonably estimable at the balance sheet date. Our determination as to the
classification of our assets and the amount of our loss allowances are subject
to review by our principal federal regulator, the Office of Thrift Supervision,
which can require that we establish additional loss allowances. We regularly
review our asset portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of our
review of our assets, at December 31, 2006, classified assets consisted of
substandard assets of $178,000, and no assets classified as doubtful or loss.
As
of December 31, 2006, our largest substandard asset was a loan secured by a
residential property in Victor, New York, with a principal balance of $101,000.
The classified assets total includes $171,000 of nonperforming loans.
78
Allowance
for Loan Losses
We
provide for loan losses based on the allowance method. Accordingly, all loan
losses are charged to the related allowance and all recoveries are credited
to
it. Additions to the allowance for loan losses are provided by charges to income
based on various factors which, in our judgment, deserve current recognition
in
estimating probable losses. We regularly review the loan portfolio and make
provisions for loan losses in order to maintain the allowance for loan losses
in
accordance with accounting principles generally accepted in the United States
of
America.
The
allowance for loan losses is evaluated on a regular basis by management and
is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is generally established when the collateral value of the impaired
loan is lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience adjusted for
qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management’s estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
A
loan is
considered impaired when, based on current information and events, it is
probable that Fairport Savings Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management considers the significance of payment delays and payment
short falls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
the
delay, the reasons for the delay, the borrower’s prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis by either the present value
of
expected future cash flows discounted at the loan’s effective interest rate or
the fair value of the collateral if the loan is collateral
dependent.
79
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, we do not separately identify individual consumer
and
residential loans for impairment disclosures.
We
periodically evaluate the carrying value of loans and the allowance is adjusted
accordingly. While we use the best information available to make evaluations,
future adjustments to the allowance may be necessary if conditions differ
substantially from the information used in making the evaluations. In addition,
as an integral part of their examination process, the Office of Thrift
Supervision periodically reviews the allowance for loan losses. The Office
of
Thrift Supervision may require us to recognize additions to the allowance based
on their analysis of information available to them at the time of their
examination.
The
following table sets forth activity in our allowance for loan losses for the
years indicated. During 2006 and 2005, we had no recoveries.
|
At
or For the Years Ended December 31,
|
|||||||
|
2006
|
|
2005
|
|
||||
|
|
|
(Dollars
in thousands)
|
|||||
|
Balance
at beginning of year
|
$
|
331
|
$
|
307
|
|||
|
Charge-offs:
|
|||||||
|
Real
estate loans:
|
|||||||
|
One-
to four-family residential
|
—
|
—
|
|||||
|
Home
equity lines of credit
|
—
|
—
|
|||||
|
Multi-family
residential
|
—
|
—
|
|||||
|
Construction
|
—
|
—
|
|||||
|
Commercial
|
—
|
—
|
|||||
|
Other
loans
|
9
|
2
|
|||||
|
Total
charge-offs
|
9
|
2
|
|||||
|
Net
charge-offs
|
9
|
2
|
|||||
|
Provision
for loan losses
|
—
|
26
|
|||||
|
Balance
at end of year
|
$
|
322
|
$
|
331
|
|||
|
Ratios:
|
|||||||
|
Net
charge-offs to average loans outstanding
|
0.01
|
%
|
—
|
%
|
|||
|
Allowance
for loan losses to non-performing loans at end of year
|
188.30
|
%
|
472.86
|
%
|
|||
|
Allowance
for loan losses to total loans at end of year
|
0.27
|
%
|
0.30
|
%
|
|||
80
Allocation
of Allowance for Loan Losses. The
following table sets forth the allowance for loan losses allocated by loan
category, the total loan balances by category, and the percent of loans in
each
category to total loans at the dates indicated. The allowance for loan losses
allocated to each category is not necessarily indicative of future losses in
any
particular category and does not restrict the use of the allowance to absorb
losses in other categories.
|
At
December 31,
|
|||||||||||||||||||
|
2006
|
2005
|
||||||||||||||||||
|
Amount
|
Percent
of Allowance to Total Allowance
|
Percent
of Loans in Category to Total Loans
|
Amount
|
Percent
of Allowance to Total Allowance
|
Percent
of Loans in Category to Total Loans
|
||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
Real
estate loans:
|
|||||||||||||||||||
|
One-
to four-family residential
|
$
|
228
|
70.8
|
%
|
90.6
|
%
|
$
|
232
|
70.1
|
%
|
88.6
|
%
|
|||||||
|
Home
equity lines of credit
|
55
|
17.1
|
5.7
|
44
|
13.3
|
6.6
|
|||||||||||||
|
Multi-family
residential
|
8
|
2.5
|
0.9
|
8
|
2.4
|
1.0
|
|||||||||||||
|
Construction
|
2
|
0.6
|
0.3
|
1
|
0.3
|
0.2
|
|||||||||||||
|
Commercial
|
28
|
8.7
|
2.3
|
35
|
10.6
|
3.2
|
|||||||||||||
|
Other
loans
|
1
|
0.3
|
0.2
|
1
|
0.3
|
0.4
|
|||||||||||||
|
Total
allocated allowance
|
322
|
100.0
|
100.0
|
321
|
97.0
|
100.0
|
|||||||||||||
|
Unallocated
allowance
|
—
|
—
|
—
|
10
|
3.0
|
—
|
|||||||||||||
|
Total
allowance for loan losses
|
$
|
322
|
100.0
|
%
|
100.0
|
%
|
$
|
331
|
100.0
|
%
|
100.0
|
%
|
|||||||
Investments
Our
board
of directors is responsible for approving and overseeing our investment policy.
The investment policy is reviewed at least annually by management and any
changes to the policy are recommended to the board of directors and are subject
to its approval. This policy dictates that investment decisions be made based
on
the safety of the investment, liquidity requirements, potential returns, the
ability to provide collateral for pledging requirements, and consistency with
our interest rate risk management strategy. Our asset/liability management
committee, which consists of our chief executive officer, chief financial
officer and other members of management, oversees our investing activities
and
strategies. All transactions are formally reviewed by the board of directors
at
least quarterly. Any investment which, subsequent to its purchase, fails to
meet
the guidelines of the policy is reported to the asset/liability management
committee, which decides whether to hold or sell the investment.
Our
current investment policy requires that we invest primarily in debt securities
issued by the U.S. Government, agencies of the U.S. Government or U.S.
Government-sponsored enterprises. The policy also permits investments in
mortgage-backed securities, including pass-through securities issued and
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. We also hold investments
in New York State municipal obligations. The investment policy also permits
investments in asset-backed securities, bankers acceptances, money market funds,
term federal funds, repurchase agreements and reverse repurchase
agreements.
Our
current investment policy prohibits hedging through the use of such instruments
as financial futures, interest rate options and swaps.
SFAS
No.
115 requires that, at the time of purchase, we designate a security as held
to
maturity, available-for-sale, or trading, depending on our ability and intent.
Securities available-for-sale are reported at fair value, while securities
held
to maturity are reported at amortized cost. We do not have a trading
portfolio.
81
Our
investment portfolio at December 31, 2006, consisted of $18.2 million of
U.S. Government and federal agency obligations. At December 31, 2006, our
mortgage-backed securities portfolio totaled $5.9 million, or 3.9% of total
assets, and consisted of securities guaranteed by Fannie Mae, Ginnie Mae and
Freddie Mac. At December 31, 2006, our securities classified as available for
sale consisted of Freddie Mac stock with a cost basis of $67,000 and a fair
value of $604,000.
U.S.
Government and Federal Agency Obligations.
U.S. Government and federal agency securities are utilized as shorter-term
investment vehicles and as an alternative to loan originations. Investment
in
U.S. government and agency securities provide lower yields than loans, however,
they provide greater liquidity on a short-term basis.
Mortgage-Backed
Securities. We
purchase both fixed-rate and adjustable-rate mortgage-backed securities insured
or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. We invest in
mortgage-backed securities to achieve higher interest income and monthly cash
flow with minimal administrative expense, and to lower our credit risk as a
result of the guarantees provided by Freddie Mac, Fannie Mae or Ginnie
Mae.
Mortgage-backed
securities are created by the pooling of mortgages and the issuance of a
security with an interest rate that is less than the interest rate on the
underlying mortgages. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although we invest only in mortgage-backed securities backed by one- to
four-family mortgages. The issuers of such securities (generally Ginnie Mae,
a
U.S. Government agency, and government sponsored enterprises, such as
Fannie Mae and Freddie Mac) pool and resell the participation interests in
the
form of securities to investors such as Fairport Savings Bank, and guarantee
the
payment of principal and interest to investors. Mortgage-backed securities
generally yield less than the loans that underlie such securities because of
the
cost of payment guarantees and credit enhancements. However, mortgage-backed
securities are more liquid than individual mortgage loans since there is an
active trading market for such securities. In addition, mortgage-backed
securities may be used to collateralize our specific liabilities and
obligations. Investments in mortgage-backed securities involve a risk that
actual payments will be greater or less than the prepayment rate estimated
at
the time of purchase, which may require adjustments to the amortization of
any
premium or acceleration of any discount relating to such interests, thereby
affecting the net yield on our securities. We periodically review current
prepayment speeds to determine whether prepayment estimates require modification
that could cause amortization or accretion adjustments.
82
The
following table sets forth the amortized cost and fair value of our securities
portfolio at the dates indicated.
|
At
December 31,
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
||||||||||
|
(In
thousands)
|
|||||||||||||
|
Securities
held to maturity:
|
|||||||||||||
|
U.S.
Government and agency obligations
|
$
|
18,200
|
$
|
18,001
|
$
|
17,716
|
$
|
17,501
|
|||||
|
State
and municipal
|
50
|
50
|
110
|
112
|
|||||||||
|
Mortgage-backed
|
5,941
|
5,822
|
7,825
|
7,655
|
|||||||||
|
Total
securities held to maturity
|
$
|
24,191
|
$
|
23,873
|
$
|
25,651
|
$
|
25,268
|
|||||
|
Securities
available for sale:
|
|||||||||||||
|
Freddie
Mac stock
|
$
|
67
|
$
|
604
|
$
|
67
|
$
|
576
|
|||||
|
Total
securities available for sale
|
$
|
67
|
$
|
604
|
$
|
67
|
$
|
576
|
|||||
83
Portfolio
Maturities and Yields. The
composition and maturities of the investment securities portfolio and the
mortgage-backed securities portfolio at December 31, 2006 are summarized in
the
following table. Maturities are based on the final contractual payment dates,
and do not reflect the impact of prepayments or early redemptions that may
occur. All of our securities at December 31, 2006 were taxable securities.
Equity securities consisting of Freddie Mac common stock with an amortized
cost
of $67,000 and a fair value of $604,000 have no maturity date. Accordingly,
they
are not included in the table.
|
One
Year or Less
|
More
than One Year
through
Five Years
|
More
than Five Years
through
Ten Years
|
More
than Ten Years
|
Total
Securities
|
||||||||||||||||||||||||||||||
|
Amortized
Cost
|
Weighted
Average Yield
|
Amortized
Cost
|
Weighted
Average Yield
|
Amortized
Cost
|
Weighted
Average Yield
|
Amortized
Cost
|
Weighted
Average Yield
|
Amortized
Cost
|
Fair
Value
|
Weighted
Average Yield
|
||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||
|
Securities
held to maturity:
|
||||||||||||||||||||||||||||||||||
|
U.S.
Government and agency obligations
|
$
|
6,200
|
4.31
|
%
|
$
|
2,000
|
4.93
|
%
|
$
|
5,500
|
4.64
|
%
|
$
|
4,500
|
5.90
|
%
|
$
|
18,200
|
$
|
18,001
|
4.87
|
%
|
||||||||||||
|
State
and municipal
|
—
|
—
|
—
|
—
|
50
|
7.21
|
—
|
—
|
50
|
50
|
7.21
|
|||||||||||||||||||||||
|
Mortgage-backed
|
—
|
—
|
218
|
3.85
|
—
|
—
|
5,723
|
4.30
|
5,941
|
5,822
|
4.28
|
|||||||||||||||||||||||
|
Total
securities held to maturity
|
$
|
6,200
|
4.31
|
$
|
2,218
|
4.82
|
$
|
5,550
|
4.66
|
$
|
10,223
|
5.00
|
$
|
24,191
|
$
|
23,873
|
4.72
|
|||||||||||||||||
84
Sources
of Funds
General.
Deposits
traditionally have been our primary source of funds for our lending and
investment activities. We also borrow, primarily from the Federal Home Loan
Bank
of New York, to supplement cash flow needs, to lengthen the maturities of
liabilities for interest rate risk management purposes and to manage our cost
of
funds. Our additional sources of funds are scheduled loan payments, loan
prepayments, maturing investments, proceeds of loan sales, and retained
earnings.
Deposits.
We
generate deposits primarily from the areas in which our branch offices are
located. We rely on our competitive pricing, convenient locations and customer
service to attract and retain deposits. We offer a variety of deposit accounts
with a range of interest rates and terms. Our deposit accounts consist of
savings accounts, NOW accounts, money market accounts, certificates of deposit
and individual retirement accounts and other qualified plan accounts. We
currently do not accept brokered deposits.
Interest
rates paid, maturity terms, service fees and withdrawal penalties are
established on a periodic basis. Deposit rates and terms are based primarily
on
current operating strategies and market interest rates, liquidity requirements,
interest rates paid by competitors and our deposit growth goals.
At
December 31, 2006, our deposits totaled $108.6 million. Specifically, at
December 31, 2006, NOW accounts totaled $5.0 million, savings accounts totaled
$11.9 million, money market accounts totaled $10.3 million and non-interest
bearing checking accounts totaled $3.3 million. At December 31, 2006,
certificates of deposit, including individual retirement accounts (all of which
were certificate of deposit accounts), totaled $78.1 million, of which $43.7
million had remaining maturities of one year or less. Based on historical
experience and our current pricing strategy, we believe we will retain a large
portion of these accounts upon maturity.
The
following table sets forth the distribution of our average total deposit
accounts, by account type, for the years indicated.
|
For
the Years Ended December 31,
|
|||||||||||||||||||
|
2006
|
2005
|
||||||||||||||||||
|
Average
Balance
|
Percent
|
Weighted
Average
Rate
|
Average
Balance
|
Percent
|
Weighted
Average
Rate
|
||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
Deposit
type:
|
|||||||||||||||||||
|
NOW
|
$
|
3,826
|
3.5
|
%
|
0.52
|
%
|
$
|
3,257
|
3.1
|
%
|
0.49
|
%
|
|||||||
|
Savings
|
12,041
|
11.0
|
0.69
|
13,674
|
13.1
|
0.50
|
|||||||||||||
|
Money
market
|
10,567
|
9.7
|
2.42
|
11,270
|
10.9
|
1.11
|
|||||||||||||
|
Individual
retirement accounts
|
14,900
|
13.6
|
3.89
|
14,297
|
13.8
|
3.55
|
|||||||||||||
|
Certificates
of deposit
|
64,028
|
58.6
|
3.86
|
57,204
|
55.2
|
3.17
|
|||||||||||||
|
Non-interest
bearing demand deposits
|
3,887
|
3.6
|
—
|
4,008
|
3.9
|
—
|
|||||||||||||
|
Total
deposits
|
$
|
109,249
|
100.0
|
%
|
3.12
|
%
|
$
|
103,710
|
100.0
|
%
|
2.44
|
%
|
|||||||
85
As
of
December 31, 2006, the aggregate amount of our outstanding certificates of
deposit, including our individual retirement accounts, in amounts greater than
or equal to $100,000 was approximately $14.3 million. The following table sets
forth the maturity of those certificates as of December 31, 2006.
|
At
December
31, 2006
|
|||||
|
(In
thousands)
|
|||||
|
Three
months or less
|
$
|
1,314
|
|||
|
Over
three months through six months
|
3,290
|
||||
|
Over
six months through one year
|
4,760
|
||||
|
Over
one year to three years
|
3,484
|
||||
|
Over
three years
|
1,495
|
||||
|
Total
|
$
|
14,343
|
|||
The
following table sets forth, by interest rate ranges, information concerning
the
period to maturity of our certificates of deposit, including our individual
retirement accounts.
|
At
December 31, 2006
|
||||||||||||||||||||
|
Period
to Maturity
|
||||||||||||||||||||
|
Less
Than or
Equal
to
One
Year
|
More
Than
One
to
Two
Years
|
More
Than
Two
to Three
Years
|
More
Than
Three
Years
|
Total
|
Percent
of
Total
|
|||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Interest
Rate Range:
|
||||||||||||||||||||
|
2.99%
and below
|
$
|
1,952
|
$
|
663
|
$
|
136
|
$
|
229
|
$
|
2,980
|
3.82
|
%
|
||||||||
|
3.00%
to 3.99%
|
20,429
|
7,982
|
4,546
|
2,005
|
34,962
|
44.80
|
||||||||||||||
|
4.00%
to 4.99%
|
19,302
|
5,016
|
3,188
|
5,354
|
32,860
|
42.10
|
||||||||||||||
|
5.00%
to 5.99%
|
2,061
|
3,758
|
358
|
1,065
|
7,242
|
9.28
|
||||||||||||||
|
Total
|
$
|
43,744
|
$
|
17,419
|
$
|
8,228
|
$
|
8,653
|
$
|
78,044
|
100.00
|
%
|
||||||||
The
following table sets forth our time deposits, including our individual
retirement accounts classified by interest rate range at the dates
indicated.
|
At
December 31,
|
||||||||
|
2006
|
2005
|
|||||||
|
(In
thousands)
|
||||||||
|
Interest
Rate Range:
|
||||||||
|
2.99%
and below
|
$
|
2,980
|
$
|
15,859
|
||||
|
3.00%
to 3.99%
|
34,962
|
52,383
|
||||||
|
4.00%
to 4.99%
|
32,860
|
7,617
|
||||||
|
5.00%
to 5.99%
|
7,242
|
159
|
||||||
|
Total
|
$
|
78,044
|
$
|
76,018
|
||||
Borrowings.
Our
borrowings consist primarily of loans, commonly referred to as “advances,” from
the Federal Home Loan Bank of New York. Our advances carried a weighted average
rate at the end of 2006 of 4.82%. At December 31, 2006, we had the ability
to
borrow approximately $76.3 million under our credit facilities with the Federal
Home Loan Bank of New York of which $28.0 million were advanced. Borrowings
from
the Federal Home Loan Bank of New York are secured by our investment in the
common stock of the Federal Home Loan Bank of New York as well as by a blanket
pledge of our mortgage portfolio not otherwise pledged.
86
Our
short-term borrowings consist of Federal Home Loan Bank advances. The following
table sets forth information concerning balances and interest rates on all
of
our short-term borrowings at and for the periods shown:
|
At
or For the Years Ended
December
31,
|
||||||||
|
2006
|
2005
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
Balance
at end of year
|
$
|
4,200
|
$
|
—
|
||||
|
Average
balance during year
|
$
|
1,017
|
368
|
|||||
|
Maximum
outstanding at any month end
|
$
|
4,200
|
$
|
3,000
|
||||
|
Weighted
average interest rate at end of year
|
5.33
|
%
|
—
|
%
|
||||
|
Average
interest rate during year
|
4.95
|
%
|
2.85
|
%
|
||||
Properties
We
operate from our main office in Fairport, New York which we own, and our two
branch offices, both of which are leased, located in the towns of Penfield
and
Irondequoit. The consolidated net book value of our premises, land and equipment
was $2.1 million at December 31, 2006. The following is a list of our
locations:
|
Fairport
(Main Office)
45
South Main Street
Fairport,
New York 14450
(585)
223-9080
|
Penfield
2163
Rte 250
Fairport,
New York 14450
(585)
377-8970
|
Irondequoit
2118
Hudson Ave.
Irondequoit,
New York 14617
(585)
266-4100
|
Subsidiary
Activities
Oakleaf
Services Corporation, our subsidiary, provides investment advisory services
to
our customers by providing annuities, insurance products and mutual funds.
At
December 31, 2006 we had a $50,000 investment in Oakleaf Services Corporation
and during the year ended December 31, 2006, we derived $160,000 of fee income
from Oakleaf Services Corporation.
Federal
savings banks are required to provide 30 days advance notice to the OTS and
the
FDIC before establishing or acquiring a subsidiary or conducting a new activity
in a subsidiary. The insured savings bank must also provide the FDIC and the
OTS
such information as may be required by applicable regulations and must conduct
the activity in accordance with the rules and orders of the OTS. In addition
to
other enforcement and supervision powers, the OTS may determine after notice
and
opportunity for a hearing that the continuation of a savings bank's ownership
of
or relation to a subsidiary (i) constitutes a serious risk to the safety,
soundness or stability of the savings bank, or (ii) is inconsistent with law
and
regulation. Upon the making of such a determination, the OTS may order the
savings bank to divest the subsidiary or take other actions.
Legal
Proceedings
We
are
periodically involved in various claims and lawsuits that arise incident to
our
financial services business. At December 31, 2006 we were not involved in any
legal proceedings, the outcome of which would be material to our financial
condition or results of operation.
87
Expense
and Tax Allocation
Fairport
Savings Bank has entered into an agreement with FSB Community Bankshares, Inc.
and FSB Community Bankshares, MHC to provide them with certain administrative
support services, whereby Fairport Savings Bank will be compensated at not
less
than the fair market value of the services provided. In addition, Fairport
Savings Bank and FSB Community Bankshares, Inc. have entered into an agreement
to establish a method for allocating and for reimbursing the payment of their
consolidated tax liability.
Personnel
As
of
December 31, 2006, we had 36 full-time employees and three part-time employees.
Our employees are not represented by any collective bargaining group. Management
believes that our relationship with our employees is good.
FEDERAL
AND
STATE TAXATION
Federal
Taxation
General.
FSB
Community Bankshares, Inc. and Fairport Savings Bank are subject to federal
income taxation in the same general manner as other corporations, with some
exceptions discussed below. Currently, FSB Community Bankshares, Inc. and
Fairport Savings Bank are included as part of FSB Community Bankshares,
MHC’s
consolidated tax group. However, upon completion of the stock offering, FSB
Community Bankshares, Inc. and Fairport Savings Bank will no longer be part
of
FSB Community Bankshares, MHC’s consolidated tax group since FSB Community
Bankshares, MHC will no longer own at least 80% of the common stock of FSB
Community Bankshares, Inc. Following the stock offering, FSB Community
Bankshares, Inc. intends to file consolidated tax returns with Fairport Savings
Bank, its wholly owned subsidiary. Our consolidated federal tax returns are
not
currently under audit and have not been audited during the past five
years.
The
following discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters and is not a comprehensive description
of
the tax rules applicable to FSB Community Bankshares, MHC,
FSB
Community Bankshares, Inc. or Fairport Savings Bank.
Method
of Accounting.
For
federal income tax purposes, FSB Community Bankshares, MHC currently reports
its
income and expenses on the accrual method of accounting and uses a tax year
ending December 31 for filing its federal and state income tax returns.
Bad
Debt Reserves.
Historically,
Fairport Savings Bank was subject to special provisions in the tax law
applicable to qualifying savings associations regarding allowable tax bad debt
deductions and related reserves. Tax law changes were enacted in 1996 that
eliminated the ability of savings associations to use the percentage of taxable
income method for computing tax bad debt reserves for tax years after 1995,
and
required recapture into taxable income over a six-year period of all bad debt
reserves accumulated after a savings association’s last tax year beginning
before January 1, 1988. At December 31, 2006, Fairport Savings Bank had
recaptured all amounts that resulted from these changes in the tax
law.
88
Currently,
the FSB Community Bankshares, MHC consolidated group uses the specific charge
off method to account for bad debt deductions for income tax purposes, and
FSB
Community Bankshares, Inc. intends to use the specific chargeoff method to
account for tax bad debt deductions in the future.
Taxable
Distributions and Bad Debt Recapture.
Prior
to
1996, bad debt reserves created prior to 1988 were subject to recapture into
taxable income if Fairport Savings Bank failed to meet certain thrift asset
and
definitional tests or made certain distributions. Tax law changes in 1996
eliminated thrift-related recapture rules. However, under current law, pre-1988
tax bad debt reserves remain subject to recapture if Fairport Savings Bank
makes
certain non-dividend distributions, repurchases any of its common stock, pays
dividends in excess of earnings and profits, or fails to qualify as a bank
for
tax purposes.
At
December 31, 2006, the total federal pre-base year bad debt reserve of Fairport
Savings Bank was approximately $1.5 million.
Alternative
Minimum Tax.
The
Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax
at
a rate of 20% on a base of regular taxable income plus certain tax preferences,
less any available exemption. The alternative minimum tax is imposed to the
extent it exceeds the regular income tax. Net operating losses can offset no
more than 90% of alternative taxable income. Certain payments of alternative
minimum tax may be used as credits against regular tax liabilities in future
years. FSB Community Bankshares, MHC’s consolidated group has not been subject
to the alternative minimum tax and has no such amounts available as credits
for
carryover.
Net
Operating Loss Carryovers.
A
financial institution may carry back net operating losses to the preceding
two
taxable years and forward to the succeeding 20 taxable years. At December 31,
2006, FSB Community Bankshares, MHC’s consolidated group had no net operating
loss carryforwards for federal income tax purposes.
Corporate
Dividends-Received Deduction.
FSB
Community Bankshares, Inc. may exclude from its federal taxable income 100%
of
dividends received from Fairport Savings Bank as a wholly-owned subsidiary.
The
corporate dividends-received deduction is 80% when the corporation receiving
the
dividend owns at least 20% of the stock of the distributing corporation. The
dividends-received deduction is 70% when the corporation receiving the dividend
owns less than 20% of the distributing corporation.
State
Taxation
FSB
Community Bankshares, Inc. and Fairport Savings Bank report income on a calendar
year basis to New York State. New York State franchise tax on corporations
is
imposed in an amount equal to the greater of (a) 7.5% of “entire net income”
allocable to New York State, (b) 3% of “alternative entire net income” allocable
to New York State, (c) 0.01 % of the average value of assets allocable to New
York State, or (d) nominal minimum tax. Entire net income is based on Federal
taxable income, subject to certain modifications. Alternative entire net income
is equal to entire net income without certain modifications
89
SUPERVISION
AND
REGULATION
General
Fairport
Savings Bank is examined and supervised by the Office of Thrift Supervision
and
is subject to examination by the Federal Deposit Insurance Corporation. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution may engage and is intended primarily for the protection
of the Federal Deposit Insurance Corporation’s deposit insurance funds and
depositors. Under this system of federal regulation, financial institutions
are
periodically examined to ensure that they satisfy applicable standards with
respect to their capital adequacy, assets, management, earnings, liquidity
and
sensitivity to market interest rates. Following completion of its examination,
the federal agency critiques the institution’s operations and assigns its rating
(known as an institution’s CAMELS rating). Under federal law, an institution may
not disclose its CAMELS rating to the public. Fairport Savings Bank also is
a
member of and owns stock in the Federal Home Loan Bank of New York, which is
one
of the twelve regional banks in the Federal Home Loan Bank System. Fairport
Savings Bank also is regulated to a lesser extent by the Board of Governors
of
the Federal Reserve System, governing reserves to be maintained against deposits
and other matters. The Office of Thrift Supervision will examine Fairport
Savings Bank and prepare reports for the consideration of its board of directors
on any operating deficiencies. Fairport Savings Bank’s relationship with its
depositors and borrowers also is regulated to a great extent by federal law
and,
to a much lesser extent, state law, especially in matters concerning the
ownership of deposit accounts and the form and content of Fairport Savings
Bank’s mortgage documents.
Any
change in these laws or regulations, whether by the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision or Congress, could have a material
adverse impact on FSB Community Bankshares, Inc., Fairport Savings Bank and
their operations.
FSB
Community Bankshares, Inc. and FSB Community Bankshares, MHC, as savings and
loan holding companies, are required to file certain reports with, are subject
to examination by, and otherwise must comply with the rules and regulations
of
the Office of Thrift Supervision. Upon completion of the stock offering, FSB
Community Bankshares, Inc. will also be subject to the rules and regulations
of
the Securities and Exchange Commission under the federal securities laws.
Certain
of the regulatory requirements that are or will be applicable to Fairport
Savings Bank, FSB Community Bankshares, Inc. and FSB Community Bankshares,
MHC
are described below. This description of statutes and regulations is not
intended to be a complete explanation of such statutes and regulations and
their
effects on Fairport Savings Bank, FSB Community Bankshares, Inc. and FSB
Community Bankshares, MHC and is qualified in its entirety by reference to
the
actual statutes and regulations.
90
Federal
Banking Regulation
Business
Activities. A
federal
savings bank derives its lending and investment powers from the Home Owners’
Loan Act, as amended, and the regulations of the Office of Thrift Supervision.
Under these laws and regulations, Fairport Savings Bank may invest in: mortgage
loans secured by residential real estate without limitation as a percentage
of
assets; non-residential real estate loans up to 400% of capital in the
aggregate; commercial business loans up to 20% of assets in the aggregate;
consumer loans up to 35% of assets in the aggregate; and certain types of debt
securities and certain other assets. Fairport Savings Bank also may establish
subsidiaries that may engage in activities not otherwise permissible for
Fairport Savings Bank, including real estate investment and securities and
insurance brokerage.
Capital
Requirements.
Office
of Thrift Supervision regulations require savings associations to meet three
minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio
(3% for savings associations receiving the highest rating on the CAMELS rating
system) and an 8% risk-based capital ratio.
The
risk-based capital standard for savings associations requires the maintenance
of
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision, based on
the
risks believed inherent in the type of asset. Core capital is defined as common
shareholders’ equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
Additionally, a savings association that retains credit risk in connection
with
an asset sale may be required to maintain additional regulatory capital because
of the recourse back to the savings association. Fairport Savings Bank does
not
typically engage in asset sales.
91
The
following table shows Fairport Savings Bank’s Core capital, Tier-1 risk based
capital and Total Risk Based Capital ratios on a historical and pro forma basis
at December 31, 2006.
|
As
of December 31, 2006
|
|||||||||||||||||||
|
Historical
Capital
|
Percent
of
Assets(1)
|
Pro
Forma
Capital(2)
|
Percent
of
Assets(1)
|
Pro
Forma
Capital
Requirements
|
Percent
of
Assets(1)
|
||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
Tangible
capital
|
$
|
13,515
|
8.88
|
%
|
$
|
17,199
|
10.98
|
%
|
$
|
2,350
|
1.50
|
%
|
|||||||
|
Core
capital
|
13,515
|
8.88
|
17,199
|
10.98
|
6,266
|
4.00
|
|||||||||||||
|
Tier 1
risk-based capital
|
13,515
|
18.94
|
17,199
|
23.81
|
2,890
|
4.00
|
|||||||||||||
|
Total
risk-based capital
|
13,837
|
19.40
|
17,521
|
24.25
|
5,779
|
8.00
|
|||||||||||||
|
(1)
|
Tangible
capital levels are shown as a percentage of tangible assets. Core
capital
levels are shown as a percentage of total adjusted assets. Total
risk-based capital levels are shown as a percentage of risk-weighted
assets.
|
|
(2)
|
Assumes
the sale of 987,000 shares of common stock in the stock
offering.
|
As
the
table shows, at December 31, 2006, Fairport Savings Bank’s capital exceeded all
applicable requirements.
Loans-to-One
Borrower.
Generally, a federal savings association may not make a loan or extend credit
to
a single or related group of borrowers in excess of 15% of unimpaired capital
and surplus. An additional amount may be loaned, equal to 10% of unimpaired
capital and surplus, if the loan is secured by readily marketable collateral,
which generally does not include real estate. As of December 31, 2006, Fairport
Savings Bank’s largest lending relationship with a single or related group of
borrowers was a residential mortgage loan totaling $987,000, which represented
7.12% of unimpaired capital and surplus, and therefore, Fairport Savings Bank
was in compliance with the loans-to-one borrower limitations.
Qualified
Thrift Lender Test. As
a
federal savings association, Fairport Savings Bank must satisfy the qualified
thrift lender, or “QTL,” test. Under the QTL test, Fairport Savings Bank must
maintain at least 65% of its “portfolio assets” in “qualified thrift
investments” (primarily residential mortgages and related investments, including
mortgage-backed securities) in at least nine months of the most recent 12-month
period. “Portfolio assets” generally means total assets of a savings
institution, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the
conduct of the savings association’s business.
Fairport
Savings Bank also may satisfy the QTL test by qualifying as a “domestic building
and loan association” as defined in the Internal Revenue Code.
A
savings
association that fails the qualified thrift lender test must either convert
to a
bank charter or operate under specified restrictions. At December 31, 2006,
Fairport Savings Bank maintained approximately 96.48% of its portfolio assets
in
qualified thrift investments, and therefore satisfied the QTL test.
Capital
Distributions. Office
of
Thrift Supervision regulations govern capital distributions by a federal savings
association, which include cash dividends, stock repurchases and other
transactions charged to the capital account. A savings association must file
an
application for approval of a capital distribution if:
|
·
|
the
total capital distributions for the applicable calendar year exceed
the
sum of the savings association’s net income for that year to date plus the
savings association’s retained net income for the preceding two years;
|
92
|
·
|
the
savings association would not be at least adequately capitalized
following
the distribution;
|
|
·
|
the
distribution would violate any applicable statute, regulation, agreement
or Office of Thrift Supervision-imposed condition; or
|
|
·
|
the
savings association is not eligible for expedited treatment of its
filings.
|
Even
if
an application is not otherwise required, every savings association that is
a
subsidiary of a holding company must still file a notice with the Office of
Thrift Supervision at least 30 days before the board of directors declares
a
dividend or approves a capital distribution.
The
Office of Thrift Supervision may disapprove a notice or application
if:
|
·
|
the
savings association would be undercapitalized following the
distribution;
|
|
·
|
the
proposed capital distribution raises safety and soundness concerns;
or
|
|
·
|
the
capital distribution would violate a prohibition contained in any
statute,
regulation or agreement.
|
In
addition, the Federal Deposit Insurance Act provides that an insured depository
institution shall not make any capital distribution, if after making such
distribution the institution would be undercapitalized.
Liquidity.
A
federal savings association is required to maintain a sufficient amount of
liquid assets to ensure its safe and sound operation. We seek to maintain a
ratio of 4.0% or greater of liquid assets to total assets. For the year ended
December 31, 2006, our liquidity ratio averaged 3.54% due to significantly
above-average loan demand and originations. We believe that we have enough
sources of liquidity to satisfy our short- and long-term liquidity needs as
of
December 31, 2006. We anticipate that we will maintain higher liquidity levels
following the completion of the stock offering.
Community
Reinvestment Act and Fair Lending Laws.
All
savings associations have a responsibility under the Community Reinvestment
Act
and related regulations of the Office of Thrift Supervision to help meet the
credit needs of their communities, including low- and moderate-income
neighborhoods. In connection with its examination of a federal savings
association, the Office of Thrift Supervision is required to assess the savings
association’s record of compliance with the Community Reinvestment Act. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. A savings association’s failure to
comply with the provisions of the Community Reinvestment Act could, at a
minimum, result in denial of certain corporate applications such as branches
or
mergers, or in restrictions on its activities. The failure to comply with the
Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions by the Office of Thrift Supervision, as well as other
federal regulatory agencies and the Department of Justice. Fairport Savings
Bank
received a satisfactory Community Reinvestment Act rating in its most recent
federal examination.
93
Transactions
with Related Parties.
A
federal savings association’s authority to engage in transactions with its
affiliates is limited by Office of Thrift Supervision regulations and by
Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation
W. An affiliate is a company that controls, is controlled by, or is under common
control with an insured depository institution such as Fairport Savings Bank.
FSB Community Bankshares, Inc. is an affiliate of Fairport Savings Bank. In
general, loan transactions between an insured depository institution and its
affiliates are subject to certain quantitative and collateral requirements.
In
this regard, transactions between an insured depository institution and its
affiliates are limited to 10% of the institution’s unimpaired capital and
unimpaired surplus for transactions with any one affiliate and 20% of unimpaired
capital and unimpaired surplus for transactions in the aggregate with all
affiliates. Collateral in specified amounts ranging from 100% to 130% of the
amount of the transaction must usually be provided by affiliates in order to
receive loans from the savings association. In addition, Office of Thrift
Supervision regulations prohibit a savings association from lending to any
of
its affiliates that are engaged in activities that are not permissible for
bank
holding companies and from purchasing the securities of any affiliate, other
than a subsidiary. Finally, transactions with affiliates must be consistent
with
safe and sound banking practices, not involve low-quality assets and be on
terms
that are as favorable to the institution as comparable transactions with
non-affiliates. The Office of Thrift Supervision requires savings associations
to maintain detailed records of all transactions with affiliates.
Fairport
Savings Bank’s authority to extend credit to its directors, executive officers
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the
Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other
things, these provisions require that extensions of credit to
insiders:
|
(i)
|
be
made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing
for comparable transactions with unaffiliated persons and that do
not
involve more than the normal risk of repayment or present other
unfavorable features, and
|
|
(ii)
|
not
exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based,
in
part, on the amount of Fairport Savings Bank’s
capital.
|
In
addition, extensions of credit in excess of certain limits must be approved
by
Fairport Savings Bank’s board of directors.
Enforcement.
The
Office of Thrift Supervision has primary enforcement responsibility over federal
savings institutions and has the authority to bring enforcement action against
all “institution-affiliated parties,” including shareholders, and attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action by the Office of Thrift Supervision may range from the
issuance of a capital directive or cease and desist order, to removal of
officers and/or directors of the institution and the appointment of a receiver
or conservator. Civil penalties cover a wide range of violations and actions,
and range up to $25,000 per day, unless a finding of reckless disregard is
made,
in which case penalties may be as high as $1 million per day. The Federal
Deposit Insurance Corporation also has the authority to terminate deposit
insurance or to recommend to the Director of the Office of Thrift Supervision
that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the Federal Deposit
Insurance Corporation has authority to take action under specified
circumstances.
94
Standards
for Safety and Soundness.
Federal
law requires each federal banking agency to prescribe certain standards for
all
insured depository institutions. These standards relate to, among other things,
internal controls, information systems and audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth, compensation,
and other operational and managerial standards as the agency deems appropriate.
The federal banking agencies adopted Interagency Guidelines Prescribing
Standards for Safety and Soundness to implement the safety and soundness
standards required under federal law. The guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution
to
submit a compliance plan.
Prompt
Corrective Action Regulations.
Under
the prompt corrective action regulations, the Office of Thrift Supervision
is
required and authorized to take supervisory actions against undercapitalized
savings associations. For this purpose, a savings association is placed in
one
of the following five categories based on the savings association’s
capital:
|
·
|
well-capitalized
(at least 5% leverage capital, 6% Tier 1 risk-based capital and 10%
total risk-based capital);
|
|
·
|
adequately
capitalized (at least 4% leverage capital, 4% Tier 1 risk-based
capital and 8% total risk-based capital);
|
|
·
|
undercapitalized
(less than 8% total risk-based capital, 4% Tier 1 risk-based capital
or 3% leverage capital);
|
|
·
|
significantly
undercapitalized (less than 6% total risk-based capital, 3% Tier 1
risk-based capital or 3% leverage capital);
and
|
|
·
|
critically
undercapitalized (less than 2% tangible
capital).
|
Generally,
the banking regulator is required to appoint a receiver or conservator for
a
savings association that is “critically undercapitalized” within specific time
frames. The regulations also provide that a capital restoration plan must be
filed with the Office of Thrift Supervision within 45 days of the date a savings
association receives notice that it is “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” The criteria for an
acceptable capital restoration plan include, among other things, the
establishment of the methodology and assumptions for attaining adequately
capitalized status on an annual basis, procedures for ensuring compliance with
restrictions imposed by applicable federal regulations, the identification
of
the types and levels of activities the savings association will engage in while
the capital restoration plan is in effect, and assurances that the capital
restoration plan will not appreciably increase the current risk profile of
the
savings association. Any holding company for the savings association required
to
submit a capital restoration plan must guarantee the lesser of an amount equal
to 5% of the savings association’s assets at the time it was notified or deemed
to be under capitalized by the Office of Thrift Supervision, or the amount
necessary to restore the savings association to adequately capitalized status.
This guarantee remains in place until the Office of Thrift Supervision notifies
the savings association that it has maintained adequately capitalized status
for
each of four consecutive calendar quarters, and the Office of Thrift Supervision
has the authority to requirement payment and collect payment under the
guarantee. Failure by a holding company to provide the required guarantee will
result in certain operating restrictions on the savings association, such as
restrictions on the ability to declare and pay dividends, pay executive
compensation and management fees, and increase assets or expand operations.
The
Office of Thrift Supervision may also take any one of a number of discretionary
supervisory actions against undercapitalized associations, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
95
At
December 31, 2006, Fairport Savings Bank met the criteria for being considered
“well-capitalized.”
Insurance
of Deposit Accounts. Deposit
accounts in Fairport Savings Bank are insured by the Federal Deposit Insurance
Corporation, generally up to a maximum of $100,000 per separately insured
depositor and up to a maximum of $250,000 for self-directed retirement accounts.
Fairport Savings Bank’s deposits, therefore, are subject to Federal Deposit
Insurance Corporation deposit insurance assessments.
On
February 15, 2006, federal legislation was enacted to require, among other
things, that the Federal Deposit Insurance Corporation adopt regulations
increasing the maximum amount of federal deposit insurance coverage per
separately insured depositor beginning in 2010 (with a cost of living adjustment
to become effective in five years) and modifying the deposit insurance fund’s
reserve ratio for a range between 1.15% and 1.50% of estimated insured
deposits.
The
Federal Deposit Insurance Corporation has adopted final regulations establishing
a risk-based assessment system that will enable the Federal Deposit Insurance
Corporation to more closely tie each financial institution’s premiums to the
risk it poses to the deposit insurance fund. Under the new risk-based assessment
system, the Federal Deposit Insurance Corporation is required to evaluate the
risk of each financial institution based on three primary sources of
information: (1) its supervisory rating, (2) its financial ratios, and (3)
its
long-term debt issuer rating, if the institution has one. The new rates for
nearly all of the financial institutions industry will vary between five and
seven cents for every $100 of domestic deposits. At the same time, the Federal
Deposit Insurance Corporation also adopted final regulations designating the
reserve ratio for the deposit insurance fund during 2007 at 1.25% of estimated
insured deposits.
Effective
March 31, 2006, the Federal Deposit Insurance Corporation merged the Bank
Insurance Fund and the Savings Association Insurance Fund into a single
insurance fund called the Deposit Insurance Fund. The merger of the two separate
insurance funds did not affect the authority of the Financing Corporation,
a
mix-ownership government corporation, to impose and collect, with approval
of
the Federal Deposit Insurance Corporation, assessments for anticipated payments,
insurance costs and custodial fees on bonds issued by the Financing Corporation
in the 1980s to recapitalize the Federal Savings and Loan Insurance Corporation.
The bonds issued by the Financing Corporation are due to mature in 2017 through
2019. For the quarter ended December 31, 2006, the Financing Corporation
assessment was equal to 1.24 basis points for each $100 of domestic deposits
maintained at an institution.
96
Prohibitions
Against Tying Arrangements.
Federal
savings associations are prohibited, subject to some exceptions, from extending
credit to or offering any other service, or fixing or varying the consideration
for such extension of credit or service, on the condition that the customer
obtain some additional service from the institution or its affiliates or not
obtain services of a competitor of the institution.
Federal
Home Loan Bank System.
Fairport
Savings Bank is a member of the Federal Home Loan Bank System, which consists
of
12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides
a central credit facility primarily for member institutions. As a member of
the
Federal Home Loan Bank of New York, Fairport Savings Bank is required to acquire
and hold shares of capital stock in the Federal Home Loan Bank in an amount
at
least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, 1/20
of
its borrowings from the Federal Home Loan Bank, or 0.3% of assets, whichever
is
greater. As of December 31, 2006, Fairport Savings Bank was in compliance with
this requirement.
Other
Regulations
Interest
and other charges collected or contracted for by Fairport Savings Bank are
subject to state usury laws and federal laws concerning interest rates. Fairport
Savings Bank’s operations are also subject to federal laws applicable to credit
transactions, such as the:
|
·
|
Truth-In-Lending
Act, governing disclosures of credit terms to consumer
borrowers;
|
|
·
|
Home
Mortgage Disclosure Act of 1975, requiring financial institutions
to
provide information to enable the public and public officials to
determine
whether a financial institution is fulfilling its obligation to help
meet
the housing needs of the community it
serves;
|
|
·
|
Equal
Credit Opportunity Act, prohibiting discrimination on the basis of
race,
creed or other prohibited factors in extending
credit;
|
|
·
|
Fair
Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting
agencies;
|
|
·
|
Fair
Debt Collection Act, governing the manner in which consumer debts
may be
collected by collection agencies;
and
|
97
|
·
|
rules
and regulations of the various federal agencies charged with the
responsibility of implementing such federal
laws.
|
The
operations of Fairport Savings Bank also are subject to the:
|
·
|
Right
to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying
with
administrative subpoenas of financial
records;
|
|
·
|
Electronic
Funds Transfer Act and Regulation E promulgated thereunder, which
govern
automatic deposits to and withdrawals from deposit accounts and customers’
rights and liabilities arising from the use of automated teller machines
and other electronic banking
services;
|
|
·
|
Title
III of The Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred
to as the “USA PATRIOT Act”), which significantly expanded the
responsibilities of financial institutions, including savings and
loan
associations, in preventing the use of our financial system to fund
terrorist activities. Among other provisions, the USA PATRIOT Act
and the
related regulations of the Office of Thrift Supervision require savings
associations operating in the United States to develop new anti-money
laundering compliance programs, due diligence policies and controls
to
ensure the detection and reporting of money laundering. Such required
compliance programs are intended to supplement existing compliance
requirements, also applicable to financial institutions, under the
Bank
Secrecy Act and the Office of Foreign Assets Control Regulations;
and
|
|
·
|
The
Gramm-Leach-Bliley Act, which placed limitations on the sharing of
consumer financial information by financial institutions with unaffiliated
third parties. Specifically, the Gramm-Leach-Bliley Act requires
all
financial institutions offering financial products or services to
retail
customers to provide such customers with the financial institution’s
privacy policy and provide such customers the opportunity to “opt out” of
the sharing of certain personal financial information with unaffiliated
third parties.
|
Holding
Company Regulation
General.
FSB
Community Bankshares, MHC and FSB Community Bankshares, Inc. are non-diversified
savings and loan holding companies within the meaning of the Home Owners’ Loan
Act. As such, FSB Community Bankshares, MHC and FSB Community Bankshares, Inc.
are registered with the Office of Thrift Supervision and subject to Office
of
Thrift Supervision regulations, examinations, supervision and reporting
requirements. In addition, the Office of Thrift Supervision has enforcement
authority over FSB Community Bankshares, Inc. and FSB Community Bankshares,
MHC,
and their subsidiaries. Among other things, this authority permits the Office
of
Thrift Supervision to restrict or prohibit activities that are determined to
be
a serious risk to the subsidiary savings institution. As federal corporations,
FSB Community Bankshares, Inc. and FSB Community Bankshares, MHC are generally
not subject to state business organization laws.
98
Permitted
Activities.
Pursuant to Section 10(o) of the Home Owners’ Loan Act and Office of Thrift
Supervision regulations and policy, a mutual holding company and a federally
chartered mid-tier holding company such as FSB Community Bankshares, Inc. may
engage in the following activities: (i) investing in the stock of a savings
bank; (ii) acquiring a mutual association through the merger of such association
into a savings bank subsidiary of such holding company or an interim savings
bank subsidiary of such holding company; (iii) merging with or acquiring another
holding company, one of whose subsidiaries is a savings bank; (iv) investing
in
a corporation, the capital stock of which is available for purchase by a savings
bank under federal law or under the law of any state where the subsidiary
savings bank or associations share their home offices; (v) furnishing or
performing management services for a savings bank subsidiary of such company;
(vi) holding, managing or liquidating assets owned or acquired from a savings
subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings bank subsidiary of such company; (viii) acting as trustee
under deeds of trust; (ix) any other activity: (a) that the Federal Reserve
Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956, unless
the
Director, by regulation, prohibits or limits any such activity for savings
and
loan holding companies; or (b) in which multiple savings and loan holding
companies were authorized (by regulation) to directly engage on March 5, 1987;
(x) any activity permissible for financial holding companies under Section
4(k)
of the Bank Holding Company Act, including securities and insurance
underwriting; and (xi) purchasing, holding, or disposing of stock acquired
in
connection with a qualified stock issuance if the purchase of such stock by
such
savings and loan holding company is approved by the Director. If a mutual
holding company acquires or merges with another holding company, the holding
company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed in (i)
through (x) above, and has a period of two years to cease any nonconforming
activities and divest any nonconforming investments.
The
Home
Owners’ Loan Act prohibits a savings and loan holding company, including FSB
Community Bankshares, Inc. and FSB Community Bankshares, MHC, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of
another savings institution or holding company thereof, without prior written
approval of the Office of Thrift Supervision. It also prohibits the acquisition
or retention of, with certain exceptions, more than 5% of a nonsubsidiary
company engaged in activities other than those permitted by the Home Owners’
Loan Act, or acquiring or retaining control of an institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings institutions, the Office of Thrift Supervision must consider the
financial and managerial resources, future prospects of the company and
institution involved, the effect of the acquisition on the risk to the federal
deposit insurance fund, the convenience and needs of the community and
competitive factors.
99
The
Office of Thrift Supervision is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions:
| (i) |
the
approval of interstate supervisory acquisitions by savings and loan
holding companies; and
|
| (ii) |
the
acquisition of a savings institution in another state if the laws
of the
state of the target savings institution specifically permit such
acquisitions.
|
The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Waivers
of Dividends by FSB Community Bankshares, MHC.
Office
of Thrift Supervision regulations require FSB Community Bankshares, MHC to
notify the Office of Thrift Supervision of any proposed waiver of its receipt
of
dividends from FSB Community Bankshares, Inc. The Office of Thrift Supervision
reviews dividend waiver notices on a case-by-case basis, and, in general, does
not object to any such waiver if:
| (i) |
the
waiver would not be detrimental to the safe and sound operation of
the
subsidiary savings association; and
|
| (ii) |
the
mutual holding company’s board of directors determines that such waiver is
consistent with such directors’ fiduciary duties to the mutual holding
company’s members.
|
We
anticipate that FSB Community Bankshares, MHC will waive any dividends paid
by
FSB Community Bankshares, Inc. Under Office of Thrift Supervision regulations,
our public shareholders would not be diluted because of any dividends waived
by
FSB Community Bankshares, MHC (and waived dividends would not be considered
in
determining an appropriate exchange ratio) in the event FSB Community
Bankshares, MHC converts to stock form.
Conversion
of FSB Community Bankshares, MHC to Stock Form.
Office
of Thrift Supervision regulations permit FSB Community Bankshares, MHC to
convert from the mutual form of organization to the capital stock form of
organization. There can be no assurance when, if ever, a conversion transaction
would occur, and the board of directors has no current intention or plan to
undertake a conversion transaction. In a conversion transaction a new stock
holding company would be formed as the successor to FSB Community Bankshares,
Inc., FSB Community Bankshares, MHC’s corporate existence would end, and certain
depositors and borrowers of Fairport Savings Bank would receive the right to
subscribe for additional shares of the new holding company. In a conversion
transaction, each share of common stock held by shareholders other than FSB
Community Bankshares, MHC would be automatically converted into a number of
shares of common stock of the new holding company determined pursuant an
exchange ratio that ensures that shareholders other than FSB Community
Bankshares, MHC own the same percentage of common stock in the new holding
company as they owned in FSB Community Bankshares, Inc. immediately prior to
the
conversion transaction, subject to adjustment for any assets held by FSB
Community Bankshares, MHC.
100
Federal
Securities Laws
We
have
filed with the Securities and Exchange Commission a registration statement
under
the Securities Act of 1933 for the registration of the shares of common stock
to
be issued pursuant to the stock offering. Upon completion of the stock offering,
our common stock will be registered with the Securities and Exchange Commission
under the Securities Exchange Act of 1934. We will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934.
The
registration under the Securities Act of 1933 of shares of common stock to
be
issued in the stock offering does not cover the resale of those shares. Shares
of common stock purchased by persons who are not our affiliates may be resold
without registration. Shares purchased by our affiliates will be subject to
the
resale restrictions of Rule 144 under the Securities Act of 1933. If we meet
the
current public information requirements of Rule 144 under the Securities Act
of
1933, each affiliate of ours that complies with the other conditions of Rule
144, including those that require the affiliate’s sale to be aggregated with
those of other persons, would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period,
the
greater of 1% of our outstanding shares, or the average weekly volume of trading
in the shares during the preceding four calendar weeks. In the future, we may
permit affiliates to have their shares registered for sale under the Securities
Act of 1933.
Sarbanes-Oxley
Act
The
Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing
and accounting, executive compensation, and enhanced and timely disclosure
of
corporate information. As directed by the Sarbanes-Oxley Act, our Chief
Executive Officer and Chief Financial Officer each will be required to certify
that our quarterly and annual reports do not contain any untrue statement of
a
material fact. The rules adopted by the Securities and Exchange Commission
under
the Sarbanes-Oxley Act have several requirements, including having these
officers certify that: they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of our internal control over financial
reporting; they have made certain disclosures to our auditors and the audit
committee of the board of directors about our internal control over financial
reporting; and they have included information in our quarterly and annual
reports about their evaluation and whether there have been changes in our
internal control over financial reporting or in other factors that could
materially affect internal control over financial reporting. We will prepare
policies, procedures and systems designed to ensure compliance with these
regulations.
101
Shared
Management Structure
The
directors of FSB Community Bankshares, Inc. are those same persons who are
the
directors of Fairport Savings Bank. In addition, each executive officer of
FSB
Community Bankshares, Inc. is also an executive officer of Fairport Savings
Bank. We expect that FSB Community Bankshares, Inc. and Fairport Savings Bank
will continue to have common executive officers until there is a business reason
to establish separate management structures. To date, directors and executive
officers have been compensated for their services only to Fairport Savings
Bank.
In the future, directors and executive officers could receive additional
compensation for their services to FSB Community Bankshares, Inc.
Directors
of FSB Community Bankshares, Inc. and Fairport Savings
Bank
The
boards of directors of FSB Community Bankshares, Inc. and Fairport Savings
Bank
each currently consist of nine members. Directors serve three-year staggered
terms so that approximately one-third of the directors are elected at each
annual meeting of shareholders. The table below sets forth information regarding
the current members of the boards of directors, including the term of office
for
each board member.
|
Directors
|
Age (1)
|
Position
|
Director
Since
|
Term
Expires
|
||||
|
D.
Lawrence Keef
|
74
|
Director
|
1997
|
2008
|
||||
|
Gary
Lindsay
|
64
|
Director
|
2007
|
2008
|
||||
|
Terence
O’Neil
|
64
|
Vice
Chairman of the Board
|
1998
|
2008
|
||||
|
Lowell
T. Twitchell
|
64
|
Director
|
1984
|
2008
|
||||
|
Thomas
J. Hanss
|
67
|
Chairman
of the Board
|
1999
|
2009
|
||||
|
James
E. Smith
|
60
|
Director
|
1991
|
2009
|
||||
|
Dana
C. Gavenda
|
55
|
President,
Chief Executive Officer and Director
|
2002
|
2010
|
||||
|
Robert
W. Sturn
|
64
|
Director
|
2000
|
2010
|
||||
|
Charis
W. Warshof
|
57
|
Director
|
2002
|
2010
|
| (1) |
As
of December 31, 2006.
|
Board
Independence
The
Board
of Directors has determined that each of our directors, with the exception
of
Messrs. Gavenda and Sturn, is “independent” as defined in the listing standards
of the Nasdaq Stock Market. Mr. Gavenda is not independent because he is one
of
our executive officers, and Mr. Sturn is not independent because until July
2004
he served as one of our executive officers.
The
Business Background of Our Directors
The
business experience for the past five years of each of our directors is set
forth below. Unless otherwise indicated, directors have held their positions
for
the past five years.
D.
Lawrence Keef
is
retired. Prior to his retirement in 1994, Mr. Keef had a 30 year career in
banking, with a primary emphasis on commercial real estate lending.
102
Gary
Lindsay
is a
practicing certified public accountant. Prior to founding his accounting
practice in 1991, from 1974 until 1991, Mr. Lindsay was a tax partner with
KPMG,
LLP.
Terence
O’Neil is
retired. Prior to his retirement in 2005, since 1980 Mr. O’Neil was the owner
and President of Green Lantern Inn, a restaurant located in Fairport, New
York.
Thomas
J. Hanss is
retired. Prior to his retirement in 1994, from 1982 until 1986, Mr. Hanss was
chief financial officer of a banking subsidiary of Manufacturers Hanover. Mr.
Hanss is a licensed certified public accountant in the State of New York.
Lowell
T. Twitchell is
retired. Prior to his retirement in 2001, from 1979 until 2001 Mr. Twitchell
served as President of Fairport Savings Bank.
James
E. Smith
is the
Supervisor of the Town of Perinton, New York, an elected office that he has
held
since 1984.
Dana
C. Gavenda has
been
our President and Chief Executive Officer since December 2001. Mr. Gavenda
has
been in banking since the inception of his career in 1973.
Robert
W. Sturn is
retired. Prior to his retirement in July 2004, from 1994 until 2004, Mr. Sturn
was Executive Vice President of Fairport Savings Bank in which role he managed
Fairport Savings Bank’s mortgage operations.
Charis
W. Warshof is
Vice
President, Investors Relations with Home Properties, Inc., a real estate
investment trust located in Rochester, New York, a position she has held since
2001.
Meetings
and Committees of the Boards of Directors
We
conduct business through meetings of our board of directors and its committees.
During the year ended December 31, 2006, the board of directors of FSB Community
Bankshares, Inc. met four times and the board of directors of Fairport Savings
Bank met 13 times. The board of directors has established the following
committees: the Audit Committee; the Compensation/Benefits/Marketing Committee;
the Nominating Committee; and the ALCO Committee.
The
Audit
Committee consists of Messrs. Hanss (chair), O’Neill, Twitchell and Lindsay.
This committee is responsible for providing oversight relating to our financial
statements and financial reporting process, systems of internal accounting
and
financial controls, internal audit function, annual independent audit and the
compliance and ethics programs established by management and the board. Each
member of the Audit Committee is independent in accordance with the listing
standards of the Nasdaq Stock Market and also under the applicable federal
securities laws. The Audit Committee met four times during the year ended
December 31, 2006.
The
Compensation/Benefits/Marketing Committee consists of Messrs. Sturn (Chair),
Warshof and Smith. This committee is responsible for executive officer and
director compensation and benefits. Mr. Sturn is not currently considered
independent under the listing standards of the Nasdaq Stock Market. Following
completion of the offering, it is expected that the
Compensation/Benefits/Marketing Committee will consist only of directors who
are
deemed to be independent in accordance with the listing standards of the Nasdaq
Stock Market. The
Compensation/Benefits/Marketing Committee met five times during the year ended
December 31, 2006.
103
The
Nominating Committee consists of Messrs. Hanss (chair), Smith and Keef, each
of
whom is independent in accordance with the listing standards of the Nasdaq
Stock
Market. The
Nominating Committee met four times during the year ended December 31,
2006.
The
full
board of directors comprises the Assets and Liabilities Committee (“ALCO”). ALCO
met four times during the year ended December 31, 2006.
Executive
Officers Who Are Not Directors
The
table
below sets forth information, as of December 31, 2006, regarding our executive
officers who are not directors.
|
Name
|
Title
|
Age
|
||
|
Kevin
D. Maroney
|
Senior
Vice President and Chief Financial Officer
|
49
|
||
|
Leslie
J. Zornow
|
Senior
Vice President, Retail Banking
|
42
|
The
executive officers of FSB Community Bankshares, Inc. and Fairport Savings Bank
are elected annually and hold office until their respective successors are
elected or until death, resignation, retirement or removal by the board of
directors.
The
business experience for the past five years of each of our executive officers
who is not a director is set forth below. Unless otherwise indicated, executive
officers have held their positions for the past five years.
Kevin
D. Maroney is
our
Senior Vice President and Chief Financial Officer, positions he has held since
2004. Prior to his employment with Fairport Savings Bank, from 1993 until 2004,
Mr. Maroney served as senior vice president/finance and operations officer
with
Wyoming County Bank, Warsaw, New York.
Leslie
J. Zornow is
our
Senior Vice President, Retail Banking, positions she has held since January
2004. Prior to her employment with Fairport Savings Bank, in 2003, Ms. Zornow
served as interim President of the Geneva Chamber of Commerce, Geneva, New
York
and from 1996 until 2003 served as an executive officer of Savings Bank of
the
Finger Lakes where she oversaw the institution’s branch network, marketing and
human resources.
104
Executive
Compensation
The
following table sets forth for the year ended December 31, 2006 certain
information as to the total remuneration paid by us to Dana C. Gavenda, who
serves as our President and Chief Executive Officer, and our two most highly
compensated executive officers other than Mr. Gavenda. Each of the individuals
listed in the table below is referred to as a Named Executive Officer.
|
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
All
other compensation
($)
|
Total
($)
|
|||||||||||
|
Dana
C. Gavenda
President,
Chief
Executive
Officer
|
2006
|
$
|
141,992
|
$
|
26,388
|
$
|
45,103(1
|
)
|
$
|
213,483
|
||||||
|
Kevin
D. Maroney
Senior
Vice President
and
Chief Financial
Officer
|
2006
|
$
|
91,535
|
$
|
10,333
|
$
|
13,450(2
|
)
|
$
|
115,318
|
||||||
|
Leslie
J. Zornow
Senior
Vice President,
Retail
Banking
|
2006
|
$
|
80,376
|
$
|
9,089
|
$
|
11,037
(3
|
)
|
$
|
100,512
|
||||||
| (1) |
Includes
$19,209 credited to Mr. Gavenda under Fairport Savings Bank’s supplemental
executive retirement plan and does not include any earnings.
Also includes
employer contributions to the 401(k) Plan of $21,449, which consists
of a
$16,686 employer profit sharing contribution (i.e., 10% of Mr.
Gavenda’s 2006 adjusted Form W-2 compensation), and an employer “401(k)
safe harbor” contribution of $4,763 (i.e., 3% of Mr. Gavenda’s 2006
adjusted Form W-2 compensation). Also includes a one-time country
club
initiation fee as well as monthly dues for country club membership.
Includes an allowance for an automobile.
|
| (2) |
Consists
of employer contributions to the 401(k)
Plan.
|
| (3) |
Consists
of employer contributions to the 401(k)
Plan.
|
Benefit
Plans
Employment
Agreement. Fairport
Savings Bank entered into an employment agreement with Dana C. Gavenda effective
as of March 1, 2006. The agreement has an initial term of three years. Unless
notice of non-renewal is provided, the agreement renews annually such that
the
remaining term of the agreement is three years. After the initial three-year
term under the agreement, if Mr. Gavenda receives timely notification of the
board’s intention not to renew the agreement on the next anniversary date, the
agreement will cease one year following such anniversary date. Under the
agreement, Mr. Gavenda’s base salary for the year beginning March 1, 2007 is
$147,500 and the base salary for the year beginning March 1, 2008 will be
$155,000. Mr. Gavenda’s base salary is subject to annual approval which is
conducted by the Compensation/Benefits/Marketing Committee of the board, and
may
be increased or decreased. In addition to the base salary, the agreement
provides for, among other things, participation in bonus programs and other
employee pension benefit and fringe benefit plans applicable to executive
employees, and use of an automobile and reimbursement of expenses associated
with the use of such automobile. Mr. Gavenda’s employment may be terminated for
“just cause” (as defined below) at any time, in which event Mr. Gavenda would
have no right to receive compensation or other benefits for any period after
termination. “Just cause” means termination of Mr. Gavenda’s employment by a
vote of at least a majority of the entire membership of the board because of
(i)
Mr. Gavenda’s personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses); or (ii) a final cease-and-desist order
regarding Mr. Gavenda’s employment with Fairport Savings Bank; or (iii) Mr.
Gavenda’s willful commission of any act that, in the judgment of the board,
would likely cause substantial economic damage to Fairport Savings Bank; or
(iv)
Mr. Gavenda’s material breach of any provision of the employment
agreement.
105
Mr.
Gavenda is entitled to severance payments and benefits in the event of his
termination of employment under specified circumstances. In the event Mr.
Gavenda’s employment is terminated by Fairport Savings Bank for reasons other
than just cause, disability, death, retirement or a “change in control,” (as
defined in the employment agreement) or in the event Mr. Gavenda resigns during
the term of the agreement following (1) the failure to elect or reelect or
to appoint or reappoint Mr. Gavenda to his executive position, (2) a
material change in Mr. Gavenda’s functions, duties, or responsibilities, which
change would cause Mr. Gavenda’s position to become one of lesser
responsibility, importance or scope, (3) a relocation of Mr. Gavenda’s principal
place of employment by more than 30 miles from its location at the effective
date of the employment agreement or a material reduction in the benefits and
perquisites from those being provided to Mr. Gavenda as of the effective date
of
the employment agreement, (4) the liquidation or dissolution of Fairport
Savings Bank, or (5) a material breach of the employment agreement by Fairport
Savings Bank, Mr. Gavenda (or, in the event of Mr. Gavenda’s death, his
beneficiary) would be entitled to a severance payment equal to the greater
of
(i) the remaining amount due under the agreement or (ii) the sum of the highest
base salary paid to Mr. Gavenda under the agreement, plus the greater of (x)
the
average annual cash bonus paid to Mr. Gavenda under the agreement during the
last three years prior to the termination date or (y) the cash bonus paid to
Mr.
Gavenda for the most recent fiscal year prior to the termination. Such severance
shall be paid as a lump sum within 30 days of Mr. Gavenda’s termination of
employment, or, if Internal Revenue Code Section 409A applies to such payment,
then the payment shall be made on the first day of the seventh month following
Mr. Gavenda’s termination of employment. Additionally, Mr. Gavenda would be
entitled to the continuation of life, medical, disability and dental coverage
for 36 months. In the event these severance payment provisions of the employment
agreement are triggered, as of December 31, 2006, Mr. Gavenda would be entitled
to a cash severance benefit in the amount of approximately $337,000.
In
the
event of a termination following a “change in control” (as defined in the
employment agreement) of Fairport Savings Bank or FSB Community Bankshares,
Inc., Mr. Gavenda (or, in the event of his death, his beneficiary) would be
entitled to a severance payment equal to three times the sum of (i) Mr.
Gavenda’s highest base salary during the term of the employment agreement, and
(ii) the greater of (x) the average annual cash bonus paid to Mr. Gavenda under
the agreement during the last three years prior to the termination date or
(y)
the cash bonus paid to Mr. Gavenda for the most recent fiscal year prior to
the
termination. Such severance shall be paid as a lump sum within 30 days of Mr.
Gavenda’s termination of employment, or, if Internal Revenue Code Section 409A
applies to such payment, then the payment shall be made on the first day of
the
seventh month following Mr. Gavenda’s termination of employment. Additionally,
Mr. Gavenda would be entitled to the continuation of life, medical, disability
and dental coverage for 36 months. Any payments to Mr. Gavenda would be reduced,
if necessary, so as not to be an “excess parachute payment” as defined by Code
Section 280G (relating to payments made in connection with a change in control).
In the event these severance payment provisions of the employment agreement
are
triggered, as of December 31, 2006, Mr. Gavenda would be entitled to a cash
severance benefit in the amount of approximately $490,000.
106
Should
Mr. Gavenda become “disabled” (as defined in the next sentence) during the term
of the agreement, Fairport Savings Bank would pay Mr. Gavenda 65% of base salary
until the earliest of the time that executive returns to his duties at Fairport
Savings Bank, or attains full-time employment with another employer, or attains
the age of 65, or until Mr. Gavenda’s death, provided that any amount paid to
Mr. Gavenda pursuant to any disability insurance would reduce the compensation
he would receive. Mr. Gavenda would also be entitled to continued life and
health care coverage substantially identical to the coverage he had before
becoming disabled during the period that he is receiving disability benefits.
“Disabled” means that (i) Mr. Gavenda is unable to perform his duties by reason
of incapacity or illness and Mr. Gavenda shall have been absent from his duties
on a full-time basis for six months within any twelve month period; or (ii)
Mr.
Gavenda has experienced a mental or physical condition which, in the reasonable
opinion of the disinterested members of the board, makes Mr. Gavenda unable
or
incompetent to properly carry out the duties of his position; or (iii) if
necessary to comply with Internal Revenue Code Section 409A, “disabled” shall
have the meaning required under Code Section 409A. The board may require that
Mr. Gavenda be examined by a physician selected by the board and the decision
of
the physician regarding Mr. Gavenda’s disability status shall be conclusive and
binding on all parties.
In
the
event Mr. Gavenda dies while employed by Fairport Savings Bank, Mr. Gavenda’s
beneficiary or estate will be paid Mr. Gavenda’s base salary for one year, and
Mr. Gavenda’s family will be entitled to continuation of medical, dental and
other insurance benefits for one year.
Upon
termination of Mr. Gavenda’s employment other than in connection with a change
in control or disability, Mr. Gavenda agrees for a period of two years following
termination of employment not to serve as an officer, director or consultant
with any financial institution operating in Monroe County, New York with assets
of less than $1.0 billion.
Fairport
Savings Bank does not have other employment or change in control agreements
with
any other named executive officers.
Supplemental
Retirement Plan.
Effective May 1, 2006, Fairport Savings Bank established a Supplemental
Executive Retirement Plan (“SERP”) with Dana C. Gavenda, its Chief Executive
Officer. Under the terms of the SERP, on May 1, 2006 and on each anniversary
date thereafter through the earlier of May 1, 2015 or the date Mr. Gavenda
terminates employment, Fairport Savings Bank will credit a specified amount
to
Mr. Gavenda’s accrued SERP obligation account (the “SERP Benefit”). The maximum
aggregate value of the SERP Benefit as of May 1, 2015 will be $493,765, which
is
intended to provide a 15-year period certain annuity of approximately $50,000
per year. The SERP Benefit will not be credited with earnings nor debited for
losses or expenses. Mr. Gavenda is 100% vested in his SERP Benefit at all times.
The SERP Benefits will be paid to Mr. Gavenda in equal monthly installments
for
15 years, beginning on the date that is six months after the later of (i) the
date he terminates employment or (ii) attains age 65. In the event Mr. Gavenda
dies while receiving payments, his designated beneficiary shall continue to
receive the remaining payments. If Mr. Gavenda dies before he is eligible to
receive payments, the SERP Benefit shall be forfeited.
107
If
Mr.
Gavenda’s employment is terminated for “cause” (as defined in the next
sentence), then he will forfeit all SERP Benefits. “Cause” means of termination
of Mr. Gavenda’s employment due to any of the following: (a) engaging in willful
or grossly negligent misconduct that is materially injurious to Fairport Savings
Bank; (b) embezzlement or misappropriation of the funds or property of Fairport
Savings Bank; (c) conviction of a felony or the entrance of a plea of guilty
or
nolo contendere to a felony; (d) conviction of any crime involving fraud,
dishonesty, moral turpitude or breach of trust or the entrance of a plea of
guilty to such a crime; (e) failure or refusal to devote full business time
and
attention to the performance of his duties, if such breach has not been cured
within 15 days after notice is given; (f) issuance of a final non-appealable
order or other direction by a federal or state regulatory agency prohibiting
Mr.
Gavenda’s employment in the business of banking; or (g) violation of a
non-compete or non-solicitation agreement.
In
the
event Mr. Gavenda terminates employment due to “disability” (as defined in the
next sentence), the SERP Benefit shall be paid to him in a lump sum no later
than 90 days after the date he terminated employment. Mr. Gavenda shall be
treated as having a “disability” if: (a) he is unable to engage in any
substantial gainful activity by reason of any medically determinable physical
or
mental impairment which can be expected to result in death or can be expected
to
last for a continuous period of not less than 12 months; or (b) he is, by reason
of any medically determinable physical or mental impairment which can be
expected to result in death or can be expected to last for a continuous period
of not less than 12 months, receiving income replacement benefits for a period
of not less than three months under an accident and health plan covering
employees of Fairport Savings Bank.
In
the
event of a “change in control” (as defined in the SERP) of Fairport Savings
Bank, the SERP Benefit shall be paid to Mr. Gavenda in a lump sum as soon as
administratively feasible but no later than 90 days after his termination of
employment following the change in control, unless such payments are subject
to
Internal Revenue Code Section 409A, in which case such payment will be made
on
the first day of the seventh month following Mr. Gavenda’s termination of
employment. In the event the SERP is terminated, the SERP Benefit shall be
paid
to Mr. Gavenda in the form of equal monthly installments starting on the first
day of the calendar month that is 12 months after the termination of the SERP
and ending no later than 24 months after the termination of the SERP (or such
other payment schedule as may be required in order to comply with Internal
Revenue Code Section 409A).
401(k)
Plan.
Fairport Savings Bank sponsors a 401(k) plan for eligible employees who have
attained age 21 and completed six months of service. The Plan allows employees
to contribute from 1% to 100% of their annual salary subject to statutory
limitations. Each year, Fairport Savings Bank contributes 3% of each eligible
employee’s adjusted Form W-2 compensation to the Plan as a “basic 401(k) safe
harbor” contribution. In addition, Fairport Savings Bank may make a
discretionary profit sharing contribution of each eligible employees’ annual
adjusted Form W-2 compensation. In 2006, the profit sharing contribution was
equal to 10% of eligible employees’ adjusted Form W-2 compensation.
108
Stock
Benefit Plans
Employee
Stock Ownership Plan and Trust.
The
Board of Directors of Fairport Savings Bank intends to adopt an employee stock
ownership plan in connection with the stock offering. Employees who are at
least
21 years old with at least one year of employment with Fairport Savings Bank
are
eligible to participate. As part of the stock offering, the employee stock
ownership plan trust intends to borrow funds from FSB Community Bankshares,
Inc.
and use those funds to purchase a number of shares equal to 3.92% of the
outstanding shares of common stock, including shares of common stock issued
to
FSB Community Bankshares, MHC. Collateral for the loan will be the common stock
purchased by the employee stock ownership plan. The loan will be repaid
principally from discretionary contributions by Fairport Savings Bank to the
employee stock ownership plan over a period of not more than 20 years. The
loan
documents will provide that the loan may be repaid over a shorter period,
without penalty for prepayments. It is anticipated that the interest rate on
the
loan will equal the prime interest rate at the closing of the stock offering,
and will adjust annually at the beginning of each calendar year.
The
shares purchased with the loan will initially be held in a suspense account
and
will be allocated to participants’ accounts in the employee stock ownership plan
as the loan is repaid. Participants will have no interest in the shares in
the
suspense account and will only have an interest in the shares actually allocated
to their accounts as the loan is repaid. Subject to IRS rules, through December
31, 2009, contributions to the employee stock ownership plan and shares released
from the suspense account in an amount proportional to the repayment of the
employee stock ownership plan loan will be allocated among employee stock
ownership plan participants on the basis of a uniform point allocation formula
whereby one point is awarded for each $1,000 of eligible compensation and two
points are awarded for each year of service. Beginning January 1, 2010,
allocations will be made to participants in the ratio that their compensation
bears to the compensation of all plan participants. Benefits under the plan
will
become vested at the rate of 20% per year, starting upon completion of two
years
of credited service, and will be fully vested upon completion of six years
of
credited service, with credit given to participants for up to three years of
credited service with Fairport Savings Bank’s mutual predecessor prior to the
adoption of the plan. A participant’s interest in his account under the plan
will also fully vest in the event of termination of service due to a
participant’s normal retirement, death, disability, or upon a change in control
(as defined in the plan). Vested benefits will be payable generally in the
form
of common stock, or to the extent participants’ accounts contain cash, benefits
will be paid in cash. Fairport Savings Bank’s contributions to the employee
stock ownership plan are discretionary, subject to the loan terms and tax law
limits. Therefore, benefits payable under the employee stock ownership plan
cannot be estimated. Pursuant to SOP 93-6, we will be required to record
compensation expense each year in an amount equal to the fair market value
of
the shares released from the suspense account. In the event of a change in
control, the employee stock ownership plan will terminate.
Stock-Based
Benefit Plan.
Following the stock offering, we intend to adopt a stock-based benefit plan
that
will provide for grants of stock options and awards of shares of common stock.
Under current Office of Thrift Supervision regulations, the number of options
granted or shares awarded under such a plan may not exceed 4.90% and 1.96%,
respectively, of our outstanding shares (including shares issued to FSB
Community Bankshares, MHC). Under current Office of Thrift Supervision
regulations, the number of options granted or shares awarded under the plan,
when aggregated with any subsequently adopted stock-based benefit plans
(exclusive of any shares held by any employee stock ownership plan), may not
exceed 25% of the number of shares of common stock held by persons other than
FSB Community Bankshares, MHC.
109
The
stock-based benefit plan will comply with all applicable regulations of the
Office of Thrift Supervision. The stock-based benefit plan cannot be established
sooner than six months after the stock offering and would require the approval
of our shareholders by a majority of the total votes of FSB Community
Bankshares, Inc. eligible to be cast (excluding votes eligible to be cast by
FSB
Community Bankshares, MHC), unless we obtain a waiver from the Office of Thrift
Supervision that would allow the approval of the stock-based benefit plan by
a
majority of votes cast by our shareholders (excluding shares voted by FSB
Community Bankshares, MHC). Unless a waiver is obtained from the Office of
Thrift Supervision, the following additional Office of Thrift Supervision
restrictions would apply to our stock-based benefit plan:
|
·
|
non-employee
directors in the aggregate may not receive more than 30% of the options
and awards authorized under the
plan;
|
|
·
|
any
one non-employee director may not receive more than 5% of the options
and
stock awards authorized under the
plan;
|
|
·
|
any
officer or employee may not receive more than 25% of the options
or stock
awards authorized under the plan;
|
|
·
|
the
options and awards may not vest more rapidly than 20% per year, beginning
on the first anniversary of shareholder approval of the plan;
and
|
|
·
|
accelerated
vesting of awards is not permitted except for death, disability or
upon a
change in control of Fairport Savings Bank or FSB Community Bankshares,
Inc.
|
We
may
obtain the shares needed for this plan by issuing additional shares of common
stock from authorized but unissued shares or through stock
repurchases.
The
Office of Thrift Supervision has proposed amendments to its existing regulations
regarding stock-based benefit plans that are intended to clarify and simplify
such regulations. Specifically, the amendments would clarify that we may grant
options and award shares of common stock under one or more stock-based benefit
plans in excess of 4.90% and 1.96%, respectively, of our total outstanding
shares if the stock-based benefit plans are adopted more than one year following
the stock offering, provided shares used to fund the plans in excess of these
amounts are obtained through stock repurchases. The proposed amendments would
also require that, if the stock-based benefit plans are adopted less than one
year following the stock offering, the stock-based benefit plans must be
approved by a majority of the votes of FSB Community Bankshares, Inc.
shareholders cast at an annual or special meeting of shareholders, excluding
votes eligible to be cast by FSB Community Bankshares, MHC. Under the proposed
amendments, there would be no separate vote required of minority shareholders
if
the stock-based benefit plans are adopted more than one year following the
stock
offering. The proposed amendments would further clarify that the current
regulatory restrictions set forth above regarding the amount of individual
and
group awards, and restrictions on accelerated vesting of awards, would not
apply
if the stock-based benefit plans are adopted more than one year following the
stock offering.
110
In
the event the Office of Thrift Supervision adopts these regulations as proposed,
or otherwise changes its existing regulations or policies, we may implement
stock-based benefit plans that exceed the current limits applicable to the
overall size of such plans and individual awards thereunder, and otherwise
grant
awards with terms that are different than those required by current Office
of
Thrift Supervision regulations and policy. Moreover, to the extent that any
new
regulations or policies contain a more flexible voting standard for shareholder
approval than that currently required, we intend to use the more flexible voting
standard, which could result in the vote of FSB Community Bankshares, MHC
controlling the outcome of a shareholder vote on stock-based benefit
plans.
Director
Compensation
FSB
Community Bankshares, Inc. pays no fees for service on the Board of Directors
or
Board committees. However, each of the individuals who currently serves as
one
of our directors also serves as a director of Fairport Savings Bank and earns
fees in that capacity. Each non-employee director receives a fee of $700 for
each scheduled monthly meeting, and receives $300
for
attendance at meetings of the Audit Committee, Compensation/Benefits/ Marketing
Committee, Nominating Committee and ALCO Committee. In addition to these fees,
Director Keef received a fee of $4,000 for serving as the Chairman of the Board
and a fee of $275 for serving as the chairman of the nominating committee;
Director Smith received a fee of $250 for serving as Vice Chairman of the Board;
and Director Hanss received a fee of $1,300 for his role as chairman of the
audit committee. Fairport Savings Bank paid fees totaling $90,625 to its ten
board members during the year ended December 31, 2006.
The
following table sets forth for the year ended December 31, 2006 certain
information as to the total remuneration we paid to our directors other than
Mr.
Gavenda. Compensation paid to Mr. Gavenda for his service as a director is
included in “Executive Compensation—Summary Compensation Table.”
|
Name
|
Fees
earned
or
paid in
cash
($)
|
Total
($)
|
|||||
|
D.
Lawrence Keef
|
$
|
16,275
|
$
|
16,275
|
|||
|
Gary
Lindsay(1)
|
—
|
—
|
|||||
|
Terence
O’Neil
|
12,400
|
12,400
|
|||||
|
Lowell
T. Twitchell
|
12,050
|
12,050
|
|||||
|
Thomas
J. Hanss
|
13,700
|
13,700
|
|||||
|
James
E. Smith
|
12,950
|
12,950
|
|||||
|
Robert
W. Sturn
|
10,900
|
10,900
|
|||||
|
Charis
W. Warshof
|
11,150
|
11,150
|
|||||
|
Sara
E. Hartman(2)
|
1,200
|
1,200
|
|||||
| (1) |
Mr.
Lindsay first became a director in
2007.
|
| (2) |
Ms.
Hartman left the board of directors in January
2006.
|
111
Related
Party Transactions
The
Sarbanes-Oxley Act generally prohibits us from making loans to our executive
officers and directors, but it contains a specific exemption from such
prohibition for loans made by Fairport Savings Bank to our executive officers
and directors in compliance with federal banking regulations.
The
aggregate amount of our outstanding loans to our officers and directors and
their related entities was approximately $803,000 at December 31, 2006. All
of
such loans were made in the ordinary course of business, were made on the same
terms, including interest rates and collateral, as those prevailing at the
time
for comparable transactions with other persons, and did not involve more than
the normal risk of collectibility or present other unfavorable features. These
loans were performing according to their repayment terms at December 31, 2006,
and were made in compliance with federal banking regulations.
Additionally,
neither FSB Community Bankshares, Inc. nor Franklin Savings Bank have made
loans
to, or have engaged in material transactions with, promoters. FSB Community
Bankshares, Inc. has no intention of engaging in any material transactions
with
promoters in the future.
112
Proposed
Management and Director Purchases in the Stock Offering
The
following table sets forth information regarding intended common stock
subscriptions by each of the directors and executive officers of FSB Community
Bankshares, Inc. and Fairport Savings Bank and their associates, and by all
directors and executive officers as a group. In the event the individual maximum
purchase limitation is increased, persons subscribing for the maximum amount
may
increase their purchase orders. Directors and executive officers will purchase
shares of common stock at the same $10.00 purchase price per share and on the
same terms as other purchasers in the stock offering. Any purchases made by
any
of our affiliates for the explicit purpose of meeting the minimum number of
shares of common stock required to be sold in order to complete the stock
offering shall be made for investment purposes only and not with a view toward
distribution. This table excludes shares of common stock to be purchased by
the
employee stock ownership plan, as well as any stock awards or stock option
grants that may be made no earlier than six months after the completion of
the
stock offering. This table also excludes additional shares that may be purchased
by our directors and executive officers following the completion of the stock
offering. The directors and executive officers have indicated their intention
to
subscribe for an aggregate of $265,000 of shares of common stock in the stock
offering, equal to 2.7% of the number of shares of common stock to be sold
in
the stock offering, at the midpoint of the estimated valuation
range.
|
Name
and Title
|
Number
of
Shares
|
Aggregate
Purchase
Price
(1)
|
Percent
at
Midpoint
of
Offering
Range
|
|||||||
|
D.
Lawrence Keef, Director
|
1,000
|
$
|
10,000
|
*
|
||||||
|
Gary
Lindsay, Director
|
1,000
|
10,000
|
*
|
|||||||
|
Terence
O’Neil, Vice Chairman of the Board
|
1,000
|
10,000
|
*
|
|||||||
|
Lowell
T. Twitchell, Director
|
1,000
|
10,000
|
*
|
|||||||
|
Thomas
J. Hanss, Chairman of the Board
|
5,000
|
50,000
|
*
|
|||||||
|
James
E. Smith, Director
|
1,000
|
10,000
|
*
|
|||||||
|
Dana
C. Gavenda, President, Chief Executive Officer and
Director
|
10,000
|
100,000
|
1.0
|
%
|
||||||
|
Robert
W. Sturn, Director
|
1,000
|
10,000
|
*
|
|||||||
|
Charis
W. Warshof, Director
|
3,000
|
30,000
|
*
|
|||||||
|
Kevin
Maroney, Senior Vice President and Chief Financial Officer
|
2000
|
20,000
|
*
|
|||||||
|
Leslie
J. Zornow, Senior Vice President, Retail Banking
|
500
|
5,000
|
*
|
|||||||
|
All
directors and executive officers as a group
|
26,500
|
$
|
265,000
|
2.7
|
%
|
|||||
| * |
Less
than 1.0%.
|
|
(1)
|
Includes
purchases by the individual’s spouse and other relatives of the named
individual living in the same household. The above named individuals
are
not aware of any other purchases by a person who, or entity
that would be
considered an associate of the named individuals under the
stock issuance
plan.
|
113
THE
STOCK
OFFERING
The
board of directors of FSB Community Bankshares, Inc. has approved the stock
issuance plan, and the Office of Thrift Supervision has approved the stock
issuance plan as part of its approval of our application to conduct the stock
offering, subject to the satisfaction of certain conditions imposed by the
Office of Thrift Supervision in its approval. Office of Thrift Supervision
approval does not constitute a recommendation or endorsement of the stock
issuance plan by the Office of Thrift Supervision.
General
On
January 24, 2007, our board of directors unanimously adopted the stock issuance
plan
and
approved amendments to the plan effective as of April 25, 2007 and May 7, 2007.
Pursuant to the stock issuance plan, we will sell shares of our common stock
to
depositors and eligible borrowers of Fairport Savings Bank and other persons,
and issue shares of our common stock to FSB Community Bankshares, MHC. Upon
completion of the stock offering, purchasers in the stock offering will own
47.0% of our outstanding shares of common stock, and FSB Community Bankshares,
MHC will own 53.0% of our outstanding shares of common stock.
The
aggregate price of the shares of common stock sold in the stock offering will
be
within the offering range. The offering range of between $8.4 million and $11.4
million has been established by the board of directors, based upon an
independent appraisal of the estimated pro forma market value of our shares
of
common stock. The appraisal was prepared by RP Financial, LC, a consulting
firm
experienced in the valuation and appraisal of savings institutions. All shares
of common stock to be sold in the stock offering will be sold at the same price
per share. The independent appraisal will be affirmed or, if necessary, updated
at the completion of the stock offering. See “How We Determined the Stock
Pricing and the Number of Shares to be Issued” for additional information as to
the determination of the estimated pro forma market value of the shares of
common stock.
Offering
materials for the stock offering initially have been distributed by mail, with
additional copies made available through our Stock Information Center and
Sandler O’Neill & Partners, L.P. All prospective purchasers must send
payment directly to us. We will deposit these funds in a segregated savings
account at Fairport Savings Bank or, at our discretion, another federally
insured depository institution, and we will not release the funds until the
stock offering is completed or terminated.
The
following describes the material aspects of the stock offering. Prospective
purchasers should also carefully review the terms of the stock issuance plan.
A
copy of the stock issuance plan is available from Fairport Savings Bank upon
request and is available for inspection at the offices of Fairport Savings
Bank
and at the Office of Thrift Supervision. The plan is also filed as an exhibit
to
the Registration Statement of which this prospectus is a part, copies of which
may be obtained from the Securities and Exchange Commission. See “Where You Can
Find More Information.”
114
Reasons
for the Stock Offering
The
proceeds from the sale of our shares of common stock will provide Fairport
Savings Bank with additional capital, which may be used to support future
growth, internally or through acquisitions. In addition, since Fairport Savings
Bank competes with local and regional banks and other entities for employees,
we
believe that the stock offering will enable us to attract and retain management
and employees through various stock benefit plans, including stock option plans,
stock award plans and an employee stock ownership plan.
In
the
future, the unissued shares of common and preferred stock authorized by our
charter, as well as any treasury shares that may have been repurchased, will
permit us to raise additional equity capital through further sales of securities
and may permit us to issue securities in connection with possible acquisitions,
subject to market conditions and any required regulatory approvals. We currently
have no plans with respect to additional offerings of common or preferred
stock.
The
stock
offering proceeds will provide additional flexibility to grow through
acquisitions of other financial institutions or other businesses. Although
there
are no current arrangements, understandings or agreements, written or oral,
regarding any such opportunities, we will be in a position after the stock
offering to take advantage of any such favorable opportunities that may arise.
See “How We Intend to Use the Proceeds from the Stock Offering” for a
description of our intended use of proceeds.
After
considering the advantages and disadvantages of the stock offering, as well
as
applicable fiduciary duties, our board of directors unanimously approved the
stock issuance plan as being in the best interests of FSB Community Bankshares,
Inc., Fairport Savings Bank, and Fairport Savings Bank’s customers and the
communities we serve.
Offering
of Shares of Common Stock
Under
the
stock issuance plan, up to 1,135,050 shares, subject to adjustment, of our
common stock will be offered for sale, subject to certain restrictions described
below, through a subscription and community offering.
Subscription
Offering.
The
subscription offering will expire at 5:00 p.m., Eastern time, on June 14, 2007,
unless otherwise extended by Fairport Savings Bank and FSB Community Bankshares,
Inc. Regulations of the Office of Thrift Supervision require that all shares
to
be offered in the stock offering be sold within 90 days of Office of Thrift
Supervision approval of the use of the prospectus or a longer period as may
be
approved by the Office of Thrift Supervision. This period expires on August
13,
2007, unless extended with the approval of the Office of Thrift Supervision.
If
the stock offering is not completed by August 13, 2007, all subscribers will
have the right to modify or rescind their subscriptions and to have their
subscription funds returned promptly with interest. In the event of an extension
of this type, all subscribers will be notified in writing of the time period
within which subscribers must notify Fairport Savings Bank of their intention
to
maintain, modify or rescind their subscriptions. If the subscriber rescinds
or
does not respond in any manner to Fairport Savings Bank’s notice, the funds
submitted will be refunded to the subscriber with interest at Fairport Savings
Bank’s current passbook savings rate, and/or the subscriber’s withdrawal
authorizations will be terminated. In the event that the stock offering is
not
completed, all funds submitted and not previously refunded pursuant to the
subscription and community offering will be promptly refunded with interest
at
Fairport Savings Bank’s current passbook savings rate, and all withdrawal
authorizations will be terminated.
115
Subscription
Rights.
Under
the stock issuance plan, nontransferable subscription rights to purchase the
shares of common stock have been issued to persons and entities as described
below. The amount of shares of common stock that these persons may purchase
will
depend on the availability of the shares of common stock for purchase under
the
categories described in the stock issuance plan. Subscription priorities have
been established for the allocation of shares of common stock to the extent
that
the shares are available. These priorities are as follows:
Category
1: Eligible Account Holders.
Subject
to the maximum purchase limitations, each depositor with $50 or more on deposit
at Fairport Savings Bank, as of the close of business on December 31, 2005,
will
receive nontransferable subscription rights to subscribe for up to the greater
of the following:
|
(i)
|
$150,000
of shares of common stock;
|
|
(ii)
|
one-tenth
of one percent of the total offering of shares of common stock;
or
|
|
(iii)
|
15
times the product, rounded down to the nearest whole number, obtained
by
multiplying the total number of shares of common stock to be sold
in the
stock offering by a fraction, the numerator of which is the amount
of the
qualifying deposits of the eligible account holder and the denominator
is
the total amount of qualifying deposits of all eligible account holders.
At December 31, 2005, total qualifying deposits were $106.8
million.
|
If
the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock will be allocated among subscribing eligible account
holders so as to permit each one, to the extent possible, to purchase a number
of shares sufficient to make the person’s total allocation equal to the lesser
of 100 shares or the number of shares for which such person has subscribed.
Thereafter, unallocated shares will be allocated among the remaining subscribing
eligible account holders whose subscriptions remain unfilled in the proportion
that the amounts of their respective qualifying deposits bear to the total
amount of qualifying deposits of all remaining eligible account holders whose
subscriptions remain unfilled; however, no fractional shares will be issued.
If
the amount so allocated exceeds the amount subscribed for by any one or more
eligible account holder, the excess will be reallocated, one or more times
as
necessary, among those eligible account holders whose subscriptions are still
not fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied. Subscription rights received by
officers and directors in this category based on any increase in their deposits
in Fairport Savings Bank in the one-year period preceding December 31, 2005,
are
subordinated to the subscription rights of other eligible account holders.
116
Category
2: Tax-Qualified Employee Plans.
The
tax-qualified employee plans of Fairport Savings Bank, such as the employee
stock ownership plan and the 401(k) savings plan, have nontransferable
subscription rights to purchase up to 4.9% of the shares of common stock to
be
outstanding immediately following the stock offering. The employee stock
ownership plan intends to purchase 3.92% of the shares of our outstanding shares
of common stock unless additional purchases are required to complete the stock
offering at the minimum of the offering range. In the event the number of shares
offered in the stock offering is increased above the maximum of the valuation
range, the tax-qualified employee plans will have a priority to purchase any
shares exceeding the maximum of the valuation range up to 4.9% of the shares
of
common stock to be outstanding immediately following the stock offering. In
addition to purchasing shares of common stock in the stock offering, the
employee stock ownership plan may purchase shares of common stock in the open
market or may purchase shares of common stock directly from us subsequent to
the
completion of the stock offering.
Category
3: Supplemental Eligible Account Holders.
To
the
extent that there are sufficient shares of common stock remaining after
satisfaction of subscriptions by eligible account holders and the tax-qualified
employee plans, and subject to the maximum purchase limitations, each depositor
with $50 or more on deposit as of the close of business on March 31, 2007,
will
receive nontransferable subscription rights to subscribe for up to the greater
of:
|
(i)
|
$150,000
of shares of common stock;
|
|
(ii)
|
one-tenth
of one percent of the total offering of shares of common stock;
or
|
|
(iii)
|
15
times the product, rounded down to the nearest whole number, obtained
by
multiplying the total number of shares of common stock to be sold
in the
stock offering, the numerator of which is the amount of qualifying
deposits of the supplemental eligible account holder and the denominator
is the total amount of qualifying deposits of all supplemental eligible
account holders. At March 31, 2007, total qualifying deposits were
$114.2
million.
|
If
the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock will be allocated among subscribing supplemental eligible
account holders so as to permit each supplemental eligible account holder,
to
the extent possible, to purchase a number of shares sufficient to make his
or
her total allocation equal to the lesser of 100 shares or the number of shares
for which such person has subscribed. Thereafter, unallocated shares will be
allocated among subscribing supplemental eligible account holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to total qualifying deposits of all
subscribing supplemental eligible account holders.
117
Category
4: Other Members.
To
the
extent that there are sufficient shares of common stock remaining after
satisfaction of subscriptions by eligible account holders, the tax-qualified
employee plans and supplemental eligible account holders, and subject to the
maximum purchase limitations, each depositor with $50 or more on deposit at
Fairport Savings Bank as of the close of business on April 30, 2007, who is
neither an Eligible Account Holder or Supplemental Eligible Account Holder
and
each borrower from Fairport Savings Bank as of January 14, 2005 who maintained
such borrowing as of the close of business on April 30, 2007, who is neither
an
Eligible Account Holder nor Supplemental Eligible Account Holder (“Other
Members”), will receive nontransferable subscription rights to subscribe for up
to the greater of:
|
(i)
|
$150,000
of shares of common stock; or
|
|
(ii)
|
one-tenth
of one percent of the total offering of shares of common stock;
or
|
|
(iii)
|
with
respect to Other Members who are depositors of Fairport Savings Bank,
15
times the product, rounded down to the nearest whole number, obtained
by
multiplying the total number of shares of common stock to be sold
in the
stock offering by a fraction, the numerator of which is the amount
of
qualifying deposits of the Other Members who are depositors of Fairport
Savings Bank and the denominator of which is the total amount of
qualifying deposits of all Other Members who are depositors of Fairport
Savings Bank. Total qualifying deposits were $115.2 million at April
30,
2007.
|
If
the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock will be allocated among subscribing Other Members so
as
to permit each Other Member, to the extent possible, to purchase a number of
shares sufficient to make his or her total allocation equal to the lesser of
100
shares or the number of shares for which such person actually subscribed.
Thereafter, unallocated shares will be allocated among subscribing Other Members
whose subscriptions remain unfilled in the proportion that the amounts of their
respective subscriptions bear to total subscriptions of all subscribing Other
Members.
We
will
make reasonable efforts to comply with the securities laws of all states in
the
United States in which persons entitled to subscribe for shares of common stock
pursuant to the stock issuance plan reside. However, no shares of common stock
will be offered or sold under the stock issuance plan to any person who resides
in a foreign country or resides in a state of the United States in which a
small
number of persons otherwise eligible to subscribe for shares under the stock
issuance plan reside or as to which we determine that compliance with the
securities laws of the state would be impracticable for reasons of cost or
otherwise, including, but not limited to, a requirement that Fairport Savings
Bank or FSB Community Bankshares, Inc. or any of their officers, directors
or
employees register, under the securities laws of the state, as a broker, dealer,
salesman or agent. No payments will be made in lieu of the granting of
subscription rights to any person.
Community
Offering.
We will
offer, in a community offering to members of the general public to whom we
deliver a copy of this prospectus and a stock order form, any shares of common
stock that remain unsubscribed for in the subscription offering. In the
community offering, preference will be given to natural persons residing in
the
New York Counties of Livingston, Monroe, Ontario, Orleans and Wayne (the “Local
Community”). Subject to the maximum purchase limitations, these persons may
purchase up to $150,000 of shares of common stock. The community offering,
if
any, may begin concurrently with, during or promptly after the subscription
offering, and may terminate at any time without notice, but may not terminate
later than August 13, 2007, unless extended by FSB Community Bankshares, Inc.
Subject to any required regulatory approvals, we will determine, in our
discretion, the advisability of a community offering, the commencement and
termination dates of any community offering, and the methods of finding
potential purchasers in such offering. The opportunity to subscribe for shares
of common stock in the community offering category is subject to our right,
in
our sole discretion, to accept or reject these orders in whole or in part either
at the time of receipt of an order or as soon as practicable
thereafter.
118
If
there
are not sufficient shares of common stock available to fill orders in the
community offering, the shares of common stock will be allocated, if possible,
first to each natural person residing in the Local Community whose order we
accept, in an amount equal to the lesser of 1,000 shares of common stock or
the
number of shares of common stock ordered. Thereafter, unallocated shares of
common stock will be allocated among persons residing in the Local Community
whose orders remain unsatisfied, on an equal number of shares basis. If there
are any shares of common stock remaining, shares will be allocated to other
members of the general public who order in the community offering applying
the
same allocation described above for persons who reside in the Local
Community.
Syndicated
Community Offering.
All
shares of common stock not purchased in the subscription and community
offerings, if any, may be offered for sale to the general public in a syndicated
community offering through a syndicate of registered broker-dealers to be formed
and managed by Sandler O’Neill & Partners, L.P. We expect to market any
shares of common stock that remain unsubscribed after the subscription and
community offerings through a syndicated community offering. We have the right
to reject orders in whole or part in our sole discretion in the syndicated
community offering. Neither Sandler O’Neill & Partners, L.P. nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of common stock in the syndicated community offering; however, in the
event Sandler O’Neill & Partners, L.P. agrees to participate in a syndicated
community offering, it will use its best efforts in the sale of shares of common
stock in the syndicated community offering.
The
price
at which shares of common stock are sold in the syndicated community offering
will be the same price as in the subscription and community offerings. Subject
to the overall purchase limitations, no person by himself or herself may
purchase more than $150,000 of shares of common stock.
Sandler
O’Neill & Partners, L.P. may enter into agreements with selected dealers to
assist in the sale of the shares of common stock in the syndicated community
offering. No orders may be placed or filled by or for a selected dealer during
the subscription offering. After the close of the subscription offering, Sandler
O’Neill & Partners, L.P. will instruct selected dealers as to the number of
shares of common stock to be allocated to each selected dealer. Only after
the
close of the subscription offering and upon allocation of shares to selected
dealers may selected dealers take orders from their customers. During the
subscription and community offerings, selected dealers may only solicit
indications of interest from their customers to place orders with us as of
a
certain order date for the purchase of shares of common stock. When and if
we,
in consultation with Sandler O’Neill & Partners, L.P., believe that enough
indications of interest and orders have not been received in the subscription
and community offerings to consummate the stock offering, we will instruct
Sandler O’Neill & Partners, L.P. to request, as of the order date, selected
dealers to submit orders to purchase shares for which they have previously
received indications of interest from their customers. Selected dealers will
send confirmations of the orders to customers on the next business day after
the
order date. Selected dealers will debit the accounts of their customers on
the
settlement date, which date will be three business days from the order date.
Customers who authorize selected dealers to debit their brokerage accounts
are
required to have the funds for payment in their account on but not before the
settlement date. On the settlement date, selected dealers will remit funds
to
the account we establish for each selected dealer. Each customer’s funds so
forwarded, along with all other accounts held in the same title, will be insured
by the Federal Deposit Insurance Corporation up to the maximum amount
permissible under applicable Federal Deposit Insurance Corporation regulations.
After we receive payment from selected dealers, funds will earn interest at
Fairport Savings Bank’s passbook rate until the completion or termination of the
stock offering. Funds will be promptly returned, with interest, in the event
the
stock offering is not completed as described above.
119
The
syndicated community offering will terminate no more than 45 days following
the
subscription expiration date, unless extended by FSB Community Bankshares,
Inc.
with the approval of the Office of Thrift Supervision.
Limitations
on Purchase of Shares.
The plan
provides for certain limitations on the purchase of shares of common stock
in
the stock offering. These limitations are as follows:
|
A.
|
The
aggregate amount of outstanding shares of our common stock owned
or
controlled by persons other than FSB Community Bankshares, MHC at
the
close of the stock offering shall be less than 50% of our total
outstanding shares of common stock.
|
|
B.
|
The
maximum purchase of shares of common stock in the subscription offering
by
a person, or group of persons through one or more individual and/or
joint
deposit accounts, is $150,000. The maximum purchase of shares of
common
stock in the subscription offering by a group of persons through
a single
deposit account, is $150,000. No person by himself, or with an associate
or group of persons acting in concert, may purchase more than $200,000
of
the common stock offered in the stock offering, except
that:
|
|
(i)
|
we
may, in our sole discretion and without further notice to or solicitation
of subscribers or other prospective purchasers, increase such maximum
purchase limitation to 5% of the number of shares offered in the
stock
offering;
|
|
(ii)
|
our
tax-qualified employee plans may purchase up to 4.9% of the shares
of
common stock to be outstanding immediately following the stock offering;
and
|
|
(iii)
|
shares
to be held by any of our tax-qualified employee plans and attributable
to
a person shall not be aggregated with other shares purchased directly
by
or otherwise attributable to such
person.
|
|
C.
|
The
aggregate amount of shares of common stock acquired in the stock
offering,
plus all prior issuances by FSB Community Bankshares, Inc., by any
of our
non-tax-qualified employee plans or any of our officers or directors
and
his or her associates, exclusive of any shares of common stock acquired
by
such plan or management person and his or her associates in the secondary
market, shall not exceed 4.9% of our outstanding shares of common
stock at
the conclusion of the stock offering. In calculating the number of
shares
held by any management person and his or her associates under this
paragraph, shares held by any tax-qualified employee plan or
non-tax-qualified employee plan of FSB Community Bankshares, Inc.
or
Fairport Savings Bank that are attributable to such person shall
not be
counted.
|
120
|
D.
|
The
aggregate amount of shares of common stock acquired in the stock
offering,
plus all prior issuances by FSB Community Bankshares, Inc., by any
of our
non-tax-qualified employee plans or any of our officers or directors
and
his or her associates, exclusive of any shares of common stock acquired
by
such plan or management person and his or her associates in the secondary
market, shall not exceed 4.9% of our shareholders’ equity at the
conclusion of the stock offering. In calculating the number of shares
held
by any management person and his or her associates under this paragraph,
shares held by any tax-qualified employee plan or non-tax-qualified
employee plan of FSB Community Bankshares, Inc. or Fairport Savings
Bank
that are attributable to such person shall not be
counted.
|
|
E.
|
The
aggregate amount of shares of common stock acquired in the stock
offering,
plus all prior issuances by FSB Community Bankshares, Inc., by any
one or
more of our tax-qualified employee stock benefit plans, exclusive
of any
shares of common stock acquired by such plans in the secondary market,
shall not exceed 4.9% of our outstanding shares of common stock at
the
conclusion of the stock offering.
|
|
F.
|
The
aggregate amount of shares of common stock acquired in the stock
offering,
plus all prior issuances by FSB Community Bankshares, Inc., by any
one or
more of our tax-qualified employee stock benefit plans, exclusive
of any
shares of common stock acquired by such plans in the secondary market,
shall not exceed 4.9% of our shareholders’ equity at the conclusion of the
stock offering.
|
|
G.
|
The
aggregate amount of shares of common stock acquired in the stock
offering,
plus all prior issuances by FSB Community Bankshares, Inc., by all
stock
benefit plans of FSB Community Bankshares, Inc. or Fairport Savings
Bank,
other than employee stock ownership plans, shall not exceed 32% of
our
outstanding shares of common stock held by persons other than FSB
Community Bankshares, MHC.
|
|
H.
|
The
aggregate amount of shares of common stock acquired in the stock
offering,
plus all prior issuances by FSB Community Bankshares, Inc., by all
non-tax-qualified employee plans or our officers or directors and
their
associates, exclusive of any shares of common stock acquired by such
plans
or management persons and their associates in the secondary market,
shall
not exceed 32% of our outstanding shares of common stock held by
persons
other than FSB Community Bankshares, MHC at the conclusion of the
stock
offering. In calculating the number of shares held by management persons
and their associates under this paragraph, shares held by any of
our
tax-qualified employee plans or non-tax-qualified employee plans
that are
attributable to such persons shall not be
counted.
|
121
|
I.
|
The
aggregate amount of shares of common stock acquired in the stock
offering,
plus all prior issuances by FSB Community Bankshares, Inc., by all
non-tax-qualified employee stock benefit plans or management persons
and
their associates, exclusive of any shares of common stock acquired
by such
plans or management persons and their associates in the secondary
market,
shall not exceed 25% of our shareholders’ equity held by persons other
than FSB Community Bankshares, MHC at the conclusion of the stock
offering. In calculating the number of shares held by management
persons
and their associates under this paragraph, shares held by any of
our
tax-qualified employee plans or non-tax-qualified employee plans
that are
attributable to such persons shall not be
counted.
|
|
J.
|
Notwithstanding
any other provision of the stock issuance plan, no person shall be
entitled to purchase any shares of common stock to the extent such
purchase would be illegal under any federal law or state law or regulation
or would violate regulations or policies of the National Association
of
Securities Dealers, Inc., particularly those regarding free riding
and
withholding. We and/or our agents may ask for an acceptable legal
opinion
from any purchaser as to the legality of such purchase and may refuse
to
honor any purchase order if such opinion is not timely
furnished.
|
|
K.
|
Our
board of directors has the right in its sole discretion to reject
any
order submitted by a person whose representations our board of directors
believes to be false or who it otherwise believes, either alone or
acting
in concert with others, is violating, circumventing, or intends to
violate, evade or circumvent the terms and conditions of the stock
issuance plan.
|
|
L.
|
A
minimum of 25 shares of common stock must be purchased by each person
purchasing shares in the stock offering to the extent those shares
are
available; provided, however, that in the event the minimum number
of
shares of common stock purchased times the price per share exceeds
$500,
then such minimum purchase requirement shall be reduced to such number
of
shares which when multiplied by the price per share shall not exceed
$500,
as determined by our board of
directors.
|
For
purposes of the plan, the members of our board of directors are not deemed
to be
acting in concert solely by reason of their board membership. The term
“associate” is used above to indicate any of the following relationships with a
person:
|
·
|
any
corporation or organization, other than FSB Community Bankshares,
MHC, FSB
Community Bankshares, Inc. or Fairport Savings Bank or a majority-owned
subsidiary of FSB Community Bankshares, MHC, FSB Community Bankshares,
Inc. or Fairport Savings Bank, of which a person is a senior officer
or
partner, or beneficially owns, directly or indirectly, 10% or more
of any
class of equity securities of the corporation or organization;
|
122
|
·
|
any
trust or other estate, if the person has a substantial beneficial
interest
in the trust or estate or is a trustee or fiduciary of the estate.
For
purposes of Office of Thrift Supervision Regulations Sections 563b.370,
563b.380, 563b.385, 563b.390 and 563b.505, a person who has a substantial
beneficial interest in one of our tax-qualified or non-tax-qualified
employee plans, or who is a trustee or fiduciary of the plan is not
an
associate of the plan. For purposes of Section 563b.370 of the Office
of
Thrift Supervision Regulations, our tax-qualified employee plans
are not
associates of a person;
|
|
·
|
any
person who is related by blood or marriage to such person
and:
|
|
(i)
|
who
lives in the same house as the person;
or
|
|
(ii)
|
who
is a director or senior officer of FSB Community Bankshares, MHC,
FSB
Community Bankshares, Inc. or Fairport Savings Bank or a subsidiary
thereof; and
|
|
·
|
any
person acting in concert with the persons or entities specified
above.
|
As
used
above, the term “acting in concert” means:
|
·
|
knowing
participation in a joint activity or interdependent conscious parallel
action towards a common goal, whether or not pursuant to an express
agreement; or
|
|
·
|
a
combination or pooling of voting or other interests in the securities
of
an issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or
otherwise.
|
A
person
or company that acts in concert with another person or company (“other party”)
shall also be deemed to be acting in concert with any person or company who
is
also acting in concert with that other party, except that any of our
tax-qualified employee plans will not be deemed to be acting in concert with
its
trustee or a person who serves in a similar capacity solely for the purpose
of
determining whether stock held by the trustee and stock held by the plan will
be
aggregated.
Persons
or companies who file jointly with any regulatory agency a Schedule 13D or
Schedule 13G under the Securities Exchange Act of 1934 with respect to any
security registered under Section 12 of such act will be deemed to be acting
in
concert.
123
Non-exclusive
examples of the applicability of the purchase limitations described above
include, but are not limited to, the following:
| (i) |
Depositor
A has multiple deposit accounts, each of which is registered in his
own
name. No Associate of or individual otherwise Acting in Concert with
Depositor A is purchasing shares of common stock in the subscription
offering. Depositor A can purchase a maximum of $150,000 of shares
of
common stock in the subscription
offering.
|
| (ii) |
Depositor
B has one deposit account registered in her own name. Depositor B
has
another deposit account that is held jointly with Depositor C (either
as
an “and” account, an “or” account, or in any other form of joint account).
No other Associate of or individual otherwise Acting in Concert with
either of Depositor B or Depositor C is purchasing shares of common
stock
in the subscription offering. Generally, no more than a total of
$150,000
of shares of common stock may be ordered in the subscription offering
through the ownership of these two deposit accounts. However, if
Depositor
C purchased $150,000 of shares of common stock through an individual
retirement account, Keogh account or 401(k) plan, then Depositor
B could
also purchase a maximum of $150,000 of shares of common stock in
the
subscription offering.
|
| (iii) |
Depositor
D and Depositor E have multiple joint accounts with each other that
are
all titled in the same manner. No other Associate of or individual
otherwise Acting in Concert with either of Depositor D or Depositor
E is
purchasing shares of common stock in the subscription offering. No
more
than a total of $150,000 of shares of common stock may be ordered
in the
subscription offering through the ownership of these deposit accounts,
regardless of whether Depositor D or Depositor E purchases shares
of
common stock through an individual retirement account, Keogh account
or
401(k) plan.
|
| (iv) |
Depositor
F has one deposit account registered in his own name. Depositor G,
who is
Depositor F’s spouse, has one deposit account registered in her own name.
No other Associate of or individual otherwise Acting in Concert with
either of Depositor F or Depositor G is purchasing shares of common
stock
in the subscription offering. The maximum combined amount of shares
of
common stock that may be purchased by Depositor F and Depositor G
through
the ownership of these two deposit accounts is a total of
$200,000.
|
Our
board
of directors may, in its sole discretion, increase the maximum purchase
limitation up to 9.99% of the shares being offered in the stock offering.
However, orders for shares exceeding 5.0% of the shares sold may not exceed,
in
the aggregate, 10% of the shares sold. Requests to purchase shares of common
stock under this provision will be allocated by our board of directors in
accordance with the priority rights and allocation procedures set forth above.
Depending upon market and financial conditions, and subject to certain
regulatory limitations, our board of directors, with the approval of the Office
of Thrift Supervision, may increase or decrease any of the above purchase
limitations at any time. In computing the number of shares of common stock
to be
allocated, all numbers will be rounded down to the next whole number.
124
Shares
of
common stock purchased in the stock offering will be freely transferable except
for shares of common stock purchased by executive officers and directors of
Fairport Savings Bank or FSB Community Bankshares, Inc. and except as described
below. In addition, under National Association of Securities Dealers, Inc.
guidelines, members of the National Association of Securities Dealers and their
associates are subject to certain reporting requirements upon purchase of these
securities.
Tax
Effects of the Stock Offering
We
have
received an opinion from our special counsel, Luse Gorman Pomerenk & Schick,
P.C., Washington, D.C., as to the material federal income tax consequences
of
the stock offering to FSB Community Bankshares, Inc. and as to the generally
applicable material federal income tax consequences of the stock offering to
our
account holders and persons who purchase common stock in the stock offering.
This opinion is based, among other things, on factual representations made
by
us, on certain assumptions stated in the opinion, on the Internal Revenue Code,
regulations now in effect or proposed, current administrative rulings, practices
and judicial authority, all of which are subject to change (which change may
be
made with retroactive effect). This opinion has been included as an exhibit
to
our registration statement filed with the Securities and Exchange Commission,
of
which this prospectus is a part.
The
opinion provides, among other things, that:
|
1.
|
we
will not recognize gain or loss upon the constructive exchange by
FSB
Community Bankshares, MHC of the shares of our common stock that
it
presently holds for the shares of our common stock that will be issued
to
it in connection with the stock
offering;
|
|
2.
|
no
gain or loss or taxable income will be recognized by eligible account
holders, supplemental eligible account holders or other members upon
the
distribution to them or their exercise of nontransferable subscription
rights to purchase our shares of common stock;
|
|
3.
|
it
is more likely than not that the tax “basis” of our shares of common stock
to persons who purchase shares in the stock offering will be the
purchase
price thereof, and that their holding period for the shares will
commence
upon the consummation of the stock offering;
and
|
|
4.
|
no
gain or loss will be recognized by us on our receipt of cash in exchange
for shares of our common stock sold in the stock offering.
|
The
tax
opinions as to items 2 and 3 above are based on the position that subscription
rights to be received by eligible account holders, supplemental eligible account
holders and other members do not have any economic value at the time of
distribution or at the time the subscription rights are exercised. In this
regard, Luse Gorman Pomerenk & Schick, P.C. noted that the subscription
rights will be granted at no cost to the recipients, are legally
non-transferable and of short duration, and will provide the recipient with
the
right only to purchase shares of common stock at the same price to be paid
by
members of the general public in any community offering. The firm also noted
that the Internal Revenue Service has not in the past concluded that
subscription rights have value. However, as stated in the opinion, the issue
of
whether or not the nontransferable subscription rights have value is based
on
all the facts and circumstances.
125
The
opinion of Luse Gorman Pomerenk & Schick, P.C., unlike a letter ruling
issued by the Internal Revenue Service, is not binding on the Internal Revenue
Service and the conclusions expressed therein may be challenged at a future
date. The Internal Revenue Service has issued favorable rulings for transactions
substantially similar to the stock offering, but any such ruling may not be
cited as precedent by any taxpayer other than the taxpayer to whom the ruling
is
addressed. We do not plan to apply for a letter ruling concerning the
transactions described herein.
We
also
have received a letter from RP Financial, LC stating its belief that the
subscription rights do not have any ascertainable fair market value and that
the
price at which the subscription rights are exercisable will not be more or
less
than the fair market value of the shares on the date of the exercise. This
position is based on the fact that these rights are acquired by the recipients
without cost, are nontransferable and of short duration, and afford the
recipients the right only to purchase the shares of common stock at the same
price as will be paid by members of the general public in any community
offering.
If
the
subscription rights granted to eligible account holders, supplemental eligible
account holders and other members are deemed to have an ascertainable value,
receipt of these rights could result in taxable gain to those eligible account
holders, supplemental eligible account holders and other members who exercise
the subscription rights in an amount equal to the ascertainable value, and
we
could recognize gain on a distribution. Eligible account holders, supplemental
eligible account holders and other members are encouraged to consult with their
own tax advisors as to the tax consequences in the event that subscription
rights are deemed to have an ascertainable value.
The
federal tax opinion referred to in this prospectus is filed as an exhibit to
the
registration statement. See “Where You Can Find More Information.”
Stock
Registration Instructions
Your
subscription rights may be exercised only by you and only for your own account.
With the exception of IRA and Keogh account stock purchases, shares purchased
in
the subscription offering must be registered in the names of all depositors
on
the qualifying account(s). Deleting names of depositors or adding non-depositors
or otherwise altering the form of beneficial ownership of a qualifying account
will result in the loss of your subscription rights. When registering your
stock
purchase on the order form, you should not add the name(s) of any persons who
have no subscription rights or who qualify in a lower purchase priority than
you
do. Doing so may jeopardize your subscription rights.
Restrictions
on Transferability of Subscription Rights
Federal
law prohibits the transfer of subscription rights. We may reasonably investigate
to determine compliance with this restriction. Persons selling or otherwise
transferring their rights to subscribe for shares of common stock in the
subscription offering or subscribing for shares of common stock on behalf of
another person may forfeit those rights and may face possible further sanctions
and penalties imposed by the Office of Thrift Supervision or another agency
of
the United States Government. We
will pursue any and all legal and equitable remedies in the event we become
aware of the transfer of subscription rights and we will not honor orders known
by us to involve the transfer of these rights.
Each
person exercising subscription rights will be required to certify that he or
she
is purchasing shares solely for his or her own account and that he or she has
no
agreement or understanding with any other person for the sale or transfer of
the
shares of common stock. Once tendered, subscription orders cannot be revoked
without our consent.
126
Marketing
Arrangements
We
have
retained Sandler O’Neill & Partners, L.P. as a financial advisor to consult
with and advise and assist us, on a best efforts basis, in the distribution
of
shares in the stock offering. Sandler O’Neill & Partners, L.P. is a
broker-dealer registered with the Securities and Exchange Commission and a
member of the National Association of Securities Dealers, Inc. The services
that
Sandler O’Neill & Partners, L.P. will provide include:
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consulting
as to the marketing implications of the stock issuance, including
the
percentage of common stock to be
offered;
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reviewing
with our board of directors the financial impact of the stock offering
on
FSB Community Bankshares, Inc. and Fairport Savings Bank based on
the
independent appraiser’s appraisal of the shares of common
stock;
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reviewing
all stock offering documents, including the prospectus, stock order
forms
and related offering materials;
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assisting
in the design and implementation of a marketing strategy for the
stock
offering;
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assisting
us in scheduling and preparing for meetings with potential investors
and
broker-dealers in connection with the stock offering;
and
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providing
such other general advice and assistance as may be requested to promote
the successful completion of the stock
offering.
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For
these
services, Sandler O’Neill will receive a fee of $150,000, of which $25,000 has
been paid as of the date of this prospectus. In the event there is a syndicated
community offering, the total fees paid to Sandler O’Neill and other National
Association of Securities Dealers member firms in the syndicated community
offering will not exceed 5.5% of the aggregate dollar amount of the shares
of
common stock sold in the syndicated community offering.
We
have
agreed to reimburse Sandler O’Neill for its reasonable out-of-pocket expenses up
to a maximum of $60,000. We will indemnify Sandler O’Neill against liabilities
and expenses (including legal fees) incurred in connection with certain claims
or liabilities arising out of or based upon untrue statements or omissions
contained in the offering materials for the shares of common stock, including
liabilities under the Securities Act of 1933.
127
We
have
also engaged Sandler O’Neill to act as our conversion agent in connection with
the stock offering. For these services, Sandler O’Neill will receive a fee of
$15,000, of which $5,000 has been paid as of the date of this prospectus. In
its
role as conversion agent, Sandler O’Neill will assist us in the stock offering
as follows:
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consolidation
of accounts and development of a central
file;
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preparation
of stock order forms;
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organization
and supervision of the Stock Information Center;
and
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subscription
services.
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Sandler
O’Neill & Partners, L.P. has not prepared any report or opinion constituting
a recommendation or advice to us or to persons who subscribe for shares of
common stock, nor has it prepared an opinion as to the fairness to us of the
purchase price or the terms of the stock to be sold. Sandler O’Neill &
Partners, L.P. expresses no opinion as to the prices at which shares of common
stock to be issued may trade.
Our
directors and executive officers may participate in the stock offering. However,
such participation will be limited to answering questions about FSB Community
Bankshares, Inc. and Fairport Savings Bank. In addition, trained employees
may
provide ministerial services, such as providing clerical work in effecting
a
sales transaction or answering questions of a ministerial nature. Questions
by
prospective purchasers regarding the stock offering process will be directed
to
registered representatives of Sandler O’Neill. We will rely on Rule 3a4-1 under
the Securities Exchange Act of 1934, as amended, so as to permit officers,
directors and employees to participate in the sale of the common stock. No
officer, director or employee will be compensated for his or her participation
by the payment of commissions or other remuneration based either directly or
indirectly on the transactions in the shares of common stock.
Description
of Sales Activities
We
will
offer the shares of common stock in the subscription offering and community
offering principally by the distribution of this prospectus and through
activities conducted at our Stock Information Center. The Stock Information
Center is expected to operate during normal business hours throughout the
subscription offering and community offering. It is expected that at any
particular time one or more Sandler O’Neill & Partners, L.P. employees will
be working at the Stock Information Center. Employees of Sandler O’Neill &
Partners, L.P. will be responsible for mailing materials relating to the stock
offering, responding to questions regarding the stock offering and processing
stock orders.
128
Sales
of
shares of common stock will be made by registered representatives affiliated
with Sandler O’Neill & Partners, L.P. or by the selected dealers
managed by Sandler O’Neill & Partners, L.P. Our officers and employees
may participate in the offering in clerical capacities, providing administrative
support in effecting sales transactions or, when permitted by state securities
laws, answering questions of a mechanical nature relating to the proper
execution of the order form. Our officers may answer questions regarding our
business when permitted by state securities laws. Other questions of prospective
purchasers, including questions as to the advisability or nature of the
investment, will be directed to registered representatives. Our officers and
employees have been instructed not to solicit offers to purchase shares of
common stock or provide advice regarding the purchase of shares of common stock.
None
of
our officers, directors or employees will be compensated, directly or
indirectly, for any activities in connection with the offer or sale of
securities issued in the stock offering.
None
of
our personnel participating in the stock offering is registered or licensed
as a
broker or dealer or an agent of a broker or dealer. Our personnel will assist
in
the above-described sales activities under an exemption from registration as
a
broker or dealer provided by Rule 3a4-1 promulgated under the Securities
Exchange Act of 1934. Rule 3a4-1 generally provides that an “associated person
of an issuer” of securities will not be deemed a broker solely by reason of
participation in the sale of securities of the issuer if the associated person
meets certain conditions. These conditions include, but are not limited to,
that
the associated person participating in the sale of an issuer’s securities is not
compensated in connection with the offering at the time of participation, that
the person is not associated with a broker or dealer and that the person
observes certain limitations on his or her participation in the sale of
securities. For purposes of this exemption, “associated person of an issuer” is
defined to include any person who is a director, officer or employee of the
issuer or a company that controls, is controlled by or is under common control
with the issuer.
How
We Determined the Stock Pricing and the Number of Shares to be
Issued
The
stock
issuance plan and federal regulations require that the aggregate purchase price
of the shares of common stock sold in the stock offering be based on the
appraised pro forma market value of the shares of common stock, as determined
on
the basis of an independent valuation. We retained RP Financial, LC to make
the
independent valuation. RP Financial, LC will receive a fee of $30,000 for the
preparation of the initial and final independent valuations, and will receive
a
fee of $5,000 for any additional updates to the independent valuation. We have
agreed to indemnify RP Financial, LC and its employees and affiliates against
certain losses (including any losses in connection with claims under the federal
securities laws) arising out of its services as appraiser, except where RP
Financial, LC’s liability results from its negligence or bad faith.
The
independent valuation was prepared by RP Financial, LC in reliance upon the
information contained in the prospectus, including the financial statements.
RP
Financial, LC also considered the following factors, among others:
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our
present and projected operating results and financial condition,
including
the reductions in earnings we have experienced in recent periods
and the
anticipated increased costs resulting from opening the new branch
office;
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129
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the
economic and demographic conditions in our market
areas;
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historical
financial and other information relating to FSB Community Bankshares,
Inc.
and Fairport Savings Bank;
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a
comparative evaluation of our operating and financial statistics
with
those of other publicly traded subsidiaries of holding companies;
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the
impact of the stock offering on our shareholders’ equity and earnings
potential;
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our
proposed dividend policy; and
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the
trading market for securities of comparable institutions and general
conditions in the market for such securities.
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Consistent
with the Office of Thrift Supervision appraisal guidelines and regulatory
guidance, the appraisal applied three primary methodologies: the pro forma
price-to-book value approach applied to reported and tangible book value, the
pro forma price-to-earnings approach applied to reported and core earnings,
and
the pro forma price-to-assets approach. The market value ratios applied in
the
three methodologies were based upon the current market valuations of the peer
group companies identified by RP Financial, LC, subject to valuation adjustments
applied by RP Financial, LC to account for differences between FSB Community
Bankshares, Inc. and the peer group. The peer group was comprised of ten
publicly-traded institutions operating as subsidiaries of mutual holding
companies. The valuation considered market value ratios for FSB Community
Bankshares, Inc. and the peer group on both a fully-converted basis and a
non-fully converted basis.
On
the
basis of the foregoing, RP Financial, LC advised us that as of February 23,
2007, the estimated pro forma market value of the shares of common stock on
a
fully converted basis ranged from a minimum of $17.9 million to a maximum of
$24.2 million, with a midpoint of $21.0 million (the estimated valuation range).
Our board of directors determined to offer the shares of common stock in the
stock offering at the purchase price of $10.00 per share and that 47.0% of
the
shares issued should be held by purchasers in the stock offering and 53.0%
should be held by FSB Community Bankshares, MHC. Based on the estimated
valuation range and the purchase price of $10.00 per share, the number of shares
of common stock that we will issue will range from 1,785,000 shares to 2,415,000
shares, with a midpoint of 2,100,000 shares, and the number of shares sold
in
the stock offering will range from 838,950 shares to 1,135,050 shares, with
a
midpoint of 987,000 shares.
Our
board
of directors reviewed the independent valuation and, in particular, considered
our financial condition and results of operations for the year ended December
31, 2006, financial comparisons to other financial institutions, and stock
market conditions for financial institutions and other issuers generally, all
of
which are set forth in the independent valuation. The board also reviewed the
methodology and the assumptions used by RP Financial, LC in preparing the
independent valuation, and concluded that the methodology and assumptions were
reasonable. In preparing the valuation, RP Financial, LC applied downward
valuation adjustments relative to the peer group for financial condition,
profitability, growth and viability of earnings, dividends, and liquidity of
the
shares. The primary factors leading to the adjustments were related to the
lower
historical earnings of Fairport Savings Bank as compared to the peer group,
a
factor influenced by recent reductions in net interest income and increased
expenses related to branching, and the anticipated lower levels of liquidity
in
the common stock relative to the peer group companies.
130
The
estimated valuation range may be amended with the approval of the Office of
Thrift Supervision, if necessitated by subsequent developments in our financial
condition or market conditions generally.
Following
commencement of the subscription offering, the maximum of the estimated
valuation range may be increased up to $27.8 million and the maximum number
of
shares that will be outstanding immediately following the stock offering may
be
increased up to 2,777,250 shares. Under such circumstances, the number of shares
sold in the stock offering will be increased up to 1,305,308 shares and the
number of shares held by FSB Community Bankshares, MHC will be increased up
to
1,471,942 shares. The increase in the valuation range may occur to reflect
changes in market conditions, without the resolicitation of subscribers. The
minimum of the estimated valuation range and the minimum of the offering range
may not be decreased without a resolicitation of subscribers. The purchase
price
of $10.00 per share will remain fixed. See “—Limitations On Purchase of Shares”
as to the method of distribution and allocation of additional shares of common
stock that may be issued in the event of an increase in the offering range
to
fill unfilled orders in the subscription and community offerings.
The
independent valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of our
common stock. RP Financial, LC did not independently verify the financial
statements and other information we provided, nor did RP Financial, LC value
independently our assets or liabilities. The independent valuation considers
us
as a going concern and should not be considered as an indication of our
liquidation value. Moreover, because the valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject
to
change from time to time, no assurance can be given that persons purchasing
shares in the stock offering will thereafter be able to sell such shares at
prices at or above the purchase price.
The
independent valuation will be updated at the time of the completion of the
stock
offering. If the update to the independent valuation at the conclusion of the
stock offering results in an increase in the pro forma market value of the
shares of common stock to more than $27.8 million or a decrease in the pro
forma
market value to less than $17.9 million, then, after consulting with the Office
of Thrift Supervision, we may terminate the stock issuance plan and return
all
funds promptly, with interest on payments made by check, certified or teller’s
check, bank draft or money order; extend or hold a new subscription offering,
community offering, or both; establish a new offering range and commence a
resolicitation of subscribers; or take such other actions as may be permitted
by
the Office of Thrift Supervision, in order to complete the stock offering.
In
the event that a resolicitation is commenced, unless an affirmative response
is
received within a reasonable period of time, all funds will be returned promptly
to investors as described above. A resolicitation, if any, following the
conclusion of the subscription and community offerings would not exceed 45
days
unless further extended by the Office of Thrift Supervision, for periods of
up
to 90 days, not to extend beyond 24 months following the date of the approval
by
the Office of Thrift Supervision of the stock issuance plan, or May 14,
2009.
131
An
increase in the independent valuation and the number of shares to be issued
in
the stock offering would decrease both a subscriber’s ownership interest and our
pro forma earnings and shareholders’ equity on a per share basis while
increasing pro forma earnings and shareholders’ equity on an aggregate basis. A
decrease in the independent valuation and the number of shares of common stock
to be issued in the stock offering would increase both a subscriber’s ownership
interest and our pro forma earnings and shareholders’ equity on a per share
basis while decreasing pro forma net income and shareholders’ equity on an
aggregate basis. For a presentation of the effects of such changes, see “Pro
Forma Data.”
Copies
of
the appraisal report of RP Financial, LC and the detailed memorandum of the
appraiser setting forth the method and assumptions for such appraisal are
available for inspection at the main office of Fairport Savings Bank and the
other locations specified under “Where You Can Find More
Information.”
No
sale
of shares of common stock may occur unless, prior to such sale, RP Financial,
LC
confirms to the Office of Thrift Supervision and us that, to the best of its
knowledge, nothing of a material nature has occurred that, taking into account
all relevant factors, would cause RP Financial, LC to conclude that the
independent valuation is incompatible with its estimate of the pro forma market
value of the shares of common stock at the conclusion of the stock offering.
Any
change that would result in an aggregate purchase price that is below the
minimum or above the maximum of the estimated valuation range would be subject
to approval of the Office of Thrift Supervision. If such confirmation is not
received, we may extend the stock offering, reopen the stock offering or
commence a new stock offering, establish a new estimated valuation range and
commence a resolicitation of all purchasers with the approval of the Office
of
Thrift Supervision, or take such other actions as permitted by the Office of
Thrift Supervision, in order to complete the stock offering.
Prospectus
Delivery and Procedure for Purchasing Shares
Prospectus
Delivery. To
ensure
that each purchaser receives a prospectus at least 48 hours prior to the end
of
the stock offering, in accordance with Rule 15c2-8 under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), no prospectus will be mailed later
than five days or hand delivered any later than two days prior to the end of
the
stock offering. Execution of the order form will confirm receipt or delivery
of
a prospectus in accordance with Rule 15c2-8. Order forms will be distributed
only with a prospectus. Neither we nor Sandler O’Neill & Partners, L.P. is
obligated to deliver a prospectus and an order form by any means other than
the
U.S. Postal Service.
Expiration
Date. The
stock
offering will terminate at 5:00 p.m., Eastern time, on June 14, 2007, unless
extended by us for up to 90 days following the date of Office of Thrift
Supervision approval of the use of this prospectus, which is August 13, 2007,
or, if approved by the Office of Thrift Supervision, for an additional period
after August 13, 2007 (as so extended, the “expiration date”). We are not
required to give purchasers notice of any extension unless the expiration date
is later than August 13, 2007, in which event purchasers will be given the
right
to increase, decrease, confirm, or rescind their orders.
132
Use
of Order Forms. In
order
to purchase shares of common stock, each purchaser must complete an order form,
except for certain persons purchasing in the syndicated community offering
as
more fully described below. Any person receiving an order form who desires
to
purchase shares of common stock may do so by delivering to us, a properly
executed and completed order form, together with full payment for the shares
of
common stock purchased. The order form must be received, not post-marked, at
the
Stock Information Center by U.S. Mail or overnight delivery, prior to 5:00
p.m.,
Eastern time, on June 14, 2007. Hand delivery of stock order forms may be made
only to the main office of Fairport Savings Bank located at 45 South Main
Street, Fairport, New York and must be received no later than 5:00 p.m., Eastern
time, on June 14, 2007, unless we extend this deadline. Stock
order forms will not be accepted at any of our offices other than our main
office.
Each
person ordering shares of common stock is required to represent that he or
she
is purchasing such shares for his or her own account. Our interpretation of
the
terms and conditions of the stock issuance plan and of the acceptability of
the
order forms will be final. We are not required to accept copies of order
forms.
To
ensure
that eligible account holders, supplemental eligible account holders and other
members are properly identified as to their stock purchase priorities, such
parties must list all deposit accounts on the order form giving all names on
each deposit account and the account numbers at the applicable eligibility
date.
Failure to list all of your account relationships, all of which will be reviewed
when considering relevant account relationships in the event of an
oversubscription of shares of our common stock, could result in a loss of all
or
part of your share allocation in the event of an oversubscription. In the event
of an oversubscription of shares of our common stock, shares will be allocated
in accordance with the stock issuance plan. Our interpretation of the terms
and
conditions of the stock issuance plan and of the acceptability of the order
form
will be final. If the number of shares allocated to you is less than the number
of shares for which you have subscribed, we will first use funds from the check
or money order you provided, and secondly from any account from which you have
requested that funds be withdrawn.
We
are not required to accept orders submitted on photocopied or telecopied order
forms. Orders cannot and will not be accepted without the execution of the
certification appearing on the order form. We
are
not required to notify subscribers of incomplete or improperly executed order
forms and we have the right to waive or permit the correction of incomplete
or
improperly executed order forms as long as it is performed before the expiration
of the stock offering. We do not represent, however, that we will do so and
we
have no affirmative duty to notify any prospective subscriber of any such
defects.
Payment
for Shares.
Payment
for all shares will be required to accompany a completed order form for the
purchase to be valid. Payment for shares may be made by check or money order
made payable to Fairport Savings Bank, or authorization of withdrawal from
a
deposit account maintained with Fairport Savings Bank. You may not use a check
drawn on a Fairport Savings Bank line of credit, and we will not accept
third-party checks (a check written by someone other than you) payable to you
and endorsed over to Fairport Savings Bank. Appropriate means by which such
withdrawals may be authorized are provided in the order forms.
133
Once
a
withdrawal amount has been authorized, a hold will be placed on such funds,
making them unavailable to the depositor until the stock offering has been
completed or terminated. In the case of payments authorized to be made through
withdrawal from deposit accounts, all funds authorized for withdrawal will
continue to earn interest at the contract rate until the stock offering is
completed or terminated.
Interest
penalties for early withdrawal applicable to certificate of deposit accounts
at
Fairport Savings Bank will not apply to withdrawals authorized for the purchase
of shares of common stock. However, if a withdrawal results in a certificate
of
deposit account with a balance less than the applicable minimum balance
requirement, the certificate of deposit will be canceled at the time of
withdrawal without penalty, and the remaining balance will earn interest at
our
passbook rate subsequent to the withdrawal.
Payments
we receive will be placed in a segregated savings account at Fairport Savings
Bank or, at our discretion, another federally insured depository institution,
and will be paid interest at Fairport Savings Bank’s passbook rate from the date
payment is received until the stock offering is completed or terminated. Such
interest will be paid by check on all funds held, including funds accepted
as
payment for shares of common stock, promptly following completion or termination
of the stock offering. Subscribers’ funds will be transmitted to the segregated
account referred to above no later than noon of the next business day where
they
will be invested in investments that are permissible under SEC Rule
15c2-4.
The
employee stock ownership plan will not be required to pay for the shares of
common stock it intends to purchase until consummation of the stock offering,
provided that there is a loan commitment to lend to the employee stock ownership
plan the amount of funds necessary to purchase the number of shares ordered.
Owners
of
self-directed individual retirement accounts may use the assets of such
individual retirement accounts to purchase shares of common stock in the stock
offering, provided that the individual retirement accounts are not maintained
at
Fairport Savings Bank. Persons with individual retirement accounts maintained
with us must have their accounts transferred to a self-directed individual
retirement account with an unaffiliated trustee in order to purchase shares
of
common stock in the stock offering. In addition, the Employee Retirement Income
Security Act (“ERISA”) and Internal Revenue Service regulations require that
executive officers, trustees, and 10% shareholders who use self-directed
individual retirement account funds and/or Keogh plan accounts to purchase
shares of common stock in the stock offering, make such purchase for the
exclusive benefit of the individual retirement account and/or Keogh plan
participant. Assistance on how to transfer individual retirement accounts
maintained at Fairport Savings Bank can be obtained from the Stock Information
Center. Depositors interested in using funds in an individual retirement account
maintained at Fairport Savings Bank should contact the Stock Information Center
as soon as possible.
Once
submitted, an order cannot be modified or revoked unless the stock offering
is
terminated or extended beyond August 13, 2007.
134
Depending
on market conditions, the shares of common stock may be offered for sale to
the
general public on a best efforts basis in a syndicated community offering by
a
selling group of broker-dealers to be managed by Sandler O’Neill & Partners,
L.P. Sandler O’Neill & Partners, L.P., in its discretion, will instruct
selected broker-dealers as to the number of shares of common stock to be
allocated to each selected broker-dealer. Only upon allocation of shares of
common stock to selected broker-dealers may they take orders from their
customers. Investors who desire to purchase shares of common stock in the
community offering directly through a selected broker-dealer, which may include
Sandler O’Neill & Partners, L.P., will be advised that the members of the
selling group are required either:
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upon
receipt of an executed order form or direction to execute an order
form on
behalf of an investor, to forward the appropriate purchase price
to us for
deposit in a segregated account on or before 12:00 noon, Eastern
time, of
the business day next following such receipt or execution;
or
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(b)
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upon
receipt of confirmation by such member of the selling group of an
investor’s interest in purchasing shares of common stock, and following a
mailing of an acknowledgment by such member to such investor on the
business day next following receipt of confirmation, to debit the
account
of such investor on the third business day next following receipt
of
confirmation and to forward the appropriate purchase price to us
for
deposit in the segregated account on or before 12:00 noon, prevailing
time, of the business day next following such
debiting.
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Payment
for any shares purchased pursuant to alternative (a) above must be made by
check
in full payment therefor. Payment for shares of common stock purchased pursuant
to alternative (b) above may be made by wire transfer to Fairport Savings
Bank.
Delivery
of Stock Certificates. Certificates
representing shares of common stock issued in the stock offering will be mailed
to the persons entitled thereto at the registration address noted on the order
form, as soon as practicable following consummation of the stock offering.
Any
certificates returned as undeliverable will be held by us until claimed by
persons legally entitled thereto or otherwise disposed of in accordance with
applicable law. Until certificates for the shares of common stock are available
and delivered to purchasers, purchasers may not be able to sell the shares
of
common stock that they ordered.
Restrictions
on Purchase or Transfer of Stock by Directors and Officers
All
shares of the common stock purchased by our directors and executive officers
and
their associates in the stock offering will be subject to the restriction that
such shares may not be sold or otherwise disposed of for value for a period
of
one year following the date of purchase, except for any disposition of such
shares following the death of the original purchaser or by reason of an exchange
of securities in connection with a merger or acquisition approved by the
applicable regulatory authorities. Our directors’ and officers’ sales of shares
of our common stock will also be subject to certain insider trading and other
transfer restrictions under the federal securities laws. See “Supervision and
Regulation—Federal Securities Laws.”
135
During
the three-year period following the stock offering, purchases of our shares
of
common stock by directors, executive officers, or any person who was an
executive officer or director of Fairport Savings Bank after adoption of the
stock issuance plan and their associates may be made only through a broker
or
dealer registered with the Securities and Exchange Commission, except with
the
prior written approval of the Office of Thrift Supervision. This restriction
does not apply, however, to negotiated transactions involving more than 1%
of
our outstanding shares of common stock or to the purchase of shares of common
stock under the stock-based benefit plan expected to be implemented subsequent
to completion of the stock offering.
We
have
filed with the Securities and Exchange Commission a registration statement
under
the Securities Act of 1933, as amended, for the registration of the sale of
shares of common stock to be issued in the stock offering. The registration
under the Securities Act of the sale of the common stock to be issued in the
stock offering does not cover the resale of the shares of common stock. Shares
of common stock purchased by persons who are not our affiliates may be resold
without registration. Shares purchased by our affiliates will have resale
restrictions under Rule 144 of the Securities Act of 1933. If we meet the
current public information requirements of Rule 144, each of our affiliates
who
complies with the other conditions of Rule 144, including those that require
the
affiliate’s sale to be aggregated with those of certain other persons, would be
able to sell in the public market, without registration, a number of shares
not
to exceed, in any three-month period, the greater of 1% of our outstanding
shares of common stock or the average weekly volume of trading in the shares
of
common stock during the preceding four calendar weeks. In the future, we may
permit affiliates to have their shares of common stock registered for sale
under
the Securities Act of 1933 under certain circumstances.
Under
guidelines of the National Association of Securities Dealers, members of the
National Association of Securities Dealers and their associates face certain
reporting requirements upon purchase of the securities.
Interpretation,
Amendment and Termination
All
interpretations of the stock issuance plan by our board of directors will be
final, subject to the authority of the Office of Thrift Supervision. The stock
issuance plan provides that, if deemed necessary or desirable by our board
of
directors, the plan may be substantially amended by a majority vote of the
board
of directors as a result of comments from regulatory authorities or otherwise,
at any time prior to the approval of the plan by the Office of Thrift
Supervision, and at any time thereafter with the concurrence of the Office
of
Thrift Supervision. The stock issuance plan may be terminated by a majority
vote
of the board of directors at any time prior to approval of the plan by the
Office of Thrift Supervision and may be terminated at any time thereafter with
the concurrence of the Office of Thrift Supervision.
Stock
Information Center
If
you
have any questions regarding the stock offering, please call the Stock
Information Center at (866) 818-9961, from 10:00 a.m. to 4:00 p.m., Eastern
time, Monday through Friday.
136
RESTRICTIONS
ON
THE ACQUISITION OF
FSB
COMMUNITY BANKSHARES, INC. AND FAIRPORT SAVINGS BANK
General
The
principal federal regulatory restrictions that affect the ability of any person,
firm or entity to acquire FSB Community Bankshares, Inc. or Fairport Savings
Bank or their respective capital stock are described below. Also discussed
are
certain provisions in our charter and bylaws that may be deemed to affect the
ability of a person, firm or entity to acquire us. Lastly, as a federally
chartered mutual holding company, FSB Community Bankshares, MHC will always
own
a majority of our outstanding shares of common stock so long as we operate
in
the mutual holding company structure, and therefore will be able to control
the
outcome of any action requiring a vote of all of our shareholders.
Federal
Law
The
Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings institution unless the Office of Thrift Supervision has
been given 60 days prior written notice. The Home Owners’ Loan Act provides that
no company may acquire “control” of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed
to
have been acquired by, among other things, the acquisition of more than 25%
of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control
is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class
of
stock of a savings institution, where certain enumerated “control factors” are
also present in the acquisition.
The
Office of Thrift Supervision may prohibit an acquisition of control
if:
|
·
|
it
would result in a monopoly or substantially lessen
competition;
|
|
·
|
the
financial condition of the acquiring person might jeopardize the
financial
stability of the institution; or
|
|
·
|
the
competence, experience or integrity of the acquiring person indicates
that
it would not be in the interests of the depositors or of the public
to
permit the acquisition of control by such
person.
|
These
restrictions do not apply to the acquisition of a savings institution’s capital
stock by one or more tax-qualified employee stock benefit plans, provided that
the plans do not beneficially own more than 25% of any class of equity security
of the savings institution.
For
a
period of three years following completion of the stock issuance, Office of
Thrift Supervision regulations generally prohibit any person from acquiring
or
making an offer to acquire beneficial ownership of more than 10% of the stock
of
FSB Community Bankshares, Inc. or Fairport Savings Bank without the prior
approval of the Office of Thrift Supervision.
137
Corporate
Governance Provisions in the Charter and Bylaws of FSB Community Bankshares,
Inc. and Fairport Savings Bank
The
following discussion is a summary of certain provisions of our charter and
bylaws that relate to corporate governance. The description is necessarily
general and qualified by reference to the charter and bylaws.
Classified
Board of Directors.
Our
board of directors is required by our bylaws to be divided into three staggered
classes that are as equal in number as possible. Each year one class will be
elected by our shareholders for a three-year term and until their successors
are
elected and qualified. A classified board promotes continuity and stability
of
our management, but makes it more difficult for shareholders to change a
majority of the directors because it generally takes at least two annual
elections of directors for this to occur.
Authorized
but Unissued Shares of Capital Stock.
Following the stock offering, we will have authorized but unissued shares of
preferred stock and common stock. See “Description of Capital Stock of FSB
Community Bankshares, Inc.” Although these shares could be used by our board of
directors to make it more difficult or to discourage an attempt to obtain
control of us through a merger, tender offer, proxy contest or otherwise, it
is
unlikely that we would use or need to use shares for these purposes since FSB
Community Bankshares, MHC will own a majority of our shares of common stock
for
as long as we remain in the mutual holding company structure.
How
Shares are Voted.
Our
charter provides that there will not be cumulative voting by shareholders for
the election of our directors. No cumulative voting rights means that FSB
Community Bankshares, MHC, as the holder of a majority of the shares eligible
to
be voted at a meeting of shareholders, may elect all directors to be elected
at
our meetings of shareholders. This would enable FSB Community Bankshares, MHC
to
prevent minority shareholder representation on our board of
directors.
Procedures
for Shareholder Nominations or Proposals for New
Business.
Our
bylaws provide that any shareholder that desires to nominate a person for
election as a director or propose new business at a meeting of shareholders
must
send written notice to our Secretary at least five days before the date of
the
annual meeting. The bylaws further provide that if a shareholder desires to
nominate a director or propose new business and does not follow the prescribed
procedures, the proposal will not be considered until an adjourned, special,
or
annual meeting of the shareholders taking place 30 days or more thereafter.
Management believes that it is in the best interests of FSB Community
Bankshares, Inc. and our shareholders to provide enough time for management
to
disclose to shareholders information about a dissident slate of nominations
for
directors. This advance notice requirement may also give management time to
solicit its own proxies in an attempt to defeat any dissident slate of
nominations if management thinks it is in the best interest of shareholders
generally. Similarly, adequate advance notice of shareholder proposals will
give
management time to study such proposals and to determine whether to recommend
to
the shareholders that such proposals be adopted.
138
Benefit
Plans
In
addition to the provisions of our charter and bylaws described above, certain
benefit plans we have adopted in connection with the stock offering, or expect
to adopt following completion of the stock offering, contain, or may contain,
provisions that also may discourage hostile takeover attempts that our board
of
directors might conclude are not in the best interests of FSB Community
Bankshares, Inc., Fairport Savings Bank or our shareholders.
DESCRIPTION
OF
CAPITAL STOCK OF FSB COMMUNITY BANKSHARES,
INC.
General
We
are
authorized to issue 10,000,000 shares of common stock with a par value of $0.10
per share, and 1,000,000 shares of serial preferred stock. Each share of our
common stock will have the same relative rights as, and will be identical in
all
respects with, each other share of common stock. Upon payment of the purchase
price for the shares of common stock in accordance with the stock issuance
plan,
all of the stock will be duly authorized, fully paid and nonassessable.
Presented below is a description of our capital stock that is deemed material
to
an investment decision with respect to the stock offering. The shares of common
stock will represent nonwithdrawable capital, will not be an account of an
insurable type, and will not be insured by the Federal Deposit Insurance
Corporation.
We
currently expect that we will have a maximum of up to 2,777,250 shares of common
stock outstanding after the stock offering, of which 1,305,308 shares will
be
held by persons other than FSB Community Bankshares, MHC. Our board of directors
can, without shareholder approval, issue additional shares of common stock,
although FSB Community Bankshares, MHC, so long as it is in existence, must
own
a majority of our outstanding shares of common stock. Our issuance of additional
shares of common stock could dilute the voting strength of existing shareholders
and may assist management in impeding an unfriendly takeover or attempted change
in control. We have no present plans to issue additional shares of common stock
other than pursuant to the stock benefit plans previously
discussed.
Common
Stock
Distributions.
We
can
pay dividends if, as and when declared by our board of directors, subject to
compliance with limitations imposed by law. The holders of our shares of common
stock will be entitled to receive and share equally in such dividends as may
be
declared by our board of directors out of funds legally available therefor.
Dividends from FSB Community Bankshares, Inc. will depend, in large part, upon
the net proceeds of the stock offering we retain, and to a lesser extent, on
the
receipt of future dividends from Fairport Savings Bank. Initially, we will
have
no additional sources of income to support dividends other than earnings from
the investment of proceeds of the stock offering and interest payments received
in connection with our loan to the employee stock ownership plan. A regulation
of the Office of Thrift Supervision imposes limitations on “capital
distributions” by savings institutions. See “Supervision and Regulation—Capital
Distributions.” Pursuant to our charter, we are authorized to issue preferred
stock. If we issue preferred stock, the holders thereof may have a priority
over
the holders of the common stock with respect to dividends.
139
Voting
Rights.
Upon the
effective date of the stock offering, the holders of shares of common stock
will
possess exclusive voting rights in FSB Community Bankshares, Inc. Each holder
of
common stock will be entitled to one vote per share and will not have any right
to cumulate votes for the election of directors. If we issue preferred stock,
holders of the preferred stock may also possess voting rights.
Public
shareholders will own a minority of the outstanding shares of our common stock.
As a result, shareholders other than FSB Community Bankshares, MHC will not
be
able to exercise voting control over most matters put to a vote of shareholders,
although under current OTS regulations minority shareholder approval is required
for approval of certain benefit plans implemented within one year of completion
of the stock offering and for approval of a “second-step conversion.” FSB
Community Bankshares, MHC will own a majority of our outstanding shares of
common stock after the stock offering and, through its board of directors,
will
be able to exercise voting control over
most
matters put to a vote of shareholders. If a rule currently proposed by the
Office of Thrift Supervision is adopted in its current form, this voting control
will extend to stock-based benefit plans presented to shareholders for approval
more than one year following completion of this stock offering. The same
directors and certain officers who manage FSB Community Bankshares, Inc. and
Fairport Savings Bank also manage FSB Community Bankshares, MHC. In addition,
FSB Community Bankshares, MHC may exercise its voting control to prevent a
sale
or merger transaction in which shareholders could receive a premium for their
shares.
Liquidation.
In
the
event of any liquidation, dissolution or winding up of Fairport Savings Bank,
FSB Community Bankshares, Inc., as holder of Fairport Savings Bank’s capital
stock, would be entitled to receive, after payment or provision for payment
of
all debts and liabilities of Fairport Savings Bank, including all deposit
accounts and accrued interest thereon, all assets of Fairport Savings Bank
available for distribution. In the event of our liquidation, dissolution or
winding up, the holders of our shares of common stock would be entitled to
receive, after payment or provision for payment of all its debts and
liabilities, all of our assets available for distribution. If preferred stock
is
issued, the holders thereof may have a priority over the holders of the common
stock in the event of liquidation or dissolution.
Rights
to Buy Additional Shares.
Holders
of our shares of common stock will not be entitled to preemptive rights with
respect to any shares which may be issued. Preemptive rights are the priority
right to buy additional shares if we issue more shares in the future. The shares
of common stock are not subject to redemption.
Preferred
Stock
None
of
our shares of authorized preferred stock will be issued in the stock issuance.
Such stock may be issued with such preferences and designations as the board
of
directors may determine from time to time. Our board of directors can, without
shareholder approval, issue preferred stock with voting, dividend, liquidation
and conversion rights which could dilute the voting strength of the holders
of
the common stock and may assist management in impeding an unfriendly takeover
or
attempted change in control. We have no present plans to issue preferred
stock.
140
TRANSFER
AGENT
AND REGISTRAR
Registrar
and Transfer Company, Cranford, New Jersey will act as the transfer agent and
registrar for the common stock.
LEGAL
AND
TAX MATTERS
The
legality of the shares of common stock and the federal income tax consequences
of the stock offering have been passed upon for Fairport Savings Bank and FSB
Community Bankshares, Inc. by the firm of Luse Gorman Pomerenk & Schick,
P.C., Washington, D.C. Luse Gorman Pomerenk & Schick, P.C. has consented to
the references in this prospectus to its opinion. Certain legal matters
regarding the stock offering will be passed upon for Sandler O’Neill &
Partners, L.P. by Malizia Spidi & Fisch, PC, Washington, D.C.
The
consolidated financial statements of FSB Community Bankshares, Inc.
included in this prospectus have been audited by Beard Miller Company LLP
(“BMC”), an independent registered public accounting firm, as stated in their
report appearing herein, and is included in reliance upon the report of such
firm given upon their authority as experts in accounting and
auditing.
In
connection with our decision to conduct the stock offering, on January 12,
2007,
we decided to dismiss our accounting firm of Mengel, Metzger, Barr & Co LLP
(“MMB”). This decision was approved by our board of directors.
MMB’s
reports on our consolidated financial statements as of December 31, 2005 and
2004 and for the year ended December 31, 2005 and the eighteen month period
ended December 31, 2004 did not contain an adverse opinion or a disclaimer
of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
In
connection with MMB’s audits of our consolidated financial statements for the
year ended December 31, 2005 and the eighteen month period ended December 31,
2004, there were no disagreements with MMB on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which disagreements, if not resolved to the satisfaction of MMB,
would
have caused MMB to make reference to the subject matter of the disagreements
in
connection with its reports.
We
have
provided MMB with a copy of the disclosure contained in this prospectus, which
was received by MMB on April 18, 2007. MMB has issued a letter stating that
it
agrees with our disclosure on this matter. This letter is included as an exhibit
to our registration statement filed with the Securities and Exchange
Commission.
141
We
engaged BMC on January 29, 2007 to audit our consolidated financial statements
as of and for the years ended December 31, 2006 and 2005. The engagement of
BMC
was approved by our audit committee. We had no relationship with BMC in any
way
during the years ended December 31, 2006 or 2005 or during any period subsequent
to December 31, 2006 prior to engaging BMC.
RP
Financial, LC has consented to the publication in this prospectus of the summary
of its report to Fairport Savings Bank and FSB Community Bankshares, Inc.
setting forth its opinion as to the estimated pro forma market value of the
common stock upon the completion of the stock offering and its letter with
respect to subscription rights.
WHERE
YOU
CAN FIND MORE INFORMATION
We
have
filed a registration statement with the Securities and Exchange Commission
under
the Securities Act of 1933, with respect to the shares of common stock offered
hereby. As permitted by the rules and regulations of the Securities and Exchange
Commission, this prospectus does not contain all the information set forth
in
the registration statement. This information can be examined without charge
at
the public reference facilities of the Securities and Exchange Commission
located at 100 F Street, NE, Washington, D.C. 20549, and copies of the material
can be obtained from the Securities and Exchange Commission at prescribed rates.
The registration statement also is available through the Securities and Exchange
Commission’s world wide web site on the internet at http://www.sec.gov.
The
statements contained in this prospectus as to the contents of any contract
or
other document filed as an exhibit to the registration statement are, of
necessity, brief descriptions thereof and are not necessarily complete, but
do
contain all material information regarding the documents. Each statement is
qualified by reference to the contract or document.
We
have
filed an Application MHC-2 with the Office of Thrift Supervision with respect
to
the stock offering. Pursuant to the rules and regulations of the Office of
Thrift Supervision, this prospectus omits certain information contained in
that
Application. The Application may be examined at the principal offices of the
Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552 and
at
the Northeast Regional Office of the Office of Thrift Supervision located at
Harborside Financial Center Plaza Five, Suite 1600, Jersey City, New Jersey
07311.
We
will
provide, free of charge, a copy of our charter and bylaws.
REGISTRATION
REQUIREMENTS
In
connection with the stock offering, we will register the common stock with
the
Securities and Exchange Commission under Section 12(g) of the Securities
Exchange Act of 1934. Upon this registration, FSB Community Bankshares, Inc.
and
the holders of its shares of common stock will become subject to the proxy
solicitation rules, reporting requirements and restrictions on stock purchases
and sales by directors, officers and greater than 10% shareholders, the annual
and periodic reporting and certain other requirements of the Securities Exchange
Act of 1934. Under the stock issuance plan, we have undertaken that we will
not
terminate this registration for a period of at least three years following
the
stock offering.
142
Table
of
Contents
|
PAGE
NO.
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-8
|
SCHEDULES
All
schedules are omitted because the required information is not applicable
or is
included in the consolidated financial statements and related
notes.
F-1
[LETTERHEAD
OF BEARD MILLER COMPANY LLP]
To
the
Board of Directors
FSB
Community Bankshares, Inc.
Fairport,
New York
We
have
audited the accompanying consolidated balance sheets of FSB Community
Bankshares, Inc. as of December 31, 2006 and 2005, and the related consolidated
statements of income, stockholder’s equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility
of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
The Company
is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the
purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An
audit also
includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well
as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of FSB
Community Bankshares, Inc.
as of
December 31, 2006 and 2005, and the results of their operations and their
cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/
Beard
Miller Company LLP
Beard
Miller Company LLP
Syracuse,
New York
March
13,
2007
F-2
December
31, 2006 and 2005
|
2006
|
2005
|
||||||
|
Assets
|
(Dollars
In Thousands,
|
|
|||||
|
|
|
except
per share data)
|
|||||
|
Cash
and due from banks
|
$
|
1,202
|
$
|
845
|
|||
|
Interest-bearing
demand deposits
|
980
|
3,824
|
|||||
|
Cash
and Cash Equivalents
|
2,182
|
4,669
|
|||||
|
Securities
available for sale
|
604
|
576
|
|||||
|
Securities
held to maturity (fair value 2006 - $23,873, 2005
- $25,268)
|
24,191
|
25,651
|
|||||
|
Investment
in FHLB stock
|
1,490
|
1,147
|
|||||
|
Loans,
net of allowance for loan losses of
|
|||||||
|
$322
and $331, respectively
|
121,137
|
108,435
|
|||||
|
Accrued
interest receivable
|
873
|
737
|
|||||
|
Premises
and equipment, net
|
2,146
|
1,544
|
|||||
|
Foreclosed
real estate
|
—
|
225
|
|||||
|
Other
assets
|
200
|
129
|
|||||
|
Total
Assets
|
$
|
152,823
|
$
|
143,113
|
|||
|
Liabilities
and Stockholder’s
Equity
|
|||||||
|
Liabilities
|
|||||||
|
Deposits:
|
|||||||
|
Non-interest
bearing
|
$
|
3,336
|
$
|
4,380
|
|||
|
Interest
bearing
|
105,244
|
102,420
|
|||||
|
Total
Deposits
|
108,580
|
106,800
|
|||||
|
Short
term borrowings
|
4,200
|
—
|
|||||
|
Long
term borrowings
|
23,824
|
20,658
|
|||||
|
Advances
from borrowers for taxes and insurance
|
1,828
|
1,577
|
|||||
|
Other
liabilities
|
521
|
460
|
|||||
|
Total
Liabilities
|
138,953
|
129,495
|
|||||
|
Commitments
and Contingencies
|
—
|
—
|
|||||
|
Stockholder’s
Equity
|
|||||||
|
Preferred
Stock - No par - 1,000,000 shares authorized; no
shares issued and outstanding
|
—
|
—
|
|||||
|
Common
Stock - $0.10 par - 10,000,000 shares authorized; 100
shares issued and outstanding
|
—
|
—
|
|||||
|
Additional
paid in capital
|
10
|
10
|
|||||
|
Retained
earnings
|
13,505
|
13,272
|
|||||
|
Accumulated
other comprehensive income
|
355
|
336
|
|||||
|
Total
Stockholder’s Equity
|
13,870
|
13,618
|
|||||
|
Total
Liabilities and Stockholder’s Equity
|
$
|
152,823
|
$
|
143,113
|
|||
See
notes
to consolidated financial statements.
F-3
Consolidated
Statements of Income
Years
Ended December 31, 2006 and 2005
|
2006
|
2005
|
||||||
|
(In
Thousands)
|
|||||||
|
Interest
and Dividend Income
|
|
||||||
|
Loans
|
$
|
6,797
|
$
|
5,762
|
|||
|
Securities
|
963
|
672
|
|||||
|
Mortgage-backed
securities
|
268
|
335
|
|||||
|
Other
|
65
|
47
|
|||||
|
Total
Interest and Dividend Income
|
8,093
|
6,816
|
|||||
|
Interest
Expense
|
|||||||
|
Deposits
|
3,409
|
2,528
|
|||||
|
Borrowings:
|
|||||||
|
Short
term
|
51
|
10
|
|||||
|
Long
term
|
961
|
440
|
|||||
|
Total
Interest Expense
|
4,421
|
2,978
|
|||||
|
|
|||||||
|
Net
Interest Income
|
3,672
|
3,838
|
|||||
|
Provision
for Loan Losses
|
—
|
26
|
|||||
|
Net
Interest Income After
|
|||||||
|
Provision
for Loan Losses
|
3,672
|
3,812
|
|||||
|
Other
Income
|
|||||||
|
Service
fees
|
75
|
66
|
|||||
|
Fee
income
|
160
|
105
|
|||||
|
Realized
gain on sale of securities
|
—
|
21
|
|||||
|
Other
income
|
125
|
127
|
|||||
|
Total
Other Income
|
360
|
319
|
|||||
|
Other
Expense
|
|||||||
|
Salaries
and employee benefits
|
2,098
|
1,934
|
|||||
|
Occupancy
expense
|
272
|
282
|
|||||
|
Data
processing costs
|
87
|
80
|
|||||
|
Advertising
|
185
|
156
|
|||||
|
Equipment
expense
|
305
|
301
|
|||||
|
Electronic
banking
|
88
|
72
|
|||||
|
Directors
fees
|
93
|
104
|
|||||
|
Mortgage
fees and taxes
|
173
|
126
|
|||||
|
Other
expense
|
387
|
393
|
|||||
|
Total
Other Expense
|
3,688
|
3,448
|
|||||
|
Income
Before Income Taxes
|
344
|
683
|
|||||
|
Provision
for Income Taxes
|
111
|
226
|
|||||
|
Net
Income
|
$
|
233
|
$
|
457
|
|||
See
notes
to consolidated financial statements.
F-4
Consolidated
Statements of Stockholder’s Equity
Years
Ended December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
||||||
|
|
|
|
|
|
|
Additional
|
|
|
|
other
|
|
|
|
||||||
|
|
|
Preferred
|
|
Common
|
|
Paid
In
|
|
Retained
|
|
comprehensive
|
|
|
|
||||||
|
Stock
|
Stock
|
Capital
|
earnings
|
income
|
Total
|
||||||||||||||
|
(In
Thousands)
|
|||||||||||||||||||
|
Balance
- January 1, 2005
|
$
|
—
|
$
|
—
|
$
|
10
|
$
|
12,815
|
$
|
374
|
$
|
13,199
|
|||||||
|
Comprehensive
income
|
|||||||||||||||||||
|
Net
income
|
457
|
—
|
457
|
||||||||||||||||
|
Change
in net unrealized gain
|
|||||||||||||||||||
|
on
securities available for sale,
|
|||||||||||||||||||
|
net
of reclassification adjustment and
taxes
|
— |
(38
|
)
|
(38
|
) | ||||||||||||||
|
Total
Comprehensive Income
|
419
|
||||||||||||||||||
|
Balance
- December 31, 2005
|
—
|
—
|
10
|
13,272
|
336
|
13,618
|
|||||||||||||
|
Comprehensive
income
|
|||||||||||||||||||
|
Net
income
|
233
|
—
|
233
|
||||||||||||||||
|
Change
in net unrealized gain
|
|||||||||||||||||||
|
on
securities available for sale,
|
|||||||||||||||||||
|
net
of reclassification adjustment and
taxes
|
— | 19 | 19 | ||||||||||||||||
|
Total
Comprehensive Income
|
252
|
||||||||||||||||||
|
Balance
- December 31, 2006
|
$
|
—
|
$
|
—
|
$
|
10
|
$
|
13,505
|
$
|
355
|
$
|
13,870
|
|||||||
See
notes
to consolidated financial statements.
F-5
FSB
Community Bankshares, Inc.
Consolidated
Statements of Cash Flows
Years
ended December 31, 2006 and 2005
|
2006
|
2005
|
||||||
|
(In
Thousands)
|
|||||||
|
Cash
Flows From Operating Activities
|
|
|
|||||
|
Net
income
|
$
|
233
|
$
|
457
|
|||
|
Adjustments
to reconcile net income to net cash provided
|
|||||||
|
from
operating activities:
|
|||||||
|
Gain
on sale of securities available for sale
|
—
|
(21
|
)
|
||||
|
Gain
on sale of loans
|
(3
|
)
|
—
|
||||
|
Amortization
of premium on investments
|
51
|
95
|
|||||
|
Accretion
of discount on investments
|
(4
|
)
|
(7
|
)
|
|||
|
Amortization
of net deferred loan origination costs
|
8
|
56
|
|||||
|
Depreciation
and amortization
|
216
|
241
|
|||||
|
Provision
for loan losses
|
—
|
26
|
|||||
|
Deferred
income tax (benefit) expense
|
6
|
(18
|
)
|
||||
|
Increase
in accrued interest receivable
|
(136
|
)
|
(186
|
)
|
|||
|
Increase
in other assets
|
(65
|
)
|
(25
|
)
|
|||
|
Increase
(decrease) in other liabilities
|
46
|
(4
|
)
|
||||
|
Net
Cash Provided By Operating Activities
|
352
|
614
|
|||||
|
|
|||||||
|
Cash
Flows From Investing Activities
|
|||||||
|
Proceeds
from sale of securities available for sale
|
—
|
21
|
|||||
|
Purchase
of securities held to maturity
|
(1,500
|
)
|
(12,745
|
)
|
|||
|
Proceeds
from maturities and calls of securities
|
|||||||
|
held
to maturity
|
2,916
|
5,590
|
|||||
|
Net
increase in loans
|
(13,898
|
)
|
(9,924
|
)
|
|||
|
Proceeds
from sales of loans
|
1,182
|
280
|
|||||
|
Purchase
of Federal Home Loan Bank stock
|
(343
|
)
|
(236
|
)
|
|||
|
Purchase
of premises and equipment
|
(818
|
)
|
(59
|
)
|
|||
|
Proceeds
from sale of foreclosed real estate
|
225
|
—
|
|||||
|
Net
Cash Used By Investing Activities
|
(12,236
|
)
|
(17,073
|
)
|
|||
|
Cash
Flows From Financing Activities
|
|||||||
|
Net
increase in deposits
|
1,780
|
5,724
|
|||||
|
Net
increase (decrease) in short-term borrowings
|
4,200
|
(1,000
|
)
|
||||
|
Proceeds
from long-term borrowings
|
9,000
|
13,500
|
|||||
|
Repayments
on long-term borrowings
|
(5,834
|
)
|
(640
|
)
|
|||
|
Net
increase in advances from borrowers
|
|||||||
|
for
taxes and insurance
|
251
|
233
|
|||||
|
Net
Cash Provided By Financing Activities
|
9,397
|
17,817
|
|||||
|
Net
Increase (Decrease) in Cash
|
|||||||
|
and
Cash Equivalents
|
(2,487
|
)
|
1,358
|
||||
|
Cash
and Cash Equivalents - Beginning
|
4,669
|
3,311
|
|||||
|
Cash
and Cash Equivalents - Ending
|
$
|
2,182
|
$
|
4,669
|
|||
F-6
FSB
Community Bankshares, Inc.
Consolidated
Statements of Cash Flows, Cont’d
Years
ended December 31, 2006 and 2005
|
2006
|
2005
|
||||||
|
(In
Thousands)
|
|||||||
|
Supplementary
Cash Flows Information
|
|||||||
|
Interest
paid
|
$
|
4,400
|
$
|
2,934
|
|||
|
Income
taxes paid
|
$
|
119
|
$
|
202
|
|||
|
Non-Cash
Operating, Investing And
|
|||||||
|
Financing
Activities
|
|||||||
|
Transfer
of loans to foreclosed real estate
|
$
|
—
|
$
|
225
|
|||
See
notes
to consolidated financial statements.
F-7
FSB
Community Bankshares, Inc.
Notes
To Consolidated Financial Statements
December
31, 2006 and 2005
NOTE
1:
NATURE
OF
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of operations
FSB
Community Bankshares, Inc. the “Company” provides a variety of financial
services to individuals and corporate customers through its wholly-owned
subsidiary, Fairport Savings Bank (the “Bank”). The Bank’s operations are
conducted in three branches located in Monroe County, New York. The Company
and
the Bank are subject to the regulations of certain regulatory authorities
and
undergo periodic examinations by those regulatory authorities.
The
Bank
also provides non-deposit investment services to its customers through
its
wholly-owned subsidiary Oakleaf Services Corporation (“Oakleaf”). The results of
operations of Oakleaf are not material to the consolidated financial
statements.
Reorganization
On
December 17, 2003, the Bank’s depositors approved a Plan of Reorganization (the
“Plan”) from a Federal Mutual Savings Bank to a Federal Mutual Holding Company.
Under the Plan, effective January 14, 2005, FSB Community Bankshares,
MHC (the
“Mutual Company”) was incorporated under the laws of the United States as a
mutual holding company. Also under the Plan, the Company was incorporated
and
became a wholly-owned subsidiary of the Mutual Company. In addition,
effective
January 14, 2005, the Bank completed its reorganization whereby the Bank
converted to a stock savings bank and became a wholly-owned subsidiary
of the
Company.
Basis
of consolidation
The
Mutual Company, which engages in no significant business activity other
than
holding the stock of the Company, is not included in the accompanying
consolidated financial statements. The consolidated financial statements
include
the accounts of the Company, the Bank and Oakleaf. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Use
of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenue
and
expense during the reporting period. Actual results could differ from
those
estimates. Material estimates that are particularly susceptible to significant
changes in the near term relate to the determination of the allowance
for loan
losses.
Cash
and cash equivalents
For
purposes of the consolidated statements of cash flows, cash and cash
equivalents
include cash, balances due from banks, and interest-bearing demand
deposits.
F-8
NOTE
1:
NATURE
OF
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont’d
Significant
Group Concentrations of Credit Risk
Most
of
the Bank’s activities are with customers located within Monroe, Livingston,
Ontario, Orleans, and Wayne Counties, New York. Note 2 discusses the
types of
securities that the Bank invests in. The concentration of credit by type
of loan
is set forth in Note 3. Although the Bank has a diversified loan portfolio,
its
debtors’ ability to honor their contracts is primarily dependent upon the real
estate and general economic conditions in those areas.
Securities
The
Bank
has classified as held to maturity, all debt securities which it has
the
positive intent and ability to hold until maturity. These securities
are carried
at amortized cost. All other debt and equity securities having readily
determinable fair values are classified as available for sale and stated
at fair
value. Unrealized gains or losses related to securities available for
sale are
excluded from earnings and reported in other comprehensive income net
of the
related deferred income tax effect. The Bank has no securities classified
as
trading securities.
Amortization
of premiums and accretion of discounts are calculated using the interest
method
and included in interest income.
Declines
in fair value of securities held to maturity and available for sale below
their
cost that are deemed to be other than temporary are reflected in earnings
as
realized losses. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the
fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Bank to
retain
its investment in the issuer for a period of time sufficient to allow
for any
anticipated recovery in fair value. Realized gains or losses, determined
on the
basis of the cost of the specific securities sold, are included in
earnings.
Federal
law requires a member institution of the Federal Home Loan Bank System
to hold
stock of its district Federal Home Loan Bank according to a predetermined
formula. This restricted stock is carried at cost.
Mortgage
Loans Held for Sale
Mortgage
loans held for sale in the secondary market are carried at the lower
of cost or
estimated market value. Realized gains and losses on sales are computed
using
the specific identification method. There were no loans held for sale
at
December 31, 2006 and 2005.
The
Bank
retains the servicing on loans sold and receives a fee based on the principal
balance outstanding. Servicing rights were not material at December 31,
2006 and
2005.
Loans
serviced for others totaled $1,906,338 and $742,844 at December 31, 2006
and
2005, respectively.
F-9
NOTE
1:
NATURE
OF
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont’d
Loans
Loans
that management has the intent and ability to hold for the foreseeable
future or
until maturity or pay-off generally are reported at their outstanding
unpaid
principal balances adjusted for charge-offs, the allowance for loan losses,
and
net deferred origination fees and costs. Interest income is accrued on
the
unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the
related
loan yield using the interest method over the contractual life of the
loan.
The
accrual of interest is generally discontinued when the contractual payment
of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though
the
loan is currently performing. A loan may remain on accrual status if
it is in
the process of collection and is well secured. When a loan is placed
on
nonaccrual status, unpaid interest credited to income in the current
year is
reversed and unpaid interest accrued in prior years is charged against
the
allowance for loan losses. Interest received on nonaccrual loans generally
is
either applied against principal or reported as interest income, according
to
management’s judgment as to the collectibility of principal. Generally, loans
are restored to accrual status when the obligation is brought current,
has
performed in accordance with the contractual terms for a reasonable period
of
time and the ultimate collectibility of the total contractual principal
and
interest is no longer in doubt.
Allowance
for loan losses
The
allowance for loan losses is established as losses are estimated to have
occurred in the loan portfolio. The allowance for loan losses is recorded
through a provision for loan losses charged to earnings. Loan losses
are charged
against the allowance when management believes the uncollectibility of
a loan
balance is confirmed. Subsequent recoveries, if any, are credited to
the
allowance.
The
allowance for loan losses is evaluated on a regular basis by management
and is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic conditions.
This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
The
allowance consists of specific, general and unallocated components. The
specific
component relates to loans that are classified as either doubtful, substandard
or special mention. For such loans that are also classified as impaired,
an
allowance is generally established when the collateral value of the impaired
loan is lower than the carrying value of that loan. The general component
covers
non-classified loans and is based on historical loss experience adjusted
for
qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management’s estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for
estimating
specific and general losses in the portfolio.
F-10
NOTE
1:
NATURE
OF
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont’d
A
loan is
considered impaired when, based on current information and events, it
is
probable that the Bank will be unable to collect the scheduled payments
of
principal or interest when due according to the contractual terms of
the loan
agreement. Factors considered by management in determining impairment
include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as
impaired.
Management determines the significance of payment delays and payment
shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the
reasons for the delay, the borrower’s prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment
is
measured on a loan by loan basis by either the present value of expected
future
cash flows discounted at the loan’s effective interest rate or the fair value of
the collateral if the loan is collateral dependent.
Large
groups of smaller balance homogeneous loans are collectively evaluated
for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.
Premises
and equipment
Premises
and equipment are stated at cost. Depreciation and amortization is computed
on
the straight-line basis over the shorter of the estimated useful lives
or lease
terms of the related assets. Estimated useful lives are generally 20
to 50 years
for premises and 3 to 10 years for furniture and equipment.
Foreclosed
Real Estate
Real
estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value less estimated
selling
costs at the date of foreclosure. Any write-downs based on the asset’s fair
value at date of acquisition are charged to the allowance for loan losses.
After
foreclosure, property held for sale is carried at the lower of the new
basis or
fair value less any costs to sell. Costs of significant property improvements
are capitalized, whereas costs relating to holding property are expensed.
Valuations are periodically performed by management, and any subsequent
write-downs are recorded as a charge to operations, if necessary, to
reduce the
carrying value of the property to the lower of its cost or fair value
less cost
to sell.
Income
Taxes
Income
taxes
are provided for the tax effects of certain transactions reported in
the
consolidated financial statements. Income taxes consist of taxes currently
due
plus deferred taxes related primarily to temporary differences between
the
financial reporting and income tax basis of the allowance for loan losses,
premises and equipment, and deferred loan origination costs. The deferred
tax
assets and liabilities represent the future tax return consequences of
the
temporary differences, which will either be taxable or deductible when
the
assets and liabilities are recovered or settled. Deferred tax assets
and
liabilities are reflected at income tax rates applicable to the period
in which
the deferred tax assets and liabilities are expected to be realized or
settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities
are adjusted through the provision for income taxes.
F-11
NOTE
1:
NATURE
OF
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont’d
Advertising
Costs
The
Company follows the policy of charging the costs of advertising to expense
as
incurred.
Off-Balance
Sheet Financial Instruments
In
the
ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit. Such
financial
instruments are recorded in the consolidated balance sheets when they
are
funded.
Transfers
of Financial Assets
Transfers
of financial assets are accounted for as sales, when control over the
assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Bank, (2) the transferee
obtains
the right (free of conditions that constrain it from taking advantage
of that
right) to pledge or exchange the transferred assets, and (3) the Bank
does not
maintain effective control over the transferred assets through an agreement
to
repurchase them before their maturity.
Comprehensive
Income
Accounting
principles generally require that recognized revenue, expenses, gains,
and
losses be included in net income. Although certain changes in assets
and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the stockholder’s equity
section of the consolidated balance sheets, such items, along with net
income,
are components of comprehensive income.
The
components of other comprehensive income (loss) and related tax effects
for the
years ended December 31, 2006 and 2005 are as follows:
|
2006
|
|
|
2005
|
|
|||
|
|
|
|
(In
Thousands)
|
||||
|
Unrealized
holding gain (loss) on available for sale securities
|
$
|
29
|
$
|
(37
|
)
|
||
|
Less
reclassification adjustment for realized gains included
|
|||||||
|
in
net income
|
—
|
(21
|
)
|
||||
|
Net
unrealized gain (loss)
|
29
|
(58
|
)
|
||||
|
Tax
effect
|
10
|
(20
|
)
|
||||
|
Net
of tax amount
|
$
|
19
|
$
|
(38
|
)
|
||
F-12
NOTE
1:
NATURE
OF
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont’d
Recent
Accounting Standards Issued
FAS
157
In
September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that
require or permit fair value measurements. The new guidance is effective
for
financial statements issued for fiscal years beginning after November 15,
2007, and for interim periods within those fiscal years. The company
is
currently evaluating the potential impact, if any, of the adoption of
FASB
Statement No. 157 on our consolidated financial position, results of
operations and cash flows.
SAB
108
On
September 13, 2006, the Securities and Exchange Commission “SEC” issued
Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal
of prior
year misstatements should be considered in quantifying a potential current
year
misstatement. Prior to SAB 108, Companies might evaluate the materiality
of
financial-statement misstatements using either the income statement or
balance
sheet approach, with the income statement approach focusing on new
misstatements added in the current year, and the balance sheet approach
focusing
on the cumulative amount of misstatement present in a company’s balance sheet.
Misstatements that would be material under one approach could be viewed
as
immaterial under another approach, and not be corrected. SAB 108 now
requires
that companies view financial statement misstatements as material if
they are
material according to either the income statement or balance sheet approach.
The
Company has analyzed SAB 108 and determined that upon adoption it will
have no
impact on the reported results of operations or financial
condition.
FIN
48
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes.” The interpretation clarifies the accounting for uncertainty in
income taxes recognized in a company’s financial statements in accordance with
Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes.” Specifically, the pronouncement prescribes a recognition threshold and
a
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. The interpretation
also provides guidance on the related derecognition, classification,
interest
and penalties, accounting for interim periods, disclosure and transition
of
uncertain tax positions. The interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is evaluating the impact
of this
new pronouncement on its consolidated financial statements.
F-13
NOTE
2:
SECURITIES
The
amortized cost and estimated fair value of securities with gross unrealized
gains and losses at December 31, 2006 and 2005 are as follows:
|
Gross
|
Gross
|
||||||||||||
|
Amortized
|
unrealized
|
unrealized
|
Estimated
|
||||||||||
|
cost
|
gains
|
losses
|
fair
value
|
||||||||||
|
(In
Thousands)
|
|||||||||||||
|
2006:
|
|||||||||||||
|
Securities
available for sale
|
|||||||||||||
|
Equity
securities
|
$
|
67
|
$
|
537
|
$
|
—
|
$
|
604
|
|||||
|
Securities
held to maturity
|
|||||||||||||
|
U.S.
Government obligations
|
$
|
18,200
|
$
|
—
|
$
|
(199
|
)
|
$
|
18,001
|
||||
|
State
and municipal securities
|
50
|
—
|
—
|
50
|
|||||||||
|
Mortgage-backed
securities
|
5,941
|
6
|
(125
|
)
|
5,822
|
||||||||
|
$
|
24,191
|
$
|
6
|
$
|
(324
|
)
|
$
|
23,873
|
|||||
|
2005:
|
|||||||||||||
|
Securities
available for sale
|
|||||||||||||
|
Equity
securities
|
$
|
67
|
$
|
509
|
$
|
—
|
$
|
576
|
|||||
|
Securities
held to maturity
|
|||||||||||||
|
U.S.
Government obligations
|
$
|
17,716
|
$
|
—
|
$
|
(215
|
)
|
$
|
17,501
|
||||
|
State
and municipal securities
|
110
|
2
|
—
|
112
|
|||||||||
|
Mortgage-backed
securities
|
7,825
|
11
|
(181
|
)
|
7,655
|
||||||||
|
|
$
|
25,651
|
$
|
13
|
$
|
(396
|
)
|
$
|
25,268
|
||||
Mortgage-backed
securities consist of securities issued by FNMA, FHLMC, and GNMA.
The
amortized cost and estimated fair value by contractual maturity of debt
securities at December 31, 2006 are shown below. Actual maturities may
differ
from contractual maturities because borrowers may have the right to call
or
prepay obligations.
|
Amortized
|
Estimated
|
||||||
|
cost
|
fair
value
|
||||||
|
(In
Thousands)
|
|||||||
|
Due
in one year or less
|
$
|
6,200
|
$
|
6,166
|
|||
|
Due
after one year through five years
|
2,000
|
1,986
|
|||||
|
Due
after five years through ten years
|
5,550
|
5,472
|
|||||
|
Due
after ten years
|
4,500
|
4,427
|
|||||
|
Mortgage-backed
securities
|
5,941
|
5,822
|
|||||
|
|
$
|
24,191
|
$
|
23,873
|
|||
F-14
NOTE
2:
SECURITIES, Cont’d
Gross
gains of $-0- and $21,000 were realized on sales of securities available
for
sale in 2006 and 2005, respectively. There were no realized losses in
2006 or
2005.
No
securities were pledged to secure public deposits or for any other purpose
required or permitted by law at December 31, 2006 and 2005.
The
following table shows gross unrealized losses and fair value, aggregated
by
investment category and length of time the individual securities have
been in a
continuous unrealized loss position, at December 31, 2006 and 2005:
|
Less
than 12 Months
|
12
Months or More
|
Total
|
|||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
||||||||||||||
|
(In
Thousands)
|
|||||||||||||||||||
|
2006:
|
|||||||||||||||||||
|
U.S.
Government
|
|||||||||||||||||||
|
obligations
|
$
|
997
|
$
|
3
|
$
|
15,502
|
$
|
196
|
$
|
16,499
|
$
|
199
|
|||||||
|
Mortgage-backed
|
|||||||||||||||||||
|
securities
|
131
|
1
|
4,976
|
124
|
5,107
|
125
|
|||||||||||||
|
Total
|
$
|
1,128
|
$
|
4
|
$
|
20,478
|
$
|
320
|
$
|
21,606
|
$
|
324
|
|||||||
|
2005:
|
|||||||||||||||||||
|
U.S.
Government
|
|||||||||||||||||||
|
obligations
|
$
|
13,554
|
$
|
162
|
$
|
2,947
|
$
|
53
|
$
|
16,501
|
$
|
215
|
|||||||
|
Mortgage-backed
|
|||||||||||||||||||
|
securities
|
1,471
|
12
|
5,085
|
169
|
6,556
|
181
|
|||||||||||||
|
Total
|
$
|
15,025
|
$
|
174
|
$
|
8,032
|
$
|
222
|
$
|
23,057
|
$
|
396
|
|||||||
Management
evaluates securities for other-than-temporary impairment at least on
a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (1) the length of time and the
extent to
which the fair value has been less than cost, (2) the financial condition
and
near-term prospects of the issuer, and (3) the intent and ability of
the Company
to retain its investment in the issuer for a period of time sufficient
to allow
for any anticipated recovery in fair value.
At
December 31, 2006, two debt securities have been in a continuous unrealized
loss
position for less than twelve months. Twenty-one securities have been
in a
continuous unrealized loss position for more than twelve months. As management
has the intent and ability to hold debt securities until maturity, no
declines
are deemed to be other than temporary.
F-15
NOTE
3:
LOANS
Net
loans
at December 31, 2006 and 2005 consist of the following:
|
2006
|
|
|
2005
|
||||
|
(In
Thousands)
|
|||||||
|
Real
estate loans:
|
|||||||
|
Secured
by one to four family residences
|
$
|
109,786
|
$
|
96,205
|
|||
|
Secured
by five or more family residences
|
1,040
|
1,110
|
|||||
|
Construction
|
380
|
209
|
|||||
|
Commercial
|
2,745
|
3,488
|
|||||
|
Home
equity lines of credit
|
6,929
|
7,209
|
|||||
|
Other
|
241
|
380
|
|||||
|
Total
loans
|
121,121
|
108,601
|
|||||
|
Net
deferred loan origination costs
|
338
|
165
|
|||||
|
Allowance
for loan losses
|
(322
|
)
|
(331
|
)
|
|||
|
Net
loans
|
$
|
121,137
|
$
|
108,435
|
|||
An
analysis of activity in the allowance for loan losses for the years ended
December 31, 2006 and 2005 is as follows:
|
2006
|
2005
|
||||||
|
(In
Thousands)
|
|||||||
|
Balance
at January 1,
|
$
|
331
|
$
|
307
|
|||
|
Provision
for loan losses
|
—
|
26
|
|||||
|
Loans
charged-off
|
(9
|
)
|
(2
|
)
|
|||
|
Balance
at December 31,
|
$
|
322
|
$
|
331
|
|||
At
December 31, 2006 and 2005 there were no loans considered to be impaired
as
defined in Statement of Financial Accounting Standards (“SFAS”) No. 114,
“Accounting by Creditors for Impairment of a Loan”, as amended.
At
December 31, 2006 and 2005, the Bank had nonaccrual loans of $171,000
and
$70,000 respectively. There were no loans that were past due 90 days
or more and
still accruing interest at December 31, 2006 and 2005.
F-16
NOTE
4:
PREMISES AND EQUIPMENT
Premises
and equipment at December 31, 2006 and 2005 are summarized as
follows:
|
2006
|
2005
|
||||||
|
(In
Thousands)
|
|||||||
|
Premises
|
$
|
1,710
|
$
|
1,687
|
|||
|
Furniture,
fixtures and equipment
|
1,357
|
1,314
|
|||||
|
Construction
in progress
|
604
|
—
|
|||||
|
3,671
|
3,001
|
||||||
|
Less
accumulated depreciation
|
1,525
|
1,457
|
|||||
|
$
|
2,146
|
$
|
1,544
|
||||
Construction
in progress at December 31, 2006 represents costs incurred in connection
with a
new branch facility that opened in Irondequoit, New York in January
2007.
At
December 31, 2006, the Company was obligated under noncancelable operating
leases for an existing branch in Penfield, New York and the new branch
in
Irondequoit. Future minimum rental payments under these leases for the
next five
years are as follows:
|
Penfield
|
Irondequoit
|
Total
|
||||||||
|
(In
Thousands)
|
||||||||||
|
2007
|
$
|
65
|
$
|
55
|
$
|
120
|
||||
|
2008
|
72
|
55
|
127
|
|||||||
|
2009
|
72
|
55
|
127
|
|||||||
|
2010
|
72
|
55
|
127
|
|||||||
|
2011
|
72
|
55
|
127
|
|||||||
|
Total
|
$
|
628
|
||||||||
Rent
expense under the Penfield lease totaled $70,000 and $66,000 during 2006
and
2005, respectively.
F-17
NOTE
5:
DEPOSITS
The
components of deposits at December 31, 2006 and 2005 consist of the
following:
|
2006
|
2005
|
||||||
|
(In
Thousands)
|
|||||||
|
Non-interest
bearing
|
$
|
3,336
|
$
|
4,380
|
|||
|
NOW
accounts
|
5,040
|
3,643
|
|||||
|
Regular
savings and demand clubs
|
11,889
|
12,405
|
|||||
|
Money
market
|
10,271
|
10,354
|
|||||
|
Individual
retirement accounts
|
15,115
|
15,011
|
|||||
|
Certificates
of deposit
|
62,929
|
61,007
|
|||||
|
$
|
108,580
|
$
|
106,800
|
||||
As
of
December 31, 2006, individual retirement accounts and certificates of
deposit
have scheduled maturities as follows (in thousands):
|
2007
|
$
|
43,744
|
||
|
2008
|
17,419
|
|||
|
2009
|
8,228
|
|||
|
2010
|
8,236
|
|||
|
2011
|
417
|
|||
|
$
|
78,044
|
The
aggregate amount of time deposits, each with a minimum denomination of
$100,000,
was $14,343,000
and $12,115,320 at December 31, 2006 and 2005, respectively. Generally,
deposits in excess of $100,000 are not insured by the Federal Deposit
Insurance
Corporation.
Interest
expense on deposits for the years ended December 31, 2006 and 2005 is
as
follows:
|
2006
|
2005
|
||||||
|
(In
Thousands)
|
|||||||
|
NOW
accounts
|
$
|
20
|
$
|
16
|
|||
|
Regular
savings and demand clubs
|
83
|
68
|
|||||
|
Money
market
|
256
|
126
|
|||||
|
Individual
retirement accounts
|
579
|
508
|
|||||
|
Certificates
of deposit
|
2,471
|
1,810
|
|||||
|
$
|
3,409
|
$
|
2,528
|
||||
F-18
NOTE
6:
SHORT TERM AND LONG TERM BORROWINGS
Short
term and long term borrowings consist of advances from the Federal Home
Loan
Bank of New York (FHLB).
The
Bank
has an overnight line of credit and a one-month overnight repricing line
of
credit with the FHLB. Each line has a maximum borrowing limit of $10,996,500
at
December 31, 2006. At December 31, 2006, the overnight line bears interest
at
the federal funds rate plus 11 basis points and the one-month overnight
repricing line bears interest at the federal funds rate plus 6 basis
points. The
lines expire on July 31, 2007 and are secured by one to four family residential
mortgages. Short term borrowings on the overnight line totaled $4,200,000
at
December 31, 2006 with an interest rate of 5.33%. There were no borrowings
on
the lines at December 31, 2005.
Long
term
borrowings with the FHLB at December 31, 2006 and 2005 are as
follows:
|
Advance
|
Maturity
|
Current
|
|||||||||||
|
Date
|
Date
|
Rate
|
2006
|
2005
|
|||||||||
|
(In
Thousands)
|
|||||||||||||
|
04/08/04
|
04/09/07
|
2.86
|
%
|
$
|
500
|
$
|
500
|
||||||
|
04/08/04
|
04/08/08
|
3.34
|
%
|
1,500
|
1,500
|
||||||||
|
04/26/04
|
04/26/06
|
2.68
|
%
|
—
|
350
|
||||||||
|
08/24/04
|
08/24/06
|
2.99
|
%
|
—
|
2,000
|
||||||||
|
11/18/04
|
11/18/08
|
3.87
|
%
|
1,000
|
1,000
|
||||||||
|
11/29/04
|
12/01/08
|
4.10
|
%
|
1,000
|
1,000
|
||||||||
|
11/29/04
|
11/30/09
|
3.94
|
%
|
624
|
815
|
||||||||
|
03/22/05
|
03/23/09
|
4.60
|
%
|
750
|
750
|
||||||||
|
03/22/05
|
03/22/10
|
4.73
|
%
|
750
|
750
|
||||||||
|
05/13/05
|
05/14/07
|
4.14
|
%
|
1,000
|
1,000
|
||||||||
|
08/18/05
|
08/18/10
|
4.70
|
%
|
1,000
|
1,000
|
||||||||
|
09/06/05
|
09/06/11
|
4.53
|
%
|
1,000
|
1,000
|
||||||||
|
09/14/05
|
09/14/15
|
4.75
|
%
|
945
|
993
|
||||||||
|
10/20/05
|
01/20/06
|
4.28
|
%
|
—
|
3,000
|
||||||||
|
11/01/05
|
11/02/09
|
5.05
|
%
|
1,000
|
1,000
|
||||||||
|
11/01/05
|
11/01/10
|
4.95
|
%
|
819
|
1,000
|
||||||||
|
11/16/05
|
11/18/13
|
5.19
|
%
|
1,000
|
1,000
|
||||||||
|
11/16/05
|
11/16/12
|
5.18
|
%
|
1,000
|
1,000
|
||||||||
|
11/16/05
|
11/16/10
|
5.11
|
%
|
1,000
|
1,000
|
||||||||
|
06/05/06
|
06/06/16
|
5.63
|
%
|
1,000
|
—
|
||||||||
|
06/05/06
|
06/05/14
|
5.60
|
%
|
1,000
|
—
|
||||||||
|
08/17/06
|
08/19/13
|
5.45
|
%
|
1,000
|
—
|
||||||||
|
08/17/06
|
08/17/15
|
5.50
|
%
|
1,000
|
—
|
||||||||
|
08/24/06
|
08/24/11
|
5.39
|
%
|
956
|
—
|
||||||||
|
09/08/06
|
09/09/13
|
5.32
|
%
|
980
|
—
|
||||||||
|
11/28/06
|
11/28/11
|
5.00
|
%
|
1,000
|
—
|
||||||||
|
12/20/06
|
01/22/07
|
5.37
|
%
|
2,000
|
—
|
||||||||
|
|
|||||||||||||
|
$
|
23,824
|
$
|
20,658
|
||||||||||
F-19
NOTE
6:
SHORT TERM AND LONG TERM BORROWINGS, Cont’d
Long
term
borrowings are secured by residential mortgages and the Bank’s investment in
FHLB stock. As of December 31, 2006, $76,296,000 was available for long
term
borrowings of which $23,824,000 was outstanding.
The
maturities of long term borrowings are as follows at December 31, 2006
(amounts
in thousands):
|
2007
|
$
|
4,244
|
||
|
2008
|
4,281
|
|||
|
2009
|
2,568
|
|||
|
2010
|
3,383
|
|||
|
2011
|
2,379
|
|||
|
Thereafter
|
6,969
|
|||
|
$
|
23,824
|
NOTE
7:
INCOME TAXES
The
provision for income taxes for 2006 and 2005 consists of the
following:
|
2006
|
2005
|
||||||
|
Currently
payable:
|
(In
Thousands)
|
||||||
|
State
|
$
|
1
|
$
|
2
|
|||
|
Federal
|
104
|
242
|
|||||
|
Deferred
(benefit) expense
|
6
|
(18
|
)
|
||||
|
$
|
111
|
$
|
226
|
||||
Items
that give rise to differences between income tax expense included in
the
consolidated statements of income and statutory income tax at a rate
of 34% were
not material in 2006 or 2005.
The
Company’s
effective tax
rate was 32.3% and 33.1% in 2006 and 2005, respectively.
F-20
NOTE
7:
INCOME TAXES, Cont’d
Deferred
income tax assets and liabilities resulting from temporary differences
are
summarized as follows and are included in other liabilities in the accompanying
consolidated balance sheets at December 31, 2006 and 2005:
|
2006
|
2005
|
||||||
|
(In
Thousands)
|
|||||||
|
Deferred
tax assets:
|
|||||||
|
Deferred
loan origination fees
|
$
|
36
|
$
|
47
|
|||
|
Reserve
for uncollectible interest
|
1
|
2
|
|||||
|
Pension
expense
|
6
|
6
|
|||||
|
Allowance
for loan losses
|
15
|
18
|
|||||
|
Accrued
bonuses
|
9
|
8
|
|||||
|
Other
|
4
|
5
|
|||||
|
71
|
86
|
||||||
|
Deferred
tax liabilities:
|
|||||||
|
Depreciation
|
(32
|
)
|
(41
|
)
|
|||
|
Unrealized
gain on securities available for sale
|
(183
|
)
|
(173
|
)
|
|||
|
(215
|
)
|
(214
|
)
|
||||
|
Net
deferred tax liability
|
$
|
(144
|
)
|
$
|
(128
|
)
|
|
As
a
thrift institution, the Bank is subject to special provisions in the
Federal and
New York State income tax laws regarding its allowable income tax bad
debt
deductions and related tax basis bad debt reserves. These reserves consist
of
defined base-year amounts for Federal and New York State purposes. In
accordance
with SFAS 109 “Accounting for Income Taxes” (SFAS 109), deferred income taxes
liabilities are to be recognized with respect to any base-year reserves
which
are to become taxable (or “recaptured”) in the foreseeable future.
Under
current income tax laws, the Federal base-year reserve would be subject
to
recapture if the Bank pays a cash dividend in excess of earnings and
profits or
liquidates. The New York State base-year reserves would be subject to
recapture
if the Bank failed to meet certain definitional tests, including maintaining
a
thrift charter. The Bank does not expect to take any actions in the foreseeable
future that would require the recapture of any Federal or New York State
reserves.
In
accordance with SFAS 109, deferred tax liabilities have not been recognized
with
respect to the Federal base-year reserve of $1,518,000 and
the
New York State base-year reserve of $5,030,000 at
December 31, 2006 since the Bank does not expect that these amounts will
become
taxable in the foreseeable future. The unrecognized deferred tax liability
with
respect to the Federal base-year reserve was $516,000 at December 31,
2006. The
unrecognized deferred tax liability with respect to the New York State
base-year
reserve, net of Federal income tax benefits, was $249,000 at December
31,
2006.
F-21
NOTE 8: RETIREMENT PLANS
The
Bank
has a
401(k) plan for all eligible employees. Employees are eligible for participation
in the 401(k) Plan after six months of service and attaining age 21.
The 401(k)
Plan allows employees to contribute 1% to 100% of their annual salary
subject to
statutory limitations. Matching contributions made by the Bank are 100%
of the
first 3% of compensation that an employee contributes to the 401(k) Plan.
In
addition, the Bank may make a discretionary contribution of 10% of each
eligible
employees’ annual base compensation. Matching contributions to the 401(k) Plan
amounted to $35,000 and $30,000 for the years ended December 31, 2006
and 2005,
respectively. Discretionary contributions to the 401(k) Plan were $145,000
and
$135,000 for the years ended December 31, 2006 and 2005,
respectively.
During
2006 the Bank implemented a supplemental executive retirement plan (SERP)
for
one of its executives. Expense under the SERP totaled $19,000 during
2006.
NOTE
9:
RELATED PARTY TRANSACTIONS
Certain
employees, executive officers and directors are engaged in transactions
with the
Bank in the ordinary course of business. It is the Bank’s policy that all
related party transactions are conducted at “arms length” and all loans and
commitments included in such transactions are made on substantially the
same
terms, including interest rates and collateral, as those prevailing at
the time
for comparable transactions with other customers.
As
of
December 31, 2006 and 2005, loans outstanding with related parties were
$803,000
and $770,000, respectively. During 2006, loan advances and repayments
totaled
$110,000 and $77,000, respectively.
NOTE
10:
COMMITMENTS
The
Bank
is a party to financial instruments with off-balance-sheet risk in the
normal
course of business to meet the financing needs of its customers. These
financial
instruments include commitments to extend credit. These instruments involve,
to
varying degrees, elements of credit and interest rate risk in excess
of the
amounts recognized in the consolidated balance sheets. The Bank uses
the same
credit policies in making commitments and conditional obligations as
it does for
on-balance-sheet instruments. The Bank’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to
extend credit and is represented by the contractual notional amount of
those
instruments summarized as follows at December 31, 2006 and 2005:
|
2006
|
|
2005
|
|||||
|
(In
Thousands)
|
|||||||
|
Commitments
to extend credit:
|
|||||||
|
Commitments
to grant loans
|
$
|
1,064
|
$
|
3,757
|
|||
|
Unfunded
commitments under
|
|||||||
|
lines
of credit
|
7,876
|
6,684
|
|||||
|
$
|
8,940
|
$
|
10,441
|
||||
Commitments
to grant loans at fixed rates at December 31, 2006 totaled $1,064,000
and had
interest rates that ranged from 5.625% to 6.75%.
F-22
NOTE
10:
COMMITMENTS Cont’d
Commitments
to extend credit are agreements to lend to a customer as long as there
is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment
of a fee. Since many of the commitments are expected to expire without
being
drawn upon, the total commitment amounts do not necessarily represent
future
cash requirements.
The
Bank
evaluates each customer’s credit worthiness on a case-by-case basis. The amount
and type of collateral obtained, if deemed necessary by the Bank upon
extension
of credit, varies and is based on management’s credit evaluation of the
counterparty.
NOTE
11:
REGULATORY MATTERS
The
Bank
is subject to various regulatory capital requirements administered by
its
primary federal regulator, the OTS. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary,
actions
by regulators that, if undertaken, could have a direct material effect
on the
Company’s consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must
meet
specific guidelines that involve 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 are subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require
the Bank
to maintain minimum amounts and ratios (set forth in the table below)
of total
and Tier I capital (as defined in the regulations) to risk-weighted assets
(as
defined), and of Tier I and tangible capital (as defined) to adjusted
total
assets (as defined). Management believes, as of December 31, 2006 and
2005, that
the Bank meets all capital adequacy requirements to which it is
subject.
As
of
December
31, 2006
and 2005, notification from the OTS categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized the Bank must maintain minimum total risk-based,
Tier I
risk-based, and Tier I leverage ratios as set forth in the table below.
There
are no conditions or events since that notification that management believes
have changed the Bank’s status as well capitalized.
F-23
NOTE
11:
REGULATORY MATTERS, Cont’d
The
Bank’s actual capital amounts (in thousands) and ratios are presented in the
table below.
|
To
be well capitalized
|
|||||||||||||||||||
|
For
capital
|
under
prompt corrective
|
||||||||||||||||||
|
Actual
|
adequacy
purposes
|
action
provisions
|
|||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||
|
As
of December 31, 2006
|
|||||||||||||||||||
|
Total
risk-based capital
|
|||||||||||||||||||
|
(to
risk-weighted assets)
|
$
|
13,837
|
19.40
|
%
|
$
|
5,708
|
8.0
|
%
|
$
|
7,134
|
10.0
|
%
|
|||||||
|
Tier
I capital
|
|||||||||||||||||||
|
(to
risk-weighted assets)
|
13,515
|
18.94
|
%
|
2,854
|
4.0
|
%
|
4,280
|
6.0
|
%
|
||||||||||
|
Tier
I capital (leveraged)
|
|||||||||||||||||||
|
(to
adjusted total assets)
|
13,515
|
8.88
|
%
|
6,086
|
4.0
|
%
|
7,607
|
5.0
|
%
|
||||||||||
|
Tangible
capital
|
|||||||||||||||||||
|
(to
adjusted total assets)
|
13,515
|
8.88
|
%
|
2,282
|
1.5
|
%
|
N/A
|
N/A
|
|||||||||||
|
As
of December 31, 2005
|
|||||||||||||||||||
|
Total
risk-based capital
|
|||||||||||||||||||
|
(to
risk-weighted assets)
|
$
|
13,613
|
19.95
|
%
|
$
|
5,458
|
8.0
|
%
|
$
|
6,822
|
10.0
|
%
|
|||||||
|
Tier
I capital
|
|||||||||||||||||||
|
(to
risk-weighted assets)
|
13,282
|
19.46
|
%
|
2,729
|
4.0
|
%
|
4,093
|
6.0
|
%
|
||||||||||
|
Tier
I capital (leveraged)
|
|||||||||||||||||||
|
(to
adjusted total assets)
|
13,282
|
9.32
|
%
|
5,698
|
4.0
|
%
|
7,122
|
5.0
|
%
|
||||||||||
|
Tangible
capital
|
|||||||||||||||||||
|
(to
adjusted total assets)
|
13,282
|
9.32
|
%
|
2,137
|
1.5
|
%
|
N/A
|
N/A
|
|||||||||||
The
following table presents a reconciliation of the Bank’s equity as determined
using accounting principles generally accepted in the United States
of America
(“GAAP”) and its regulatory capital amounts as of December 31, 2006 and
2005.
|
2006
|
2005
|
||||||
|
(In
Thousands)
|
|||||||
|
Bank
GAAP equity
|
$
|
13,870
|
$
|
13,618
|
|||
|
Net
unrealized gains on securities available-for-sale,
|
|||||||
|
net
of income taxes
|
(355
|
)
|
(336
|
)
|
|||
|
Tangible
capital, core capital and Tier I risk-based capital
|
13,515
|
13,282
|
|||||
|
Allowance
for loan losses
|
322
|
331
|
|||||
|
Total
risk-based capital
|
$
|
13,837
|
$
|
13,613
|
|||
The
Bank’s GAAP equity was equal to the Company’s consolidated equity as of December
31, 2006 and 2005.
F-24
NOTE
12:
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS
No.
107, Disclosure
about Fair Value of Financial Instruments
(“SFAS
107”),
requires
disclosure of fair value information about financial instruments, whether
or not
recognized in the consolidated balance sheets, for which it is practicable
to
estimate that value. In cases where quoted market prices are not available,
fair
values are based on estimates using present value or other valuation
techniques.
Those techniques are significantly affected by the assumptions used,
including
the discount rate and estimates of future cash flows. In that regard,
the
defined fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS 107 excludes certain financial instruments
and all non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying
value
of the Company.
The
following methods and assumptions were used by the Company in estimating
its
fair value disclosures for financial instruments:
Cash,
Due from Banks, and Interest-Bearing Demand Deposits
- The
carrying amounts of these assets approximate their fair values.
Investment
Securities
- Fair
values for investment securities are based primarily on quoted market
prices.
Investment
in FHLB Stock
- The
carrying value of FHLB stock approximates its fair value based on the
redemption
provisions of the FHLB.
Loans
- For
variable-rate loans that reprice frequently and with no significant
change in
credit risk, fair values are based on carrying amounts. The fair values
for
other loans are estimated using discounted cash flow analysis, based
on interest
rates currently being offered for loans with similar terms to borrowers
of
similar credit quality. Loan fair value estimates include judgments
regarding
future expected loss experience and risk characteristics.
Accrued
Interest Receivable and Payable
- The
carrying amount of accrued interest receivable and payable approximates
fair
value.
Deposits
- The
fair values disclosed for demand deposits (e.g., NOW accounts, non-interest
checking, regular savings and certain types of money market accounts)
are, by
definition, equal to the amount payable on demand at the reporting
date (i.e.,
their carrying amounts). The carrying amounts for variable-rate, fixed-term
money market accounts and certificates of deposit approximate their
fair values
at the reporting date. Fair values for fixed rate certificates of deposit
are
estimated using a discounted cash flow calculation that applies interest
rates
currently being offered on certificates to a schedule of aggregated
expected
monthly maturities on time deposits.
Borrowings
- The
fair values of long-term borrowings are estimated using discounted
cash flow
analyses, based on the Bank’s
current
incremental borrowing rates for similar types of borrowing arrangements.
The
carrying amount of short-term borrowings approximate their fair
value.
Off-Balance
Sheet Instruments
- The
fair values for off-balance sheet financial instruments are estimated
using the
fees currently charged to enter into similar agreements, taking into
account
market interest rates, the remaining terms and present credit worthiness
of the
counterparties.
F-25
NOTE
12:
FAIR VALUE OF FINANCIAL INSTRUMENTS, Cont’d
The
carrying amounts and estimated fair values of the Company’s financial
instruments at December 31, 2006 and 2005 are as follows:
|
2006
|
2005
|
||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||
|
amount
|
value
|
amount
|
value
|
||||||||||
|
(In
Thousands)
|
|||||||||||||
|
Financial
assets:
|
|||||||||||||
|
Cash
and due from banks
|
$
|
1,202
|
$
|
1,202
|
$
|
845
|
$
|
845
|
|||||
|
Interest-bearing
demand deposits
|
980
|
980
|
3,824
|
3,824
|
|||||||||
|
Securities
available for sale
|
604
|
604
|
576
|
576
|
|||||||||
|
Securities
held to maturity
|
24,191
|
23,873
|
25,651
|
25,268
|
|||||||||
|
FHLB
stock
|
1,490
|
1,490
|
1,147
|
1,147
|
|||||||||
|
Loans,
net
|
121,137
|
119,795
|
108,435
|
108,750
|
|||||||||
|
Accrued
interest receivable
|
873
|
873
|
737
|
737
|
|||||||||
|
Financial
liabilities:
|
|||||||||||||
|
Deposits
|
108,580
|
108,555
|
106,800
|
106,724
|
|||||||||
|
Short
term borrowings
|
4,200
|
4,200
|
—
|
—
|
|||||||||
|
Long
term borrowings
|
23,824
|
25,043
|
20,658
|
22,826
|
|||||||||
|
Accrued
interest payable
|
84
|
84
|
63
|
63
|
|||||||||
|
Off-balance
sheet instruments:
|
|||||||||||||
|
Commitments
to extend credit
|
—
|
—
|
—
|
—
|
|||||||||
NOTE
13:
FSB COMMUNITY BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Balance
Sheets
|
December
31,
|
|||||||
|
|
2006
|
2005
|
|||||
|
|
(In
Thousands)
|
||||||
|
Assets
|
|||||||
|
Investment
in banking subsidiary
|
$
|
13,870
|
$
|
13,618
|
|||
|
Stockholder’s
Equity
|
$
|
13,870
|
$
|
13,618
|
|||
Statements
of Income
|
Years
Ended December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
|
(In
Thousands)
|
||||||
|
Equity
in undistributed earnings of
|
|||||||
|
banking
subsidiary
|
$
|
233
|
$
|
457
|
|||
|
Net
Income
|
$
|
233
|
$
|
457
|
|||
F-26
NOTE
13: FSB COMMUNITY BANKSHARES, INC. (PARENT COMPANY
ONLY) FINANCIAL INFORMATION,
Con'td
Statements
of Cash Flows
|
Years
Ended December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
|
(In
Thousands)
|
||||||
|
Cash
Flows From Operating Activities
|
|||||||
|
Net
Income
|
$
|
233
|
$
|
457
|
|||
|
Adjustments
to reconcile net income to
|
|||||||
|
net
cash provided from operating activities:
|
|||||||
|
Equity
in undistributed earnings of
|
|||||||
|
banking
subsidiary
|
(233
|
)
|
(457
|
)
|
|||
|
Net
cash provided by operating activities
|
—
|
—
|
|||||
|
Cash
and cash equivalents - beginning
|
—
|
—
|
|||||
|
Cash
and cash equivalents - ending
|
$
|
—
|
$
|
—
|
|||
NOTE
14:
STOCK OFFERING
On
January 24, 2007, the Board of Directors of the Company adopted a plan
of stock
issuance pursuant to which the Company will sell common stock representing
a
minority ownership of up to 47% of the estimated pro forma market value
of the
Company, which will be determined by an independent appraisal. The
Company
intends to sell common stock in a subscription offering to eligible
customers of
the Bank, tax-qualified employee benefit plans that the Company intends
to form
in connection with the stock offering and, if necessary, to the general
public
in a community offering and/or a syndicated community offering. The
stock
offering is subject to the approval of various regulatory agencies.
There
were no costs incurred in connection with the stock offering during
2006. Costs
associated with the stock offering will be recorded as a reduction
of additional
paid in capital received from the offering. If the stock offering is
not
completed, all costs incurred will be expensed.
F-27
You
should rely only on the information contained in this document or that
to which
we have referred you. We have not authorized anyone to provide you
with
information that is different. This document does not constitute an
offer to
sell, or the solicitation of an offer to buy, any of the securities
offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of Fairport Savings Bank or FSB Community
Bankshares, Inc. may change after the date of this prospectus. Delivery
of this
document and the sales of shares made hereunder does not mean
otherwise.
FSB
Community
Bankshares, Inc.
---------- the Holding Company for Fairport Savings
Bank ----------
1,135,050
Shares of Common Stock
(Subject
to Increase to up to 1,305,308 Shares)
PROSPECTUS
Sandler
O’Neill + Partners, L.P.
May
14, 2007
Until
the later of August 21, 2007 or 90 days after the commencement of the
syndicated
community offering, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may
be required
to deliver a prospectus. This is in addition to the obligation of dealers
to
deliver a prospectus when acting as underwriters and with respect to
their
unsold allotments or subscriptions.