UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





[X]
            Quarterly
      Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the quarterly period ended June 30,
2010


OR


[   ]
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For the transition period from
_______________ to ______________________





Commission
File No. 001-52751





FSB Community Bankshares,
Inc.


(Exact
name of registrant as specified in its charter)





United States
            
            74-3164710(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      Number)45 South Main Street, Fairport, New
      York
            
            14450(Address
      of Principal Executive Offices)
            
            Zip
      Code





(585)
223-9080


(Registrant’s
telephone number)








N/A(Former
      name or former address, if changed since last
  report)








Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such requirements for the
past 90 days.


YES
[X]   NO [  ].





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


YES
[  ]   NO [  ].





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





Large
      accelerated filer      o
            Accelerated
      filer                    oNon-accelerated
      filer        o
            Smaller
      reporting company  x(Do
      not check if smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  YES [  ]   NO
[X]





As of
August 13, 2010 there were 1,785,000 shares of the Registrant’s common stock,
par value $0.10 per share, outstanding, 946,050 of which were held by FSB
Community Bankshares, MHC, the Registrant’s mutual holding company.










FSB
Community Bankshares, Inc.




FORM 10-Q




Index


PagePart
      I. Financial InformationItem
      1.
            Consolidated
      Financial Statements (unaudited)Consolidated
      Balance Sheets as of June 30, 2010 and December 31, 2009
            1Consolidated
      Statements of Income for the Three Months Ended June 30, 2010 and
      2009
            2Consolidated
      Statements of Income for the Six Months Ended June 30, 2010 and
      2009
            3Consolidated
      Statements of Stockholders’ Equity for the Six Months Ended June 30, 2010
      and 2009
            4Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2010 and
      2009
            5Notes
      to Consolidated Financial Statements
            7Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            18Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            30Item
      4T.
            Controls
      and Procedures
            30Part
      II. Other InformationItem
      1.
            Legal
      Proceedings
            30Item
      1A.
            Risk
      Factors
            30Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            32Item
      3.
            Defaults
      upon Senior Securities
            32Item
      4.
            [Removed
      and Reserved]
            32Item
      5.
            Other
      Information
            32Item
      6.
            Exhibits
            32Signature
      Page
            33











Part
I. Financial Information




Item 1.   Consolidated Financial
Statements




FSB
COMMUNITY BANKSHARES, INC.





Consolidated
Balance Sheets


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


(Dollars
in thousands, except share data)




Assets
            
            June
      30,
                2010
            
            
            December
      31, 2009Cash
      and due from banks
            
            $
            13,003
            
            
            $
            3,385Interest-earning
      demand deposits
            
            
            2,350
            
            
            
            2,580Cash
      and Cash Equivalents
            
            
            15,353
            
            
            
            5,965Securities
      available for sale
            
            
            70,791
            
            
            
            75,483Securities
      held to maturity (fair value 2010 $5,287; 2009 $6,183)
            
            
            5,130
            
            
            
            6,098Investment
      in FHLB stock
            
            
            1,666
            
            
            
            1,886Loans
      held for sale
            
            
            3,360
            
            
            
            -Loans
      receivable, net of allowance for loan losses (2010 $374;
      2009  $368)
            
            
            115,705
            
            
            
            116,372Bank
      owned life insurance
            
            
            3,078
            
            
            
            3,013Accrued
      interest receivable
            
            
            963
            
            
            
            1,156Premises
      and equipment, net
            
            
            2,510
            
            
            
            2,556Foreclosed
      real estate
            
            
            -
            
            
            
            79Prepaid
      FDIC premium
            
            
            685
            
            
            
            793Other
      assets
            
            
            781
            
            
            
            999Total
      Assets
            
            $
            220,022
            
            
            $
            214,400Liabilities
      & Stockholders’ EquityDeposits:Non-interest-bearing
            
            $
            4,333
            
            
            $
            3,955Interest-bearing
            
            
            160,429
            
            
            
            152,555Total
      Deposits
            
            
            164,762
            
            
            
            156,510Borrowings
            
            
            30,674
            
            
            
            34,590Advances
      from borrowers for taxes and insurance
            
            
            2,348
            
            
            
            2,012Official
      bank checks
            
            
            810
            
            
            
            432Other
      liabilities
            
            
            644
            
            
            
            506Total
      Liabilities
            
            
            199,238
            
            
            
            194,050Stockholders’
      EquityPreferred
      Stock- no par value- 1,000,000 shares authorized;no
      shares issued and outstanding
            
            
            -
            
            
            
            -Common
      Stock- $0.10 par value – 10,000,000 shares authorized;1,785,000
      shares issued and outstanding
            
            
            179
            
            
            
            179Additional
      paid-in-capital
            
            
            7,273
            
            
            
            7,275Retained
      earnings
            
            
            13,385
            
            
            
            13,317Accumulated
      other comprehensive income
            
            
            524
            
            
            
            174Unearned
      ESOP shares – at cost
            
            
            (577
            )
            
            
            (595
            )Total Stockholders’
      Equity
            
            
            20,784
            
            
            
            20,350Total Liabilities and
      Stockholders’ Equity
            
            $
            220,022
            
            
            $
            214,400See
      accompanying notes to consolidated financial statements








1


FSB
COMMUNITY BANKSHARES, INC.





Consolidated
Statements of Income


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


(Dollars
in thousands, except per share data)




2010
            
            
            2009Interest
      and Dividend IncomeLoans
            
            $
            1,602
            
            
            $
            1,757Securities
            
            
            392
            
            
            
            301Mortgage-backed
      securities
            
            
            199
            
            
            
            299Other
            
            
            3
            
            
            
            2Total Interest and Dividend
      Income
            
            
            2,196
            
            
            
            2,359Interest
      expenseDeposits
            
            
            653
            
            
            
            863Borrowings
            
            
            326
            
            
            
            406Total Interest
      Expense
            
            
            979
            
            
            
            1,269Net Interest
      Income
            
            
            1,217
            
            
            
            1,090Provision
      for Loan Losses
            
            
            3
            
            
            
            8Net Interest Income After
      Provisionfor Loan
      Losses
            
            
            1,214
            
            
            
            1,082Other
      IncomeService
      fees
            
            
            60
            
            
            
            66Fee
      income
            
            
            20
            
            
            
            17Realized
      gain on sale of securities
            
            
            -
            
            
            
            92Realized
      loss on sale of foreclosed real estate
            
            
            (5
            )
            
            
            -Increase
      in cash surrender value of bank owned life insurance
            
            
            32
            
            
            
            -Realized
      gain on sale of  loans
            
            
            69
            
            
            
            16Other
            
            
            86
            
            
            
            58Total Other
      Income
            
            
            262
            
            
            
            249Other
      ExpenseSalaries
      and employee benefits
            
            
            727
            
            
            
            556Occupancy
      expense
            
            
            149
            
            
            
            124Data
      processing costs
            
            
            26
            
            
            
            24Advertising
            
            
            53
            
            
            
            52Equipment
      expense
            
            
            104
            
            
            
            87Electronic
      banking
            
            
            21
            
            
            
            19Directors’
      fees
            
            
            28
            
            
            
            29Mortgage
      fees and taxes
            
            
            87
            
            
            
            72FDIC
      premium expense
            
            
            59
            
            
            
            159Other
      expense
            
            
            180
            
            
            
            169Total Other
      Expenses
            
            
            1,434
            
            
            
            1,291Income Before Income
      Taxes
            
            
            42
            
            
            
            40Provision for Income
      Taxes
            
            
            7
            
            
            
            13Net
    Income
            
            $
            35
            
            
            $
            27Earnings per common
      share
            
            $
            0.02
            
            
            $
            0.02See
      accompanying notes to consolidated financial statements





2


FSB
COMMUNITY BANKSHARES, INC.





Consolidated
Statements of Income


Six
Months Ended June 30, 2010 and 2009 (unaudited)


(Dollars
in thousands, except per share data)




2010
            
            
            2009Interest
      and Dividend IncomeLoans
            
            $
            3,195
            
            
            $
            3,664Securities
            
            
            839
            
            
            
            568Mortgage-backed
      securities
            
            
            416
            
            
            
            625Other
            
            
            5
            
            
            
            3Total Interest and Dividend
      Income
            
            
            4,455
            
            
            
            4,860Interest
      expenseDeposits
            
            
            1,388
            
            
            
            1,742Borrowings:Short-term
            
            
            -
            
            
            
            1Long-term
            
            
            680
            
            
            
            830Total Interest
      Expense
            
            
            2,068
            
            
            
            2,573Net Interest
      Income
            
            
            2,387
            
            
            
            2,287Provision
      for Loan Losses
            
            
            6
            
            
            
            14Net Interest Income After
      Provisionfor Loan
      Losses
            
            
            2,381
            
            
            
            2,273Other
      IncomeService
      fees
            
            
            117
            
            
            
            115Fee
      income
            
            
            26
            
            
            
            28Realized
      gain (loss) on sale of securities
            
            
            (8
            )
            
            
            92Realized
      loss on sale of foreclosed real estate
            
            
            (5
            )
            
            
            -Increase
      in cash surrender value of bank owned life insurance
            
            
            65
            
            
            
            -Realized
      gain on sale of  loans
            
            
            83
            
            
            
            45Other
            
            
            143
            
            
            
            103Total Other
      Income
            
            
            421
            
            
            
            383Other
      ExpenseSalaries
      and employee benefits
            
            
            1,414
            
            
            
            1,249Occupancy
      expense
            
            
            299
            
            
            
            249Data
      processing costs
            
            
            43
            
            
            
            47Advertising
            
            
            94
            
            
            
            84Equipment
      expense
            
            
            207
            
            
            
            177Electronic
      banking
            
            
            37
            
            
            
            39Directors’
      fees
            
            
            55
            
            
            
            57Mortgage
      fees and taxes
            
            
            117
            
            
            
            116FDIC
      premium expense
            
            
            116
            
            
            
            181Other
      expense
            
            
            355
            
            
            
            338Total Other
      Expenses
            
            
            2,737
            
            
            
            2,537Income Before Income
      Taxes
            
            
            65
            
            
            
            119Provision (Benefit) for Income
      Taxes
            
            
            (3
            )
            
            
            41Net
    Income
            
            $
            68
            
            
            $
            78Earnings per common
      share
            
            $
            0.04
            
            
            $
            0.05See
      accompanying notes to consolidated financial statements





3


FSB
COMMUNITY BANKSHARES, INC.


Consolidated
Statements of Stockholders’ Equity Six
Months Ended June 30, 2010 and 2009 (unaudited)(Dollars in
thousands)







Common
                Stock
            
            
            Additional
                Paid
      in
                Capital
            
            
            Retained
                Earnings
            
            
            Accumulated
      Other Comprehensive Income (Loss)
            
            
            Unearned
                ESOP
                Shares
            
            
            TotalBalance
      – January 1, 2009
            
            $
            179
            
            
            $
            7,286
            
            
            $
            13,249
            
            
            $
            (43
            )
            
            $
            (630
            )
            
            $
            20,041Comprehensive
      lossNet
      income
            
            
            -
            
            
            
            -
            
            
            
            78
            
            
            
            -
            
            
            
            -
            
            
            
            78Change
      in net unrealizedloss on securities available for sale, net of
      reclassification adjustment and taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (163
            )
            
            
            -
            
            
            
            (163
            )Total
      Comprehensive Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (85
            )ESOP
      shares committed to bereleased
            
            
            -
            
            
            
            (8
            )
            
            
            -
            
            
            
            -
            
            
            
            18
            
            
            
            10Balance
      – June 30, 2009
            
            $
            179
            
            
            $
            7,278
            
            
            $
            13,327
            
            
            $
            (206
            )
            
            $
            (612
            )
            
            $
            19,966Balance
      – January 1, 2010
            
            $
            179
            
            
            $
            7,275
            
            
            $
            13,317
            
            
            $
            174
            
            
            $
            (595
            )
            
            $
            20,350Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            68
            
            
            
            -
            
            
            
            -
            
            
            
            68Change
      in net unrealized  gainon securities available for sale, net of reclassification
      adjustment and taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            350
            
            
            
            -
            
            
            
            350Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            418ESOP
      shares committed to bereleased
            
            
            -
            
            
            
            (2
            )
            
            
            -
            
            
            
            -
            
            
            
            18
            
            
            
            16Balance
      – June 30, 2010
            
            $
            179
            
            
            $
            7,273
            
            
            $
            13,385
            
            
            $
            524
            
            
            $
            (577
            )
            
            $
            20,784





See
accompanying notes to consolidated financial statements





4





FSB
COMMUNITY BANKSHARES, INC.


Consolidated
Statements of Cash Flows Six
Months Ended June 30, 2010 and 2009 (unaudited)(Dollars in
thousands)


2010
            
            
            2009Cash
      Flows From Operating ActivitiesNet
      income
            
            $
            68
            
            
            $
            78Adjustments
      to reconcile net income to net cash used by operating
      activities:Net amortization of premiums and
      discounts on investments
            
            
            515
            
            
            
            285Gain
      on sale of securities available for sale
            
            
            (2
            )
            
            
            (92
            )Loss
      on sale of securities held to maturity
            
            
            10
            
            
            
            -Gain
      on sale of loans
            
            
            (83
            )
            
            
            (45
            )Proceeds
      from loans sold
            
            
            3,729
            
            
            
            11,101Loans
      originated for sale
            
            
            (7,006
            )
            
            
            (11,056
            )Amortization
      of net deferred loan origination costs
            
            
            16
            
            
            
            11Depreciation
      and amortization
            
            
            156
            
            
            
            135Provision
      for loan losses
            
            
            6
            
            
            
            14Expense
      related to ESOP
            
            
            16
            
            
            
            10Deferred
      income tax benefit
            
            
            (28
            )
            
            
            (139
            )Earnings
      on investment in bank owned life insurance
            
            
            (65
            )
            
            
            -Decrease
      in accrued interest receivable
            
            
            193
            
            
            
            63Decrease
      (increase) in prepaid FDIC premium and other assets
            
            
            326
            
            
            
            (442
            )Decrease
      in other liabilities
            
            
            (14
            )
            
            
            (3
            )Loss
      on sale of foreclosed real estate
            
            
            5
            
            
            
            -Net
      Cash Used By Operating Activities
            
            
            (2,158
            )
            
            
            (80
            )Cash
      Flows From Investing ActivitiesPurchases
      of securities available for sale
            
            
            (46,889
            )
            
            
            (57,644
            )Proceeds
      from maturities and calls of securities available for sale
            
            
            48,000
            
            
            
            30,485Proceeds
      from sales of securities available for sale
            
            
            11
            
            
            
            5,355Proceeds
      from principal paydowns on securities available for sale
            
            
            3,589
            
            
            
            2,135Proceeds
      from principal paydowns on securities held to maturity
            
            
            265
            
            
            
            406Proceeds
      from maturities and calls of securities held to maturity
            
            
            5
            
            
            
            -Proceeds
      from sales of securities held to maturity
            
            
            686
            
            
            
            -Net
      decrease in loans
            
            
            645
            
            
            
            15,459Redemption
      of FHLB stock
            
            
            220
            
            
            
            284Proceeds
      from sales of foreclosed real estate
            
            
            74
            
            
            
            -Purchase
      of premises and equipment
            
            
            (110
            )
            
            
            (191
            )Net
      Cash Provided By(Used By) Investing Activities
            
            
            6,496
            
            
            
            (3,711
            )Cash
      Flows From Financing ActivitiesNet
      increase in deposits
            
            
            8,252
            
            
            
            14,506Net
      decrease in short-term borrowings
            
            
            -
            
            
            
            (3,850
            )Repayments
      on long-term borrowings
            
            
            (3,916
            )
            
            
            (3,883
            )Net
      increase in advances from borrowers for taxes and
insurance
            
            
            336
            
            
            
            213Net
      increase (decrease) in official bank checks
            
            
            378
            
            
            
            (89
            )Net
      Cash Provided By Financing Activities
            
            
            5,050
            
            
            
            6,897Net Increase
      in Cashand Cash
      Equivalents
            
            
            9,388
            
            
            
            3,106Cash
      and Cash Equivalents- Beginning
            
            
            5,965
            
            
            
            3,173Cash
      and Cash Equivalents- Ending
            
            $
            15,353
            
            
            $
            6,279





5


FSB
COMMUNITY BANKSHARES, INC.
 
 Consolidated
Statements of Cash Flows, (Continued)
  2010
              
              
              2009Supplementary
      Cash Flows InformationInterest
      paid
              
              $
              2,084
              
              
              $
              2,587Income
      taxes paid
              
              $
              -
              
              
              $
              115
  See
      accompanying notes to consolidated financial statements




6


Notes
to Consolidated Financial Statements




Note
1-Basis of Presentation




The
accompanying unaudited consolidated financial statements of FSB Community
Bankshares, Inc. and its wholly owned subsidiary Fairport Savings Bank
(collectively, the “Company”) have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and the applicable instructions to Form 10-Q and
Regulation S-X.  Accordingly, they do not include all of the
information and footnotes necessary for a complete presentation of consolidated
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles.  In the opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included.




The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB”.  The FASB sets generally
accepted accounting principles (“GAAP”).  References to GAAP issued by
the FASB in these footnotes are to the FASB Accounting Standards Codification,
referred to as the Codification or ASC.  The FASB finalized the
Codification effective for periods ending on or after September 15,
2009.




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




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




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




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




As
previously reported the Board of Directors of the Bank approved the formation of
a wholly owned subsidiary to be known as Fairport Mortgage Corp. to engage in
residential lending. However, due to regulatory changes the Company has decided
to establish a lending division of the Bank to be known as Fairport
Mortgage.




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





7





Note
2-Fair Value Measurement and Disclosure




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




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




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




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




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




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




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




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




8




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




June
      30, 2010
              Securities
      Available for Sale:
            
            Total
            
            
            Level 1
            
            
            Level 2
            
            
            Level 3U.S.
      Government agency securities
            
            $
            48,878
            
            
            $
            5,003
            
            
            $
            43,875
            
            
            $
            -Mortgage-backed
      securities - residential
            
            
            21,913
            
            
            
            1,541
            
            
            
            20,372
            
            
            
            -Total
      Available for Sale Securities
            
            $
            70,791
            
            
            $
            6,544
            
            
            $
            64,247
            
            
            $
            -(In Thousands)December
      31, 2009
              Securities
      Available for Sale:
            
            Total
            
            
            Level 1
            
            
            Level 2
            
            
            Level 3Equity
      securities
            
            $
            12
            
            
            $
            12
            
            
            $
            -
            
            
            $
            -U.S.
      Government agency securities
            
            
            54,629
            
            
            
            5,548
            
            
            
            49,081
            
            
            
            -Mortgage-backed
      securities - residential
            
            
            20,842
            
            
            
            -
            
            
            
            20,842
            
            
            
            -Total
      Available for Sale Securities
            
            $
            75,483
            
            
            $
            5,560
            
            
            $
            69,923
            
            
            $
            -







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




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




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




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




The carrying amounts of these assets
approximate their fair values.




Investment
Securities




The fair
value of securities available for sale (carried at fair value) and held to
maturity (carried at amortized cost) are determined by obtaining quoted market
prices on nationally recognized securities exchanges (Level 1), or matrix
pricing (Level 2), which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted market prices for
the




9




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




specific
securities but rather by relying on the securities’ relationship to other
benchmark quoted prices. For certain securities which are not traded in active
markets or are subject to transfer restrictions, valuations are adjusted to
reflect illiquidity and/or non-transferability, and such adjustments are
generally based on available market evidence (Level 3).  In the
absence of such evidence, management’s best estimate is
used.  Management’s best estimate consists of both internal and
external support on certain Level 3 investments.  Internal cash flow
models using a present value formula that includes assumptions market
participants would use along with indicative exit pricing obtained from
broker/dealers (where available) are used to support fair values of certain
Level 3 investments. The Company had no Level 3 investment securities at June
30, 2010 or at December 31, 2009.




Investment
in FHLB Stock




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




Loans
Held for Sale





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




Loans




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




Accrued
Interest Receivable and Payable






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




Deposits




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




Borrowings




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




10





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




Off-Balance Sheet
Instruments




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




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






June
      30, 2010
            
            
            December
      31, 2009Carrying
                Amount
            
            
            Fair
                Value
            
            
            Carrying
                Amount
            
            
            Fair
                Value(In
      Thousands)Financial
      assets:Cash and due from
      banks
            
            $
            13,003
            
            
            $
            13,003
            
            
            $
            3,385
            
            
            $
            3,385Interest bearing demand
      deposits
            
            
            2,350
            
            
            
            2,350
            
            
            
            2,580
            
            
            
            2,580Securities available for
      sale
            
            
            70,791
            
            
            
            70,791
            
            
            
            75,483
            
            
            
            75,483Securities held to
      maturity
            
            
            5,130
            
            
            
            5,287
            
            
            
            6,098
            
            
            
            6,183FHLB stock
            
            
            1,666
            
            
            
            1,666
            
            
            
            1,886
            
            
            
            1,886Loans
      held for sale
            
            
            3,360
            
            
            
            3,360
            
            
            
            -
            
            
            
            -Loans, net
            
            
            115,705
            
            
            
            119,899
            
            
            
            116,372
            
            
            
            118,883Accrued interest
      receivable
            
            
            963
            
            
            
            963
            
            
            
            1,156
            
            
            
            1,156Financial
      liabilities:Deposits
            
            
            164,762
            
            
            
            163,772
            
            
            
            156,510
            
            
            
            155,606Borrowings
            
            
            30,674
            
            
            
            29,127
            
            
            
            34,590
            
            
            
            32,579Accrued interest
      payable
            
            
            113
            
            
            
            113
            
            
            
            129
            
            
            
            129Off-balance
      sheet instruments:Commitments to extend
      credit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -





11


Note
3 - Securities


The
amortized cost and estimated fair value of securities with gross unrealized
gains and losses at June 30, 2010 and at December 31, 2009 are as
follows:
  Amortized
                    Cost
                
                
                Gross
                    Unrealized
                    Gains
                
                
                Gross
                    Unrealized
                    Losses
                
                
                Fair
                    Value(In
      Thousands)June
      30, 2010:Available for
    Sale:U.S.
      Government agency securities
                
                $
                48,606
                
                
                $
                287
                
                
                $
                (15
                )
                
                $
                48,878Mortgage-backed
      securities -residential
                
                
                21,391
                
                
                
                536
                
                
                
                (14
                )
                
                
                21,913$
                69,997
                
                
                $
                823
                
                
                $
                (29
                )
                
                $
                70,791Held to Maturity:Mortgage-backed securities
      –residential
                
                $
                5,130
                
                
                $
                157
                
                
                $
                -
                
                
                $
                5,287December
      31, 2009:Available for
    Sale:Equity
      securities
                
                $
                9
                
                
                $
                3
                
                
                $
                -
                
                
                $
                12U.S.
      Government agency securities
                
                
                54,842
                
                
                
                100
                
                
                
                (313
                )
                
                
                54,629Mortgage-backed
      securities –residential
                
                
                20,369
                
                
                
                473
                
                
                
                -
                
                
                
                20,842$
                75,220
                
                
                $
                576
                
                
                $
                (313
                )
                
                $
                75,483Held to Maturity:Mortgage-backed
      securities –residential
                
                $
                6,098
                
                
                $
                86
                
                
                $
                (1
                )
                
                $
                6,183


The
Company’s investment securities portfolio consists primarily of U.S. Government
sponsored agency securities, U.S Government mortgage-backed securities, and U.S.
Government sponsored agency mortgage-backed securities.  The U.S.
Government sponsored agency securities and the U.S. Government sponsored
mortgage-backed securities have little credit risk because their principal and
interest payments are backed by an agency of the U.S. Government.  At
June 30, 2010 the Company’s securities portfolio totaled $3.6 million of U.S.
Government mortgage-backed securities, including $1.4 million classified as held
to maturity, and $2.2 million classified as available for
sale.




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




12




Note
3 – Securities (continued)
  Available
      for Sale
                
                
                Held
      to MaturityAmortized
      Cost
                
                
                Estimated Fair
    Value
                
                
                Amortized
      Cost
                
                
                Estimated |Fair
    Value(In
      Thousands)
                
                
                (In
      Thousands)Due
      in one year or less
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Due
      after one year through five years
                
                
                9,346
                
                
                
                9,368
                
                
                
                -
                
                
                
                -Due
      after five years through ten years
                
                
                14,555
                
                
                
                14,610
                
                
                
                -
                
                
                
                -Due
      after ten years
                
                
                24,705
                
                
                
                24,900
                
                
                
                -
                
                
                
                -Mortgage-backed
      securities –
                  residential
                
                
                21,391
                
                
                
                21,913
                
                
                
                5,130
                
                
                
                5,287$
                69,997
                
                
                $
                70,791
                
                
                $
                5,130
                
                
                $
                5,287
  For the
six months ended June 30, 2010 there was a $10,573 gross realized loss on sale
of mortgage-backed securities held to maturity resulting from proceeds of
$686,000, and a $2,120 gross realized gain on sale of FHLMC common stock
available for sale resulting from proceeds of $11,000. In accordance with
accounting guidance, the Company was able to sell securities classified as held
to maturity after the Company had already collected a substantial portion (at
least 85%) of the principal outstanding at acquisition due either to prepayments
or to scheduled principal and interest payments on the debt
securities.  For the six months ended June 30, 2009 there was a
$92,000 realized gain on sale of mortgage-backed securities classified as
available for sale resulting from proceeds of $5.3 million.




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




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




13





Note
3 – Securities (continued)





Less
      than 12 Months
              
              
              12
      Months or More
              
              
              TotalFair
                  Value
              
              
              Gross
      Unrealized Losses
              
              
              Fair
                  Value
              
              
              Gross
      Unrealized Losses
              
              
              Fair
                  Value
              
              
              Gross
      Unrealized Losses(In
      Thousands)June
      30, 2010:U.S. Government
      agency
                securities
              
              $
              2,639
              
              
              $
              15
              
              
              $
              -
              
              
              $
              -
              
              
              $
              2,639
              
              
              $
              15Mortgaged-backed
                securities –
                residential
              
              
              2,864
              
              
              
              14
              
              
              
              -
              
              
              
              -
              
              
              
              2,864
              
              
              
              14$
              5,503
              
              
              $
              29
              
              
              $
              -
              
              
              $
              -
              
              
              $
              5,503
              
              
              $
              29December
      31, 2009:U.S. Government
      agency
                securities
              
              $
              27,241
              
              
              $
              313
              
              
              $
              -
              
              
              $
              -
              
              
              $
              27,241
              
              
              $
              313Mortgaged-backed
                securities
      –
                residential
              
              
              442
              
              
              
              1
              
              
              
              18
              
              
              
              -
              
              
              
              460
              
              
              
              1$
              27,683
              
              
              $
              314
              
              
              $
              18
              
              
              $
              -
              
              
              $
              27,701
              
              
              $
              314




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





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




Note
4 - Federal Home Loan Bank of New York Stock




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




Management
evaluates the FHLB stock for impairment in accordance with FASB ASC Topic
942-10-15, Financial Services
– Depository and Lending.  Management’s determination of
whether this investment is




14


Note
4 - Federal Home Loan Bank of New York Stock (continued)




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




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





Note
5 - Comprehensive Income (Loss)




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





The
components of other comprehensive income (loss) and related tax effects for the
three and six months ended June 30, 2010 and 2009 are as follows:





For
      the Three Months Ended June 30,
            
            
            For
      the Six Months Ended June 30,2010
            
            
            2009
            
            
            2010
            
            
            2009(In
      Thousands)
            
            
            (In
      Thousands)Unrealized
      holding gain (loss) on available for sale securities
            
            $
            127
            
            
            $
            (780
            )
            
            $
            531
            
            
            $
            (339
            )Reclassification
      adjustment for realized  gain included in net
    income
            
            
            -
            
            
            
            (92
            )
            
            
            (2
            )
            
            
            (92
            )Net Unrealized Gain (Loss)
            
            
            127
            
            
            
            (688
            )
            
            
            529
            
            
            
            (247
            )Tax
      effect
            
            
            42
            
            
            
            (234
            )
            
            
            179
            
            
            
            (84
            )Net
      of tax amount
            
            $
            85
            
            
            $
            (454
            )
            
            $
            350
            
            
            $
            (163
            )




Note
6 - Earnings Per Common Share




Basic
earnings per common share are calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. The
Company has not granted any restricted stock awards or stock options and, during
the three and six months ended June 30, 2010 and 2009, had no potentially
dilutive common stock equivalents.  Unallocated common shares held by
the ESOP are not included in the weighted-average number of common shares
outstanding for purposes of calculating earnings per common share until they are
committed to be released.  The weighted average common shares
outstanding were 1,727,273 for the three months ended June 30, 2010 and
1,726,838 for the six months ended June 30, 2010, and 1,723,775 for the three
months ended June 30, 2009 and 1,723,340 for the six months ended June 30,
2009.





15


Note
7 - Recent Accounting Pronouncements




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




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




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




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




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




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




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




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




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


provisions
within subtopic 310-40.




16


Note
7 - Recent Accounting Pronouncements (continued)





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







The FASB
issued ASU 20100-20, Receivables (Topic 310): Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses, in order to help investors assess the credit risk of a company’s
receivables portfolio and the adequacy of its allowance for credit losses held
against the portfolios by expanding credit risk disclosures.






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






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






For
public companies, the amendments that require disclosures as of the end of a
reporting period are effective for periods ending on or after December
15, 2010.  The amendments that require disclosures about activity that
occurs during a reporting period are effective for periods beginning on or after
December 15, 2010.






Note
8 – Subsequent Events




In July
2010, the Bank restructured a portion of its Federal Home Loan Bank advances by
repaying $13.2 million of existing borrowings and replacing these borrowings
with $13.2 million of new, lower cost FHLB advances. This transaction resulted
in $638,000 in prepayment penalties that will be deferred and recognized in
interest expense as an adjustment to the cost of the Company’s new borrowings in
future periods.  The existing borrowings were a combination of
fixed-rate and amortizing advances with an average cost of 4.29% and a weighted
average duration of 1.47 years.  The new borrowings are all fixed-rate
borrowings with an average cost of 1.53% and an average duration of 3.11
years.  The relevant accounting treatment for this transaction was an
interpretation of the guidance provided in ASC 470-50.This transaction
was executed as an earnings and interest rate risk strategy, resulting in lower
FHLB advance costs and an extension in average duration.




Note
9 – Formation of a Subsidiary




As
previously reported, the Board of Directors of the Bank approved the formation
of a wholly owned subsidiary to be known as Fairport Mortgage Corp. to engage in
residential lending. However, due to regulatory changes the Company has decided
to establish a lending division of the Bank to be known as Fairport
Mortgage.





17





Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  General
  Throughout
the Management’s Discussion and Analysis (“MD&A”), the term “the Company”
refers to the consolidated entity of FSB Community Bankshares, Inc., Fairport
Savings Bank, and Oakleaf Services Corporation, a wholly owned subsidiary of
Fairport Savings Bank.  At June 30, 2010, FSB Community
Bankshares, MHC the Company’s mutual holding company parent, held 946,050
shares, or 53.0%, of the Company’s common stock, engaged in no significant
activities, and was not included in the MD&A.





Forward
Looking Statements




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




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




Critical
Accounting Policies




The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB”.  References to GAAP issued
by the FASB in the footnotes to the financial statements are to the FASB
Accounting Standards Codification, referred to as the Codification or
ASC.




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





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.




18


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




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




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




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




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





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


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





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





19


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





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




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




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




Total
Assets.Total assets
increased by $5.6 million, or 2.6%, to $220.0 million at June 30, 2010 from
$214.4 million at December 31, 2009.  The increase in total assets
primarily reflects increases in cash and cash equivalents, and loans held for
sale, partially offset by decreases in securities available for sale, securities
held to maturity, net loans receivable, and Federal Home Loan Bank
stock.




Cash and
cash equivalents, mainly interest-earning deposits at the Federal Reserve Bank
and Federal Home Loan Bank increased by $9.4 million, or 157.4%, to $15.4
million at June 30, 2010 from $6.0 million at December 31,
2009.  Excess cash and cash equivalents were maintained at June 30,
2010 in anticipation of funding mortgage loan commitments in the last six months
of 2010.




Total
securities decreased by $5.7 million, or 6.9%, to $75.9 million at June 30, 2010
from $81.6 million at December 31, 2009. Securities classified as available for
sale decreased $4.7 million to $70.8 million at June 30, 2010 from $75.5 million
at December 31, 2009.  The $4.7 million decrease was attributable to
maturities and calls of $48.0 million of U.S. government agency securities
classified as available for sale, and $4.1 million in principal repayments
received and amortization, partially offset by the purchase of $42.4 million of
U.S. government agency securities and purchases of $4.5 million of
mortgage-backed securities, and a $530,000 increase in the fair value of
securities available for sale. We sold $8,750 of FHLMC common stock held in
available for sale securities for a realized gain on sale of $2,120 in the first
six months of 2010.




Securities
classified as held to maturity decreased $968,000, or 15.9% to $5.1 million at
June 30, 2010 from $6.1 million at December 31, 2009 primarily as a result of
the sale of $691,000 of  mortgage-backed securities with a realized
loss of $10,573 and $277,000 in principal repayments and
amortization.  In accordance with accounting guidance, the sale of
securities classified as held to maturity occurred after the Company received a
minimum of 85% of the principal outstanding at acquisition due either to
prepayments or to scheduled principal and interest payments on the debt
securities.  All securities purchased in 2010 have been classified as
available for sale to provide a portfolio of marketable securities for liquidity
as an alternative to borrowings. The Company has reviewed its investment
securities portfolio for the quarter and six months ended June 30, 2010, and has
determined that no other-than-temporary impairment exists in the
portfolio.




20


Investment
in FHLB of New York stock decreased by $220,000, or 11.7%, to $1.7 million at
June 30, 2010, from $1.9 million at December 31, 2009 due to stock
redemptions.  The FHLB of New York requires members to purchase and
redeem stock based on the level of borrowings.




Net loans
receivable decreased $667,000, or 0.6%, to $115.7 million at June 30, 2010 from
$116.4 million at December 31, 2009.  The Company continues to execute
its business plan of making high quality loans to existing and new customers in
our market area with $14.7 million of fixed-rate loan refinances and home
purchase originations in the first six months of 2010.  The Bank sold
$5.5 million of long-term, fixed-rate conventional residential mortgage loans
and FHA mortgage loans as a balance sheet management strategy in the first six
months of 2010 to reduce interest rate risk in a potentially rising rate
environment.  The $5.5 million of sold loans included $1.8 million in
direct broker loans, which had no impact on the statement of cash flows, and
$3.7 million in correspondent loans. The Bank sold these loans at a gain of
$83,000 which was recorded in other income, and will realize servicing income on
these loans as long as they have outstanding balances.  Management
believed that selling these loans was a prudent interest rate risk
decision.  Total loans sold and serviced as of June 30, 2010 totaled
$17.8 million compared to $16.8 million as of December 31, 2009. We may
experience further declines in our total residential mortgages loan portfolio
with additional mortgage loan sales. In the current interest rate environment we
intend to continue to sell a portion of our existing fixed-rate residential
mortgage loans on a servicing retained basis resulting in additional loan
servicing income, as well as selling the majority of FHA mortgage loans
originated on a servicing released basis.  At June 30, 2010 the Bank
had $3.4 million in loans held for sale comprised of FHA mortgage loans
originated and closed by the Bank in the second quarter of 2010 that have been
committed for sale in the secondary market and will be delivered and funded in
the third quarter of 2010.




The Bank
opened three mortgage loan origination offices in January of 2010 located in
Canandaigua, Pittsford, and Watertown, New York.  Six additional
mortgage loan originators and two support staff members were hired at these
locations. The Bank intends to continue to emphasize aggressive, yet prudent
originations of loans secured by one-to-four family residential real estate. The
Bank initially intended to establish Fairport Mortgage Corp. as a wholly owned
subsidiary of the Bank.  However, due to regulatory changes the
Company has decided to continue operating the mortgage origination offices as a
division of Fairport Savings Bank to be known as Fairport
Mortgage.   The primary responsibilities of the Fairport Mortgage
origination team will be to originate mortgage loans to increase the bank’s
current mortgage loan portfolio, to originate loans for the Bank to close and
sell as a correspondent to outside investors, and also to broker a select
portion of residential mortgage loans directly to other investors.




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




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




Deposits and
Borrowings.Totaldeposits increased by
$8.3 million, or 5.3%, to $164.8 million at June 30, 2010 from $156.5 million at
December 31, 2009.  The $8.3 million deposit increase consisted of
core deposit growth of $7.3 million including non-interest bearing checking
accounts, NOW accounts, money market accounts, and savings accounts, and $1.0
million in non-core deposit growth including IRAs and Certificates of
Deposit.  Management believes the deposit growth resulted, in part,
from customers’ preference for the flexibility provided by short-term core
deposits in the current low interest rate environment.




The
significant deposit growth demonstrates our competitive strength in our
market.  The net deposit growth was primarily attributable to the
Webster branch growth of $5.4 million, Irondequoit branch growth of $1.7
million, and Penfield branch growth of $1.9 million. Our marketing efforts and
focus on customer service, we believe, has resulted in attracting new clients
and increasing core deposits.




21


Long term
borrowings decreased by $3.9 million, or 11.3%, to $30.7 million at June 30,
2010 from $34.6 million on December 31, 2009.  The Company used its
sources of liquidity to decrease Federal Home Loan Bank advances and does not
intend to renew maturing FHLB advances during the remainder of 2010 as a result
of management’s decision to replace wholesale borrowings through core deposit
growth.




In July
2010 the Bank executed a $13.2 million FHLB debt restructuring as an earnings
and interest rate risk strategy, by lowering the FHLB advance interest rates and
extending the duration of the debt.




Stockholders’
Equity.Total
stockholders’ equity increased by $434,000 or 2.1%, to $20.8 million at June 30,
2010 from $20.4 million at December 31, 2009.  The increase resulted
from $68,000 in net income, an increase of $350,000 in accumulated other
comprehensive income, and a $16,000 increase from committed ESOP
shares.  The Bank continued to exceed the requirement to be
categorized as well capitalized, the highest standard of capital rating as
defined by the Bank’s regulators, as the end of the second quarter
2010.




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




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




22




For
      the Three Months Ended June 30,2010
              
              
              2009Average
                  Balance
              
              
              Interest
                  Income/
                  Expense
              
              
              Yield/
                  Cost
              
              
              Average
                  Balance
              
              
              Interest
                  Income/
                  Expense
              
              
              Yield/
                  Cost(Dollars
      in thousands)Interest-earning
      assets:Loans
              
              $
              115,822
              
              
              $
              1,602
              
              
              
              5.53
              %
              
              $
              124,501
              
              
              $
              1,757
              
              
              
              5.64
              %Securities
              
              
              56,240
              
              
              
              392
              
              
              
              2.79
              
              
              
              35,215
              
              
              
              301
              
              
              
              3.42Mortgage-backed
      securities
              
              
              25,217
              
              
              
              199
              
              
              
              3.16
              
              
              
              28,800
              
              
              
              299
              
              
              
              4.15Other
              
              
              12,464
              
              
              
              3
              
              
              
              0.10
              
              
              
              7,780
              
              
              
              2
              
              
              
              0.10Total
      interest-earning assets
              
              
              209,743
              
              
              
              2,196
              
              
              
              4.19
              
              
              
              196,296
              
              
              
              2,359
              
              
              
              4.81Non-interest-earning
      assets
              
              
              8,982
              
              
              
              
              
              
              
              
              
              
              
              4,459Total
      assets
              
              $
              218,725
              
              
              
              
              
              
              
              
              
              
              $
              200,755Interest-bearing
      liabilities:NOW
      accounts
              
              $
              10,892
              
              
              $
              19
              
              
              
              0.70
              %
              
              $
              8,198
              
              
              $
              14
              
              
              
              0.68
              %Passbook
      savings
              
              
              26,518
              
              
              
              52
              
              
              
              0.78
              
              
              
              14,108
              
              
              
              24
              
              
              
              0.68Money
      market savings
              
              
              25,493
              
              
              
              66
              
              
              
              1.04
              
              
              
              20,337
              
              
              
              85
              
              
              
              1.67Individual
      retirement accounts
              
              
              18,459
              
              
              
              131
              
              
              
              2.84
              
              
              
              17,701
              
              
              
              166
              
              
              
              3.75Certificates
      of
      deposit
              
              
              78,082
              
              
              
              385
              
              
              
              1.97
              
              
              
              75,525
              
              
              
              574
              
              
              
              3.04Borrowings
              
              
              30,874
              
              
              
              326
              
              
              
              4.22
              
              
              
              37,938
              
              
              
              406
              
              
              
              4.28Total
      interest-bearingliabilities
              
              
              190,318
              
              
              
              979
              
              
              
              2.06
              %
              
              
              173,807
              
              
              
              1,269
              
              
              
              2.92
              %Non-interest-bearing
      liabilities:Demand
      deposits
              
              
              4,272
              
              
              
              
              
              
              
              
              
              
              
              3,552Other
              
              
              3,450
              
              
              
              
              
              
              
              
              
              
              
              3,003Total
      liabilities
              
              
              198,040
              
              
              
              
              
              
              
              
              
              
              
              180,362Stockholders’
      equity
              
              
              20,685
              
              
              
              
              
              
              
              
              
              
              
              20,393Total
      liabilities and stockholders’ equity
              
              $
              218,725
              
              
              
              
              
              
              
              
              
              
              $
              200,755Net
      interest
      income
              
              
              
              
              
              $
              1,217
              
              
              
              
              
              
              
              
              
              
              $
              1,090Interest
      rate spread
      (1)
              
              
              
              
              
              
              
              
              
              
              2.13
              %
              
              
              
              
              
              
              
              
              
              
              1.89
              %Net
      interest-earning assets (2)
              
              $
              19,425
              
              
              
              
              
              
              
              
              
              
              $
              22,489Net
      interest margin
      (3)
              
              
              
              
              
              
              2.32
              %
              
              
              
              
              
              
              
              
              
              
              2.22
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              110
              %
              
              
              
              
              
              
              
              
              
              
              113
              %


(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.





23




For
      the Six Months Ended June 30,2010
              
              
              2009Average
                  Balance
              
              
              Interest
                  Income/
                  Expense
              
              
              Yield/
                  Cost
              
              
              Average
                  Balance
              
              
              Interest
                  Income/
                  Expense
              
              
              Yield/
                  Cost(Dollars
      in thousands)Interest-earning
      assets:Loans
              
              $
              115,123
              
              
              $
              3,195
              
              
              
              5.55
              %
              
              $
              128,867
              
              
              $
              3,664
              
              
              
              5.69
              %Securities
              
              
              57,722
              
              
              
              839
              
              
              
              2.91
              
              
              
              29,901
              
              
              
              568
              
              
              
              3.81Mortgage-backed
      securities
              
              
              25,458
              
              
              
              416
              
              
              
              3.27
              
              
              
              28,852
              
              
              
              625
              
              
              
              4.33Other
              
              
              9,352
              
              
              
              5
              
              
              
              0.11
              
              
              
              5,993
              
              
              
              3
              
              
              
              0.10Total
      interest-earning assets
              
              
              207,655
              
              
              
              4,455
              
              
              
              4.29
              %
              
              
              193,613
              
              
              
              4,860
              
              
              
              5.02
              %Non-interest-earning
      assets
              
              
              9,255
              
              
              
              
              
              
              
              
              
              
              
              4,456Total
      assets
              
              $
              216,910
              
              
              
              
              
              
              
              
              
              
              $
              198,069Interest-bearing
      liabilities:NOW
      accounts
              
              $
              9,958
              
              
              $
              34
              
              
              
              0.68
              %
              
              $
              7,859
              
              
              $
              28
              
              
              
              0.71
              %Passbook
      savings
              
              
              26,702
              
              
              
              124
              
              
              
              0.93
              
              
              
              13,789
              
              
              
              50
              
              
              
              0.73Money
      market savings
              
              
              24,463
              
              
              
              132
              
              
              
              1.08
              
              
              
              18,858
              
              
              
              180
              
              
              
              1.91Individual
      retirement accounts
              
              
              18,267
              
              
              
              272
              
              
              
              2.98
              
              
              
              17,347
              
              
              
              333
              
              
              
              3.84Certificates
      of deposit
              
              
              77,785
              
              
              
              826
              
              
              
              2.12
              
              
              
              74,299
              
              
              
              1,151
              
              
              
              3.10Borrowings
              
              
              31,961
              
              
              
              680
              
              
              
              4.26
              
              
              
              39,352
              
              
              
              831
              
              
              
              4.22Total
      interest-bearingliabilities
              
              
              189,136
              
              
              
              2,068
              
              
              
              2.19
              %
              
              
              171,504
              
              
              
              2,573
              
              
              
              3.00
              %Non-interest-bearing
      liabilities:Demand
      deposits
              
              
              4,107
              
              
              
              
              
              
              
              
              
              
              
              3,488Other
              
              
              3,026
              
              
              
              
              
              
              
              
              
              
              
              2,787Total
      liabilities
              
              
              196,269
              
              
              
              
              
              
              
              
              
              
              
              177,779Stockholders’
      equity
              
              
              20,651
              
              
              
              
              
              
              
              
              
              
              
              20,290Total
      liabilities and stockholders’ equity
              
              $
              216,920
              
              
              
              
              
              
              
              
              
              
              $
              198,069Net
      interest income
              
              
              
              
              
              $
              2,387
              
              
              
              
              
              
              
              
              
              
              $
              2,287Interest
      rate spread (1)
              
              
              
              
              
              
              
              
              
              
              2.10
              %
              
              
              
              
              
              
              
              
              
              
              2.02
              %Net
      interest-earning assets (2)
              
              $
              18,519
              
              
              
              
              
              
              
              
              
              
              $
              22,109Net
      interest margin (3)
              
              
              
              
              
              
              2.30
              %
              
              
              
              
              
              
              
              
              
              
              2.36
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              110
              %
              
              
              
              
              
              
              
              
              
              
              113
              %


(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.







24




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




General.The Company had net
income of $35,000 for the three months ended June 30, 2010 compared to net
income of $27,000 for the three months ended June 30, 2009.  The
increase of $8,000 in net income for the second quarter of 2010 compared to the
second quarter of 2009 resulted primarily from an increase in net interest
income of $127,000, an increase in other income of $13,000, a decrease in income
tax expense of $6,000, and a decrease in provision for loan losses of $5,000,
partially offset by an increase in other expenses of $143,000.  The
net interest margin increased 10 basis points to 2.32% in the second quarter of
2010 from 2.22% in the second quarter of 2009.  The increase in net
interest margin, reflective of an increase in net interest income, was the
result of the Company’s ability to reduce the deposit costs in a low interest
rate environment, partially offset by a volume reduction in higher yielding
assets, mainly mortgages, being replaced by an increased volume of lower
yielding assets, primarily investment securities. The increase in other income
was mainly due to increases in BOLI income, realized gain on sale of loans and
miscellaneous other income, primarily additional mortgage fees collected. The
increase in non-interest expense is primarily due to expenses related to our
Webster branch that opened in September 2009 and our three mortgage origination
offices that opened in January 2010 including additional salaries and employee
benefits, occupancy, equipment, and mortgages fees and taxes expenses, partially
offset by a decrease in FDIC premium expense which was higher during the 2009
period due to the one-time special assessment in the second quarter of
2009.





Interest and
Dividend Income.Interest and
dividend income decreased by $163,000 or 6.9%, to $2.2 million for the three
months ended June 30, 2010 from $2.4 million for the three months ended June 30,
2009.  The decrease in interest and dividend income resulted from a
$155,000 or 8.8% decrease in interest income from loans, and a $100,000 or 33.4%
decrease in interest income from mortgage-backed securities, partially offset by
a $91,000 or 30.2% increase in taxable securities income, and a $1,000 or 50.0%
increase in other interest income primarily interest-earning deposit accounts at
the Federal Reserve Bank and Federal Home Loan Bank. Average interest-earning
assets increased by $13.4 million, or 6.9%, to $209.7 million for the three
months ended June 30, 2010 from $196.3 million for the three months ended June
30, 2009.  The yield on interest-earning assets decreased by 62 basis
points to 4.19% for the three months ended June 30, 2010 compared to 4.81% for
the three months ended June 30, 2009, reflecting a yield decrease in all but one
interest earning asset categories as a result of the repositioning of assets
into lower yielding, yet shorter maturity, assets in a lower market interest
rate environment at June 30, 2010.




Interest
Expense.Interest expense
decreased $290,000 or 22.9%, to $979,000 for the three months ended June 30,
2010 from $1.3 million for the three months ended June 30, 2009.  The
decrease in interest expense resulted primarily from significantly lower average
rates paid on deposits.  The average balance of interest-bearing
liabilities increased $16.5 million, or 9.5%, to $190.3 million for the three
months ended June 30, 2010 compared to $173.8 million for the three months ended
June 30, 2009.  The average cost of interest-bearing liabilities,
however, decreased by 86 basis points to 2.06% for the three months ended June
30, 2010 from 2.92% for the three months ended June 30, 2009.  The
average cost of deposit accounts decreased by 90 basis points to 1.64% for the
three months ended June 30, 2010 compared to 2.54% for the three months ended
June 30, 2009. The average cost of borrowings decreased by 6 basis points to
4.22% for the three months ended June 30, 2010 compared to 4.28% for the three
months ended June 30, 2009. The average balance of borrowings decreased $7.1
million or 18.6%, to $30.8 million for the three months ended June 30, 2010
compared to $37.9 million for the three months ended June 30,
2009.  The decrease in interest expense reflects the Bank’s management
of lower deposit costs in a historically low interest rate
environment.  The Bank has continued to respond to the lower interest
rate environment allowing for deposit re-pricing in a downward fashion of higher
cost CDs, IRAs and money market savings accounts, decreasing our overall cost of
funds.




At June
30, 2010, we had $11.7 million of certificates of deposit, including IRAs that
will mature during the third quarter of 2010 with a weighted average cost of
1.66%. Based on current market rates, if these funds remain with Fairport
Savings Bank with similar maturities, the rates paid on these deposits will
decrease.




25


Net Interest
Income.Net
interest income increased $127,000 or 11.7%, to $1.2 million for the three
months ended June 30, 2010 from $1.1 million for the three months ended June 30,
2009.  The increase in net interest income was due primarily to a
lower average cost of deposits lowering the overall cost of interest bearing
liabilities, partially offset by a decrease in higher yielding earning assets,
lowering the overall cost of interest-earning assets. The Company’s net interest
margin increased 10 basis points to 2.32% for the three months ended June 30,
2010 from 2.22% for the three months ended June 30, 2009.




Provision for
Loan Losses.Based on
management’s evaluation of the factors that determine the level of the allowance
for loan losses, we recorded $3,000 in provision for loan losses for the three
month period ended June 30, 2010 compared to a $8,000 provision for loan losses
for the three months ended June 30, 2009.  The allowance for loan
losses as of June 30, 2010 was $374,000 or 0.31% of total loans, compared to
$357,000 or 0.30% of total loans as of June 30, 2009. We ended the quarter with
$23,000 in non-accrual loans at June 30, 2010 compared to $460,000 in
non-accrual loans at June 30, 2009.  We recorded no charge offs in the
second quarter of 2010 or 2009.  We had no foreclosed real estate at
June 30, 2010 or 2009.




Other
Income.Total other
income increased $13,000 or 5.2%, to $262,000 for the three months ended June
30, 2010 compared to $249,000 for the three months ended June 30, 2009. In the
three months ended June 30, 2010 versus the three months ended June 30, 2009,
there was an increase of $32,000 in BOLI income, $53,000 more in gain on sale of
mortgage loans in the secondary market, a $28,000 increase in other income
primarily from mortgage fees, and an increase of $3,000 in commissions from
Oakleaf Services insurance/annuity and security sales,  partially
offset by $92,000 less in realized gain on sale of securities, a $6,000 decrease
in service fee income primarily from deposit account service charge fees, and a
$5,000 realized loss on sale of foreclosed real estate.




Other
Expense.Total other
expense increased $143,000, or 11.1%, to $1.4 million for the three months ended
June 30, 2010 compared to $1.3 million for the three months ended June 30,
2009.  The increase was primarily the result of expenses related to
our Webster branch that opened in September 2009 and our three mortgage
origination offices that opened in January 2010 including a $171,000 increase in
salaries and employee benefits, a $25,000 increase in occupancy expense, a
$17,000 increase in equipment expense, a $15,000 increase in mortgage fees and
taxes, a $11,000 increase in other expenses, and  a $2,000 increase in
both data processing and electronic banking, partially offset by a $100,000
decrease in FDIC insurance premium expense for the three months ended June 30,
2010. The FDIC imposed a one-time special assessment on all depository
institutions, as a result of the assessment the Bank accrued $91,000 for the
quarter ended June 30, 2009 payable to the FDIC at September 30,
2009.




Income Tax
Expense.We had pre-tax
income of $42,000 for the three months ended June 30, 2010 versus pre-tax income
of $40,000 for the three months ended June 30, 2009, and had a $7,000 tax
expense for the three months ended June 30, 2010, versus a $13,000 tax expense
for the three months ended June 30, 2009, a change in taxes of
$6,000.  The effective tax rate was 16.6 % for the three months ended
June 30, 2010 compared to a tax expense rate of 32.5% for the three months ended
June 30, 2009.  The lower effective tax rate in the quarter ended June
30, 2010 was a result of the utilization of New York State mortgage recording
tax credits in the current period.




Comparison
of Operating Results for the Six Months Ended June 30, 2010 and June 30,
2009




General.We had net income
of $68,000 for the six months ended June 30, 2010 compared to net income of
$78,000 for the six months ended June 30, 2009.  The $10,000 decrease
was attributable to an increase in other expenses of $200,000, offset by an
increase in net interest income of $100,000, an increase in other income of
$38,000, an $8,000 decrease in the provision for loan losses, and a decrease in
income tax of $44,000. The net interest margin decreased by 6 basis points to
2.30% for the six months ended June 30, 2010 from 2.36% for the six months ended
June 30, 2009.  The decrease in net interest margin reflects a
decrease in our total average interest-earning assets more than total average
interest-bearing liabilities for the six months ended June 30, 2010 compared to
June 30, 2009, and a volume reduction in higher yielding assets, mainly mortgage
loans, being replaced by lower yielding assets mainly securities and interest
earning deposits. The increase in net interest income is primarily due to the
Company’s ability to reduce interest-bearing liabilities costs at a quicker pace
than interest-earning assets in a low interest rate environment.The increase in other
income was mainly due to increases in BOLI income, realized gain on sale of
loans and miscellaneous other income primarily additional mortgage fees
collected, partially offset with realized gain on sale of securities recorded in
2009. The increase in non-interest expense is primarily due to expenses related
to our Webster branch that opened in September 2009 and our three mortgage
origination offices that opened in January 2010 including additional salaries
and employee benefits, occupancy, equipment, advertising, and other
miscellaneous expenses, partially offset by a decrease in FDIC premium expense
related to the one-time special assessment in the second quarter of
2009.




26


Interest and
Dividend Income.Interest and
dividend income decreased by $405,000, or 8.3%, to $4.5 million for the six
months ended June 30, 2010 from $4.9 million for the six months ended June 30,
2009.  The decrease in interest and dividend income resulted primarily
from a $469,000, or 12.8% decrease in interest income from loans, and a
$209,000, or 33.4% decrease in interest income from mortgage-backed securities,
partially offset by a $271,000, or 47.7% increase in interest income from
securities, and a $2,000, or 66.7% increase in interest income from other
sources, mainly interest-earning deposits at the Federal Reserve Bank and
Federal Home Loan Bank.  Average interest-earning assets increased by
$14.1 million, or 7.3%, to $207.7 million for the six months ended June 30, 2009
from $193.6 million for the six months ended June 30, 2009.  The yield
on interest earning assets, however, decreased by 73 basis points to 4.29% for
the six months ended June 30, 2010 compared to 5.02% for the six months ended
June 30, 2009, reflecting decreases in interest yields in all but one asset
categories.




Interest
Expense.Interest expense
decreased $505,000, or 19.6%, to $2.1 million for the six months ended June 30,
2010 from $2.6 million for the six months ended June 30, 2009.  The
decrease in interest expense resulted from lower average rates paid on deposit
liabilities despite an increase in the aggregate average balance. Average
balances in interest bearing liabilities increased $17.6 million, or 10.3%, to
$189.1 million for the six months ended June 30, 2010 compared to $171.5 million
for the six months ended June 30, 2009.  The average cost of
interest-bearing liabilities decreased by 81 basis points to 2.19% for the six
months ended June 30, 2010 from 3.00% for the six months ended June 30,
2009.  The average cost of deposit accounts decreased by 87 basis
points to 1.77% for the six months ended June 30, 2010 compared to 2.64% for the
six months ended June 30, 2009. The average cost of borrowings increased by 4
basis points to 4.26% for the six months ended June 30, 2010 compared to 4.22%
for the six months ended June 30, 2009.  The decrease in interest
expense reflects a significantly lower cost of funds in total deposits in a
lower interest rate environment.




Net Interest
Income.Net
interest income increased $100,000, or 4.4%, to $2.4 million for the six months
ended June 30, 2010 from $2.3 million for the six months ended June 30,
2009.  The increase in net interest income was  primarily
due to a decrease in the average cost of our interest-bearing liabilities of 81
basis points, while the average yield on our interest-earning assets decreased
by 73 basis points.  Our net interest margin decreased by 6 basis
points to 2.30% for the six months ended June 30, 2010 from 2.36% for the six
months ended June 30, 2009.  The decrease in net interest margin was
attributable to less in interest earning assets than interest bearing
liabilities and the repositioning of the assets from long-term mortgages to
shorter-term investments.




Provision for
Loan Losses.Based on
management’s evaluation of the factors that determine the level of the allowance
for loan losses, we recorded a $6,000 provision for loan losses for the six
month period ended June 30, 2010 compared to the $14,000 provision for loan
losses for the six month period ended June 30, 2009.  We continue to
maintain exceptional credit quality within our loan portfolio with no
charge-offs recorded within either reporting period.  The allowance
for loan losses at June 30, 2010 was $374,000 or 0.31% of total loans, compared
to $357,000 or 0.30% of total loans at June 30, 2009. We ended the quarter with
$23,000 in non-accrual loans at June 30, 2010 compared to $460,000 in
non-accrual loans at June 30, 2009. We had no foreclosed real estate at June 30,
2010 or 2009.




27


Other
Income.Other income
increased $38,000, or 9.9%, to $421,000 for the six months ended June 30, 2009
compared to $383,000 for the six months ended June 30, 2009.  The
$38,000 increase was due to a $65,000 increase in BOLI income, a $38,000
increase in gain on sale of mortgage loans in the secondary market, a $40,000
increase in other income primarily from mortgage fees, and a $2,000 increase in
deposit service fees, partially offset by $100,000 less in realized gain on sale
of securities, a $5,000 realized loss on sale of foreclosed real estate, and
$2,000 less in commissions from Oakleaf Services insurance/annuity and security
sales.




Other
Expenses.Other expenses
increased $200,000, or 7.9%, to $2.7 million for the six months ended June 30,
2010 compared to $2.5 million for the six months ended June 30,
2009.  The increase was primarily the result of expenses related to
our Webster branch that opened in September 2009 and our three mortgage
origination offices that opened in January 2010 including: a $165,000 increase
in salaries and employee benefits, a $50,000 increase in occupancy expense, a
$30,000 increase in equipment expense, a $10,000 increase in advertising, a
$17,000 increase in other expenses, and a $1,000 increase in mortgage fees and
taxes.  These increases were partially offset by a $65,000 decrease in
FDIC insurance premium expense, a $4,000 decrease in data processing costs, and
a $2,000 decrease in both directors fees and electronic banking,




Income
Taxes.The Company had
pre-tax income of $65,000 for the six months ended June 30, 2010 versus pre-tax
income of $119,000 for the six months ended June 30, 2009, and had a $3,000 tax
benefit for the six months ended June 30, 2010, versus a $41,000 tax expense for
the six months ended June 30, 2009, a change of $44,000.  The
effective tax rate was (4.6)% for the six months ended June 30, 2009 compared to
34.5% for the six months ended June 30, 2009.  The effective tax rate
for the six months ended June 30, 2010 was the result of the utilization of New
York State mortgage recording tax credits in the current period.




Liquidity
and Capital Resources




Liquidity
is the ability to meet current and future financial obligations of a short-term
nature.  Our primary sources of funds consist of deposit inflows, loan
repayments, advances from the Federal Home Loan Bank of New York, maturities and
principal repayments of securities, and loan sales.  While maturities
and scheduled amortization of loans and securities are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.  Our
asset/liability management committee is responsible for establishing and
monitoring our liquidity targets and strategies in order to ensure that
sufficient liquidity exists for meeting the borrowing needs and deposit
withdrawals of our customers as well as unanticipated
contingencies.  We seek to maintain a liquidity ratio of 10.0% or
greater.  For the quarter ended June 30, 2010, our liquidity ratio
averaged 22.2%.  We believe that we have enough sources of liquidity
to satisfy our short and long-term liquidity needs as of June 30,
2010.




We
regularly adjust our investments in liquid assets based upon our assessment
of:




(i)           expected
loan demand;




(ii)           expected
deposit flows;




(iii)           yields
available on interest-earning deposits and securities; and




(iv)           the
objectives of our asset/liability management program.




Excess
liquid assets are invested generally in interest-earning deposits, short-term
and intermediate-term securities and federal funds sold.




28


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 June 30, 2010, cash and cash equivalents
totaled $15.4 million.




Our cash
flows are derived from operating activities, investing activities and financing
activities as reported in our Consolidated Statements of Cash Flows included in
our Consolidated Financial Statements.




At June
30, 2010, we had $3.2 million in loan commitments outstanding.  In
addition to commitments to originate loans, we had $9.0 million in unused lines
of credit to borrowers. Certificates of deposit, including IRAs comprised solely
of certificates of deposits, due within one year of June 30, 2010 totaled $51.9
million, or 54.6% of our certificates of deposit and 31.5% of total deposits.
If these deposits
do not remain with us, we will be required to seek other sources of funds
including loan sales, other deposit products, including certificates of deposit,
and Federal Home Loan Bank advances. Depending on market conditions, we may be
required to pay higher rates on such deposits or other borrowings than we
currently pay on the certificates of deposit due on or before June 30, 2011. We
believe, however, based on past experience that a significant portion of such
deposits will remain with us. We have the ability to attract and retain deposits
by adjusting the interest rates offered.




Our
primary investing activity is and will continue to be originating loans. During
the three months ended June 30, 2010, we originated $12.2 million of
loans.




Financing
activities consist primarily of activity in deposit accounts and Federal Home
Loan Bank borrowings.  We experienced a net increase in total deposits
of $1.6 million for the quarter ended June 30, 2010.  Deposit flows
are affected by the overall level of interest rates, the interest rates and
products offered by us and our local competitors, and by other
factors.




Liquidity
management is both a daily and long-term function of business
management.  If we require funds beyond our ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Bank of New
York, which provides an additional source of funds.  Federal Home Loan
Bank borrowings decreased by $3.9 million to $30.7 million for the six months
ended June 30, 2010, compared to a net decrease of $7.8 million to $37.7 million
for the six months ended June 30, 2009.  Historically, Federal Home
Loan Bank borrowings have primarily been used to fund loan demand and expanding
the investment portfolio.  At June 30, 2010, we had the ability to
borrow approximately $79.1 million from the Federal Home Loan Bank of New York,
of which $30.7 million had been advanced.




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





Fairport
Savings Bank is subject to various regulatory capital requirements, including a
risk-based capital measure.  The risk-based capital guidelines include
both a definition of capital and a framework for calculating risk-weighted
assets by assigning balance sheet assets and off-balance sheet items to broad
risk categories.  At June 30, 2010, Fairport Savings Bank exceeded all
regulatory capital requirements, and was considered “well capitalized” under
regulatory guidelines.




Off-Balance
Sheet Arrangements




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





29


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 June
30, 2010 and 2009, we had $3.2 million and $3.8 million, respectively, of
commitments to grant loans, and $9.0 million and $7.6 million, respectively, of
unfunded commitments under lines of credit.








Item
3.  Quantitative and Qualitative Disclosures About Market Risk





Not
applicable since the Company is a smaller reporting company.




Item
4T. Controls and Procedures




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of
the period covered by this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective at June 30, 2010.




There
were no significant changes made in the Company’s internal control over
financial reporting or in other factors that could significantly affect the
Company’s internal control over financial reporting during the period covered by
this report that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.











Part
II – Other Information




Item 1. Legal
Proceedings




The
Company and its subsidiaries are subject to various legal actions arising in the
normal course of business. In the opinion of management, the resolution of these
legal actions is not expected to have a material adverse effect on the Company’s
financial condition or results of operations.




Item
1A. Risk Factors




In
addition to the other information contained this Quarterly Report on Form 10-Q,
the following risk factors represent material updates and additions to the risk
factors previously disclosed in the Company’s Annual Report on Form 10-K for the
Year Ended December 31, 2009, as filed with the Securities and Exchange
Commission.  Additional risks not presently known to us, or that we
currently deem immaterial, may also adversely affect our business, financial
condition or results of operations.





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





30




Financial
reform legislation recently enacted by Congress will, among other things,
tighten capital standards, create a new Consumer Financial Protection Bureau and
result in new laws and regulations that are expected to increase our costs of
operations.




Congress
recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”). This new law will significantly change the current bank
regulatory structure and affect the lending, deposit, investment, trading and
operating activities of financial institutions and their holding companies. The
Dodd-Frank Act requires various federal agencies to adopt a broad range of new
implementing rules and regulations, and to prepare numerous studies and reports
for Congress. The federal agencies are given significant discretion in drafting
the implementing rules and regulations, and consequently, many of the details
and much of the impact of the Dodd-Frank Act may not be known for many months or
years.




Certain
provisions of the Dodd-Frank Act are expected to have a near term effect on us.
For example, the new law provides that the Office of Thrift Supervision, which
is currently the primary federal regulator for FSB Community Bankshares, Inc.
and its subsidiary, Fairport Savings Bank, will cease to exist one year from the
date of the new law’s enactment. The Office of the Comptroller of the Currency,
which is currently the primary federal regulator for national banks, will become
the primary federal regulator for federal thrifts. The Board of Governors of the
Federal Reserve System will supervise and regulate all savings and loan holding
companies that were formerly regulated by the Office of Thrift Supervision,
including FSB Community Bankshares, Inc.




Also
effective one year after the date of enactment is a provision of the Dodd-Frank
Act that eliminates the federal prohibitions on paying interest on demand
deposits, thus allowing businesses to have interest bearing checking accounts.
Depending on competitive responses, this significant change to existing law
could have an adverse effect on our interest expense.




The
Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation
insurance assessments. Assessments will now be based on the average consolidated
total assets less tangible equity capital of a financial institution. The
Dodd-Frank Act also permanently increases the maximum amount of deposit
insurance for banks, savings institutions and credit unions to $250,000 per
depositor, retroactive to January 1, 2009, and non-interest bearing
transaction accounts have unlimited deposit insurance through December 31,
2013.





The
Dodd-Frank Act will require publicly traded companies to give stockholders a
non-binding vote on executive compensation and so-called “golden parachute”
payments, and by authorizing the Securities and Exchange Commission to
promulgate rules that would allow stockholders to nominate their own candidates
using a company’s proxy materials. The legislation also directs the Federal
Reserve Board to promulgate rules prohibiting excessive compensation paid to
bank holding company executives, regardless of whether the company is publicly
traded or not.




The
Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad
powers to supervise and enforce consumer protection laws. The Consumer Financial
Protection Bureau has broad rule-making authority for a wide range of consumer
protection laws that apply to all banks and savings institutions, including the
authority to prohibit “unfair, deceptive or abusive” acts and practices. The
Consumer Financial Protection Bureau has examination and enforcement authority
over all banks and savings institutions with more than $10 billion in assets.
Banks and savings institutions with $10 billion or less in assets will be
examined by their applicable bank regulators.  The Dodd-Frank Act also
weakens the federal preemption rules that have been applicable for national
banks and federal savings associations, and gives state attorneys general the
ability to enforce federal consumer protection laws.




It is
difficult to predict at this time what specific impact the Dodd-Frank Act and
the yet to be written implementing rules and regulations will have on community
banks. However, it is expected that at a minimum they will increase our
operating and compliance costs and could increase our interest
expense.




31




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




(a)
            There
      were no sales of unregistered securities during the period covered by this
      Report.




(b)
              Not
      applicable.




(c)
            There
      were no issuer repurchases of securities during the period covered by this
      Report.






Item 3. Defaults Upon Senior
Securities




Not
applicable.







Item
4. [Removed and Reserved]






Item 5. Other
Information




None.






Item 6. Exhibits




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




3.1
            Charter of FSB Community Bankshares,
  Inc.*




3.2
            Bylaws of FSB Community Bankshares,
Inc.*




4
            Form of Common Stock Certificate of FSB Community Bankshares,
      Inc.*




10.1
            Supplemental Executive Retirement
Plan*




10.2
            Form
      of Employee Stock Ownership Plan*




10.3
            Supplemental
      Executive Retirement Plan for K.
Maroney**




31.1
            Certification of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002




31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002




32
            Certification of Chief Executive Officer and Chief Financial Officer
      pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002


_____________________


*
            Filed
      as exhibits to the Company’s Registration Statement on Form SB-2, and any
      amendments thereto, with the Securities and Exchange Commission
      (Registration No. 333-141380) on March 16,
2007.





**
            Filed
      as an exhibit to the Company’s Current Report on Form 8-K, file with the
      Securities and Exchange Commission on August 4,
  2010.





32





SIGNATURES







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




FSB COMMUNITY BANKSHARES,
      INC.








Date:
            August
      16, 2010
            /s/ Dana C. Gavenda


Dana C. Gavenda
 President and Chief Executive
      Officer













Date:
            August
      16, 2010
            /s/ Kevin D. Maroney


Kevin D. Maroney
 Executive Vice President and Chief Financial
      Officer