UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWashington,
      D.C. 20549FORM
      10-K





x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Fiscal Year Ended December 31, 2008ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ___________________ to
      ______________________Commission
      File Number: 001- 52751FSB
      Community Bankshares, Inc.(Exact
      Name of Registrant as Specified in its
Charter)





United
      States
                
                
                74-3164710(State
      or Other Jurisdiction of Incorporation or Organization)
                
                (I.R.S.
      Employer Identification No.)





45
      South Main Street, Fairport, New York
              
              
              14450(Address
      of Principal Executive Offices)
              
              (Zip
      Code)





(585)
      223-9080(Issuer’s
      Telephone Number including area code)Securities
      Registered Pursuant to Section 12(b) of the Act:NoneName
      of Each ExchangeTitle
      of Class
                    
                    On
      Which RegisteredSecurities
      Registered Pursuant to Section 12(g) of the Act:Common
      Stock, par value $0.10 per
share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES o   NO x.




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. YES o   NO x.




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 reports), and (2) has been subject to such requirements for the past 90
days.




(1) YES
x   NO
o




(2) YES
x   NO
o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x




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.


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 o   NO x









As
of June 30, 2008 the aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant, computed by reference to the
closing price of the common stock as of June 30, 2008 was $6.8
million.




As
of March 27, 2009, there were 1,785,000 shares of the Registrant’s common stock,
par value $0.10 per share, outstanding, of which 946,050 shares, or 53%, were
held by FSB Community Bankshares, MHC, the Registrant’s mutual holding company
parent.




DOCUMENTS
INCORPORATED BY REFERENCE


1.
                Proxy
      Statement for the 2009 Annual Meeting of Stockholders (Parts II and
      III).2.
                Annual
      Report to Shareholders for the year ended December 31, 2008 (Part
      II).




2




PART
I


ITEM
      1.BUSINESS




Forward-Looking
Statements




This
Annual Report contains certain “forward-looking statements” which may be
identified by the use of words such as “believe,” “expect,” “anticipate,”
“should,” “planned,” “estimated” and “potential.” Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage, commercial and
other loans, real estate values, competition, changes in accounting principles,
policies, or guidelines, changes in legislation or regulation, and other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing products and services.




FSB
Community Bankshares, MHC




FSB
Community Bankshares, MHC is a federally chartered mutual holding company and it
currently owns 53% of the outstanding common stock of FSB Community Bankshares,
Inc. FSB Community Bankshares, MHC has not engaged in any significant business
other than owning the common stock of FSB Community Bankshares, Inc. So long as
FSB Community Bankshares, MHC exists, it is required to own a majority of the
voting stock of FSB Community Bankshares, Inc. The executive office of FSB
Community Bankshares, MHC is located at 45 S. Main Street, Fairport, New York
14450, and its telephone number is (585) 223-9080. FSB Community Bankshares, MHC
is subject to comprehensive regulation and examination by the Office of Thrift
Supervision (“OTS”).




FSB
Community Bankshares, Inc.




FSB
Community Bankshares, Inc. is a federally chartered mid-tier stock holding
company of Fairport Savings Bank. FSB Community Bankshares, Inc. owns 100% of
the common stock of Fairport Savings Bank and has approximately $3.0 million in
investment securities. FSB Community Bankshares, Inc. has not engaged in any
significant business activity other than owning the common stock of Fairport
Savings Bank and $3.0 million in investment securities, and currently does not
intend to expand materially its business activities, other than through its
ownership of Fairport Savings Bank (the “Bank”).




FSB
Community Bankshares, Inc. completed its initial public offering on August 10,
2007 by selling 838,950 shares, or 47.0% of our outstanding common stock, at a
price of $10.00 per share, to the Bank’s eligible depositors, the Bank’s
employee stock ownership plan and the public. Additionally, we issued 946,050
shares, or 53.0% of our common stock, to FSB Community Bankshares, MHC our
federally chartered mutual holding company parent.




At
December 31, 2008, we had total consolidated assets of $196.1 million, total
deposits of $127.5 million and stockholders’ equity of $20.0 million. Our
consolidated net income for the year ended December 31, 2008 was
$25,000.




Our
executive offices and the Bank’s executive offices are located at 45 South Main
Street, Fairport, New York 14450, and our telephone number is (585)
223-9080.




Our
website address is www.fairportsavingsbank.com.
Information on our website is not and should not be considered a part of this
Annual Report on Form 10-K.We make our Annual Report on Form 10-K and amendments
thereto available on our website as soon as reasonably practicable after filing
or furnishing them to the SEC. Also available on the website is our Corporate
Profile, our officers and directors, corporate governance, and a link to SEC
filings.


3




Fairport
Savings Bank




Fairport
Savings Bank is a federally chartered savings bank headquartered in Fairport,
New York and was originally founded in 1888. Fairport Savings Bank conducts
business from its main office in Fairport, New York and our branch offices
located in Penfield, New York which opened in 2003 and Irondequoit, New York,
which opened in January 2007. The telephone number at its main office is (585)
223-9080. Fairport Savings Bank is subject to comprehensive regulation and
examination by the OTS.




Our
principal business consists of originating one-to-four-family residential real
estate mortgage loans and home equity lines of credit, and to a lesser extent,
originations of commercial real estate, multi-family, construction and other
consumer loans. We attract retail deposits from the general public in the areas
surrounding our main office and our branch offices. We offer our customers a
variety of deposit products with interest rates that are competitive with those
of similar products offered by other financial institutions in our market area.
Loans that we sell consist of long-term, fixed-rate residential real estate
mortgage loans. We retain the servicing rights on all loans that we sell. Our
loans are sold without recourse. We have not entered into loan participations in
recent years. Our revenues are derived primarily from interest on loans and, to
a lesser extent, interest on investment securities and mortgage-backed
securities. We also generate revenues from fees and service charges. Our primary
sources of funds are deposits, borrowings, and principal and interest payments
on loans and securities. Additionally, we derive a portion of our non-interest
income through Oakleaf Services Corporation, our subsidiary that offers
non-deposit investments such as annuities, insurance products and mutual
funds.




Market
Area




Fairport
Savings Bank considers its market area to consist of Monroe County, New York,
and to a lesser extent, the surrounding counties in Western New York. Monroe
County is a suburban market dominated by the City of Rochester, the third
largest city in the State of New York. In 2008, Monroe County had a population
of 742,000. Population growth has been largely stagnant over the last two
decades. The Monroe County economy is largely dependent on several large
manufacturing companies, as well as sizeable higher education and health care
facilities centered in Rochester. The University of Rochester and Strong
Memorial Hospital were two of the largest employers in the Rochester area in
2006. Rochester is also home to a number of international businesses, including
Eastman Kodak, Bausch & Lomb, Constellation Brands and Paychex.
Additionally, Xerox, while no longer headquartered in Rochester, has its
principal offices and manufacturing facilities in Monroe County.




Competition




We
face intense competition in our market areas both in making loans and attracting
deposits. Our market areas have a high concentration of financial institutions,
including large money center and regional banks, community banks and credit
unions. We face additional competition for deposits from money market funds,
brokerage firms, mutual funds and insurance companies. Some of our competitors
offer products and services that we currently do not offer, such as commercial
business loans, trust services and private banking.




The
majority of our depositors live and/or work in Monroe County, New York. At June
30, 2008, the latest date for which information is available through the Federal
Deposit Insurance Corporation, we held approximately 1.4% of the thrift and bank
deposits available in Monroe County.




Our
primary strategy for increasing and retaining our customer base is to offer
competitive deposit and loan rates and product features, delivered with
exceptional customer service. Our primary focus is to build and develop
profitable customer relationships across all lines of business while maintaining
our role as a community bank.


4




Lending
Activities




Our
principal lending activity is the origination of first mortgage loans to
purchase or refinance one-to-four-family residential real estate. We also
originate a significant number of home equity lines of credit and, to a lesser
extent, multi-family residential, construction, commercial real estate and other
loans (consisting of automobile, passbook, overdraft protection and unsecured
loans). At December 31, 2008, one-to-four-family residential real estate
mortgage loans totaled $123.9 million, or 91.4% of our loan portfolio, home
equity lines of credittotaled $8.2 million, or
6.1% of our loan portfolio, commercial real estate loans totaled $2.1 million or
1.6% of our loan portfolio, and other loans totaled $1.3 million or 0.9% of our
loan portfolio.




Our
strategic plan continues to focus on residential real estate lending, whereby a
portion of fixed-rate long term residential loan originations will be sold, on a
servicing-retained basis, to increase non-interest income, and the remaining
loans will be added to our loan portfolio for interest earning income. In 2008
we sold $2.9 million in 30 year fixed rate mortgages. Our total loans sold and
serviced as of December 31, 2008 was $5.4 million. We may experience declines in
the residential mortgage loan portfolio during 2009 if the economy continues to
weaken. Additionally, based on our desired interest rate sensitivity position,
we may increase the amount of residential mortgages we sell in the secondary
market.




Loan Portfolio
Composition.The following table sets forth the composition of our loan
portfolio by type of loan at the dates indicated.


At
      December 31,2008
                  
                  
                  2007Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent(Dollars
      in thousands)Real
      estate loans:One-to-four-family
      residential(1)
                  
                  $
                  123,880
                  
                  
                  
                  91.4
                  %
                  
                  $
                  113,267
                  
                  
                  
                  91.2
                  %Home
      equity lines of credit
                  
                  
                  8,214
                  
                  
                  
                  6.1
                  
                  
                  
                  6,622
                  
                  
                  
                  5.3Multi-family
      residential
                  
                  
                  846
                  
                  
                  
                  0.6
                  
                  
                  
                  918
                  
                  
                  
                  0.7Construction(2)
                  
                  
                  316
                  
                  
                  
                  0.2
                  
                  
                  
                  1,114
                  
                  
                  
                  0.9Commercial
                  
                  
                  2,119
                  
                  
                  
                  1.6
                  
                  
                  
                  2,123
                  
                  
                  
                  1.7Other
      loans
                  
                  
                  148
                  
                  
                  
                  0.1
                  
                  
                  
                  200
                  
                  
                  
                  0.2Total
      loans receivable
                  
                  
                  135,523
                  
                  
                  
                  100.0
                  %
                  
                  
                  124,244
                  
                  
                  
                  100.0
                  %Deferred
      loan origination costs
                  
                  
                  535
                  
                  
                  
                  
                  
                  
                  
                  401Allowance
      for loan losses
                  
                  
                  (345
                  )
                  
                  
                  
                  
                  
                  
                  (319
                  )Total
      loans receivable, net
                  
                  $
                  135,713
                  
                  
                  
                  
                  
                  
                  $
                  124,326




(1)
                            Includes
      $4.7 million and $4.7 million of closed-end home equity loans at December
      31, 2008 and 2007, respectively.(2)
                            Represents
      amounts disbursed at December 31, 2008 and
2007.




5




Loan Portfolio
Maturities.The following table summarizes the scheduled repayments of
our gross loan portfolio at December 31, 2008. Demand loans, loans having no
stated repayment schedule or maturity, and overdraft loans are reported as being
due in the year ending December 31, 2009. Maturities are based on the final
contractual payment date and do not reflect the impact of prepayments and
scheduled principal amortization.


One-to-
                  Four
      Family
                  Residential
                  Real
      Estate
                  Loans
                
                
                Home
                  Equity
      Lines
                  of
      Credit
                
                
                Multi-
                  Family
                  Residential
                  Real
      Estate
                  Loans
                
                
                Construction
                  Loans
                
                
                Commercial
                  Real
      Estate
                  Loans
                
                
                Other
      Loans
                
                
                Total(In
      thousands)Due
      During the YearsEnding December 31,2009
                
                $
                25
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                150
                
                
                $
                54
                
                
                $
                2292010
                
                
                110
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                97
                
                
                
                23
                
                
                
                2302011
                
                
                892
                
                
                
                —
                
                
                
                49
                
                
                
                —
                
                
                
                58
                
                
                
                30
                
                
                
                1,0292012
      to 2013
                
                
                6,908
                
                
                
                —
                
                
                
                62
                
                
                
                —
                
                
                
                53
                
                
                
                41
                
                
                
                7,0642014
      to 2018
                
                
                20,651
                
                
                
                —
                
                
                
                218
                
                
                
                —
                
                
                
                243
                
                
                
                —
                
                
                
                21,1122019
      to 2023
                
                
                28,736
                
                
                
                2
                
                
                
                117
                
                
                
                —
                
                
                
                997
                
                
                
                —
                
                
                
                29,8522024
      and beyond
                
                
                66,558
                
                
                
                8,212
                
                
                
                400
                
                
                
                316
                
                
                
                521
                
                
                
                —
                
                
                
                76,007Total
                
                $
                123,880
                
                
                $
                8,214
                
                
                $
                846
                
                
                $
                316
                
                
                $
                2,119
                
                
                $
                148
                
                
                $
                135,523




The
following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at December 31, 2008 that are contractually due after
December 31, 2009.


Due
      After December 31, 2009Fixed
                                      
                                      
                                      Adjustable
                                      
                                      
                                      Total(In
      thousands)Real
      estate loans:One-to-four-family
      residential
                                      
                                      $
                                      116,396
                                      
                                      
                                      $
                                      7,459
                                      
                                      
                                      $
                                      123,855Home
      equity lines of credit
                                      
                                      
                                      —
                                      
                                      
                                      
                                      8,214
                                      
                                      
                                      
                                      8,214Multi-family
      residential
                                      
                                      
                                      384
                                      
                                      
                                      
                                      462
                                      
                                      
                                      
                                      846Construction
                                      
                                      
                                      316
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      316Commercial
                                      
                                      
                                      878
                                      
                                      
                                      
                                      1,091
                                      
                                      
                                      
                                      1,969Other
      loans
                                      
                                      
                                      94
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      94Total
                                      
                                      $
                                      118,068
                                      
                                      
                                      $
                                      17,226
                                      
                                      
                                      $
                                      135,294




One-to-four-family
Residential Real Estate Mortgage Loans. Our primary lending activity is
the origination of residential real estate mortgage loans. At December 31, 2008,
$123.9 million, or 91.4% of our total loan portfolio, consisted of
one-to-four-family residential real estate mortgage loans. We offer conforming
and non-conforming, fixed-rate and adjustable-rate residential real estate
mortgage loans with maturities of up to 30 years and maximum loan amounts
generally of up to $750,000.




We
currently offer fixed-rate conventional mortgage loans with terms of up to 30
years that are fully amortizing with monthly loan payments, and adjustable-rate
mortgage loans that provide an initial fixed interest rate for one, three, five,
seven or ten years and that amortize over a period of up to 30 years. We
originate fixed-rate mortgage loans with terms of less than 15 years, but at
rates applicable to our 15-year loans. We originate fixed-rate bi-weekly
mortgage loans with terms of up to 30 years that are fully amortizing with
bi-weekly loan payments. We also offer “interest only” loans, where the borrower
pays interest for an initial period (ten years), after which the loan converts
to a fully amortizing loan.




One-to-four-family
residential real estate mortgage loans are generally underwritten according to
Freddie Mac guidelines, and we refer to loans that conform to such guidelines as
“conforming loans.” We generally originate both fixed and adjustable-rate
mortgage loans in amounts up to the maximum conforming loan limits as
established by the Office of Federal Housing Enterprise Oversight, which at
December 31, 2008 was $417,000 for single-family homes. We also originate loans
above the lending limit for conforming loans, which we refer to as “jumbo
loans.” We generally underwrite jumbo loans in a manner similar to conforming
loans generally with increased rates. These loans are generally eligible for
sale to various firms that specialize in purchasing non-conforming loans. Jumbo
loans are not uncommon in our market area. For first mortgage loans with
loan-to-value ratios in excess of 80% we require private mortgage
insurance.


6




As
a result of our conservative underwriting standards, we do not have any loans in
our loan portfolio that are considered sub-prime, or Alt-A.




We
actively monitor our interest rate risk position to determine the desirable
level of investment in fixed-rate mortgages. Depending on market interest rates
and our capital and liquidity position, we may retain all of our newly
originated longer-term fixed-rate residential mortgage loans, or we may sell all
or a portion of such loans in the secondary mortgage market to government
sponsored entities such as Freddie Mac or other purchasers.




During
periods of low market interest rates such as we are currently experiencing at
the beginning of 2009, we will attempt to sell a portion of our newly originated
fixed-rate residential real estate mortgage loans. Our ability to sell these
fixed-rate loans has been constrained in recent periods by rising interest
rates. During 2008, we sold $2.9 million in loans. For the year ended December
31, 2008, we received servicing fees of $9,873. As of December 31, 2008, the
principal balance of loans serviced for others totaled $5.4
million.




We
currently offer several adjustable-rate mortgage loans secured by residential
properties with interest rates that are fixed for an initial period ranging from
one year to ten years. After the initial fixed period, the interest rate on
adjustable-rate mortgage loans is generally reset every year based upon a
contractual spread or margin above the average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year, as published weekly by
the Federal Reserve Board, subject to periodic and lifetime limitations on
interest rate changes. All of our interest-only loans and our traditional
adjustable-rate mortgage loans with initial fixed-rate periods of one, three,
five, seven and ten years have initial and periodic caps of two percentage
points on interest rate changes, with a cap of six percentage points for the
life of the loan. Many of the borrowers who select these loans have shorter-term
credit needs than those who select long-term, fixed-rate mortgage loans. We do
not offer “Option ARM” loans, where borrowers can pay less than the interest
owed on their loan, resulting in an increased principal balance during the life
of the loan.




Adjustable-rate
mortgage loans generally present different credit risks than fixed-rate mortgage
loans primarily because the underlying debt service payments of the borrowers
increase as interest rates increase, thereby increasing the potential for
default. Interest-only loans present different credit risks than fully
amortizing loans, as the principal balance of the loan does not decrease during
the interest-only period. As a result, our exposure to loss of principal in the
event of default does not decrease during this period.




We
generally require title insurance on all of our one-to-four-family residential
real estate mortgage loans, and we also require that borrowers maintain fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) in
an amount at least equal to the lesser of the loan balance or the replacement
cost of the improvements. For fixed-rate mortgage loans with terms of fifteen
years or less, we will accept an attorney’s letter in lieu of title insurance. A
majority of our residential real estate mortgage loans have a mortgage escrow
account from which disbursements are made for real estate taxes and flood
insurance. We do not conduct environmental testing on residential real estate
mortgage loans unless specific concerns for hazards are identified by the
appraiser used in connection with the origination of the loan.




Home Equity Lines
of Credit. We offer home equity lines of credit, which are primarily
secured by a second mortgage on one-to-four-family residences. At December 31,
2008, home equity lines of credit totaled $8.2 million, or 6.1% of total loans
receivable. At this date we had an additional $7.4 million of undisbursed home
equity lines of credit.




The
underwriting standards for home equity lines of credit include a determination
of the applicant’s credit history, an assessment of the applicant’s ability to
meet existing obligations and payments on the proposed loan and the value of the
collateral securing the loan. The combined loan-to-value ratio (first and second
mortgage liens) for home equity lines of credit is generally limited to 90%. We
originate our home equity lines of credit without application fees or
borrower-paid closing costs. Our home equity lines of credit are offered with
adjustable rates of interest indexed to the prime rate, as reported in The Wall Street
Journal.


7




Multi-Family
Residential Loans. Loans secured by multi-family real estate totaled
$846,000 or 0.6%, of the total loan portfolio at December 31, 2008. Multi-family
residential loans generally are secured by rental properties. All multi-family
residential loans are secured by properties located within our lending area. At
December 31, 2008, we had six multi-family loans with an average principal
balance of $141,000, and the largest multi-family real estate loan had a
principal balance of $400,000. At December 31, 2008, all of our loans secured by
multi-family real estate loans were performing in accordance with their terms.
Multi-family real estate loans are offered with fixed and adjustable interest
rates. Multi-family real estate loans are originated for terms of up to 20
years. Adjustable-rate multi-family real estate loans are tied to the average
yield on U.S. Treasury securities, subject to periodic and lifetime limitations
on interest rate changes.




We
consider a number of factors in originating multi-family real estate loans. We
evaluate the qualifications and financial condition of the borrower (including
credit history), profitability and expertise, as well as the value and condition
of the mortgaged property securing the loan. When evaluating the qualifications
of the borrower, we consider the financial resources of the borrower, the
borrower’s experience in owning or managing similar property and the borrower’s
payment history with us and other financial institutions. In evaluating the
property securing the loan, the factors we consider include the net operating
income of the mortgaged property before debt service and depreciation, the debt
service coverage ratio (the ratio of net operating income to debt service) to
ensure that it is at least 120% of the monthly debt service and the ratio of the
loan amount to the appraised value of the mortgaged property. Multi-family real
estate loans are originated in amounts up to 70% of the appraised value of the
mortgaged property securing the loan. All multi-family loans are appraised by
outside independent appraisers approved by the board of directors.




Loans
secured by multi-family real estate generally involve a greater degree of credit
risk than one-to four-family residential mortgage loans and carry larger loan
balances. This increased credit risk is a result of several factors, including
the concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family real estate
typically depends upon the successful operation of the real estate property
securing the loans. If the cash flow from the project is reduced, the borrower’s
ability to repay the loan may be impaired.




Construction
Loans.We also originate construction loans for the purchase of developed
lots and for the construction of single-family residences. Construction loans
are offered to individuals for the construction of their personal residences by
a qualified builder (construction/permanent loans). At December 31, 2008,
construction loans totaled $316,000, or 0.2% of total loans receivable. At
December 31, 2008, the additional unadvanced portion of these construction loans
totaled $464,000.




Before
making a commitment to fund a construction loan, we require an appraisal of the
property by an independent licensed appraiser. We generally also review and
inspect each property before disbursement of funds during the term of the
construction loan.




Construction
financing generally involves greater credit risk than long-term financing on
improved, owner-occupied real estate. Risk of loss on a construction loan
depends largely upon the accuracy of the initial estimate of the value of the
property at completion of construction compared to the estimated cost (including
interest) of construction and other assumptions. If the estimate of construction
cost proves to be inaccurate, we may be required to advance additional funds
beyond the amount originally committed in order to protect the value of the
property. Moreover, if the estimated value of the completed project proves to be
inaccurate, the borrower may hold a property with a value that is insufficient
to assure full repayment of the loan.




Commercial Real
Estate Loans.At December 31, 2008, $2.1 million, or 1.6% of our total
loan portfolio consisted of commercial real estate loans. Commercial real estate
loans are secured by office buildings, mixed use properties, places of worship
and other commercial properties. We generally originate adjustable-rate
commercial real estate loans with maximum terms of up to 15 years. The maximum
loan-to-value ratio of commercial real estate loans is 70%. At December 31,
2008, we had 17 commercial real estate loans with an average outstanding balance
of $125,000. At December 31, 2008, our largest loan secured by commercial real
estate consisted of a $521,000 loan secured by an office building/warehouse. At
December 31, 2008 all of our loans secured by commercial real estate were
performing in accordance with their terms.


8




We
consider a number of factors in originating commercial real estate loans. We
evaluate the qualifications and financial condition of the borrower (including
credit history), profitability and expertise, as well as the value and condition
of the mortgaged property securing the loan. When evaluating the qualifications
of the borrower, we consider the financial resources of the borrower, the
borrower’s experience in owning or managing similar property and the borrower’s
payment history with us and other financial institutions. In evaluating the
property securing the loan, the factors we consider include the net operating
income of the mortgaged property before debt service and depreciation, the debt
service coverage ratio (the ratio of net operating income to debt service) to
ensure that it is at least 120% of the monthly debt service, and the ratio of
the loan amount to the appraised value of the mortgaged property. Commercial
real estate loans are originated in amounts up to 70% of the appraised value of
the mortgaged property securing the loan. All commercial loans are appraised by
outside independent appraisers approved by the board of directors. Personal
guarantees are generally obtained from commercial real estate
borrowers.




Loans
secured by commercial real estate generally are larger than one-to-four-family
residential loans and involve greater credit risk. Commercial real estate loans
often involve large loan balances to single borrowers or groups of related
borrowers. Repayment of these loans depends to a large degree on the results of
operations and management of the properties securing the loans or the businesses
conducted on such property, and may be affected to a greater extent by adverse
conditions in the real estate market or the economy in general. Accordingly, the
nature of these loans makes them more difficult for management to monitor and
evaluate.




Other
Loans. We offer a variety of loans secured by property other than real
estate. These loans include automobile, passbook, overdraft protection and
unsecured loans. At December 31, 2008, these other loans totaled $148,000, or
0.1% of the total loan portfolio.




Loan
Originations, Sales, and Servicing.Lending activities are conducted by
our loan personnel operating at our main and branch office locations and through
local mortgage brokers. All loans that we originate are underwritten pursuant to
our policies and procedures, which incorporate Freddie Mac underwriting
guidelines to the extent applicable. We originate both adjustable-rate and
fixed-rate loans. Our ability to originate fixed or adjustable-rate loans is
dependent upon the relative customer demand for such loans, which is affected by
current market interest rates as well as anticipated future market interest
rates. Our loan origination and sales activity may be adversely affected by a
rising interest rate environment that typically results in deceased loan demand.
Historically, a majority of our one-to-four-family residential real estate
mortgage loan originations have been generated by local mortgage brokers, as
well as our in-house loan representatives. Loans obtained from brokers are
underwritten and funded by us. We also obtain referrals from existing or past
customers and by referrals from local builders, real estate brokers and
attorneys.




For
loans that we sell, we sell our loans without recourse. Historically, we have
retained the servicing rights on all residential real estate mortgage loans that
we have sold, and we intend to continue this practice in the future. At December
31, 2008, we were servicing loans owned by others with a principal balance of
$5.4 million. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, contacting delinquent borrowers,
supervising foreclosures and property dispositions in the event of unremedied
defaults, making certain insurance and tax payments on behalf of the borrowers
and generally administering the loans. We retain a portion of the interest paid
by the borrower on the loans we service as consideration for our servicing
activities. We have not engaged in loan purchases or entered into loan
participations in recent years. The value of servicing rights is not material at
December 31, 2008.


9




The
following table shows our loan originations, sales and repayment activities for
the years indicated.


For
      the year ended December 31,2008
                    
                    
                    2007(In
      thousands)Total
      loans at beginning of period
                    
                    $
                    124,244
                    
                    
                    $
                    121,121Loan
      originations:Real
      estate loans:One-to
      four-family residential
                    
                    
                    25,479
                    
                    
                    
                    19,198Home
      equity lines of credit
                    
                    
                    2,184
                    
                    
                    
                    1,431Multi-family
      residential
                    
                    
                    —
                    
                    
                    
                    —Construction
                    
                    
                    2,818
                    
                    
                    
                    —Commercial
                    
                    
                    —
                    
                    
                    
                    —Other
      loans
                    
                    
                    129
                    
                    
                    
                    113Total
      loans originated
                    
                    
                    30,610
                    
                    
                    
                    20,742Sales
      and loan principal repayments:Deduct:Principal
      repayments
                    
                    
                    16,454
                    
                    
                    
                    16,605Loan
      sales
                    
                    
                    2,877
                    
                    
                    
                    1,014Net
      loan activity
                    
                    
                    11,279
                    
                    
                    
                    3,123Total
      loans at end of period
                    
                    $
                    135,523
                    
                    
                    $
                    124,244




Loan Approval
Policy and Authority. Fairport Savings Bank’s lending activities follow
written, non-discriminatory underwriting standards and loan origination policies
approved by Fairport Savings Bank’s board of directors. The loan approval
process is intended to assess the borrower’s ability to repay the loan and value
of the property that will secure the loan. To assess the borrower’s ability to
repay, we review the borrower’s employment and credit history and information on
the historical and projected income and expenses of the borrower.




We
generally require independent third-party appraisals of real property securing
loans. Appraisals are performed by independent licensed appraisers. All
appraisers are approved by the board of directors annually.




Loans to One
Borrower. A
federal savings bank generally may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of unimpaired capital and
surplus. An additional amount may be loaned equal to 10% of unimpaired capital
and surplus if the loan is secured by readily marketable collateral, which
generally does not include real estate. Our loans to one borrower limit under
this regulation is $5.0 million (including the additional amount). Our policy
provides that loans to one borrower (or related borrowers) should not exceed
$750,000. At December 31, 2008, we had two loans exceeding this amount, the
largest of which totaled $959,000 and was secured by the borrower’s primary
residence. This loan was performing in accordance with its terms. Our next
largest lending relationship to one borrower at December 31, 2008 totaled
$889,000, and was secured by the borrower’s primary residence. This loan was
performing in accordance with its terms.




Non-Performing
Assets and Delinquent Loans




System-generated
late notices are mailed to borrowers after the late payment “grace period,”
which is 15 days in the case of all loans secured by real estate and 10 days in
the case of other loans. A second notice will be mailed to borrowers if the loan
remains past due after 30 days. When a loan is more than 60 days past due, we
attempt to contact the borrower and develop a plan of repayment. By the 90th day of
delinquency, we will have our attorneys issue a demand letter. The demand letter
will require the borrowers to bring the loan current within 30 days in order to
avoid the beginning of foreclosure proceedings for loans secured by real estate.
With respect to automobile loans we will seek to repossess the vehicle if the
loan is 90 days delinquent. A report of all loans 30 days or more past due is
provided to the board of directors monthly.


10




Loans
are generallyplaced on non-accrual
status when payment of principal or interest is more than 90 days delinquent,
unless the loans are well-secured and in the process of collection. Loans are
also placed on non-accrual status if collection of principal or interest in full
is in doubt or if the loan has been restructured. At December 31, 2008 and
December 31, 2007, we had no restructured loans. When loans are placed on a
non-accrual status, unpaid accrued interest is fully reversed, and further
income is recognized only to the extent received. The loan may be returned to
accrual status if unpaid principal and interest are repaid so that the loan is
less than 90 days delinquent and a satisfactory payment history has been
established. Loans not secured by real estate will be charged-off if they become
120 days past due. At December 31, 2008 we had three non-performing loans. These
loans include two one-to-four residential properties for $61,000 and $60,000,
and one home equity line of credit for $25,000. These loans are all secured by
residential real estate which, in the opinion of management, provides adequate
collateral to cover any losses if these properties were foreclosed and
sold.




Non-Performing
Assets.The table below sets forth the amounts and categories of our
non-performing assets at the dates indicated.


At
      December 31,2008
                  
                  
                  2007(Dollars
      in thousands)Non-accrual
      loans:Real
      estate loans:One-to-four-family
      residential
                  
                  $
                  121
                  
                  
                  $
                  63Home
      equity lines of credit
                  
                  
                  25
                  
                  
                  
                  —Multi-family
      residential
                  
                  
                  —
                  
                  
                  
                  —Construction
                  
                  
                  —
                  
                  
                  
                  —Commercial
                  
                  
                  —
                  
                  
                  
                  —Other
      loans
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  
                  146
                  
                  
                  
                  63Accruing
      loans 90 days or more past due:
                  
                  
                  —
                  
                  
                  
                  —Total
      non-performing loans
                  
                  
                  146
                  
                  
                  
                  63Foreclosed
      real estate
                  
                  
                  —
                  
                  
                  
                  —Other
      non-performing assets
                  
                  
                  —
                  
                  
                  
                  —Total
      non-performing assets
                  
                  $
                  146
                  
                  
                  $
                  63Ratios:Total
      non-performing loans to total loans
                  
                  
                  0.11
                  %
                  
                  
                  0.05
                  %Total
      non-performing loans to total assets
                  
                  
                  0.07
                  %
                  
                  
                  0.04
                  %Total
      non-performing assets to total assets
                  
                  
                  0.07
                  %
                  
                  
                  0.04
                  %




For
the year ended December 31, 2008, gross interest income that would have been
recorded had our non-accruing loans been current in accordance with their
original terms was $2,751. Interest income recognized on such loans for the year
ended December 31, 2008 was $6,402.


11




Delinquent
Loans. The following table sets forth our loan delinquencies by type, by
amount and by percentage of type at the dates indicated.


Loans
      Delinquent For30-89
      Days
                
                
                90
      Days and Over
                
                
                TotalNumber
                
                
                Amount
                
                
                Number
                
                
                Amount
                
                
                Number
                
                
                Amount(Dollars
      in thousands)At December 31,
      2008Real
      estate loans:One-to-four-family
      residential
                
                
                4
                
                
                $
                59
                
                
                
                —
                
                
                $
                —
                
                
                
                4
                
                
                $
                59Home
      equity lines of credit
                
                
                1
                
                
                
                17
                
                
                
                —
                
                
                
                —
                
                
                
                1
                
                
                
                17Multi-family
      residential
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Construction
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Commercial
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Other
      loans
                
                
                1
                
                
                
                1
                
                
                
                —
                
                
                
                —
                
                
                
                1
                
                
                
                1Total
                
                
                6
                
                
                $
                77
                
                
                
                —
                
                
                $
                —
                
                
                
                6
                
                
                $
                77At
      December 31, 2007Real
      estate loans:One-to-four-family
      residential
                
                
                8
                
                
                $
                358
                
                
                
                —
                
                
                $
                —
                
                
                
                8
                
                
                $
                358Home
      equity lines of credit
                
                
                4
                
                
                
                64
                
                
                
                —
                
                
                
                —
                
                
                
                4
                
                
                
                64Multi-family
      residential
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Construction
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Commercial
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Other
      loans
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                
                12
                
                
                $
                422
                
                
                
                —
                
                
                $
                —
                
                
                
                12
                
                
                $
                422




Foreclosed
Real
Estate. Real estate acquired by us as a result of foreclosure or by deed
in lieu of foreclosure is classified as foreclosed real estate until sold. When
property is acquired it is recorded at the estimated fair market value at the
date of foreclosure, establishing a new cost basis. Estimated fair value
generally represents the sale price a buyer would be willing to pay on the basis
of current market conditions, including normal terms from other financial
institutions, less the estimated costs to sell the property. Holding costs and
declines in estimated fair market value result in charges to expense after
acquisition. At December 31, 2008, we had no foreclosed real
estate.




Classification of
Assets.Our policies, consistent with regulatory guidelines, provide for
the classification of loans and other assets that are considered to be of lesser
quality as substandard, doubtful, or loss assets. An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those assets characterized by the distinct possibility that we will
sustain some loss if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard
with the added characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable and improbable. Assets (or portions of assets)
classified as loss are those considered uncollectible and of such little value
that their continuance as assets is not warranted. Assets that do not expose us
to risk sufficient to warrant classification in one of the aforementioned
categories, but which possess potential weaknesses that deserve our close
attention, are required to be designated as special mention. As of December 31,
2008, we had no assets designated as special mention.




When
we classify assets as either substandard or doubtful, we allocate a portion of
the related general loss allowances to such assets as we deem prudent. The
allowance for loan losses is the amount estimated by management as necessary to
absorb credit losses incurred in the loan portfolio that are both probable and
reasonably estimable at the balance sheet date. Our determination as to the
classification of our assets and the amount of our loss allowances are subject
to review by our principal federal regulator, the Office of Thrift Supervision,
which can require that we establish additional loss allowances. We regularly
review our asset portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of our
review of our assets, at December 31, 2008, classified assets consisted of
substandard assets of $94,000, and no assets classified as doubtful or loss. As
of December 31, 2008, our largest substandard asset was a loan secured by
residential real estate, with a principal balance of $61,000.


12




Allowance
for Loan Losses




We
provide for loan losses based on the allowance method. Accordingly, all loan
losses are charged to the related allowance and all recoveries are credited to
it. Additions to the allowance for loan losses are provided by charges to income
based on various factors which, in our judgment, deserve current recognition in
estimating probable losses. We regularly review the loan portfolio and make
provisions for loan losses in order to maintain the allowance for loan losses in
accordance with accounting principles generally accepted in the United States of
America.




The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.




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




A
loan is considered impaired when, based on current information and events, it is
probable that Fairport Savings Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management considers the significance of payment delays and payment
short falls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower’s prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis by either the present value of
expected future cash flows discounted at the loan’s effective interest rate or
the fair value of the collateral if the loan is collateral
dependent.




Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, we do not separately identify individual consumer and
residential loans for impairment disclosures.




We
periodically evaluate the carrying value of loans and the allowance is adjusted
accordingly. While we use the best information available to make evaluations,
future adjustments to the allowance may be necessary if conditions differ
substantially from the information used in making the evaluations. In addition,
as an integral part of their examination process, the Office of Thrift
Supervision periodically reviews the allowance for loan losses. The Office of
Thrift Supervision may require us to recognize additions to the allowance based
on their analysis of information available to them at the time of their
examination.


13




The
following table sets forth activity in our allowance for loan losses for the
years indicated.


At
      or For the YearsEnded
      December 31,2008
                
                
                2007(Dollars
      in thousands)Balance
      at beginning of year
                
                $
                319
                
                
                $
                322Charge-offs:Real
      estate loans:One-to-four-family
      residential
                
                
                —
                
                
                
                —Home
      equity lines of credit
                
                
                —
                
                
                
                —Multi-family
      residential
                
                
                —
                
                
                
                —Construction
                
                
                —
                
                
                
                —Commercial
                
                
                —
                
                
                
                —Other
      loans
                
                
                —
                
                
                
                3Total
      charge-offs
                
                
                —
                
                
                
                3Net
      charge-offs
                
                
                —
                
                
                
                3Recoveries
                
                
                2
                
                
                
                —Provision
      for loan losses
                
                
                24
                
                
                
                —Balance
      at end of year
                
                $
                345
                
                
                $
                319Ratios:Net
      charge-offs to average loans outstanding
                
                
                0.00
                %
                
                
                0.00
                %Allowance
      for loan losses to non-performing loans at end of year
                
                
                236.30
                %
                
                
                506.35
                %Allowance
      for loan losses to total loans at end of year
                
                
                0.25
                %
                
                
                0.26
                %




Allocation of
Allowance for Loan Losses.The following table sets forth the allowance
for loan losses allocated by loan category, the total loan balances by category,
and the percent of loans in each category to total loans at the dates indicated.
The allowance for loan losses allocated to each category is not necessarily
indicative of future losses in any particular category and does not restrict the
use of the allowance to absorb losses in other categories.




At
      December 31,2008
                                                              
                                                              
                                                              2007Percent
      of
                                                              
                                                              
                                                              Percent
      of
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              Percent
      of
                                                              
                                                              
                                                              Percent
      ofAllowance
      to
                                                              
                                                              
                                                              Loans
      in
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              Allowance
      to
                                                              
                                                              
                                                              Loans
      inTotal
                                                              
                                                              
                                                              Category
      to
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              Total
                                                              
                                                              
                                                              Category
      toAmount
                                                              
                                                              
                                                              Allowance
                                                              
                                                              
                                                              Total
      Loans
                                                              
                                                              
                                                              Amount
                                                              
                                                              
                                                              Allowance
                                                              
                                                              
                                                              Total
      Loans(Dollars
      in thousands)Real
      estate loans:One-to-four-family
      residential
                                                              
                                                              $
                                                              247
                                                              
                                                              
                                                              
                                                              71.6
                                                              %
                                                              
                                                              
                                                              91.4
                                                              %
                                                              
                                                              $
                                                              218
                                                              
                                                              
                                                              
                                                              68.3
                                                              %
                                                              
                                                              
                                                              91.2
                                                              %Home
      equity lines of credit
                                                              
                                                              
                                                              67
                                                              
                                                              
                                                              
                                                              19.4
                                                              
                                                              
                                                              
                                                              6.1
                                                              
                                                              
                                                              
                                                              67
                                                              
                                                              
                                                              
                                                              21.0
                                                              
                                                              
                                                              
                                                              5.3Multi-family
      residential
                                                              
                                                              
                                                              6
                                                              
                                                              
                                                              
                                                              1.7
                                                              
                                                              
                                                              
                                                              0.6
                                                              
                                                              
                                                              
                                                              7
                                                              
                                                              
                                                              
                                                              2.2
                                                              
                                                              
                                                              
                                                              0.7Construction
                                                              
                                                              
                                                              2
                                                              
                                                              
                                                              
                                                              0.6
                                                              
                                                              
                                                              
                                                              0.2
                                                              
                                                              
                                                              
                                                              5
                                                              
                                                              
                                                              
                                                              1.6
                                                              
                                                              
                                                              
                                                              0.9Commercial
                                                              
                                                              
                                                              20
                                                              
                                                              
                                                              
                                                              5.8
                                                              
                                                              
                                                              
                                                              1.6
                                                              
                                                              
                                                              
                                                              21
                                                              
                                                              
                                                              
                                                              6.6
                                                              
                                                              
                                                              
                                                              1.7Other
      loans
                                                              
                                                              
                                                              1
                                                              
                                                              
                                                              
                                                              0.3
                                                              
                                                              
                                                              
                                                              0.1
                                                              
                                                              
                                                              
                                                              1
                                                              
                                                              
                                                              
                                                              0.3
                                                              
                                                              
                                                              
                                                              0.2Total
      allocated allowance
                                                              
                                                              
                                                              343
                                                              
                                                              
                                                              
                                                              99.4
                                                              
                                                              
                                                              
                                                              100.0
                                                              
                                                              
                                                              
                                                              319
                                                              
                                                              
                                                              
                                                              100.0
                                                              
                                                              
                                                              
                                                              100.0Unallocated
      allowance
                                                              
                                                              
                                                              2
                                                              
                                                              
                                                              
                                                              0.6
                                                              %
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —Total
      allowance for loan losses
                                                              
                                                              $
                                                              345
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              $
                                                              319
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              100.0
                                                              %


14




Investments




Our
board of directors is responsible for approving and overseeing our investment
policy. The investment policy is reviewed at least annually by management and
any changes to the policy are recommended to the board of directors and are
subject to its approval. This policy dictates that investment decisions be made
based on the safety of the investment, liquidity requirements, potential
returns, the ability to provide collateral for pledging requirements, and
consistency with our interest rate risk management strategy. Our asset/liability
management committee, which consists of our chief executive officer, chief
financial officer and other members of management, oversees our investing
activities and strategies. All transactions are formally reviewed by the board
of directors at least quarterly. Any investment which, subsequent to its
purchase, fails to meet the guidelines of the policy is reported to the
asset/liability management committee, which decides whether to hold or sell the
investment.




Our
current investment policy permits us to invest in debt securities issued by the
U.S. Government, agencies of the U.S. Government or U.S. Government-sponsored
enterprises. The policy also permits investments in mortgage-backed securities,
including pass-through securities issued and guaranteed by Fannie Mae, Freddie
Mac and Ginnie Mae. We also may hold investments in New York State municipal
obligations. The investment policy also permits investments in asset-backed
securities, pooled trust securities, bankers’ acceptances, money market funds,
term federal funds, repurchase agreements and reverse repurchase
agreements.




Our
current investment policy prohibits hedging through the use of such instruments
as financial futures, interest rate options and swaps.




Statement
of Financial Accounting Standard No. 115 requires that, at the time of purchase,
we designate a security as held to maturity, available-for-sale, or trading,
depending on our ability and intent. Securities available-for-sale are reported
at fair value, while securities held to maturity are reported at amortized cost.
We do not have a trading portfolio.




At
December 31, 2008 our investment portfolio, classified as available for sale,
consisted of: $22.2 million, or 11.3% of total assets, of U.S. Government and
federal agency obligations with a fair value of $22.2 million; $21.8 million, or
11.1% of total assets, of mortgage-backed securities guaranteed by Fannie Mae,
Ginnie Mae, Federal Farm Credit and Freddie Mac with a fair value of $21.7
million; and Freddie Mac stock with a cost basis of $9,000, and a fair value of
$6,000. Our investment portfolio, classified as held to maturity, consisted of:
$7.3 million, or 3.7% of total assets, of mortgage-backed securities guaranteed
by Fannie Mae, Ginnie Mae, Federal Farm Credit and Freddie Mac with a fair value
of $7.1 million.




As
previously disclosed in the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008, at September 30, 2008, the Company recorded a
$57,000 other-than-temporary impairment charge related to its investment in
Federal Home Loan Mortgage Corporation (Freddie Mac) common stock. The
impairment charge resulted from the decline in fair value of these shares in
connection with the federal government’s conservatorship of Freddie Mac in
September 2008. The carrying value of the Company’s remaining Freddie Mac common
stock at December 31, 2008 after the other-than-temporary impairment charge was
$6,000. The Company does not have any preferred stock issued by Freddie Mac or
Fannie Mae.




U.S. Government
and Federal Agency Obligations. U.S. Government and federal agency
securities are utilized as shorter-term investment vehicles and as an
alternative to loan originations. Investment in U.S. government and agency
securities provide lower yields than loans, however, they provide greater
liquidity on a short-term basis.




Mortgage-Backed
Securities.We purchase both fixed-rate and adjustable-rate
mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac or
Ginnie Mae. We invest in mortgage-backed securities to achieve higher interest
income and monthly cash flow with minimal administrative expense, and to lower
our credit risk as a result of the guarantees provided by Freddie Mac, Fannie
Mae or Ginnie Mae.


15




Mortgage-backed
securities are created by the pooling of mortgages and the issuance of a
security with an interest rate that is less than the interest rate on the
underlying mortgages. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although we invest only in mortgage-backed securities backed by
one-to-four-family mortgages. The issuers of such securities (generally Ginnie
Mae, a U.S. Government agency, and government sponsored enterprises, such as
Fannie Mae and Freddie Mac) pool and resell the participation interests in the
form of securities to investors such as Fairport Savings Bank, and guarantee the
payment of principal and interest to investors. Mortgage-backed securities
generally yield less than the loans that underlie such securities because of the
cost of payment guarantees and credit enhancements. However, mortgage-backed
securities are more liquid than individual mortgage loans since there is an
active trading market for such securities. In addition, mortgage-backed
securities may be used to collateralize our specific liabilities and
obligations. Investments in mortgage-backed securities involve a risk that
actual payments will be greater or less than the prepayment rate estimated at
the time of purchase, which may require adjustments to the amortization of any
premium or acceleration of any discount relating to such interests, thereby
affecting the net yield on our securities. We periodically review current
prepayment speeds to determine whether prepayment estimates require modification
that could cause amortization or accretion adjustments. Our mortgage-backed
securities portfolio contains no sub-prime mortgage loans and has no exposure to
sub-prime investment activity.




The
following table sets forth the amortized cost and fair value of our securities
portfolio at the dates indicated.




At
      December 31,2008
                  
                  
                  2007Amortized
                  
                  
                  Fair
                  
                  
                  Amortized
                  
                  
                  FairCost
                  
                  
                  Value
                  
                  
                  Cost
                  
                  
                  Value(In
      thousands)Securities
      held to maturity:U.S.
      Government and agency obligations
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  18,997
                  
                  
                  $
                  19,031Mortgage-backed
                  
                  
                  7,289
                  
                  
                  
                  7,091
                  
                  
                  
                  9,553
                  
                  
                  
                  9,566Total
      securities held to maturity
                  
                  $
                  7,289
                  
                  
                  $
                  7,091
                  
                  
                  $
                  28,550
                  
                  
                  $
                  28,597Securities
      available for sale:U.S.
      Government and agency obligations
                  
                  $
                  22,196
                  
                  
                  $
                  22,229
                  
                  
                  $
                  —
                  
                  
                  $
                  —Mortgage-backed
                  
                  
                  21,785
                  
                  
                  
                  21,690
                  
                  
                  
                  —
                  
                  
                  
                  —Equity
      Securities
                  
                  
                  9
                  
                  
                  
                  6
                  
                  
                  
                  65
                  
                  
                  
                  244Total
      securities available for sale
                  
                  $
                  43,990
                  
                  
                  $
                  43,925
                  
                  
                  $
                  65
                  
                  
                  $
                  244


16




Portfolio
Maturities and Yields.The composition and maturities of the investment
securities portfolio and the mortgage-backed securities portfolio at December
31, 2008 are summarized in the following table. Maturities are based on the
final contractual payment dates, and do not reflect the impact of prepayments or
early redemptions that may occur. All of our securities at December 31, 2008
were taxable securities. Equity securities consisting of Freddie Mac common
stock with a cost of $9,000 and a fair value of $6,000 have no maturity date.
Accordingly, they are not included in the table.


One
      Year or
      Less
                                                                                              
                                                                                              More
      than One Year through
      Five
      Years
                                                                                              
                                                                                              More
      than Five Years
                                                                                                through
      Ten
      Years
                                                                                              
                                                                                              
                                                                                              More
      than Ten Years
                                                                                              
                                                                                              
                                                                                              Total
      SecuritiesAmortized
                                                                                                Cost
                                                                                              
                                                                                              
                                                                                              Weighted
                                                                                                  Average
                                                                                                Yield
                                                                                              
                                                                                              
                                                                                              Amortized
                                                                                                  Cost
                                                                                              
                                                                                              
                                                                                              Weighted
                                                                                                Average
                                                                                                Yield
                                                                                              
                                                                                              
                                                                                              Amortized

                                                                                                Cost
                                                                                              
                                                                                              
                                                                                              Weighted

                                                                                                Average
                                                                                                Yield
                                                                                              
                                                                                              
                                                                                              Amortized

                                                                                                Cost
                                                                                              
                                                                                              
                                                                                              Weighted

                                                                                                Average
                                                                                                Yield
                                                                                              
                                                                                              
                                                                                              AmortizedCost
                                                                                              
                                                                                              
                                                                                              Fair Value
                                                                                              
                                                                                              
                                                                                              Weighted
                                                                                                Average
                                                                                                Yield(Dollars
      in
      thousands)Securities
      held to maturity:Mortgage-backed
      securities
                                                                                              
                                                                                              $
                                                                                              —
                                                                                              
                                                                                              
                                                                                              
                                                                                              —
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              —
                                                                                              
                                                                                              
                                                                                              
                                                                                              —
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              240
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.41
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              7,049
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.48
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              7,289
                                                                                              
                                                                                              
                                                                                              $
                                                                                              7,091
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.48
                                                                                              %Securities
      available for sale:U.S.
      Government and agency obligations
                                                                                              
                                                                                              $
                                                                                              —
                                                                                              
                                                                                              
                                                                                              
                                                                                              —
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              1,500
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.00
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              8,360
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.23
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              12,336
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.66
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              22,196
                                                                                              
                                                                                              
                                                                                              $
                                                                                              22,229
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.45
                                                                                              %Mortgage-backed
      securities
                                                                                              
                                                                                              
                                                                                              —
                                                                                              
                                                                                              
                                                                                              
                                                                                              —
                                                                                              %
                                                                                              
                                                                                              
                                                                                              —
                                                                                              
                                                                                              
                                                                                              
                                                                                              —
                                                                                              %
                                                                                              
                                                                                              
                                                                                              —
                                                                                              
                                                                                              
                                                                                              
                                                                                              —
                                                                                              %
                                                                                              
                                                                                              
                                                                                              21,785
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.71
                                                                                              %
                                                                                              
                                                                                              
                                                                                              21,785
                                                                                              
                                                                                              
                                                                                              
                                                                                              21,690
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.71
                                                                                              %Total
      securities available for sale
                                                                                              
                                                                                              $
                                                                                              —
                                                                                              
                                                                                              
                                                                                              
                                                                                              —
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              1,500
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.00
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              8,360
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.23
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              34,121
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.05
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              43,981
                                                                                              
                                                                                              
                                                                                              $
                                                                                              43,919
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.09
                                                                                              %


17




Sources
of Funds




General.Deposits traditionally have been our primary source of funds for our
lending and investment activities. We also borrow, primarily from the Federal
Home Loan Bank of New York, to supplement cash flow needs, to lengthen the
maturities of liabilities for interest rate risk management purposes and to
manage our cost of funds. Our additional sources of funds are scheduled loan
payments, loan prepayments, maturing investments, mortgage-backed securities
amortizations and pre-payments, proceeds of loan sales, and retained
earnings.




Deposits.We generate deposits
primarily from the areas in which our branch offices are located. We rely on our
competitive pricing, convenient locations and customer service to attract and
retain deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposit accounts consist of savings accounts, NOW accounts,
money market accounts, certificates of deposit and individual retirement
accounts and non-interest bearing demand deposits. We currently do not accept
brokered deposits.




Interest
rates paid, maturity terms, service fees and withdrawal penalties are
established on a periodic basis. Deposit rates and terms are based primarily on
current operating strategies and market interest rates, liquidity requirements,
interest rates paid by competitors and our deposit growth goals.




At
December 31, 2008, our deposits totaled $127.5 million. Specifically, at
December 31, 2008, NOW accounts totaled $7.6 million, savings accounts totaled
$13.4 million, money market accounts totaled $15.7 million and non-interest
bearing checking accounts totaled $3.5 million. At December 31, 2008,
certificates of deposit, including individual retirement accounts (all of which
were certificate of deposit accounts), totaled $87.3 million, of which $50.1
million had remaining maturities of one year or less. Based on historical
experience and our current pricing strategy, we believe we will retain a large
portion of these accounts upon maturity.




The
following table sets forth the distribution of our average total deposit
accounts, by account type, for the years indicated.


For
      the Years Ended December 31,2008
                                      
                                      
                                      2007Weighted
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      WeightedAverage
                                      
                                      
                                      
                                      
                                      
                                      Average
                                      
                                      
                                      Average
                                      
                                      
                                      
                                      
                                      
                                      AverageBalance
                                      
                                      
                                      Percent
                                      
                                      
                                      Rate
                                      
                                      
                                      Balance
                                      
                                      
                                      Percent
                                      
                                      
                                      Rate(Dollars
      in thousands)Deposit
      type:NOW
                                      
                                      $
                                      6,940
                                      
                                      
                                      
                                      5.4
                                      %
                                      
                                      
                                      1.08
                                      %
                                      
                                      $
                                      5,721
                                      
                                      
                                      
                                      4.9
                                      %
                                      
                                      
                                      0.65
                                      %Savings
                                      
                                      
                                      13,897
                                      
                                      
                                      
                                      10.9
                                      
                                      
                                      
                                      0.96
                                      
                                      
                                      
                                      14,306
                                      
                                      
                                      
                                      12.1
                                      
                                      
                                      
                                      1.29Money
      market
                                      
                                      
                                      12,429
                                      
                                      
                                      
                                      9.7
                                      
                                      
                                      
                                      2.12
                                      
                                      
                                      
                                      10,400
                                      
                                      
                                      
                                      8.8
                                      
                                      
                                      
                                      2.89Individual
      retirement accounts
                                      
                                      
                                      16,362
                                      
                                      
                                      
                                      12.8
                                      
                                      
                                      
                                      4.33
                                      
                                      
                                      
                                      15,733
                                      
                                      
                                      
                                      13.3
                                      
                                      
                                      
                                      4.44Certificates
      of deposit
                                      
                                      
                                      74,725
                                      
                                      
                                      
                                      58.6
                                      
                                      
                                      
                                      3.96
                                      
                                      
                                      
                                      68,672
                                      
                                      
                                      
                                      58.2
                                      
                                      
                                      
                                      4.51Non-interest
      bearing demand deposits
                                      
                                      
                                      3,256
                                      
                                      
                                      
                                      2.6
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      3,214
                                      
                                      
                                      
                                      2.7
                                      
                                      
                                      
                                      —Total
      deposits
                                      
                                      $
                                      127,609
                                      
                                      
                                      
                                      100.0
                                      %
                                      
                                      
                                      3.24
                                      %
                                      
                                      $
                                      118,046
                                      
                                      
                                      
                                      100.0
                                      %
                                      
                                      
                                      3.66
                                      %




As
of December 31, 2008, the aggregate amount of our outstanding certificates of
deposit, including our individual retirement accounts, in amounts greater than
or equal to $100,000 was approximately $22.7 million. The following table sets
forth the maturity of those certificates as of December 31, 2008.


AtDecember
      31, 2008(In
      thousands)Three
      months or less
                      
                      $
                      2,165Over
      three months through six months
                      
                      
                      4,302Over
      six months through one year
                      
                      
                      6,357Over
      one year to three years
                      
                      
                      9,122Over
      three years
                      
                      
                      722Total
                      
                      $
                      22,668


18




The
following table sets forth, by interest rate ranges, information concerning the
period to maturity of our certificates of deposit, including our individual
retirement accounts.


At
      December 31, 2008Period
      to MaturityLess
      Than or
                                                                                          
                                                                                          
                                                                                          More
      Than
                                                                                          
                                                                                          
                                                                                          More
      ThanEqual
      to
                                                                                          
                                                                                          
                                                                                          One
      to
                                                                                          
                                                                                          
                                                                                          Two
      to
                                                                                          
                                                                                          
                                                                                          More
      Than
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          Percent
      ofOne
      Year
                                                                                          
                                                                                          
                                                                                          Two
      Years
                                                                                          
                                                                                          
                                                                                          Three
      Years
                                                                                          
                                                                                          
                                                                                          Three
      Years
                                                                                          
                                                                                          
                                                                                          Total
                                                                                          
                                                                                          
                                                                                          Total(Dollars
      in thousands)Interest
      Rate Range:2.99%
      and below
                                                                                          
                                                                                          $
                                                                                          23,063
                                                                                          
                                                                                          
                                                                                          $
                                                                                          2,765
                                                                                          
                                                                                          
                                                                                          $
                                                                                          350
                                                                                          
                                                                                          
                                                                                          $
                                                                                          1,276
                                                                                          
                                                                                          
                                                                                          $
                                                                                          27,454
                                                                                          
                                                                                          
                                                                                          
                                                                                          31.4
                                                                                          %3.00%
      to 3.99%
                                                                                          
                                                                                          
                                                                                          21,511
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,143
                                                                                          
                                                                                          
                                                                                          
                                                                                          370
                                                                                          
                                                                                          
                                                                                          
                                                                                          995
                                                                                          
                                                                                          
                                                                                          
                                                                                          43,019
                                                                                          
                                                                                          
                                                                                          
                                                                                          49.34.00%
      to 4.99%
                                                                                          
                                                                                          
                                                                                          5,063
                                                                                          
                                                                                          
                                                                                          
                                                                                          3,897
                                                                                          
                                                                                          
                                                                                          
                                                                                          2,339
                                                                                          
                                                                                          
                                                                                          
                                                                                          2,052
                                                                                          
                                                                                          
                                                                                          
                                                                                          13,351
                                                                                          
                                                                                          
                                                                                          
                                                                                          15.35.00%
      to 5.99%
                                                                                          
                                                                                          
                                                                                          477
                                                                                          
                                                                                          
                                                                                          
                                                                                          593
                                                                                          
                                                                                          
                                                                                          
                                                                                          797
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,620
                                                                                          
                                                                                          
                                                                                          
                                                                                          3,487
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.0Total
                                                                                          
                                                                                          $
                                                                                          50,114
                                                                                          
                                                                                          
                                                                                          $
                                                                                          27,398
                                                                                          
                                                                                          
                                                                                          $
                                                                                          3,856
                                                                                          
                                                                                          
                                                                                          $
                                                                                          5,943
                                                                                          
                                                                                          
                                                                                          $
                                                                                          87,311
                                                                                          
                                                                                          
                                                                                          
                                                                                          100.00
                                                                                          %




The
following table sets forth our time deposits, including our individual
retirement accounts classified by interest rate range at the dates
indicated.




At
      December 31,2008
                          
                          
                          2007(In
      thousands)Interest
      Rate Range:2.99%
      and below
                          
                          $
                          27,454
                          
                          
                          $
                          4733.00%
      to 3.99%
                          
                          
                          43,019
                          
                          
                          
                          16,6684.00%
      to 4.99%
                          
                          
                          13,351
                          
                          
                          
                          44,2445.00%
      to 5.99%
                          
                          
                          3,487
                          
                          
                          
                          24,821Total
                          
                          $
                          87,311
                          
                          
                          $
                          86,206




Borrowings.
Our long-term borrowings consist primarily of loans, commonly referred to as
advances, from the Federal Home Loan Bank of New York. Our advances carried a
weighted average rate at December 31, 2008 of 3.90%. At December 31, 2008, we
had the ability to borrow approximately $102.5 million under our credit
facilities with the Federal Home Loan Bank of New York of which $45.5 million
were advanced. Borrowings from the Federal Home Loan Bank of New York are
secured by our investment in the common stock of the Federal Home Loan Bank of
New York as well as by a blanket pledge of our mortgage portfolio not otherwise
pledged.




Our
short-term borrowings consist of Federal Home Loan Bank advances. The following
table sets forth information concerning balances and interest rates on all of
our short-term borrowings at and for the periods shown:


At
      or For the Years EndedDecember
      31,2008
                            
                            
                            2007(Dollars
      in thousands)Balance
      at end of year
                            
                            $
                            3,850
                            
                            
                            $
                            —Average
      balance during year
                            
                            
                            536
                            
                            
                            
                            499Maximum
      outstanding at any month end
                            
                            
                            3,850
                            
                            
                            
                            3,200Weighted
      average interest rate at end of year
                            
                            
                            .46
                            %
                            
                            
                            n/aAverage
      interest rate during year
                            
                            
                            .75
                            %
                            
                            
                            6.01
                            %




Subsidiary
Activities




Oakleaf
Services Corporation, our subsidiary, provides investment advisory services to
our customers by providing annuities, insurance products and mutual funds. At
December 31, 2008 we had a $100,000 investment in Oakleaf Services Corporation
which reflects a $50,000 increase, and during the year ended December 31, 2008,
we derived $142,000 of fee income from Oakleaf Services
Corporation.




Federal
savings banks are required to provide 30 days advance notice to the OTS and the
FDIC before establishing or acquiring a subsidiary or conducting a new activity
in a subsidiary. The insured savings bank must also provide the FDIC and the OTS
such information as may be required by applicable regulations and must conduct
the activity in accordance with the rules and orders of the OTS. In addition to
other enforcement and supervision powers, the OTS may determine after notice and
opportunity for a hearing that the continuation of a savings bank’s ownership of
or relation to a subsidiary (i) constitutes a serious risk to the safety,
soundness or stability of the savings bank, or (ii) is inconsistent with law and
regulation. Upon the making of such a determination, the OTS may order the
savings bank to divest the subsidiary or take other actions.


19




Personnel




As
of December 31, 2008, we had 38 full-time employees and 2 part-time employees.
Our employees are not represented by any collective bargaining group. Management
believes that our relationship with our employees is good.




FEDERAL
AND STATE TAXATION




Federal
Taxation




General.FSB Community Bankshares,
Inc. and Fairport Savings Bank are subject to federal income taxation in the
same general manner as other corporations, with some exceptions discussed below.
FSB Community Bankshares, Inc. files consolidated tax returns with Fairport
Savings Bank, its wholly owned subsidiary. Our consolidated federal tax returns
are not currently under audit and have not been audited during the past five
years. The following discussion of federal taxation is intended only to
summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to FSB Community
Bankshares, MHC, FSB Community Bankshares, Inc. or Fairport Savings
Bank.




Method of
Accounting.For
federal income tax purposes, FSB Community Bankshares, MHC currently reports its
income and expenses on the accrual method of accounting and uses a tax year
ending December 31 for filing its federal and state income tax
returns.




Bad Debt
Reserves.Historically, Fairport Savings Bank was subject to special provisions in
the tax law applicable to qualifying savings associations regarding allowable
tax bad debt deductions and related reserves. Tax law changes were enacted in
1996 that eliminated the ability of savings associations to use the percentage
of taxable income method for computing tax bad debt reserves for tax years after
1995, and required recapture into taxable income over a six-year period of all
bad debt reserves accumulated after a savings association’s last tax year
beginning before January 1, 1988. At December 31, 2008, Fairport Savings Bank
had recaptured all amounts that resulted from these changes in the tax law. FSB
Community Bankshares, Inc. uses the specific chargeoff method to account for tax
bad debt deductions.




Taxable
Distributions and Bad Debt Recapture.Prior to 1996, bad debt
reserves created prior to 1988 were subject to recapture into taxable income if
Fairport Savings Bank failed to meet certain thrift asset and definitional tests
or made certain distributions. Tax law changes in 1996 eliminated thrift-related
recapture rules. However, under current law, pre-1988 tax bad debt reserves
remain subject to recapture if Fairport Savings Bank makes certain non-dividend
distributions, repurchases any of its common stock, pays dividends in excess of
earnings and profits, or fails to qualify as a bank for tax
purposes.




At
December 31, 2008, the total federal pre-base year bad debt reserve of Fairport
Savings Bank was approximately $5.5 million.




Alternative
Minimum Tax.The
Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at
a rate of 20% on a base of regular taxable income plus certain tax preferences,
less any available exemption. The alternative minimum tax is imposed to the
extent it exceeds the regular income tax. Net operating losses can offset no
more than 90% of alternative taxable income. Certain payments of alternative
minimum tax may be used as credits against regular tax liabilities in future
years. Our consolidated group has not been subject to the alternative minimum
tax and has no such amounts available as credits for carryover.




Net Operating
Loss Carryovers.A financial institution may carry back net operating losses to the
preceding two taxable years and forward to the succeeding 20 taxable years. At
December 31, 2008, our consolidated group had no net operating loss
carryforwards for federal income tax purposes.




Corporate
Dividends-Received Deduction.FSB Community Bankshares,
Inc. may exclude from its federal taxable income 100% of dividends received from
Fairport Savings Bank as a wholly owned subsidiary. The corporate
dividends-received deduction is 80% when the corporation receiving the dividend
owns at least 20% of the stock of the distributing corporation. The
dividends-received deduction is 70% when the corporation receiving the dividend
owns less than 20% of the distributing corporation.


20




State
Taxation




FSB
Community Bankshares, Inc. and Fairport Savings Bank report income on a calendar
year basis to New York State. New York State franchise tax on corporations is
imposed in an amount equal to the greater of (a) 7.1% of “entire net income”
allocable to New York State, (b) 3% of “alternative entire net income” allocable
to New York State, (c) 0.01 % of the average value of assets allocable to New
York State, or (d) nominal minimum tax. Entire net income is based on Federal
taxable income, subject to certain modifications. Alternative entire net income
is equal to entire net income without certain modifications.




Expense
and Tax Allocation




Fairport
Savings Bank has entered into an agreement with FSB Community Bankshares, Inc.
and FSB Community Bankshares, MHC to provide them with certain administrative
support services, whereby Fairport Savings Bank will be compensated at not less
than the fair market value of the services provided. In addition, Fairport
Savings Bank and FSB Community Bankshares, Inc. have entered into an agreement
to establish a method for allocating and for reimbursing the payment of their
consolidated tax liability.




SUPERVISION
AND REGULATION




General




Fairport
Savings Bank is examined and supervised by the Office of Thrift Supervision and
is subject to examination by the Federal Deposit Insurance Corporation. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution may engage and is intended primarily for the protection
of the Federal Deposit Insurance Corporation’s deposit insurance funds and
depositors. Under this system of federal regulation, financial institutions are
periodically examined to ensure that they satisfy applicable standards with
respect to their capital adequacy, assets, management, earnings, liquidity and
sensitivity to market interest rates. Following completion of its examination,
the federal agency critiques the institution’s operations and assigns its rating
(known as an institution’s CAMELS rating). Under federal law, an institution may
not disclose its CAMELS rating to the public. Fairport Savings Bank also is a
member of and owns stock in the Federal Home Loan Bank of New York, which is one
of the twelve regional banks in the Federal Home Loan Bank System. Fairport
Savings Bank also is regulated to a lesser extent by the Board of Governors of
the Federal Reserve System, governing reserves to be maintained against deposits
and other matters. The Office of Thrift Supervision will examine Fairport
Savings Bank and prepare reports for the consideration of its board of directors
on any operating deficiencies. Fairport Savings Bank’s relationship with its
depositors and borrowers also is regulated to a great extent by federal law and,
to a much lesser extent, state law, especially in matters concerning the
ownership of deposit accounts and the form and content of Fairport Savings
Bank’s mortgage documents.




Any
change in these laws or regulations, whether by the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision or Congress, could have a material
adverse impact on FSB Community Bankshares, Inc., Fairport Savings Bank and
their operations.




FSB
Community Bankshares, Inc. and FSB Community Bankshares, MHC, as savings and
loan holding companies, are required to file certain reports with, are subject
to examination by, and otherwise must comply with the rules and regulations of
the Office of Thrift Supervision. FSB Community Bankshares, Inc. is also subject
to the rules and regulations of the Securities and Exchange Commission under the
federal securities laws.




Certain
of the regulatory requirements that are or will be applicable to Fairport
Savings Bank, FSB Community Bankshares, Inc. and FSB Community Bankshares, MHC
are described below. This description of statutes and regulations is not
intended to be a complete explanation of such statutes and regulations and their
effects on Fairport Savings Bank, FSB Community Bankshares, Inc. and FSB
Community Bankshares, MHC and is qualified in its entirety by reference to the
actual statutes and regulations.


21




Federal
Banking Regulation




Business
Activities.A federal savings bank derives its lending and investment
powers from the Home Owners’ Loan Act, as amended, and the regulations of the
Office of Thrift Supervision. Under these laws and regulations, Fairport Savings
Bank may invest in: mortgage loans secured by residential real estate without
limitation as a percentage of assets; non-residential real estate loans up to
400% of capital in the aggregate; commercial business loans up to 20% of assets
in the aggregate; consumer loans up to 35% of assets in the aggregate; and
certain types of debt securities and certain other assets. Fairport Savings Bank
also may establish subsidiaries that may engage in activities not otherwise
permissible for Fairport Savings Bank, including real estate investment and
securities and insurance brokerage.




Capital
Requirements. Office of Thrift Supervision regulations require savings
associations to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for savings associations receiving the highest
rating on the CAMELS rating system) and an 8% risk-based capital
ratio.




The
risk-based capital standard for savings associations requires the maintenance of
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision, based on the
risks believed inherent in the type of asset. Core capital is defined as common
shareholders’ equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
Additionally, a savings association that retains credit risk in connection with
an asset sale may be required to maintain additional regulatory capital because
of the recourse back to the savings association. Fairport Savings Bank does not
typically engage in asset sales.




The
following table shows Fairport Savings Bank’s Tangible capital, Core capital,
Tier-1 risk based capital and Total Risk Based Capital ratios at December 31,
2008.


As
      of December 31, 2008RequiredPercent
      of
                                  
                                  Percent
      ofCapital
                                  
                                  Assets
      (1)
                                  
                                  Assets
      (1)(Dollars
      in thousands)Tangible
      capital
                                  
                                  $
                                  16,315
                                  
                                  
                                  8.47
                                  %
                                  
                                  1.50
                                  %Core
      capital
                                  
                                  
                                  16.315
                                  
                                  
                                  8.47
                                  
                                  
                                  4.00Tier 1
      risk-based capital
                                  
                                  
                                  16,315
                                  
                                  
                                  20.09
                                  
                                  
                                  4.00Total
      risk-based capital
                                  
                                  
                                  16,660
                                  
                                  
                                  20.52
                                  
                                  
                                  8.00


(1)
                Tangible
      capital levels are shown as a percentage of tangible assets. Core capital
      levels are shown as a percentage of total adjusted assets. Total
      risk-based capital levels are shown as a percentage of risk-weighted
      assets.




As
the table shows, at December 31, 2008, Fairport Savings Bank’s capital exceeded
all applicable requirements.




Loans-to-One
Borrower.Generally, a federal
savings association may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of unimpaired capital and surplus. An
additional amount may be loaned, equal to 10% of unimpaired capital and surplus,
if the loan is secured by readily marketable collateral, which generally does
not include real estate. As of December 31, 2008, Fairport Savings Bank’s
largest lending relationship with a single or related group of borrowers was a
residential mortgage loan totaling $959,000 which represented 4.79% of
unimpaired capital and surplus, and therefore, Fairport Savings Bank was in
compliance with the loans-to-one borrower limitations.




Qualified Thrift
Lender Test.As a federal savings
association, Fairport Savings Bank must satisfy the qualified thrift lender, or
“QTL,” test. Under the QTL test, Fairport Savings Bank must maintain at least
65% of its “portfolio assets” in “qualified thrift investments” (primarily
residential mortgages and related investments, including mortgage-backed
securities) in at least nine months of the most recent 12-month period.
“Portfolio assets” generally means total assets of a savings institution, less
the sum of specified liquid assets up to 20% of total assets, goodwill and other
intangible assets, and the value of property used in the conduct of the savings
association’s business.


22




Fairport
Savings Bank also may satisfy the QTL test by qualifying as a “domestic building
and loan association” as defined in the Internal Revenue Code.




A
savings association that fails the qualified thrift lender test must either
convert to a bank charter or operate under specified restrictions. At December
31, 2008, Fairport Savings Bank maintained approximately 97.61% of its portfolio
assets in qualified thrift investments, and therefore satisfied the QTL
test.




Capital
Distributions.Office of Thrift
Supervision regulations govern capital distributions by a federal savings
association, which include cash dividends, stock repurchases and other
transactions charged to the capital account. A savings association must file an
application for approval of a capital distribution if:


●
                      the
      total capital distributions for the applicable calendar year exceed the
      sum of the savings association’s net income for that year to date plus the
      savings association’s retained net income for the preceding two
      years;●
                      the
      savings association would not be at least adequately capitalized following
      the distribution;●
                      the
      distribution would violate any applicable statute, regulation, agreement
      or Office of Thrift Supervision-imposed condition; or●
                      the
      savings association is not eligible for expedited treatment of its
      filings.




Even if
an application is not otherwise required, every savings association that is a
subsidiary of a holding company must still file a notice with the Office of
Thrift Supervision at least 30 days before the board of directors declares a
dividend or approves a capital distribution.


The
      Office of Thrift Supervision may disapprove a notice or application
      if:●
                    the
      savings association would be undercapitalized following the
      distribution;●
                    the
      proposed capital distribution raises safety and soundness concerns;
      or●
                    the
      capital distribution would violate a prohibition contained in any statute,
      regulation or
agreement.




In
addition, the Federal Deposit Insurance Act provides that an insured depository
institution shall not make any capital distribution, if after making such
distribution the institution would be undercapitalized.




Liquidity.
A federal savings association is required to maintain a sufficient amount of
liquid assets to ensure its safe and sound operation. We seek to maintain a
ratio of 10.0% or greater of liquid assets to total assets. For the year ended
December 31, 2008, our liquidity ratio averaged 20.80%. We believe that we have
enough sources of liquidity to satisfy our short and long-term liquidity needs
as of December 31, 2008.




Community
Reinvestment Act and Fair Lending Laws. All savings associations have a
responsibility under the Community Reinvestment Act and related regulations of
the Office of Thrift Supervision to help meet the credit needs of their
communities, including low and moderate-income neighborhoods. In connection with
its examination of a federal savings association, the Office of Thrift
Supervision is required to assess the savings association’s record of compliance
with the Community Reinvestment Act. In addition, the Equal Credit Opportunity
Act and the Fair Housing Act prohibit lenders from discriminating in their
lending practices on the basis of characteristics specified in those statutes. A
savings association’s failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in denial of certain corporate
applications such as branches or mergers, or in restrictions on its activities.
The failure to comply with the Equal Credit Opportunity Act and the Fair Housing
Act could result in enforcement actions by the Office of Thrift Supervision, as
well as other federal regulatory agencies and the Department of Justice.
Fairport Savings Bank received a satisfactory Community Reinvestment Act rating
in its most recent federal examination.




Transactions with
Related Parties. A federal savings association’s authority to engage in
transactions with its affiliates is limited by Office of Thrift Supervision
regulations and by Sections 23A and 23B of the Federal Reserve Act and its
implementing Regulation W. An affiliate is a company that controls, is
controlled by, or is under common control with an insured depository institution
such as Fairport Savings Bank. FSB Community Bankshares, Inc. is an affiliate of
Fairport Savings Bank. In general, loan transactions between an insured
depository institution and its affiliates are subject to certain quantitative
and collateral requirements. In this regard, transactions between an insured
depository institution and its affiliates are limited to 10% of the
institution’s unimpaired capital and unimpaired surplus for transactions with
any one affiliate and 20% of unimpaired capital and unimpaired surplus for
transactions in the aggregate with all affiliates. Collateral in specified
amounts ranging from 100% to 130% of the amount of the transaction must usually
be provided by affiliates in order to receive loans from the savings
association. In addition, Office of Thrift Supervision regulations prohibit a
savings association from lending to any of its affiliates that are engaged in
activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary. Finally,
transactions with affiliates must be consistent with safe and sound banking
practices, not involve low-quality assets and be on terms that are as favorable
to the institution as comparable transactions with non-affiliates. The Office of
Thrift Supervision requires savings associations to maintain detailed records of
all transactions with affiliates.


23




Fairport
Savings Bank’s authority to extend credit to its directors, executive officers
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the
Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other
things, these provisions require that extensions of credit to
insiders:


(i)
              be
      made on terms that are substantially the same as, and follow credit
      underwriting procedures that are not less stringent than, those prevailing
      for comparable transactions with unaffiliated persons and that do not
      involve more than the normal risk of repayment or present other
      unfavorable features, and(ii)
              not
      exceed certain limitations on the amount of credit extended to such
      persons, individually and in the aggregate, which limits are based, in
      part, on the amount of Fairport Savings Bank’s
  capital.




In
addition, extensions of credit in excess of certain limits must be approved by
Fairport Savings Bank’s board of directors.




Enforcement.
The Office of Thrift Supervision has primary enforcement responsibility over
federal savings institutions and has the authority to bring enforcement action
against all “institution-affiliated parties,” including shareholders, attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action by the Office of Thrift Supervision may range from the
issuance of a capital directive or cease and desist order, to removal of
officers and/or directors of the institution and the appointment of a receiver
or conservator. Civil penalties cover a wide range of violations and actions,
and range up to $25,000 per day, unless a finding of reckless disregard is made,
in which case penalties may be as high as $1 million per day. The Federal
Deposit Insurance Corporation also has the authority to terminate deposit
insurance or to recommend to the Director of the Office of Thrift Supervision
that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the Federal Deposit
Insurance Corporation has authority to take action under specified
circumstances.




Standards for
Safety and Soundness. Federal law requires each federal banking agency to
prescribe certain standards for all insured depository institutions. These
standards relate to, among other things, internal controls, information systems
and audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.




Prompt Corrective
Action Regulations. Under the prompt corrective
action regulations, the Office of Thrift Supervision is required and authorized
to take supervisory actions against undercapitalized savings associations. For
this purpose, a savings association is placed in one of the following five
categories based on the savings association’s capital:


●
                well-capitalized
      (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10%
      total risk-based capital);●
                adequately
      capitalized (at least 4% leverage capital, 4% Tier 1 risk-based
      capital and 8% total risk-based
capital);


24




●
                undercapitalized
      (less than 8% total risk-based capital, 4% Tier 1 risk-based capital
      or 3% leverage capital);●
                significantly
      undercapitalized (less than 6% total risk-based capital, 3% Tier 1
      risk-based capital or 3% leverage capital); and●
                critically
      undercapitalized (less than 2% tangible
  capital).




Generally,
the banking regulator is required to appoint a receiver or conservator for a
savings association that is “critically undercapitalized” within specific time
frames. The regulations also provide that a capital restoration plan must be
filed with the Office of Thrift Supervision within 45 days of the date a savings
association receives notice that it is “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” The criteria for an
acceptable capital restoration plan include, among other things, the
establishment of the methodology and assumptions for attaining adequately
capitalized status on an annual basis, procedures for ensuring compliance with
restrictions imposed by applicable federal regulations, the identification of
the types and levels of activities the savings association will engage in while
the capital restoration plan is in effect, and assurances that the capital
restoration plan will not appreciably increase the current risk profile of the
savings association. Any holding company for the savings association required to
submit a capital restoration plan must guarantee the lesser of an amount equal
to 5% of the savings association’s assets at the time it was notified or deemed
to be under capitalized by the Office of Thrift Supervision, or the amount
necessary to restore the savings association to adequately capitalized status.
This guarantee remains in place until the Office of Thrift Supervision notifies
the savings association that it has maintained adequately capitalized status for
each of four consecutive calendar quarters, and the Office of Thrift Supervision
has the authority to requirement payment and collect payment under the
guarantee. Failure by a holding company to provide the required guarantee will
result in certain operating restrictions on the savings association, such as
restrictions on the ability to declare and pay dividends, pay executive
compensation and management fees, and increase assets or expand operations. The
Office of Thrift Supervision may also take any one of a number of discretionary
supervisory actions against undercapitalized associations, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.




At
December 31, 2008, Fairport Savings Bank met the criteria for being considered
“well-capitalized.”




Insurance for
Deposit Accounts.Fairport Savings Bank
is a member of the Deposit Insurance Fund, which is administered by the Federal
Deposit Insurance Corporation. Deposit accounts at Fairport Savings Bank are
insured by the Federal Deposit Insurance Corporation, generally up to a maximum
of $100,000 for each separately insured depositor and up to a maximum of
$250,000 for self-directed retirement accounts. However, the Federal Deposit
Insurance Corporation increased the deposit insurance available on all deposit
accounts to $250,000, effective until December 31, 2009. In addition, certain
noninterest-bearing transaction accounts maintained with financial institutions
participating in the Federal Deposit Insurance Corporation’s Temporary Liquidity
Guarantee Program are fully insured regardless of the dollar amount until
December 31, 2009. Fairport Savings Bank has opted to participate in the Federal
Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program. See the section titled
“Temporary Liquidity Guarantee Program.”




The
Federal Deposit Insurance Corporation imposes an assessment against all
depository institutions for deposit insurance. This assessment is based on the
risk category of the institution and, prior to 2009, ranged from 5 to 43 basis
points of the institution’s deposits. On February 27, 2009, the Federal Deposit
Insurance Corporation published a final rule raising the current deposit
insurance assessment rates to a range from 12 to 45 basis points beginning April
1, 2009. Additionally, the Federal Deposit Insurance Corporation issued an
interim rule with request for comments that would impose a special 20 basis
points special assessment on all insured deposits as of June 30, 2009, which
would be payable on September 30, 2009. There is a proposal to reduce the
special assessment from 20 basis points to 10 basis points if Congress increases
the FDIC’s borrowing capacity from the Department of Treasury. This special
assessment would total approximately $255,044 (20 basis points) or $127,522 (10
basis points) based on our deposits as of December 31, 2008.




Insurance
of deposits may be terminated by the Federal Deposit Insurance Corporation upon
a finding that an institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the Federal
Deposit Insurance Corporation. We do not currently know of any practice,
condition or violation that might lead to termination of our deposit
insurance.


25




In
addition to the Federal Deposit Insurance Corporation assessments, the Financing
Corporation (“FICO”) is authorized to impose and collect, with the approval of
the Federal Deposit Insurance Corporation, assessments for anticipated payments,
issuance costs and custodial fees on bonds issued by the FICO in the 1980s to
recapitalize the former Federal Savings and Loan Insurance Corporation. The
bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter
ended December 31, 2008, the annualized FICO assessment was equal to 1.10 basis
points for each $100 in domestic deposits maintained at an
institution.




Temporary
Liquidity Guarantee Program.On October 14, 2008, the Federal Deposit
Insurance Corporation announced a new program – the Temporary Liquidity
Guarantee Program. This program has two components. One guarantees newly issued
senior unsecured debt of a participating organization, up to certain limits
established for each institution, issued between October 14, 2008 and June 30,
2009. The Federal Deposit Insurance Corporation will pay the unpaid principal
and interest on a Federal Deposit Insurance Corporation-guaranteed debt
instrument upon the uncured failure of the participating entity to make a timely
payment of principal or interest in accordance with the terms of the instrument.
The guarantee will remain in effect until June 30, 2012. In return for the
Federal Deposit Insurance Corporation’s guarantee, participating institutions
will pay the Federal Deposit Insurance Corporation a fee based on the amount and
maturity of the debt. Fairport Savings Bank is participating in this component
of the Temporary Liquidity Guarantee Program.




The
other component of the program provides full federal deposit insurance coverage
for non-interest bearing transaction deposit accounts, regardless of dollar
amount, until December 31, 2009. An annualized 10 basis point assessment on
balances in noninterest-bearing transaction accounts that exceed the existing
deposit insurance limit of $250,000 will be assessed on a quarterly basis to
insured depository institutions that have not opted out of this component of the
Temporary Liquidity Guarantee Program. Fairport Savings Bank is also
participating in this component of the Temporary Liquidity Guarantee
Program.




U.S. Treasury’s
Troubled Asset Relief Program Capital Purchase Program. The Emergency
Economic Stabilization Act of 2008 was enacted in October 2008 and provides the
U.S. Secretary of the Treasury with broad authority to implement certain actions
to help restore stability and liquidity to U.S. markets. One of the provisions
resulting from the legislation is the Troubled Asset Relief Program Capital
Purchase Program (“CPP”), which provides for direct equity investment in
perpetual preferred stock by the U.S. Treasury Department in qualified financial
institutions. The program is voluntary and requires an institution to comply
with a number of restrictions and provisions, including limits on executive
compensation, stock redemptions and declaration of dividends. The CPP provides
for a minimum investment of one percent of total risk-weighted assets and a
maximum investment equal to the lesser of three percent of total risk-weighted
assets or $25 billion. Participation in the program is not automatic and is
subject to approval by the U.S. Treasury Department. The Company determined not
to participate in the CPP.




Prohibitions
Against Tying Arrangements. Federal savings associations
are prohibited, subject to some exceptions, from extending credit to or offering
any other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.




Federal Home Loan
Bank System. Fairport Savings Bank is a member of the Federal Home Loan
Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal
Home Loan Bank System provides a central credit facility primarily for member
institutions. As a member of the Federal Home Loan Bank of New York, Fairport
Savings Bank is required to acquire and hold shares of capital stock in the
Federal Home Loan Bank in an amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, 1/20 of its borrowings from the
Federal Home Loan Bank, or 0.3% of assets, whichever is greater. As of December
31, 2008, Fairport Savings Bank was in compliance with this
requirement.




Other
Regulations




Interest
and other charges collected or contracted for by Fairport Savings Bank are
subject to state usury laws and federal laws concerning interest rates. Fairport
Savings Bank’s operations are also subject to federal laws applicable to credit
transactions, such as the:


●
              Truth-In-Lending
      Act, governing disclosures of credit terms to consumer
      borrowers;




26





●
                Home
      Mortgage Disclosure Act of 1975, requiring financial institutions to
      provide information to enable the public and public officials to determine
      whether a financial institution is fulfilling its obligation to help meet
      the housing needs of the community it serves;●
                Equal
      Credit Opportunity Act, prohibiting discrimination on the basis of race,
      creed or other prohibited factors in extending credit;●
                Fair
      Credit Reporting Act of 1978, governing the use and provision of
      information to credit reporting agencies;●
                Fair
      Debt Collection Act, governing the manner in which consumer debts may be
      collected by collection agencies; and●
                rules
      and regulations of the various federal agencies charged with the
      responsibility of implementing such federal laws.The
      operations of Fairport Savings Bank also are subject to
    the:●
                Right
      to Financial Privacy Act, which imposes a duty to maintain confidentiality
      of consumer financial records and prescribes procedures for complying with
      administrative subpoenas of financial records;●
                Electronic
      Funds Transfer Act and Regulation E promulgated thereunder, which govern
      automatic deposits to and withdrawals from deposit accounts and customers’
      rights and liabilities arising from the use of automated teller machines
      and other electronic banking services;●
                Title
      III of The Uniting and Strengthening America by Providing Appropriate
      Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred
      to as the “USA PATRIOT Act”), which significantly expanded the
      responsibilities of financial institutions, including savings and loan
      associations, in preventing the use of our financial system to fund
      terrorist activities. Among other provisions, the USA PATRIOT Act and the
      related regulations of the Office of Thrift Supervision require savings
      associations operating in the United States to develop new anti-money
      laundering compliance programs, due diligence policies and controls to
      ensure the detection and reporting of money laundering. Such required
      compliance programs are intended to supplement existing compliance
      requirements, also applicable to financial institutions, under the Bank
      Secrecy Act and the Office of Foreign Assets Control Regulations;
      and●
                The
      Gramm-Leach-Bliley Act, which placed limitations on the sharing of
      consumer financial information by financial institutions with unaffiliated
      third parties. Specifically, the Gramm-Leach-Bliley Act requires all
      financial institutions offering financial products or services to retail
      customers to provide such customers with the financial institution’s
      privacy policy and provide such customers the opportunity to “opt out” of
      the sharing of certain personal financial information with unaffiliated
      third parties.




Holding
Company Regulation




General.
FSB Community Bankshares, Inc. is a non-diversified savings and loan holding
company within the meaning of the Home Owners’ Loan Act. As such, FSB Community
Bankshares, Inc. is registered with the Office of Thrift Supervision and subject
to Office of Thrift Supervision regulations, examinations, supervision and
reporting requirements. In addition, the Office of Thrift Supervision has
enforcement authority over FSB Community Bankshares, Inc. and its subsidiaries.
Among other things, this authority permits the Office of Thrift Supervision to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. As a federal corporation, FSB Community
Bankshares, Inc. is generally not subject to state business organization
laws.


27




Permitted
Activities. Pursuant to Section 10(o) of the Home Owners’ Loan Act and
Office of Thrift Supervision regulations and policy, a mutual holding company
and a federally chartered mid-tier holding company such as FSB Community
Bankshares, Inc. may engage in the following activities: (i) investing in the
stock of a savings bank; (ii) acquiring a mutual association through the merger
of such association into a savings bank subsidiary of such holding company or an
interim savings bank subsidiary of such holding company; (iii) merging with or
acquiring another holding company, one of whose subsidiaries is a savings bank;
(iv) investing in a corporation, the capital stock of which is available for
purchase by a savings bank under federal law or under the law of any state where
the subsidiary savings bank or associations share their home offices; (v)
furnishing or performing management services for a savings bank subsidiary of
such company; (vi) holding, managing or liquidating assets owned or acquired
from a savings subsidiary of such company; (vii) holding or managing properties
used or occupied by a savings bank subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity: (a) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the
Director, by regulation, prohibits or limits any such activity for savings and
loan holding companies; or (b) in which multiple savings and loan holding
companies were authorized (by regulation) to directly engage on March 5, 1987;
(x) any activity permissible for financial holding companies under Section 4(k)
of the Bank Holding Company Act, including securities and insurance
underwriting; and (xi) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director. If a mutual
holding company acquires or merges with another holding company, the holding
company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed in (i)
through (x) above, and has a period of two years to cease any nonconforming
activities and divest any nonconforming investments.




The
Home Owners’ Loan Act prohibits a savings and loan holding company, including
FSB Community Bankshares, Inc., directly or indirectly, or through one or more
subsidiaries, from acquiring more than 5% of another savings institution or
holding company thereof, without prior written approval of the Office of Thrift
Supervision. It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the Home Owners’ Loan Act, or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the Office of
Thrift Supervision must consider the financial and managerial resources, future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the federal deposit insurance fund, the convenience and needs of
the community and competitive factors.




The
Office of Thrift Supervision is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions:


(i)
            the
      approval of interstate supervisory acquisitions by savings and loan
      holding companies; and(ii)
            the
      acquisition of a savings institution in another state if the laws of the
      state of the target savings institution specifically permit such
      acquisitions.




The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.




Waivers of
Dividends by FSB Community Bankshares, MHC. Office of Thrift Supervision
regulations require FSB Community Bankshares, MHC to notify the Office of Thrift
Supervision of any proposed waiver of its receipt of dividends from FSB
Community Bankshares, Inc. The Office of Thrift Supervision reviews dividend
waiver notices on a case-by-case basis, and, in general, does not object to any
such waiver if:


(i)
            the
      waiver would not be detrimental to the safe and sound operation of the
      subsidiary savings association; and(ii)
            the
      mutual holding company’s board of directors determines that such waiver is
      consistent with such directors’ fiduciary duties to the mutual holding
      company’s members.




We
anticipate that FSB Community Bankshares, MHC will waive any dividends paid by
FSB Community Bankshares, Inc. Under Office of Thrift Supervision regulations,
our public shareholders would not be diluted because of any dividends waived by
FSB Community Bankshares, MHC (and waived dividends would not be considered in
determining an appropriate exchange ratio) in the event FSB Community
Bankshares, MHC converts to stock form.


28




Conversion
of FSB Community Bankshares, MHC to Stock Form. Office of Thrift
Supervision regulations permit FSB Community Bankshares, MHC to convert from the
mutual form of organization to the capital stock form of organization. There can
be no assurance when, if ever, a conversion transaction would occur, and the
board of directors has no current intention or plan to undertake a conversion
transaction. In a conversion transaction a new stock holding company would be
formed as the successor to FSB Community Bankshares, Inc., FSB Community
Bankshares, MHC’s corporate existence would end, and certain depositors and
borrowers of Fairport Savings Bank would receive the right to subscribe for
additional shares of the new holding company. In a conversion transaction, each
share of common stock held by shareholders other than FSB Community Bankshares,
MHC would be automatically converted into a number of shares of common stock of
the new holding company determined pursuant an exchange ratio that ensures that
shareholders other than FSB Community Bankshares, MHC own the same percentage of
common stock in the new holding company as they owned in FSB Community
Bankshares, Inc. immediately prior to the conversion transaction, subject to
adjustment for any assets held by FSB Community Bankshares, MHC.




Federal
Securities Laws




Our
common stock is registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, and we are subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act of 1934.




Sarbanes-Oxley
Act




The
Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing
and accounting, executive compensation, and enhanced and timely disclosure of
corporate information. As directed by the Sarbanes-Oxley Act, our Chief
Executive Officer and Chief Financial Officer each will be required to certify
that our quarterly and annual reports do not contain any untrue statement of a
material fact. The rules adopted by the Securities and Exchange Commission under
the Sarbanes-Oxley Act have several requirements, including having these
officers certify that: they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of our internal control over financial
reporting; they have made certain disclosures to our auditors and the audit
committee of the board of directors about our internal control over financial
reporting; and they have included information in our quarterly and annual
reports about their evaluation and whether there have been changes in our
internal control over financial reporting or in other factors that could
materially affect internal control over financial reporting. We will prepare
policies, procedures and systems designed to ensure compliance with these
regulations.




We
anticipate that we will incur additional expense in 2009 in order to comply with
the provisions of the Act.


ITEM
      1A.RISK
      FACTORS




The
risks set forth below, in addition to the other risks described in this Annual
Report on Form 10-K, may adversely affect our business, financial condition and
operating results. In addition to the risks set forth below and the other risks
described in this annual report, there may also be additional risks and
uncertainties that are not currently known to us or that we currently deem to be
immaterial that could materially and adversely affect our business, financial
condition or operating results. As a result, past financial performance may not
be a reliable indicator of future performance, and historical trends should not
be used to anticipate results or trends in future periods. Further, to the
extent that any of the information contained in this Annual Report on Form 10-K
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.




The
United States Economy Is In A Recession. A Prolonged Economic Downturn,
Especially One Affecting Our Geographic Market Area, Could Materially Affect our
Business and Financial Results.




The
United States economy entered a recession in the fourth quarter of 2007.
Throughout the course of 2008 and in the first quarter of 2009, economic
conditions continued to worsen, due in large part to the fallout from the
collapse of the sub-prime mortgage market. While we did not originate or invest
in sub-prime mortgages, our lending business is tied, in part, to the housing
market. Declines in home prices, increases in foreclosures and higher
unemployment have adversely affected the credit performance of real
estate-related loans, resulting in the write-down of asset values. The
continuing housing slump also has resulted in reduced demand for the
construction of new housing and further declines in home prices. Further, the
ongoing concern about the stability of the financial markets in general has
caused many lenders to reduce or cease providing funding to borrowers. These
conditions may also cause a further reduction in loan demand, and increases in
our non-performing assets, net charge-offs and provisions for loan
losses.


29




Legislative
or Regulatory Actions Responding to Financial and Market Weakness Could Affect
Us Adversely. There Can Be No Assurance that Actions of the U.S. Government,
Federal Reserve and Other Governmental and Regulatory Bodies For the Purpose of
Stabilizing the Financial Markets Will Achieve the Intended Effect.




In
response to the financial crises affecting the banking system and financial
markets, the U.S. Congress has passed legislation and the U.S. Treasury has
promulgated programs designed to purchase assets from, provide equity capital
to, and guarantee the liquidity of the financial services industry.
Specifically, Congress adopted the Emergency Economic Stabilization Act of 2008,
under which the U.S. Treasury has the authority to expend up to $700 billion to
assist in stabilizing and providing liquidity to the U.S. financial system. On
October 14, 2008, the U.S. Treasury announced the Capital Purchase Program,
under which it will purchase up to $250 billion of non-voting senior preferred
shares of certain qualified financial institutions in an attempt to encourage
financial institutions to build capital to increase the flow of financing to
businesses and consumers and to support the economy. In addition, Congress
temporarily increased FDIC deposit insurance from $100,000 to $250,000 per
depositor through December 31, 2009. The FDIC has also announced the
creation of the Temporary Liquidity Guarantee Program which is intended to
strengthen confidence and encourage liquidity in financial institutions by
temporarily guaranteeing newly issued senior unsecured debt of participating
organizations and providing full insurance coverage for noninterest-bearing
transaction deposit accounts (such as business checking accounts,
interest-bearing transaction accounts paying 50 basis points or less and
lawyers’ trust accounts), regardless of dollar amount until December 31,
2009. Finally, in February 2009, the American Recovery and Reinvestment Act of
2009 was enacted, which is intended to expand and establish government spending
programs and provide certain tax cuts to stimulate the economy. The U.S.
government continues to evaluate and develop various programs and initiatives
designed to stabilize the financial and housing markets and stimulate the
economy, including the U.S. Treasury’s recently announced Financial
Stability Plan and the recently announced foreclosure prevention
program.




The
potential exists for additional federal or state laws and regulations regarding
lending and funding practices and liquidity standards, and bank regulatory
agencies are expected to be active in responding to concerns and trends
identified in examinations, and the issuance of many formal enforcement orders
is expected. Actions taken to date, as well as potential actions, may not have
the beneficial effects that are intended, particularly with respect to the
extreme levels of volatility and limited credit availability currently being
experienced. In addition, new laws, regulations, and other regulatory changes
will increase our costs of regulatory compliance and of doing business, and
otherwise affect our operations. Our FDIC insurance premiums have increased (and
may continue to increase), and a special assessment has been implemented,
because market developments have significantly depleted the insurance fund of
the FDIC and reduced the ratio of reserves to insured deposits. New laws,
regulations, and other regulatory changes, along with negative developments in
the financial services industry and the credit markets, may significantly affect
the markets in which we do business, the markets for and value of our loans and
investments, and our ongoing operations, costs and profitability.




Recent
Negative Developments in the Financial Services Industry And the Credit Markets
May Subject Us to Additional Regulation.




As
a result of the recent financial crisis, the potential exists for the
promulgation of new federal or state laws and regulations regarding lending and
funding practices and liquidity standards, and bank regulatory agencies are
expected to be active in responding to concerns and trends identified in
examinations, which are expected to result in the issuance of many formal
enforcement orders. Negative developments in the financial services industry and
the credit markets, and the impact of new legislation in response to these
developments, may negatively affect our operations by restricting our business
operations, including our ability to originate or sell loans and pursue business
opportunities. Compliance with such regulation also will likely increase our
costs.




Our
Expenses Will Increase as a Result of Increases in FDIC Insurance
Premiums.




The
FDIC imposes an assessment against financial institutions for deposit insurance.
This assessment is based on the risk category of the institution and currently
ranges from 5 to 43 basis points of the institution’s deposits. On February 27,
2009, the FDIC issued a final rule that increases the current deposit insurance
assessment rates to a range from 12 to 45 basis points beginning April 1, 2009.
Additionally, the FDIC has issued an interim rule that would impose a special 20
basis points assessment on deposits as of June 30, 2009, which would be paid on
September 30, 2009. There is a proposal to reduce the special assessment from 20
basis points to 10 basis points if Congress increases the FDIC’s borrowing
capacity from the Department of Treasury. This special assessment would total
approximately $255,044 (20 basis points) or $127,550 (10 basis points) based on
our deposits as of December 31, 2008.


30




Lack
of Consumer Confidence in Financial Institutions May Decrease Our Level of
Deposits.




Our
level of deposits may be affected by lack of consumer confidence in financial
institutions, which have caused fewer depositors to be willing to maintain
deposits that are not FDIC-insured accounts. That may cause depositors to
withdraw deposits and place them in other institutions or to invest uninsured
funds in investments perceived as being more secure, such as securities issued
by the U.S. Treasury. These consumer preferences may force us to pay higher
interest rates to retain deposits and may constrain liquidity as we seek to meet
funding needs caused by reduced deposit levels.




An
Inadequate Allowance for Loan Losses Would Negatively Affect Our Results of
Operations.




We
are exposed to the risk that our customers will be unable to repay their loans
according to their terms and that any collateral securing the payment of their
loans will not be sufficient to avoid losses. Credit losses are inherent in the
lending business and could have a material adverse effect on our operating
results. Volatility and deterioration in the broader economy may also increase
our risk of credit losses. The determination of an appropriate level of
allowance for loan losses is an inherently uncertain process and is based on
numerous assumptions. The amount of future losses is susceptible to changes in
economic, operating and other conditions, including changes in interest rates,
that may be beyond our control, and charge-offs may exceed current estimates. We
evaluate the collectability of our loan portfolio and provide an allowance for
loan losses that we believe is adequate based upon such factors as, including,
but not limited to: the risk characteristics of various classifications of
loans; previous loan loss experience; specific loans that have loss potential;
delinquency trends; the estimated fair market value of the collateral; current
economic conditions; the views of our regulators; and geographic and industry
loan concentrations. If any of our evaluations are incorrect and borrower
defaults result in losses exceeding our allowance for loan losses, our results
of operations could be significantly and adversely affected. We cannot assure
you that our allowance will be adequate to cover probable loan losses inherent
in our portfolio.




The
Need to Account for Assets at Market Prices May Adversely Affect Our Results of
Operations.




We
report certain assets, including investments and securities, at fair value.
Generally, for assets that are reported at fair value we use quoted market
prices or valuation models that utilize market data inputs to estimate fair
value. Because we carry these assets on our books at their fair value, we may
incur losses even if the asset in question presents minimal credit risk. Given
the continued disruption in the capital markets, we may be required to recognize
other-than-temporary impairments in future periods with respect to securities in
our portfolio. The amount and timing of any impairment recognized will depend on
the severity and duration of the decline in fair value of the securities and our
estimation of the anticipated recovery period.




Other-Than-Temporary
Impairment (OTTI) Could Reduce Our Earnings.




We
evaluate our investment securities for other-than-temporary impairment (OTTI) as
required by SFAS 115. When a decline in fair value below cost is deemed to be
other-than-temporary, the related loss must be recognized as a charge to
earnings and the investment is recorded at fair value. In determining whether or
not OTTI exists management considers several factors, including but not limited
to, the length of time and extent that fair value has been less than cost, the
financial condition and near term prospects of the issuer, adverse changes to
projected cash flows, credit rating downgrades, and our ability and intent to
hold the security for a period sufficient to allow for any anticipated recovery
in fair value.




Our
Continuing Concentration of Loans in Our Primary Market Area May Increase Our
Risk.




Our
success depends primarily on the general economic conditions in the counties in
which we conduct business. Unlike large banks that are more geographically
diversified, we provide banking and financial services to customers primarily in
our market area. The local economic conditions in our market area have a
significant impact on our loans. A significant decline in general economic
conditions caused by inflation, recession, unemployment or other factors beyond
our control, would affect the local economic conditions and could adversely
affect our financial condition and results of operations.


31




Future
Changes in Interest Rates Could Reduce Our Profits




Our
ability to make a profit largely depends on our net interest income, which could
be negatively affected by changes in interest rates. Net interest income is the
difference between:


●
            the
      interest income we earn on our interest-earning assets, such as loans and
      securities; and●
            the
      interest expense we pay on our interest-bearing liabilities, such as
      deposits and borrowings.




Our
liabilities generally have shorter maturities than our assets. This imbalance
can create significant earnings volatility as market interest rates change. In
periods of rising interest rates, the interest income earned on our assets may
not increase as rapidly as the interest paid on our liabilities, resulting in a
decline in our net interest income. In periods of declining interest rates, our
interest income is generally positively affected although such positive effects
may be reduced or eliminated by prepayments of loans and redemptions of callable
securities. In addition, when long-term interest rates are not significantly
higher than short-term rates thus creating a “flat” yield curve, the Company’s
interest rate spread will decrease thus reducing net interest income. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Management of Market Risk.”




Changes
in interest rates also affect the current market value of our interest-earning
securities portfolio. Generally, the value of securities moves inversely with
changes in interest rates. At December 31, 2008, the fair value of our
securities classified as available for sale totalled $43.9 million. Unrealized
net losses on available-for-sale securities totalled $43,000 at December 31,
2008 and are reported, net of tax, as a separate component of shareholder’s
equity. However, a rise in interest rates could cause a decrease in the fair
value of securities available for sale in future periods which would have an
adverse effect on shareholder’s equity. Depending on market conditions, we often
place more emphasis on enhancing our net interest margin rather than matching
the interest rate sensitivity of our assets and liabilities. In particular, we
believe that the increased net interest income resulting from a mismatch in the
maturity of our asset and liabilities portfolios can, during periods of stable
or declining interest rates, provide high enough returns to justify increased
exposure to sudden and unexpected increases in interest rates. As a result, our
results of operations and the economic value of our equity will remain
vulnerable to increases in interest rates and to declines in the difference
between long- and short-term rates. See “Managements Discussion and Analysis of
Financial Condition and Results of Operations—Management of Market
Risk.”




If
Our Investment in The Federal Home Loan Bank Of New York is Classified as
Other-Than-Temporarily Impaired or as Permanently Impaired, Our Earnings and
Stockholders’ Equity Could Decrease.




We
own common stock of the Federal Home Loan Bank of New York. We hold this stock
to qualify for membership in the Federal Home Loan Bank System and to be
eligible to borrow funds under the Federal Home Loan Bank of New York’s advance
program. The aggregate cost and fair value of our Federal Home Loan Bank common
stock as of December 31, 2008 was $2.3 million based on its par value.
There is no market for our Federal Home Loan Bank common stock.




Recent
published reports indicate that certain member banks of the Federal Home Loan
Bank System may be subject to accounting rules and asset quality risks that
could result in materially lower regulatory capital levels. In an extreme
situation, it is possible that the capitalization of a Federal Home Loan Bank,
including the Federal Home Loan Bank of New York, could be substantially
diminished or reduced to zero. Consequently, we believe that there is a risk
that our investment in Federal Home Loan Bank of New York common stock could be
impaired at some time in the future, and if this occurs, it would cause our
earnings and stockholders’ equity to decrease by the after-tax amount of the
impairment charge.




If
the Federal Home Loan Bank of New York Stops Paying Dividends, This Will
Negatively Affect Our Earnings.




Certain
Federal Home Loan Banks stopped paying dividends in 2008, and are prohibited
from paying dividends in the future so long as they fail to meet any of their
regulatory capital requirements. We received dividends of $117,000 on our
Federal Home Loan Bank of New York stock in 2008. The failure of the Federal
Home Loan Bank to pay dividends in the future will cause our earnings and
stockholders’ equity to decrease. In 2009, we have not been accruing any
dividends on our Federal Home Loan Bank stock.


32




Future
Legislative or Regulatory Actions Responding to Perceived Financial and Market
Problems Could Impair Our Rights Against Borrowers




There
have been proposals made by members of Congress and others that would reduce the
amount distressed borrowers are otherwise contractually obligated to pay under
their mortgage loans and limit a lender’s ability to foreclose on mortgage
collateral. Were proposals such as these, or other proposals limiting our rights
as a creditor, to be implemented, we could experience increased credit losses or
increased expense in pursuing our remedies as a creditor. Should such
legislation be implemented, Fairport Savings Bank could be directly impacted for
those loans held directly within the portfolio. Such legislation could also have
a major impact on loans held within the structure of mortgage-backed securities
and thus indirectly impact us by decreasing the value of securities held in the
investment portfolio.


ITEM
      1B.UNRESOLVED STAFF
      COMMENTS




None.




ITEM
      2.PROPERTIES




We
operate from our main office in Fairport, New York which we own, and our two
branch offices, both of which are leased, located in the towns of Penfield and
Irondequoit. The consolidated net book value of our premises, land and equipment
was $2.3 million at December 31, 2008. The following is a list of our
locations:




Fairport
      (Main Office)
                    45
      South Main Street
                    Fairport,
      New York 14450
                    (585)
      223-9080
                  Penfield
                    2163
      Rte 250
                    Fairport,
      New York 14450
                    (585)
      377-8970
                  Irondequoit
                    2118
      Hudson Ave.
                    Irondequoit,
      New York 14617
                    (585)
      266-4100




Additionally,
as reported on our Current Report on Form 8-K, filed with the Securities and
Exchange Commission on April 28, 2008, we have entered into a lease agreement
with the intention of opening a new branch office in the third quarter of 2009
located in Webster Crossings Shopping Center at 1067 Ridge Road and Webster
Commons Boulevard, Town of Webster, New York.


ITEM
      3.LEGAL
      PROCEEDINGS




We
are periodically involved in various claims and lawsuits that arise incident to
our financial services business. At December 31, 2008 we were not involved in
any legal proceedings, the outcome of which would be material to our financial
condition or results of operations.


ITEM
      4.SUBMISSION OF MATTERS
      TO A VOTE OF SECURITY
HOLDERS




None.




PART
II


ITEM
      5.MARKET FOR
      REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES




(a)     The
information required by this item is incorporated by reference to our Annual
Report to Shareholders. No equity securities were sold during the year ended
December 31, 2008 that were not registered under the Securities
Act.




(b)     Not
applicable.




(c)     FSB
Community Bankshares, Inc. did not repurchase any of its equity securities
during the quarter ended December 31, 2008.


33





ITEM
      6.SELECTED FINANCIAL
      DATA




This
item is not applicable to smaller reporting companies.


ITEM
      7.MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




The
information contained in the section captioned “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” is incorporated by
reference to our Annual Report to Shareholders.


ITEM
      7A.QUANTITATIVE AND
      QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Incorporated
by reference to the Annual Report to Shareholders included as Exhibit 13 to this
Form 10-K.


ITEM
      8.FINANCIAL STATEMENTS
      AND SUPPLEMENTARY DATA




The
consolidated financial statements included in our Annual Report to Shareholders
are incorporated herein by reference.


ITEM
      9.CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




Information
required by this item is incorporated herein by reference from our definitive
Annual Meeting Proxy Statement (the “Proxy Statement”), specifically the section
captioned “Proposal II – Ratification of Appointment of Independent Registered
Public Accounting Firm—Changes In and Disagreements with Accountants on
Accounting and Financial Disclosures.”


ITEM
      9A(T).CONTROLS AND
      PROCEDURES




(a)          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) 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 in timely alerting them to the material
information relating to us (or our consolidated subsidiaries) required to be
included in our periodic SEC filings.




There
were no significant changes made in our internal controls over financial
reporting during the registrant's last fiscal quarter covered by this
report or, to our knowledge, in other factors that could significantly affect
these controls subsequent to the date of their evaluation.




(b)          Management’s
annual report on internal control over financial reporting.




Management
of FSB Community Bankshares, Inc. (the “Company”) is responsible for
establishing and maintaining adequate internal control over financial
reporting.




The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.


34




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, based on the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
“Internal Control-Integrated Framework.” Based on the assessment, management
determined that, as of December 31, 2008, the Company’s internal control over
financial reporting is effective, based on those criteria.




This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.


ITEM
      9B.OTHER
      INFORMATION




None.




PART
III


ITEM
      10.DIRECTORS, EXECUTIVE
      OFFICERS AND CORPORATE
GOVERNANCE




FSB
Community Bankshares, Inc. has adopted a Code of Ethics that applies to FSB
Community Bankshares, Inc.’s principal executive officer, principal financial
officer and all other employees and directors. The Code of Ethics is available
on our website at www.fairportsavingsbank.com.




Information
concerning directors and executive officers of FSB Community Bankshares, Inc. is
incorporated herein by reference from the Proxy Statement, specifically the
section captioned “Proposal I—Election of Directors.”


ITEM
      11.EXECUTIVE
      COMPENSATION




Information
concerning executive compensation is incorporated herein by reference from the
Proxy Statement, specifically the section captioned “Executive
Compensation.”


ITEM
      12.SECURITY OWNERSHIP OF
      CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS




Information
concerning security ownership of certain owners and management is incorporated
herein by reference from the Proxy Statement, specifically the section captioned
“Voting Securities and Principal Holder Thereof.”


ITEM
      13.CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE




Information
concerning relationships, transactions and director independence is incorporated
herein by reference from the Proxy Statement, specifically the section captioned
“Transactions with Certain Related Persons” and “Board
Independence.”


ITEM
      14.PRINCIPAL ACCOUNTANT
      FEES AND SERVICES




Information
concerning principal accountant fees and services is incorporated herein by
reference from the Proxy Statement, specifically the section captioned “Proposal
II-Ratification of Appointment of Auditor.”


35





ITEM
      15.EXHIBITS




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


3.1
                                    Charter
      of FSB Community Bankshares, Inc. (1)3.2
                                    Bylaws
      of FSB Community Bankshares, Inc. (1)4
                                    Form
      of common stock certificate of FSB Community Bankshares, Inc.
      (1)10.1
                                    Amended
      and Restated Employment Agreement of Dana C. Gavenda
(2)10.2
                                    Supplemental
      Executive Retirement Plan (1)10.3
                                    Employee
      Stock Ownership Plan (1)13
                                    Portions
      of Annual Report to Shareholders14
                                    Code
      of Ethics (3)21
                                    Subsidiaries
      of the Registrant31.1
                                    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
                                    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232
                                    Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002


(1)
                Incorporated
      by reference to the Registration Statement on Form SB-2 of FSB Community
      Bankshares, Inc. (File No. 333-141380), originally filed with the
      Securities and Exchange Commission on March 16, 2007.(2)
                Incorporated
      by reference to the Registrant’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on September 25,
  2008.(3)
                Available
      on our website at www.fairportsavingsbank.com.


36




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.


FSB
      Community Bankshares, Inc.Date:
      March 30, 2009
            By:
            /s/
      Dana C. GavendaDana
      C. Gavenda, President andChief
      Executive Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.


By:
                /s/
      Dana C. Gavenda
                
                By:
                /s/
      Thomas J. HanssDana
      C. Gavenda, President, and Chief
                  Executive
      Officer
                
                
                Thomas
      J. Hanss
                  Chairman
      of the Board(Principal
      Executive Officer)Date:
      March 30, 2009
                
                
                Date:
      March 30, 2009By:
                /s/
      Kevin D. Maroney
                
                By:
                /s/
      Gary LindsayKevin
      D. Maroney, Executive Vice President
                  and
      Chief Financial Officer
                
                
                Gary
      Lindsay
                  Director(Principal
      Financial and Accounting Officer)Date:
      March 30, 2009
                
                Date:
      March 30, 2009By:
                /s/
      Terence O’Neil
                
                By:
                /s/
      Alicia H. PenderTerence
      O’Neil
                
                
                Alicia
      H. PenderVice
      Chairman of the Board
                
                
                DirectorDate:
      March 30, 2009
                
                Date:
      March 30, 2009By:
                /s/
      James E. Smith
                
                By:
                /s/
      Lowell T. TwitchellJames
      E. Smith
                
                
                Lowell
      T. TwitchellDirector
                
                
                DirectorDate:
      March 30, 2009
                
                Date:
      March 30, 2009By:
                /s/
      Robert W. Sturn
                
                By:
                /s/
      Charis W. WarshofRobert
      W. Sturn
                
                
                Charis
      W. WarshofDirector
                
                
                DirectorDate:
      March 30, 2009
                
                Date:
      March 30, 2009
   37