Exhibit
13




PORTIONS
OF ANNUAL REPORT TO STOCKHOLDERS




MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS




Overview




Our
results of operations depend primarily on our net interest
income.  Net interest income is the difference between the interest
income we earn on our interest-earning assets, consisting primarily of loans,
investment securities and other interest-earning assets (primarily cash
equivalents), and the interest paid on our interest-bearing liabilities,
consisting primarily of savings accounts, NOW accounts, money market accounts,
time deposits and borrowings.  Our results of operations also are
affected by our provision for loan losses, non-interest income and non-interest
expense. Non-interest income consists primarily of fees and services charges
from deposit products, income from our financial services subsidiary and
miscellaneous other income.  Non-interest expense consists primarily
of salaries and employee benefits, occupancy expense, equipment expense, data
processing costs, electronic banking, mortgage fees and taxes, advertising,
directors’ fees, and other administrative expenses.




Our
results of operations also may be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
government policies and actions of regulatory authorities.




Our
financial performance in 2007 resulted primarily from the compression of our net
interest margin due to a relatively flat or inverted yield curve for most of the
year, and the higher level of non-interest expenses reflecting the January 2007
opening of the Irondequoit Branch and additional non-interest expenses
associated with the minority stock offering and ongoing expenses as a public
company.  Increased non-interest income relating to fees from our
overdraft privilege program, and gain on sale of Freddie Mac (“FHLMC”) stock was
offset by decreased revenue from our financial services
subsidiary.  We were successful in increasing our one- to four-family
mortgage and home equity loan portfolios, funded with deposit growth, in
accordance with our strategic plan.  We expect that the additional
capital acquired from our minority stock offering will provide us an opportunity
to grow the balance sheet to improve future financial performance.




Critical
Accounting Policy




Critical
accounting policies are defined as those that involve significant judgments and
uncertainties, and could potentially result in materially different results
under different assumptions and conditions. We believe that the most critical
accounting policy upon which our financial condition and results of operation
depend, and which involve the most complex subjective decisions or assessments,
is our policy with respect to our allowance for loan losses.




Allowance for
Loan Losses.The allowance for loan losses is the amount
estimated by management as necessary to absorb credit losses incurred in the
loan portfolio that are both probable and reasonably estimable at the balance
sheet date.  The amount of the allowance is based on significant
estimates, and the ultimate losses may vary from such estimates as more
information becomes available or conditions change.  The methodology
for determining the allowance for loan losses is considered a critical
accounting policy by management due to the high degree of judgment involved, the
subjectivity of the assumptions used and the potential for changes in the
economic environment that could result in changes to the amount of the recorded
allowance for loan losses.




1




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




Management
performs a quarterly evaluation of the adequacy of the allowance for loan
losses.  We consider a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, geographic concentrations, the adequacy of the underlying
collateral, the financial strength of the borrower, results of internal loan
reviews and other relevant factors.  This evaluation is inherently
subjective as it requires material estimates by management that may be
susceptible to significant change based on changes in economic and real estate
market conditions.




The
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




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




Our
business has traditionally focused on originating one-to-four-family residential
real estate mortgage loans and home equity lines of credit for retention in our
portfolio, and offering retail deposit accounts insured by the Federal Deposit
Insurance Corporation in our primary market area consisting of Monroe County and
the surrounding upstate New York counties of Livingston, Ontario, Orleans and
Wayne.  During the last several years, the operating environment for
financial institutions, and particularly those that focus on originating
longer-term mortgage loans, has been challenging. With a relatively flat or
inverted yield curve for most of 2007, the interest rate environment has caused
compression of our net interest margin.    Specifically, our
average interest rate spread decreased to 1.81% for the year ended December 31,
2007 from 2.21% for the year ended December 31, 2006, and our average net
interest margin decreased to 2.25% for the year ended December 31, 2007 from
2.57% for the year ended December 31, 2006.  For the quarter ended
December 31, 2007, our interest rate spread and net interest margin were 1.61%
and 2.21%, respectively. The Federal Reserve Bank has lowered its target for
Federal Funds Rate from 5.25% to 4.25% from September to December 31,
2007.  Decreases in short term interest rates lower our costs on
deposits and borrowings at a faster rate than our long-term loans and
investments, generally providing positive future results in our
profitability.




2




Our total
loans receivable, net increased $3.2 million during 2007 to $124.3 million at
December 31, 2007 from $121.1 million at December 31, 2006. In 2007 we
originated $20.7 million in loans, primarily of one to four family residential
mortgages.   In 2007, in order to address the interest rate risk
associated with the inversion of the yield curve and in order to improve our
interest rate risk position, we sold $1.0 million of our 30-year fixed rate
residential mortgage originations on a servicing-retained basis.  As
market conditions permit, we intend to continue to sell on a selective basis a
portion of our fixed-rate residential mortgage loans.




Deposits
increased $10.6 million to $119.2 million at December 31, 2007 from $108.6
million at December 31, 2006. In 2007, our Irondequoit branch deposits increased
$12.6 million, our Penfield branch increased by $1.8 million, and our Fairport
branch decreased by $3.8 million.  The decrease in the Fairport branch
deposits is attributable primarily to management’s decision to pay slightly
below-market certificate of deposit rates to non-checking account customers of
the bank.  In recent years, our customers have shown a preference for
shorter-term, higher interest paying certificates of deposit. At December 31,
2007 we had $86.2 million of certificates of deposit, which represented 72.3% of
our total deposits.  In 2007 we continued to attract lower cost
transaction deposits through our no fee checking account program, and in
conjunction with the opening of our Irondequoit branch, we offered a promotional
savings account and higher yielding certificate of deposit accounts in an effort
to generate deposits at this new branch site.




During
2007 we had a net loss of $281,000 compared to net income of $233,000 in
2006.  This represents a decrease of $514,000, or
220.6%.  This decrease was attributable to reduced net interest income
as a result of the relatively flat or inverted yield curve during 2007, and an
increase in our non-interest expense with the Irondequoit branch and other
expense with costs associated with operating as a public company, which was
partially offset by an increase in non-interest income.




Business
Strategy




Our
business strategy is to operate as a well-capitalized community bank that is
dedicated to providing exceptional personal service to our
customers.  We will continue to focus our efforts to be the primary
provider of financial services to families and individuals in our market
area.




On
January 4, 2007 we opened a full service office in Irondequoit, New
York.  We intend to continue an overall effort to strengthen our
branch presence throughout eastern Monroe County in areas we project can grow to
profitability within a reasonable amount of time and contribute in our strategy
of profitable growth.




3




Our
business strategy is to grow and improve our profitability by:




·
            Operating
      as a community-oriented retail financial institution with branch expansion
      primarily in eastern Monroe County, New York;·
            Continuing
      to manage our interest rate risk;·
            Aggressively
      marketing our core deposits; increasing our share of lower-cost checking
      accounts, cross selling our deposit products, enhancing transaction
      convenience with wider ATM access at no cost to the
    customer;·
            Continuing
      to emphasize the origination of residential real estate
    loans;·
            Maintaining
      high asset quality; and·
            Increasing
      non-interest revenues




These
strategies will guide our investment of the net proceeds from our stock offering
that closed on August 10, 2007.  We intend to continue to pursue our
business strategy,   subject to changes necessitated by future
market conditions and other factors.  We also intend to focus on the
following:




·
            Retail-Oriented
      Community Financial Institution.  Fairport Savings Bank
      was established in Fairport, New York in 1888 and has been operating
      continuously since that time. We are committed to meeting the financial
      needs of the communities we serve and we are dedicated to providing
      personalized quality service to our customers. We believe that we can be
      more effective than many of our competitors in serving our customers
      because of the ability of our senior management to promptly and
      effectively respond to customer requests and inquiries. We intend to use
      the mutual holding company structure to maintain Fairport Savings Bank as
      a community-oriented, independent savings bank. During 2007 we opened our
      third branch location in Irondequoit and we will attempt to open one or
      two new branch offices in Monroe County in the next three years, depending
      on market conditions and as opportunities present
    themselves.·
            Managing
      Our Interest Rate Risk.Our assets currently consist primarily of
      one- to-four family fixed-rate loans with terms of up to 30 years, while
      our liabilities consist of shorter-term deposits, primarily certificates
      of deposit which carry higher interest rates and are more sensitive to
      changes in interest rates than passbook or savings
      accounts.  The composition of our interest-earning assets and
      interest-bearing liabilities increases the risk that we will be adversely
      affected by changes in interest rates and the relative spread between
      short-term and long-term interest rates.  This risk is
      particularly acute when the yield curve is inverted, i.e., short-term
      interest rates, which are used to price deposits, are higher than
      longer-term interest rates, which are used to price loans.  The
      prolonged inversion of the yield curve in 2007 resulted in a higher
      interest rate risk profile for Fairport Savings Bank than management felt
      was acceptable.  We adopted strategies to improve our interest
      rate risk.  These strategies included reducing our fixed-rate
      loan originations, investing a portion of funds received from loan
      payments and repayments in shorter-term, liquid investment securities and
      mortgage-backed securities, emphasizing the marketing of our passbook,
      savings and checking accounts and increasing the duration of our
      certificates of deposit, and longer duration Federal Home Loan Bank
      borrowings.




4




If
      the trend of lower interest rates by the Federal Reserve continues in
      2008, we expect lower cost of funds on deposits and borrowings, which
      would positively affect our interest bearing liabilities as our
      certificates of deposit and borrowings mature and reprice at a lower cost
      to us.  We have $63.8 million in certificate of deposit accounts
      (including individual retirement accounts) that are scheduled to mature
      during 2008.  If we retain these deposits, they will most likely
      be at a lower cost to us than their current contractual
    rate.·
            Emphasizing
      Residential Real Estate Lending.  Historically, we have
      emphasized the origination of one-to-four family residential loans within
      Monroe County and the surrounding counties of Livingston, Ontario, Orleans
      and Wayne. As of December 31, 2007, 91.2% of our loan portfolio consisted
      of one-to-four family residential loans, and 99.8% of our loan portfolio
      consisted of loans secured by real estate. We intend to continue to
      emphasize originating loans secured by residential real
    estate·
            Maintaining
      High Asset Quality.Our high asset quality is a result of
      conservative underwriting standards, the diligence of our loan collection
      personnel and the stability of the local economy.  At December
      31, 2007, our ratio of non-performing loans to total loans was
      0.05%.  At December 31, 2007, our ratio of allowance for loan
      losses to non-performing loans was 506.3% and our ratio of allowance for
      loan losses to total loans was 0.26%.  Because 99.8% of our
      loans are secured by real estate, and our level of non-performing loans
      has been low in recent periods, we believe that our allowance for loan
      losses is adequate to absorb the probable losses inherent in our loan
      portfolio.




Comparison
of Financial Condition at December 31, 2007 and 2006




At
      December 31,
                2007
            
            
            At
      December 31,
                2006(In
      thousands)Selected
      Financial Condition Data:Total
      assets
            
            $
            167,630
            
            
            $
            153,339Cash
      and cash equivalents
            
            
            9,444
            
            
            
            2,698Securities
      available for sale
            
            
            244
            
            
            
            604Securities
      held to maturity
            
            
            28,550
            
            
            
            24,191Loans,
      net
            
            
            124,326
            
            
            
            121,137Deposits
            
            
            119,158
            
            
            
            108,580Federal
      Home Loan Bank advances
            
            
            25,581
            
            
            
            28,024Stockholders’
      equity
            
            
            20,149
            
            
            
            13,870





5




Comparison
of Operating Results for the Years Ended December 31, 2007 and 2006




For
      the Year Ended
                December
      31,2007
            
            
            2006(In
      thousands)Selected
      Operating Data:Interest
      and dividend income
            
            $
            8,815
            
            
            $
            8,093Interest
      expense
            
            
            5,369
            
            
            
            4,421Net
      interest income
            
            
            3,446
            
            
            
            3,672Provision
      for loan losses
            
            
            ―
            
            
            
            ―Net
      interest income after provision for loan losses
            
            
            3,446
            
            
            
            3,672Non-interest
      income
            
            
            429
            
            
            
            360Non-interest
      expense
            
            
            4,312
            
            
            
            3,688Income
      (loss) before income tax expense
            
            
            (437
            )
            
            
            344Provision
      for income taxes
            
            
            (156
            )
            
            
            111Net
      (loss) income
            
            $
            (281
            )
            
            $
            233







At
      or For the Year
                Ended
      December 31,2007
            
            
            2006Selected
      Financial Ratios and Other Data:Performance
      Ratios:Return
      on average assets
            
            
            (0.18
            )%
            
            
            0.16
            %Return
      on average equity
            
            
            (1.69
            )%
            
            
            1.69
            %Interest
      rate spread (1)
            
            
            1.81
            %
            
            
            2.21
            %Net
      interest margin (2)
            
            
            2.25
            %
            
            
            2.57
            %Efficiency
      ratio (3)
            
            
            111.28
            %
            
            
            91.5
            %Non-interest
      income to average total assets
            
            
            0.27
            %
            
            
            0.24
            %Non-interest
      expense to average total assets
            
            
            2.71
            %
            
            
            2.50
            %Average
      interest-earning assets to averageinterest-bearing
      liabilities
            
            
            112
            %
            
            
            112
            %Asset
      Quality Ratios:Non-performing
      assets as a percent of total assets
            
            
            0.04
            %
            
            
            0.11
            %Non-performing
      loans as a percent of total loans
            
            
            0.05
            %
            
            
            0.14
            %Allowance
      for loan losses as a percent of non-performing loans
            
            
            506.35
            %
            
            
            188.30
            %Allowance
      for loan losses as a percent of total loans
            
            
            0.26
            %
            
            
            0.27
            %Capital
      Ratios:Total
      risk-based capital (to risk-weighted assets)
            
            
            22.23
            %
            
            
            19.40
            %Tier
      1 leverage (core) capital (to adjusted tangible assets)
            
            
            9.89
            %
            
            
            8.88
            %Tangible
      capital (to tangible assets)
            
            
            9.89
            %
            
            
            8.88
            %Tier
      1 risk-based capital (to risk-weighted assets)
            
            
            21.81
            %
            
            
            18.94
            %Average
      equity to average total assets
            
            
            10.45
            %
            
            
            9.32
            %Other
      Data:Number
      of full service offices
            
            
            3
            
            
            
            2




_________________________(1)
            Represents
      the difference between the weighted-average yield on interest-earning
      assets and the weighted-average cost of interest-bearing liabilities for
      the period.(2)
            The
      net interest margin represents net interest income as a percent of average
      interest-earning assets for the period.(3)
            The
      efficiency ratio represents non-interest expense divided by the sum of net
      interest income and non-interest
income.




6




Comparison
of Financial Condition at December 31, 2007 and 2006





Total
Assets.Total assets increased $14.3 million, or 9.3%, to
$167.6 million at December 31, 2007 from $153.3 million at December 31, 2006,
reflecting increases in loans, and increased cash and cash equivalents and
securities classified as held to maturity.  Loans increased $3.2
million to $124.3 million at December 31, 2007, due to new loan
originations.  One- to four- family residential mortgage loans
increased to $113.3 million at December 31, 2007 from $109.8 million at December
31, 2006.





Cash and
cash equivalents increased to $9.4 million at December 31, 2007 from $2.7
million at December 31, 2006.  Securities held to maturity increased
$4.4 million to $28.6 million at December 31, 2007 from $24.2 million at
December 31, 2006, primarily due to maturities of $19.0 million and $1.6 million
of principal repayments on mortgage-backed securities, offset by purchases of
$25.0 million.  Premises and equipment, net increased $379,000, or
17.7%, to $2.5 million at December 31, 2007 from $2.1 million a year earlier due
to construction of our new branch office located in Irondequoit, New York that
opened for business in January 2007.





Deposits and
Borrowings. Total deposits increased $10.6 million to $119.2 million at
December 31, 2007 from $108.6 million at December 31, 2006.  The
increase in our deposits reflected a $8.2 million increase in our certificates
of deposit (including our individual retirement accounts) to $86.2 million at
December 31, 2007 from $78.0 million at December 31, 2006, reflecting the
competitive rates offered for these types of deposit products. Additionally,
borrowings from the Federal Home Loan Bank of New York decreased $2.4 million to
$25.6 million at December 31, 2007 from $28.0 million at December 31, 2006 as
borrowings were paid down with deposit growth in the Irondequoit
branch.  We continue to promote no fee checking accounts, with
additional no service fee ATM access, in an attempt to increase our lower cost
deposits.




Stockholders’
Equity. Stockholders’ equity increased $6.2 million to $20.1 million at
December 31, 2007 from $13.9 million at December 31, 2006, resulting primarily
from $7.4 million in net proceeds from our 2007 minority stock offering, offset
partially by a net loss for the year ended December 31, 2007 of $281,000, a
$237,000 unrealized loss on available for sale securities net of taxes and
reclassification adjustment and $665,000 in ESOP share purchases, net of
committed shares.




Comparison
of Operating Results for the Years Ended December 31, 2007 and 2006




General.We
had a net loss of $281,000 for the year ended December 31, 2007. The net loss of
$281,000 for 2007 is a decrease of $514,000 from net income of $233,000 for the
year ended December 31, 2006.  The decrease reflects a decrease in net
interest income and an increase in non-interest expense, partially offset by
higher non-interest income and lower income tax expense.




Interest and
Dividend Income.Total interest and dividend income increased
$722,000, or 8.9%, to $8.8 million for the year ended December 31, 2007 from
$8.1 million for the year ended December 31, 2006. The increase resulted from a
$10.4 million increase in average interest-earning assets and an 8 basis point
increase in the overall yield on interest earning assets to 5.75% for 2007 from
5.67% for 2006.




7




Interest
income on loans, including fees, increased $443,000, or 6.5%, to $7.2 million
for 2007 from $6.8 million for 2006, reflecting an increase in the average
balance of loans to $121.4 million from $115.6 million and a higher average
yield.  The average yield on loans increased to 5.96% for 2007 from
5.88% for 2006, reflecting increases in market interest rates. The average
balance of federal funds sold increased by $3.1 million for the year, while the
average yield increased to 5.00% for 2007 from 4.73% for 2006. The average
balance of investment securities increased $1.7 million, or 8.8%, to $20.6
million from $18.9 million, while the average yield on investment securities
increased to 5.16% from 5.10%. The average balance of mortgage-backed securities
decreased $120,000, or 1.7%, to $6.8 million from $6.9 million, and the average
yield on mortgage-backed securities increased to 4.27% from 3.87%.




Total Interest
Expense.  Total interest expense increased $948,000, or 21.4%,
to $5.4 million for the year ended December 31, 2007 from $4.4 million for the
year ended December 31, 2007. The increase in total interest expense resulted
from a $8.8 million increase in the average balance of interest-bearing
liabilities and a 48 basis point increase in the average cost of
interest-bearing liabilities to 3.94% for 2007 from 3.46% for 2006, as a result
of higher market interest rates paid on deposits.




Interest
expense on certificates of deposit increased $629,000, or 25.5%, to $3.1 million
for 2007 from $2.5 million for the prior year period. The increase resulted
primarily from a 65 basis points increase to 4.51% in the weighted average rate
we paid on certificates of deposit for 2007 from 3.86% for 2006. We increased
rates on certificates of deposits in response to increases in market interest
rates, primarily promotional certificates of deposits, in the Irondequoit
branch. Additionally, the average balance of certificates of deposit increased
to $68.7 million in 2007 from $64.0 million in 2006.




At
December 31, 2007, we had $63.8 million of certificates of deposits, including
individual retirement accounts, that are scheduled to mature during
2008.  Due to decreasing market interest rates, we expect that the
cost of these deposits will decrease; however with additional growth projected
in deposits and borrowings, we expect our interest expense to increase in
2008.




Interest
expense on Federal Home Loan Bank advances increased $36,000, or 3.6%, and was
$1.0 million in 2007 and 2006. The slight increase in interest expense was
caused by a $711,000 decrease in our average balance of Federal Home Loan Bank
advances to $21.5 million for 2007 from $22.2 million for 2006, and increased
cost on these funds from 4.55% to 4.87%. The additional deposits and borrowings
were used to fund loan originations.




Net Interest
Income.Net interest income decreased $226,000, or 6.2%, to
$3.4 million for the year ended December 31, 2007 from $3.7 million for the year
ended December 31, 2006. The decrease in net interest income was primarily
attributable to a 40 basis point decrease in our interest rate spread to 1.81%
for 2007 from 2.21% for 2006, and a decrease in our net interest margin of 32
basis points to 2.25% for 2007 from 2.57% for 2006. The decrease in our interest
rate spread and net interest margin were consistent with the relatively flat or
inverted U.S. Treasury yield curve.  From September 2007 to December
31, 2007, the Federal Reserve Board decreased its target for the federal funds
rate from 5.25% to 4.25%.  While these short-term market interest
rates (which we use as a guide to price our deposits) have decreased,
longer-term market interest rates (which we use as a guide to price our
longer-term loans) have not decreased to the same degree.  If rates on
our deposits and borrowings continue to reprice downwards faster than the rates
on our long-term loans and investments, we would experience a reduction in our
cost of funds that we expect would positively impact our interest rate spread
and net interest margin, which would have a positive effect on our
profitability.




8




Provision for
Loan Losses.We establish a provision for loan losses, which is charged
to operations, in order to maintain the allowance for loan losses at a level we
consider necessary to absorb credit losses inherent in the loan portfolio that
are both probable and reasonably estimable at the balance sheet
date.  In determining the level of the allowance for loan losses, we
consider past and current loss experience, evaluations of real estate
collateral, current economic conditions, volume and type of lending, adverse
situations that may affect a borrower’s ability to repay a loan and the levels
of nonperforming and other classified loans.  The amount of the
allowance is based on estimates and the ultimate losses may vary from such
estimates as more information becomes available or conditions
change.  We assess the allowance for loan losses on a quarterly basis
and make provisions for loan losses in order to maintain the
allowance.




Based on
our evaluation of the above factors, we recorded no provision for loan losses
for the years ended December 31, 2007 and 2006.  The allowance for
loan losses was $319,000, or 0.26% of total loans outstanding, at December 31,
2007 compared to $322,000, or 0.27% of total loans outstanding, at December 31,
2006.




Other
Income.  Other income increased by $69,000, or 19.2%, to
$429,000 for 2007 from $360,000 for 2006.  The increase was primarily
attributable to an increase in service fee income and sale of FHLMC stock,
partially offset by a decrease in fee income from Oakleaf Services Corporation,
our subsidiary that offers non-deposit investment products such as annuities,
insurance and mutual funds to our customers.  Income from service fees
increased by $34,000, or 45.3%, to $109,000 from $75,000.  We had a
realized gain on sale of securities of $81,000 and a gain on sale of foreclosed
real estate of $8,000.  Miscellaneous other income increased by
$27,000, or 21.6%, to $152,000 in 2007 from $125,000 in 2006, partially offset
by decreased fee income from Oakleaf Services Corporation of $81,000, or 50.6%,
to $79,000 in 2007 from $160,000 in 2006.




Other
Expense.  Other expense increased $624,000, or 16.9%, to $4.3
million in 2007 from $3.7 million in 2006.  Increases in salaries and
employee benefits of $224,000, advertising of $86,000, occupancy of $ 159,000,
and other of $165,000 were partially offset by a decrease in mortgage fees and
taxes of $19,000.  The increase non-interest expense in salaries and
employee benefits, occupancy expense, equipment expense and advertising was
primarily attributable to the January opening of the Irondequoit branch, and
other non-interest expenses related to the conversion and ongoing operation as a
public company. Additional costs associated with operating as a public company
will increase in 2008, and will be reflected in our other expense as we become
compliant with Sarbanes-Oxley requirements.




Income
Taxes.  Our income tax benefit was $156,000 for 2007, a
decrease in income taxes of $267,000, or 240.5%, compared to a tax expense of
$111,000 for 2006, due to a net loss in 2007.  The effective tax rate
was (35.7)% in 2007 compared to 32.2% in 2006.




9




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










At
            
            
            For
      the Years Ended December 31,December
      31,
            
            
            2007
            
            
            20062007
            
            
            
            
            
            Interest
            
            
            
            
            
            
            
            
            InterestYield/
                Cost
            
            
            Average
              Balance
            
            
            Income/
                Expense
            
            
            Yield/
                Cost
            
            
            Average
              Balance
            
            
            Income/
                Expense
            
            
            Yield/
                Cost(Dollars
      in thousands)Interest-earning
      assets:Loans
            
            5.81
            %
            
            $
            121,428
            
            
            $
            7,240
            
            
            
            5.96
            %
            
            $
            115,601
            
            
            $
            6,797
            
            
            
            5.88
            %Federal
      funds sold
            
            4.30
            
            
            
            4,437
            
            
            
            222
            
            
            
            5.00
            
            
            
            1,375
            
            
            
            65
            
            
            
            4.73Investment
      securities
            
            5.18
            
            
            
            20,566
            
            
            
            1,062
            
            
            
            5.16
            
            
            
            18,897
            
            
            
            963
            
            
            
            5.10Mortgage-backed
      securities
            
            3.97
            
            
            
            6,813
            
            
            
            291
            
            
            
            4.27
            
            
            
            6,933
            
            
            
            268
            
            
            
            3.87Total
      interest-earning assets
            
            5.65
            
            
            
            153,244
            
            
            
            8,815
            
            
            
            5.75
            
            
            
            142,806
            
            
            
            8,093
            
            
            
            5.67Noninterest-earning
      assets
            
            
            
            
            
            5,770
            
            
            
            
            
            
            
            
            
            
            
            4,928Total
      assets
            
            
            
            
            $
            159,014
            
            
            
            
            
            
            
            
            
            
            $
            147,734Interest-bearing
      liabilities:NOW
      accounts
            
            0.88
            
            
            $
            5,721
            
            
            $
            37
            
            
            
            0.65
            %
            
            $
            3,826
            
            
            $
            20
            
            
            
            0.52
            %Passbook
      savings
            
            1.60
            
            
            
            14,306
            
            
            
            185
            
            
            
            1.29
            
            
            
            12,041
            
            
            
            83
            
            
            
            0.69Money
      market savings
            
            3.09
            
            
            
            10,400
            
            
            
            301
            
            
            
            2.89
            
            
            
            10,567
            
            
            
            256
            
            
            
            2.42Individual
      retirement accounts
            
            4.07
            
            
            
            15,733
            
            
            
            698
            
            
            
            4.44
            
            
            
            14,900
            
            
            
            579
            
            
            
            3.89Certificates
      of deposit
            
            4.87
            
            
            
            68,672
            
            
            
            3,100
            
            
            
            4.51
            
            
            
            64,028
            
            
            
            2,471
            
            
            
            3.86Federal
      Home Loan Bank advances
            
            4.83
            
            
            
            21,522
            
            
            
            1,048
            
            
            
            4.87
            
            
            
            22,233
            
            
            
            1,012
            
            
            
            4.55Total
      interest-bearingliabilities
            
            4.15
            
            
            
            136,354
            
            
            
            5,369
            
            
            
            3.94
            
            
            
            127,595
            
            
            
            4,421
            
            
            
            3.46Noninterest-bearing
      liabilities:Demand
      deposits
            
            
            
            
            
            3,214
            
            
            
            
            
            
            
            
            
            
            
            3,887Other
            
            
            
            
            
            2,833
            
            
            
            
            
            
            
            
            
            
            
            2,488Total
      liabilities
            
            
            
            
            
            142,401
            
            
            
            
            
            
            
            
            
            
            
            133,970Stockholders’
      equity
            
            
            
            
            
            16,613
            
            
            
            
            
            
            
            
            
            
            
            13,764Total
      liabilities and stockholders’ equity
            
            
            
            
            $
            159,014
            
            
            
            
            
            
            
            
            
            
            $
            147,734Net
      interest income
            
            
            
            
            
            
            
            
            $
            3,446
            
            
            
            
            
            
            
            
            
            
            $
            3,672Interest
      rate spread (1)
            
            
            
            
            
            
            
            
            
            
            
            
            
            1.81
            %
            
            
            
            
            
            
            
            
            
            
            2.21
            %Net
      interest-earning assets (2)
            
            
            
            
            $
            16,890
            
            
            
            
            
            
            
            
            
            
            $
            15,211Net
      interest margin (3)
            
            
            
            
            
            
            
            
            
            2.25
            %
            
            
            
            
            
            
            
            
            
            
            2.57
            %Average
      interest-earning assets to average interest-bearing
      liabilities
            
            
            
            
            
            112
            %
            
            
            
            
            
            
            
            
            
            
            112
            %


_____________________




(1)
            Interest
      rate spread represents the difference between the yield on average
      interest-earning assets and the cost of average interest-bearing
      liabilities.(2)
            Net
      interest-earning assets represent total interest-earning assets less total
      interest-bearing liabilities.(3)
            Net
      interest margin represents net interest income divided by total
      interest-earning assets.




10




Rate/Volume
Analysis




The
following table presents the effects of changing rates and volumes on our net
interest income for the years indicated.  The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior
volume).  The volume column shows the effects attributable to changes
in volume (changes in volume multiplied by prior rate).  The net
column represents the sum of the prior columns.  For purposes of this
table, changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionately, based on the changes due to rate and the
changes due to volume.




For
      the
                Years
      Ended December 31,
                2007
      vs. 2006Increase
      (Decrease)
                Due
      toVolume
            
            
            Rate
            
            
            Net(In
      thousands)Interest-earning
      assets:Loans
            
            $
            349
            
            
            $
            94
            
            
            $
            443Federal
      funds sold
            
            
            154
            
            
            
            3
            
            
            
            157Investment
      securities
            
            
            86
            
            
            
            13
            
            
            
            99Mortgage-backed
      securities
            
            
            (5
            )
            
            
            28
            
            
            
            23Total
      interest-earningassets
            
            
            584
            
            
            
            138
            
            
            
            722Interest-bearing
      liabilities:NOW
      accounts
            
            
            11
            
            
            
            6
            
            
            
            17Passbook
      savings
            
            
            19
            
            
            
            83
            
            
            
            102Money
      market savings
            
            
            (4
            )
            
            
            49
            
            
            
            45Individual
      retirement accounts
            
            
            34
            
            
            
            85
            
            
            
            119Certificates
      of deposit
            
            
            189
            
            
            
            440
            
            
            
            629Federal
      Home Loan Bank advances
            
            
            (30
            )
            
            
            66
            
            
            
            36Total
      interest-bearingliabilities
            
            
            219
            
            
            
            729
            
            
            
            948Net
      change in net interest income
            
            $
            365
            
            
            $
            (591
            )
            
            $
            (226
            )





Management
of Market Risk




General.  The
majority of our assets and liabilities are monetary in
nature.  Consequently, our most significant form of market risk is
interest rate risk.  Our assets, consisting primarily of mortgage
loans, have longer maturities than our liabilities, consisting primarily of
deposits.  As a result, a principal part of our business strategy is
to manage interest rate risk and limit the exposure of our net interest income
to changes in market interest rates.  Accordingly, we have an
asset/liability management committee which is responsible for evaluating the
interest rate risk inherent in our assets and liabilities, for determining the
level of risk that is appropriate, given our business strategy, operating
environment, capital, liquidity and performance objectives, and for managing
this risk consistent with the guidelines approved by the board of
directors.




11




During
2007 as we sought to increase our assets, we originated a higher than usual
number of one-to-four family fixed-rate loans with terms of up to 30 years. The
increase in our assets was primarily funded through growth in shorter-term
deposits, primarily certificates of deposit, including individual retirement
accounts. The composition of our interest-earning assets and interest-bearing
liabilities increases the risk that we will be adversely affected by changes in
interest rates and the relative spread between short-term and long-term interest
rates.  This risk is particularly acute when the yield curve is
inverted, i.e., short-term interest rates, which are used to price deposits, are
higher than longer-term interest rates, which are used to price
loans.




The
relatively flat or inverted yield curve in 2007 resulted in a higher interest
rate risk profile for Fairport Savings Bank than management feels is
acceptable.  We intend to manage our interest rate risk in order to
control the exposure of our earnings and capital to changes in interest
rates.  As part of our ongoing asset-liability management, we are
taking the following actions to manage our interest rate risk.




(i)
            investing
      in shorter to medium-term repricing and/or maturating securities whenever
      market allows;(ii)
            marketing
      our passbook, savings and checking accounts and increasing the duration of
      our certificates of deposit;(iii)
            selling
      a portion of our long-term, fixed-rate one-to-four family residential real
      estate mortgage loans; and(iv)
            maintaining
      a strong capital position.





In 2007,
we sold $1.0 million of our long-term, fixed-rate one-to-four family residential
real estate mortgage loans to improve our interest rate risk position. We intend
to continue to originate and, subject to market conditions, sell a portion of
our long term fixed-rate one-to-four family residential real estate loans. As
the Federal Reserve continues to aggressively reduce borrowing costs through
decreases in the Federal Funds rate, as well as other measures, we will evaluate
our strategy.




Additionally,
shortening the average maturity of our interest-earning assets by increasing our
investments in shorter-term loans, as well as loans with variable rates of
interest, helps to better match the maturities and interest rates of our assets
and liabilities, thereby reducing the exposure of our net interest income to
changes in market interest rates.  By following these strategies, we
believe that we are better-positioned to react to changes in market interest
rates.




Net Portfolio
Value.  The Office of
Thrift Supervision requires the computation of amounts by which the net present
value of an institution’s cash flow from assets, liabilities and off balance
sheet items (the institution’s net portfolio value or “NPV”) would change in the
event of a range of assumed changes in market interest rates.  The
Office of Thrift Supervision provides all institutions that file a Consolidated
Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with
an interest rate sensitivity report of net portfolio value.  The
Office of Thrift Supervision simulation model uses a discounted cash flow
analysis and an option-based pricing approach to measuring the interest rate
sensitivity of net portfolio value.  Historically, the Office of
Thrift Supervision model estimated the economic value of each type of asset,
liability and off-balance sheet contract under the assumption that the United
States Treasury yield curve increases or decreases instantaneously by 100 to 300
basis points in 100 basis point increments.  However, given the
current relatively low level of market interest rates, an NPV calculation for an
interest rate decrease of greater than 200 basis points has not been
prepared.  A basis point equals one-hundredth of one percent, and 100
basis points equals one percent.  An increase in interest rates from
3% to 4% would mean, for example, a 100 basis point increase in the “Change in
Interest Rates” column below.  The Office of Thrift Supervision
provides us the results of the interest rate sensitivity model, which is based
on information we provide to the Office of Thrift Supervision to estimate the
sensitivity of our net portfolio value.




12




The table
below sets forth, as of December 31, 2007, the Office of Thrift Supervision’s
calculation of the estimated changes in our net portfolio value that would
result from the designated instantaneous changes in the United States Treasury
yield curve.  Computations of prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates, loan prepayments and deposit decay, and should
not be relied upon as indicative of actual results.








Change
      in Interest
              Rates
      (basis
              points)
      (1)
            
            
            
            
            
            
            
            
            NPV
      as a Percentage of Present
              Value
      of Assets (3)Estimated
              NPV
      (2)
            
            
            Estimated
      Increase (Decrease) in
              NPV
            
            
            NPV
                Ratio
      (4)
            
            
            Increase
                (Decrease)
                (basis
      points)Amount
            
            
            Percent(Dollars
      in thousands)+300
            
            
            $
            11,298
            
            
            $
            (7,121
            )
            
            
            (39
            )%
            
            
            7.24
            %
            
            
            (374
            )+200
            
            
            
            13,951
            
            
            
            (4,468
            )
            
            
            (24
            )
            
            
            8.71
            
            
            
            (227
            )+100
            
            
            
            16,696
            
            
            
            (1,724
            )
            
            
            (9
            )
            
            
            10.16
            
            
            
            (83
            )—
            
            
            
            18,420
            
            
            
            —
            
            
            
            —
            
            
            
            10.98
            
            
            
            —-100
            
            
            
            18,987
            
            
            
            567
            
            
            
            3
            
            
            
            11.17
            
            
            
            19-200
            
            
            
            18,620
            
            
            
            201
            
            
            
            1
            
            
            
            10.87
            
            
            
            (11
            )





_______________________(1)
            Assumes
      an instantaneous uniform change in interest rates at all
      maturities.(2)
            NPV
      is the discounted present value of expected cash flows from assets,
      liabilities and off-balance sheet contracts.(3)
            Present
      value of assets represents the discounted present value of incoming cash
      flows on interest-earning assets.(4)
            NPV
      Ratio represents NPV divided by the present value of
    assets.





The table
above indicates that at December 31, 2007, in the event of a 200 basis point
increase in interest rates, we would experience a 24% decrease in net portfolio
value. In the event of a 100 basis point decrease in interest rates, we would
experience a 3% increase in net portfolio value.




Certain
shortcomings are inherent in the methodologies used in determining interest rate
risk through changes in net portfolio value.  Modeling changes in net
portfolio value require making certain assumptions that may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates.  In this regard, the net portfolio value tables
presented assume that the composition of our interest-sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and assume that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration or
repricing of specific assets and liabilities.  Accordingly, although
the net portfolio value tables provide an indication of our interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on our net interest income and will differ from actual
results.




13




Additionally,
because the majority of our assets are long-term fixed-rate mortgage loans that
do not reprice as quickly as our deposits, we would experience a significant
decrease in our net interest income in the event of continued inversion of the
yield curve.  We expect that our net interest income will be
positively affected as our certificates of deposit mature and reprice at a lower
cost to us.  We have $63.8 million in certificates of deposit accounts
(including individual retirement accounts) that are scheduled to mature during
2008.  If we retain these deposits it most likely will be at a lower
cost to us than their current contractual rates.




Liquidity
and Capital Resources




Liquidity
is the ability to meet current and future financial obligations of a short-term
nature.  Our primary sources of funds consist of deposit inflows, loan
repayments, advances from the Federal Home Loan Bank of New York, maturities and
principal repayments of securities, and recently, but to a lesser extent, loan
sales.  While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.  Our asset/liability management committee
is responsible for establishing and monitoring our liquidity targets and
strategies in order to ensure that sufficient liquidity exists for meeting the
borrowing needs and deposit withdrawals of our customers as well as
unanticipated contingencies.  We seek to maintain a liquidity ratio of
4.0% or greater.  For the year ended December 31, 2007, our liquidity
ratio averaged 6.62%.  We believe that we have enough sources of
liquidity to satisfy our short and long-term liquidity needs as of December 31,
2007.  We anticipate that we will maintain higher liquidity levels
following the completion of the stock offering.




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




(i)
            expected
      loan demand;(ii)
            expected
      deposit flows;(iii)
            yields
      available on interest-earning deposits and securities;
  and(iv)
            the
      objectives of our asset/liability management
  program.




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




Our most
liquid assets are cash and cash equivalents.  The levels of these
assets are dependent on our operating, financing, lending and investing
activities during any given period. At December 31, 2007, cash and cash
equivalents totaled $9.4 million.




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




14




At
December 31, 2007, we had $1.0 million in loan commitments
outstanding.  In addition to commitments to originate loans, we had
$7.5 million in unused lines of credit to borrowers. Certificates of deposit,
including individual retirement accounts comprised solely of certificates of
deposits, due within one year of December 31, 2007 totaled $63.8 million, or
74.0% of our certificates of deposit and 53.5% of total deposits. If these deposits do not
remain with us, we will be required to seek other sources of funds, including
loan sales, other deposit products, including certificates of deposit, and
Federal Home Loan Bank advances. Depending on market conditions, we may be
required to pay higher rates on such deposits or other borrowings than we
currently pay on the certificates of deposit due on or before December 31, 2007.
We believe, however, based on past experience that a significant portion of such
deposits will remain with us. We have the ability to attract and retain deposits
by adjusting the interest rates offered.




Our
primary investing activity is originating loans. During the year ended December
31, 2007, we originated $20.7 million of loans, and during the year ended
December 31, 2006, we originated $26.4 million of loans.  We purchased
$25.0 million of securities held-to-maturity during the year ended December 31,
2007 as compared to $1.5 million of purchases of securities held-to-maturity
during the year ended December 31, 2006.




Financing
activities consist primarily of activity in deposit accounts and Federal Home
Loan Bank advances.  We experienced a net increase in total deposits
of $10.6 million for the year ended December 31, 2007 compared to a net increase
of $1.8 million for the year ended December 31, 2006.  Deposit flows
are affected by the overall level of interest rates, the interest rates and
products offered by us and our local competitors, and by other
factors.




Liquidity
management is both a daily and long-term function of business
management.  If we require funds beyond our ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Bank of New
York, which provides an additional source of funds.  Federal Home Loan
Bank advances decreased by $2.4 million to $25.6 million for the year ended
December 31, 2007, compared to a net increase of $7.4 million during the year
ended December 31, 2006.  Federal Home Loan Bank advances have
primarily been used to fund loan demand.  At December 31, 2007, we had
the ability to borrow approximately $95.9 million from the Federal Home Loan
Bank of New York, of which $25.6 million had been advanced.




Fairport
Savings Bank is subject to various regulatory capital requirements, including a
risk-based capital measure.  The risk-based capital guidelines include
both a definition of capital and a framework for calculating risk-weighted
assets by assigning balance sheet assets and off-balance sheet items to broad
risk categories.  At December 31, 2007, Fairport Savings Bank exceeded
all regulatory capital requirements.  Fairport Savings Bank is
considered “well capitalized” under regulatory guidelines. See “Supervision and
Regulation—Federal Banking Regulation—Capital Requirements” and Note 11 of the
Notes to the Consolidated Financial Statements.




The net
proceeds from our 2007 minority stock offering significantly increased our
liquidity and capital resources. Over time, the initial level of liquidity will
be reduced as net proceeds from the stock offering are used for general
corporate purposes, including the funding of loans. Our financial condition and
results of operations will be enhanced by the net proceeds from the stock
offering, resulting in increased net interest-earning assets and net interest
income. However, due to the increase in equity resulting from the net proceeds
raised in the stock offering, our return on equity will be adversely affected
following the stock offering.




15




Off-Balance
Sheet Arrangements




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




Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by us, is based on our credit evaluation of
the customer.




At
December 31, 2007 and 2006, we had $1.0 million and $1.1 million, respectively,
of commitments to grant loans, and $7.5 million and $7.9 million, respectively,
of unfunded commitments under lines of credit.




For
additional information, see Note 10 of the Notes to our Consolidated Financial
Statements.




Recent
Accounting Pronouncements




In
September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that
require or permit fair value measurements. The new guidance is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and for interim periods within those fiscal years. We are currently
evaluating the potential impact, if any, of the adoption of FASB Statement
No. 157 on our consolidated financial position, results of operations and
cash flows.




In
February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date
of FASB Statement No. 157,” that permits a one-year deferral in applying
the measurement provisions of Statement No. 157 to non-financial assets and
non-financial liabilities (non-financial items) that are not recognized or
disclosed at fair value in an entity’s financial statements on a recurring basis
(at least annually). Therefore, if the change in fair value of a non-financial
item is not required to be recognized or disclosed in the financial statements
on an annual basis or more frequently, the effective date of application of
Statement 157 to that item is deferred until fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. We are
currently evaluating the impact, if any, that the adoption of FSP 157-2 will
have on our consolidated financial position and results of
operations.




16




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115” (“SFAS 159”).  SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected will be recognized in earnings at each subsequent reporting date.
SFAS 159 is effective as of January 1, 2008. We are evaluating the
impact, if any, of the adoption of SFAS 159 on our consolidated financial
statements.




FASB
Statement No. 141 (R) “Business Combinations” was issued in December of 2007.
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. The Statement also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The guidance will
become effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008. This new pronouncement will impact our acquisitions after
January 1, 2009.





Staff
Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded at
Fair Value Through Earnings" expresses the views of the staff regarding written
loan commitments that are accounted for at fair value through earnings under
generally accepted accounting principles. To make the staff's views consistent
with current authoritative accounting guidance, the SAB revises and rescinds
portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments."  Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. We do
not expect SAB 109 to have a material impact on our consolidated financial
statements.




Impact
of Inflation and Changing Prices




Our
consolidated financial statements and related notes have been prepared in
accordance with GAAP.  GAAP generally requires the measurement of
financial position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation.  The impact of inflation is reflected in the
increased cost of our operations.  Unlike industrial companies, our
assets and liabilities are primarily monetary in nature.  As a result,
changes in market interest rates have a greater impact on performance than the
effects of inflation.




17




Table
of Contents
 
  December
31, 2007 and 2006
    Consolidated
      Financial Statements
              PageReport of
      Independent Registered Public Accounting Firm
              F-1Consolidated Balance
      Sheets
              F-2Consolidated
      Statements of Operations
              F-3Consolidated
      Statements of Stockholders’ Equity
              F-4Consolidated
      Statements of Cash Flows
              F-5Notes to
      Consolidated Financial Statements
              F-7
 
 
  FSB
Community Bankshares, Inc.
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
   To the
Board of Directors
 FSB
Community Bankshares, Inc.
 Fairport,
New York
   We have
audited the accompanying consolidated balance sheets of FSB Community
Bankshares, Inc. as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. FSB Community Bankshares, Inc.'s management is responsible for
these consolidated financial statements. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of FSB Community Bankshares,
Inc. as of December 31, 2007 and 2006, and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
   graphic
  Beard
Miller Company LLP
 Syracuse,
New York
 March 26,
2008
  
 
 F-1
 FSB
Community Bankshares, Inc.
 Consolidated
Balance Sheets
 December
31, 2007 and 2006
    2007
              
              
              2006(Dollars
      in Thousands,
                Except
      Per Share Data)AssetsCash
      and due from banks
              
              $
              1,159
              
              
              $
              1,718Interest
      bearing demand deposits
              
              
              8,285
              
              
              
              980Cash
      and Cash Equivalents
              
              
              9,444
              
              
              
              2,698Securities
      available for sale
              
              
              244
              
              
              
              604Securities
      held to maturity (fair value 2007 $28,597; 2006 $23,873)
              
              
              28,550
              
              
              
              24,191Investment
      in FHLB stock
              
              
              1,405
              
              
              
              1,490Loans,
      net of allowance for loan losses 2007 $319; 2006 $322
              
              
              124,326
              
              
              
              121,137Accrued
      interest receivable
              
              
              872
              
              
              
              873Premises
      and equipment, net
              
              
              2,525
              
              
              
              2,146Other
      assets
              
              
              264
              
              
              
              200Total
      Assets
              
              $
              167,630
              
              
              $
              153,339Liabilities
      and Stockholders’ EquityLiabilitiesDeposits:Non-interest-bearing
              
              $
              3,169
              
              
              $
              3,402Interest
      bearing
              
              
              115,989
              
              
              
              105,178Total
      Deposits
              
              
              119,158
              
              
              
              108,580Short-term
      borrowings
              
              
              -
              
              
              
              4,200Long-term
      borrowings
              
              
              25,581
              
              
              
              23,824Advances
      from borrowers for taxes and insurance
              
              
              1,898
              
              
              
              1,828Other
      liabilities
              
              
              844
              
              
              
              1,037Total
      Liabilities
              
              
              147,481
              
              
              
              139,469Commitments
      and ContingenciesStockholders’
      EquityPreferred
      stock, no par value; 1,000,000 shares authorized, no shares issued and
      outstanding
              
              
              -
              
              
              
              -Common
      stock; $0.10 par value; 10,000,000 shares authorized; shares issued and
      outstanding: 2007 – 1,785,000; 2006 – 100
              
              
              179
              
              
              
              -Paid-in
      capital
              
              
              7,293
              
              
              
              10Retained
      earnings
              
              
              13,224
              
              
              
              13,505Accumulated
      other comprehensive income
              
              
              118
              
              
              
              355Unearned
      ESOP shares – at cost
              
              
              (665
              )
              
              
              -Total
      Stockholders’ Equity
              
              
              20,149
              
              
              
              13,870Total
      Liabilities and Stockholders’ Equity
              
              $
              167,630
              
              
              $
              153,339
    See
notes to consolidated financial statements.
 F-2
  FSB
Community Bankshares, Inc.
 Consolidated
Statements of Operations
 Years
Ended December 31, 2007 and 2006
    2007
              
              
              2006(Dollars
      in Thousands,
                Except
      Per Share Data)Interest
      and Dividend IncomeLoans
              
              $
              7,240
              
              
              $
              6,797Securities
      - taxable
              
              
              1,062
              
              
              
              963Mortgage-backed
      securities
              
              
              291
              
              
              
              268Other
              
              
              222
              
              
              
              65Total
      Interest and Dividend Income
              
              
              8,815
              
              
              
              8,093Interest
      ExpenseDeposits
              
              
              4,321
              
              
              
              3,409Borrowings:Short-term
              
              
              30
              
              
              
              51Long-term
              
              
              1,018
              
              
              
              961Total
      Interest Expense
              
              
              5,369
              
              
              
              4,421Net
      Interest Income
              
              
              3,446
              
              
              
              3,672Other
      IncomeService
      fees
              
              
              109
              
              
              
              75Fee
      income
              
              
              79
              
              
              
              160Realized
      gain on sale of securities
              
              
              81
              
              
              
              -Realized
      gain on sale of foreclosed real estate
              
              
              8
              
              
              
              -Other
              
              
              152
              
              
              
              125Total
      Other Income
              
              
              429
              
              
              
              360Other
      ExpenseSalaries
      and employee benefits
              
              
              2,322
              
              
              
              2,098Occupancy
              
              
              431
              
              
              
              272Data
      processing costs
              
              
              83
              
              
              
              87Advertising
              
              
              271
              
              
              
              185Equipment
              
              
              337
              
              
              
              305Electronic
      banking
              
              
              65
              
              
              
              88Directors
      fees
              
              
              97
              
              
              
              93Mortgage
      fees and taxes
              
              
              154
              
              
              
              173Other
              
              
              552
              
              
              
              387Total
      Other Expenses
              
              
              4,312
              
              
              
              3,688Income
      (Loss) before Income Taxes
              
              
              (437
              )
              
              
              344Provision
      (Benefit) for Income Taxes
              
              
              (156
              )
              
              
              111Net
      Income (Loss)
              
              $
              (281
              )
              
              $
              233Basic
      earnings (loss) per common share
              
              $
              (0.22
              )
              
              $
              0.25
 
  See
notes to consolidated financial statements.
 F-3
  
  FSB
Community Bankshares, Inc.
 Consolidated
Statements of Stockholders’ Equity
 Years
Ended December 31, 2007 and 2006
 (In
Thousands)
    Preferred
                  Stock
              
              
              Common
                Stock
              
              
              Paid-In
                Capital
              
              
              Retained
                Earnings
              
              
              Accumulated
                Other
                Comprehensive
      Income
              
              
              Unearned
                ESOP
                Shares
              
              
              TotalBalance
      - December 31, 2005
              
              $
              -
              
              
              $
              -
              
              
              $
              10
              
              
              $
              13,272
              
              
              $
              336
              
              
              $
              -
              
              
              $
              13,618Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              233
              
              
              
              -
              
              
              
              -
              
              
              
              233Change
      in unrealized gain onsecurities
      available for sale,net
      of reclassificationadjustment
      and taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              19
              
              
              
              -
              
              
              
              19Total
      Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              252Balance
      - December 31, 2006
              
              
              -
              
              
              
              -
              
              
              
              10
              
              
              
              13,505
              
              
              
              355
              
              
              
              -
              
              
              
              13,870Comprehensive
      loss:Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (281
              )
              
              
              -
              
              
              
              -
              
              
              
              (281
              )Change
      in unrealized gain onsecurities
      available for sale,net
      of reclassificationadjustment
      and taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (237
              )
              
              
              -
              
              
              
              (237
              )Total
      Comprehensive Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (518
              )Shares
      issued in public offering, net of offering costs of
    $905,000
              
              
              -
              
              
              
              179
              
              
              
              7,283
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,462Shares
      purchased by ESOP
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (700
              )
              
              
              (700
              )ESOP
      shares committed to be released
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              35
              
              
              
              35Balance
      - December 31, 2007
              
              $
              -
              
              
              $
              179
              
              
              $
              7,293
              
              
              $
              13,224
              
              
              $
              118
              
              
              $
              (665
              )
              
              $
              20,149
 
 See
notes to consolidated financial statements.
 F-4
 
 FSB
Community Bankshares, Inc.
 Consolidated
Statements of Cash Flows
 Years
Ended December 31, 2007 and 2006
 
    2007
              
              
              2006(In
      Thousands)Cash
      Flows from Operating ActivitiesNet
      income (loss)
              
              $
              (281
              )
              
              $
              233Adjustments
      to reconcile net income (loss) to net cash provided (used) by operating
      activities:Gain
      on sale of securities available for sale
              
              
              (81
              )
              
              
              -Gain
      on sale of loans
              
              
              (4
              )
              
              
              (3
              )Net
      gain on sale of foreclosed real estate
              
              
              (8
              )
              
              
              -Amortization
      of premium on investments
              
              
              36
              
              
              
              51Accretion
      of discount on investments
              
              
              (3
              )
              
              
              (4
              )Amortization
      of net deferred loan origination costs
              
              
              44
              
              
              
              8Depreciation
      and amortization
              
              
              298
              
              
              
              216Stock-based
      compensation expense
              
              
              35
              
              
              
              -Deferred
      income tax (benefit) expense
              
              
              (6
              )
              
              
              6(Increase)
      decrease in accrued interest receivable
              
              
              1
              
              
              
              (136
              )Increase
      in other assets
              
              
              (48
              )
              
              
              (65
              )Increase
      (decrease) in other liabilities
              
              
              (81
              )
              
              
              562Net
      Cash Provided (Used) by Operating Activities
              
              
              (98
              )
              
              
              868Cash
      Flows from Investing ActivitiesProceeds
      from sales of securities available for sale
              
              
              82
              
              
              
              -Purchases
      of securities held to maturity
              
              
              (24,980
              )
              
              
              (1,500
              )Proceeds
      from maturities and calls of securities held to maturity
              
              
              19,009
              
              
              
              2,916Proceeds
      from principal paydowns on securities held to maturity
              
              
              1,579
              
              
              
              -Net
      increase in loans
              
              
              (4,288
              )
              
              
              (13,898
              )Proceeds
      from sales of loans
              
              
              1,018
              
              
              
              1,182Redemption
      (purchase) of Federal Home Loan Bank stock
              
              
              85
              
              
              
              (343
              )Purchase
      of premises and equipment
              
              
              (677
              )
              
              
              (818
              )Proceeds
      from sale of foreclosed real estate
              
              
              49
              
              
              
              225Net
      Cash Used in Investing Activities
              
              
              (8,123
              )
              
              
              (12,236
              )Cash
      Flows from Financing ActivitiesNet
      increase in deposits
              
              
              10,578
              
              
              
              1,780Net
      increase (decrease) in short-term borrowings
              
              
              (4,200
              )
              
              
              4,200Proceeds
      from long-term borrowings
              
              
              6,000
              
              
              
              9,000Repayments
      on long-term borrowings
              
              
              (4,243
              )
              
              
              (5,834
              )Net
      increase in advances from borrowers for taxes and
insurance
              
              
              70
              
              
              
              251Net
      proceeds from common stock offering
              
              
              7,462
              
              
              
              -Purchase
      of shares for employee stock ownership plan
              
              
              (700
              )
              
              
              -Net
      Cash Provided by Financing Activities
              
              
              14,967
              
              
              
              9,397Net
      Increase (Decrease) in Cash and Cash Equivalents
              
              
              6,746
              
              
              
              (1,971
              )Cash
      and Cash Equivalents - Beginning
              
              
              2,698
              
              
              
              4,669Cash
      and Cash Equivalents - Ending
              
              $
              9,444
              
              
              $
              2,698Supplementary
      Cash Flows InformationInterest
      paid
              
              $
              5,357
              
              
              $
              4,400Income
      taxes paid
              
              $
              9
              
              
              $
              119Supplementary
      Schedule of Noncash Investing and Financing ActivitiesTransfer
      of loans to foreclosed real estate
              
              $
              41
              
              
              $
              -
   See
notes to consolidated financial statements.
 F-5
    FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
  
   Note
1 - Nature of Operations and Summary of Significant Accounting
Policies
  Organization
and Nature of Operations
  On
December 17, 2003, the Bank’s depositors approved a Plan of Reorganization
(the “Plan”) from a Federal Mutual Savings Bank to a Federal Mutual Holding
Company.  Under the Plan, effective January 14, 2005, FSB
Community Bankshares, MHC (the “Mutual Company”) was incorporated under the laws
of the United States as a mutual holding company.  Also under the
Plan, FSB Community Bankshares, Inc. (the “Company”) was incorporated and became
a wholly-owned subsidiary of the Mutual Company.  In addition,
effective January 14, 2005, the Bank completed its reorganization whereby
the Bank converted to a stock savings bank and became a wholly-owned subsidiary
of the Company.
  In August
2007, the Company completed its minority stock offering of 47% of the aggregate
total voting stock of the Company pursuant to the laws of the United States
of America and the rules and regulations of the Office of Thrift Supervision
(“OTS”).  In connection with the minority stock offering, 1,785,000
shares of common stock were issued, of which 838,950 shares were sold, including
69,972 issued to the Company’s Employee Stock Ownership Plan (ESOP), at $10 per
share raising net proceeds of $7.4 million.  The stock was offered to
the Bank’s eligible depositors, the Bank’s ESOP, and the
public.  Additionally, the Company issued 946,050 shares, or 53% of
its common stock, to the Mutual Holding Company.
  The
Company provides a variety of financial services to individuals and corporate
customers through its wholly-owned subsidiary, Fairport Savings Bank (the
“Bank”).  The Bank’s operations are conducted in three branches
located in Monroe County, New York.  The Company and the Bank are
subject to the regulations of certain regulatory authorities and undergo
periodic examinations by those regulatory authorities.
  The Bank
also provides non-deposit investment services to its customers through its
wholly-owned subsidiary, Oakleaf  Services Corporation
(“Oakleaf”).  The results of operations of Oakleaf are not material to
the consolidated financial statements
  Basis
of Consolidation
  The
Mutual Company, which engages in no significant business activity other than
holding the stock of the Company, is not included in the accompanying
consolidated financial statements.  The consolidated financial
statements include the accounts of the Company, the Bank and
Oakleaf.  All significant inter-company accounts and transactions have
been eliminated in consolidation.
  Use
of Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expense during the reporting period.  Actual results could differ from
those estimates.  Material estimates that are particularly susceptible
to significant changes in the near term relate to the determination of the
allowance for loan losses.
  Cash
and Cash Equivalents
  For
purposes of the consolidated statements of cash flows, cash and cash equivalents
include cash, balances due from banks, and interest-bearing demand
deposits.
  F-6
  FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 
 Note
1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)
  Significant
Group Concentrations of Credit Risk
  Most of
the Bank’s activities are with customers located within Monroe, Livingston,
Ontario, Orleans, and Wayne Counties, New York.  Note 2 discusses
the types of securities that the Bank invests in.  The concentration
of credit by type of loan is set forth in Note 3.  Although the Bank
has a diversified loan portfolio, its debtors’ ability to honor their contracts
is primarily dependent upon the real estate and general economic conditions in
those areas.
  Securities
  The Bank
has classified as held to maturity, all debt securities which it has the
positive intent and ability to hold until maturity.  These securities
are carried at amortized cost.  All other debt and equity securities
having readily determinable fair values are classified as available for sale and
stated at fair value.  Unrealized gains or losses related to
securities available for sale are excluded from earnings and reported in other
comprehensive income net of the related deferred income tax
effect.  The Bank has no securities classified as trading
securities.
  Amortization
of premiums and accretion of discounts are calculated using the interest method
and included in interest income.
  Declines
in fair value of securities held to maturity and available for sale below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses.  In estimating other-than-temporary impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Bank to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.  Realized gains or losses,
determined on the basis of the cost of the specific securities sold, are
included in earnings.
  Federal
Home Loan Bank of New York
  Federal
law requires a member institution of the Federal Home Loan Bank System to hold
stock of its district Federal Home Loan Bank according to a predetermined
formula.  This restricted stock is carried at cost.
  Mortgage
Loans Held for Sale
  Mortgage
loans held for sale in the secondary market are carried at the lower of cost or
estimated market value determined in the aggregate. Realized gains and
losses on sales are computed using the specific identification
method.  There were no loans held for sale at December 31, 2007
and 2006.
  The Bank
retains the servicing on loans sold and receives a fee based on the principal
balance outstanding.  Servicing rights were not material at
December 31, 2007 and 2006.
  Loans
serviced for others totaled $2,759,226 and $1,906,338 at December 31, 2007
and 2006, respectively.
  F-7
  FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 Note
1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)
  Loans
  Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off generally are reported at their outstanding unpaid
principal balances adjusted for charge-offs, the allowance for loan losses, and
net deferred origination fees and costs.  Interest income is accrued
on the unpaid principal balance.  Loan origination fees, net of
certain direct origination costs, are deferred and recognized as an adjustment
of the related loan yield using the interest method over the contractual life of
the loan.
  The
accrual of interest is generally discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing.  A loan may remain on accrual status if
it is in the process of collection and is well secured.  When a loan
is placed on nonaccrual status, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in prior years is charged
against the allowance for loan losses.  Interest received on
nonaccrual loans generally is either applied against principal or reported as
interest income, according to management’s judgment as to the collectibility of
principal.  Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.
  Allowance
for Loan Losses
  The
allowance for loan losses is established as losses are estimated to have
occurred in the loan portfolio.  The allowance for loan losses is
recorded through a provision for loan losses charged to
earnings.  Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed.  Subsequent recoveries, if any, are credited to the
allowance.
  The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic
conditions.  This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
  The
allowance consists of specific, general and unallocated
components.  The specific component relates to loans that are
classified as either doubtful, substandard or special mention.  For
such loans that are also classified as impaired, an allowance is generally
established when the collateral value of the impaired loan is lower than the
carrying value of that loan.  The general component covers
non-classified loans and is based on historical loss experience adjusted for
qualitative factors.  An unallocated component is maintained to cover
uncertainties that could affect management’s estimate of probable
losses.  The unallocated component of the allowance reflects the
margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.
  F-8
 
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 Note
1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)
  A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due.  Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired.  Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.  Impairment is measured on a loan by loan
basis by either the present value of expected future cash flows discounted at
the loan’s effective interest rate or the fair value of the collateral if the
loan is collateral dependent.
  Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly, the Bank does not separately identify
individual consumer and residential loans for impairment
disclosures.
  Premises
and Equipment
  Premises
and equipment are stated at cost.  Depreciation and amortization is
computed on the straight-line basis over the shorter of the estimated useful
lives or lease terms of the related assets.  Estimated useful lives
are generally 20 to 50 years for premises and 3 to 10 years for furniture and
equipment.
  Foreclosed
Real Estate
  Real
estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value less estimated selling costs at the date of
foreclosure.  Any write-downs based on the asset’s fair value at date
of acquisition are charged to the allowance for loan losses.  After
foreclosure, property held for sale is carried at the lower of the new basis or
fair value less any costs to sell.  Costs of significant property
improvements are capitalized, whereas costs relating to holding property are
expensed.  Valuations are periodically performed by management, and
any subsequent write-downs are recorded as a charge to operations, if necessary,
to reduce the carrying value of the property to the lower of its cost or fair
value less cost to sell.
  Income
Taxes
  Income
taxes are provided for the tax effects of certain transactions reported in the
consolidated financial statements.  Income taxes consist of taxes
currently due plus deferred taxes related primarily to temporary differences
between the financial reporting and income tax basis of the allowance for loan
losses, premises and equipment, certain state tax credits, and deferred loan
origination costs.  The deferred tax assets and liabilities represent the
future tax return consequences of the temporary differences, which will either
be taxable or deductible when the assets and liabilities are recovered or
settled.  Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
of the deferred tax assets will not be realized.  Deferred tax assets
and liabilities are reflected at income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled.  As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income
taxes.
  F-9
  FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 Note
1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)
  Advertising
Costs
  The
Company follows the policy of charging the costs of advertising to expense as
incurred.
  Off-Balance
Sheet Financial Instruments
  In the
ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend
credit.  Such financial instruments are recorded in the consolidated
balance sheets when they are funded.
  Transfers
of Financial Assets
  Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered.  Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
  Comprehensive
Income
  Accounting
principles generally require that recognized revenue, expenses, gains, and
losses be included in net income.  Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the Stockholders’ equity
section of the consolidated balance sheets, such items, along with net income,
are components of comprehensive income.
  The
components of other comprehensive income (loss) and related tax effects for the
years ended December 31, 2007 and 2006 are as follows:
  2007
              
              
              2006(In
      Thousands)Unrealized
      holding gain (loss) on available for sale securities
              
              $
              (278
              )
              
              $
              29Reclassification adjustment for
      realized gain included in net income
              
              
              (81
              )
              
              
              -Net
      Unrealized Gain (Loss)
              
              
              (359
              )
              
              
              29Tax
      effect
              
              
              (122
              )
              
              
              10Net
      of Tax Amount
              
              $
              (237
              )
              
              $
              19
 
  
 F-10
 
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
  Note
1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)
  Earnings
Per Common Share
  Basic
earnings (loss) per common share is calculated by dividing the net income (loss)
available to common shareholders by the weighted-average number of common shares
outstanding during the period. The common shares issued to FSB Community
Bankshares, MHC of 946,050 are assumed to be outstanding for all periods
presented, consistent with the provisions of SFAS No. 128, Earnings per Share,
pertaining to changes in capital structure. The 838,950 shares issued to the
public are included in the weighted average common shares outstanding
calculation only from the date such shares were issued. The Company has not
granted any restricted stock awards or stock options and, during the years ended
December 31, 2007 and 2006, had no potentially dilutive common stock
equivalents. Unallocated common shares held by the ESOP are not included in the
weighted-average number of common shares outstanding for purposes of calculating
basic  earnings per common share until they are committed to be
released.  The basic average common shares outstanding were 1,249,428
and 946,050 for the years ended December 31, 2007 and December 31, 2006
respectively.
  Reclassifications
  Amounts
in the prior year’s consolidated financial statements have been reclassified
whenever necessary to conform to the current year’s
presentation.  Such reclassifications had no impact on net
income.
  Recent
Accounting Standards Issued
  FAS 157
  In
September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
FASB Statement No. 157 applies to other accounting pronouncements that
require or permit fair value measurements. The new guidance is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and for interim periods within those fiscal years. The Company is
currently evaluating the potential impact, if any, of the adoption of FASB
Statement No. 157 on its consolidated financial position, results of
operations and cash flows.
  FSP 157-2
 
 In
February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date
of FASB Statement No. 157,” that permits a one-year deferral in applying
the measurement provisions of Statement No. 157 to non-financial assets and
non-financial liabilities (non-financial items) that are not recognized or
disclosed at fair value in an entity’s financial statements on a recurring basis
(at least annually). Therefore, if the change in fair value of a non-financial
item is not required to be recognized or disclosed in the financial statements
on an annual basis or more frequently, the effective date of application of
Statement 157 to that item is deferred until fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. The
Company is currently evaluating the impact, if any, that the adoption of FSP
157-2 will have on its consolidated financial position and results of
operations.
  F-11
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
  Note
1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)
   FAS 159
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115” (“SFAS 159”).  SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected will be recognized in earnings at each subsequent reporting date.
SFAS 159 is effective as of January 1, 2008. The Company is evaluating
the impact, if any, of the adoption of SFAS 159 on its consolidated
financial statements.
 
  FAS 141
(R)
  FASB
Statement No. 141 (R) “Business Combinations” was issued in December of 2007.
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. The Statement also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The guidance will
become effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008. This new pronouncement will impact the Company’s acquisitions
after January 1, 2009.
  SAB 109
 
 Staff
Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded at
Fair Value Through Earnings" expresses the views of the staff regarding written
loan commitments that are accounted for at fair value through earnings under
generally accepted accounting principles. To make the staff's views consistent
with current authoritative accounting guidance, the SAB revises and rescinds
portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments."  Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect SAB 109 to have a material impact on its financial
statements.
 
 F-12
  FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 Note
2 - Securities
  The
amortized cost and estimated fair value of securities with gross unrealized
gains and losses at December 31, 2007 and 2006 are as follows:
   Amortized
                  Cost
              
              
              Gross
                  Unrealized
                  Gains
              
              
              Gross
                  Unrealized
                  Losses
              
              
              Fair
                  Value(In
      Thousands)December
      31, 2007:Available for
    Sale:Equity securities
              
              $
              65
              
              
              $
              179
              
              
              $
              -
              
              
              $
              244Held to Maturity:U.S. Government
      obligations
              
              $
              18,997
              
              
              $
              37
              
              
              $
              (3
              )
              
              $
              19,031Mortgage-backed
      securities
              
              
              9,553
              
              
              
              32
              
              
              
              (19
              )
              
              
              9,566$
              28,550
              
              
              $
              69
              
              
              $
              (22
              )
              
              $
              28,597December
      31, 2006:Available for
    Sale:Equity securities
              
              $
              67
              
              
              $
              537
              
              
              $
              -
              
              
              $
              604Held to Maturity:U.S. Government
      obligations
              
              $
              18,200
              
              
              $
              -
              
              
              $
              (199
              )
              
              $
              18,001State and municipal
      securities
              
              
              50
              
              
              
              -
              
              
              
              -
              
              
              
              50Mortgage-backed
      securities
              
              
              5,941
              
              
              
              6
              
              
              
              (125
              )
              
              
              5,822$
              24,191
              
              
              $
              6
              
              
              $
              (324
              )
              
              $
              23,873
  Mortgage-backed
securities consist of securities issued by FNMA, FHLMC, and GNMA.
  The
amortized cost and estimated fair value by contractual maturity of debt
securities at December 31, 2007 are shown below.  Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations.
   
 Amortized
                Cost
              
              
              Estimated
                Fair
      Value(In
      Thousands)Due
      in one year or less
              
              $
              2,500
              
              
              $
              2,500Due
      after one year through five years
              
              
              4,307
              
              
              
              4,312Due
      after five years through ten years
              
              
              5,550
              
              
              
              5,562Due
      after ten years
              
              
              6,640
              
              
              
              6,657Mortgage-backed
      securities
              
              
              9,553
              
              
              
              9,566$
              28,550
              
              
              $
              28,597
 
 F-13
  
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 Note
2 - Securities (Continued)
  Gross
gains of $81,000 and $-0- were realized on sales of securities available for
sale in 2007 and 2006, respectively.  There were no realized losses in
2007 or 2006.
  No
securities were pledged to secure public deposits or for any other purpose
required or permitted by law at December 31, 2007 and 2006.
  The
following table shows gross unrealized losses and fair value, aggregated by
investment category and length of time the individual securities have been in a
continuous unrealized loss position, at December 31, 2007 and
2006:
   
 Less
      than 12 Months
              
              
              12
      Months or More
              
              
              TotalFair
                  Value
              
              
              Gross
      Unrealized Losses
              
              
              Fair
                  Value
              
              
              Gross
      Unrealized Losses
              
              
              Fair
                  Value
              
              
              Gross
      Unrealized Losses(In
      Thousands)2007:U.S. Governmentobligations
              
              $
              1,000
              
              
              $
              2
              
              
              $
              2,998
              
              
              $
              1
              
              
              $
              3,998
              
              
              $
              3Mortgaged-backedsecurities
              
              
              1,466
              
              
              
              6
              
              
              
              740
              
              
              
              13
              
              
              
              2,206
              
              
              
              19$
              2,466
              
              
              $
              8
              
              
              $
              3,738
              
              
              $
              14
              
              
              $
              6,204
              
              
              $
              222006:U.S. Governmentobligations
              
              $
              997
              
              
              $
              3
              
              
              $
              15,502
              
              
              $
              196
              
              
              $
              16,499
              
              
              $
              199Mortgaged-backedsecurities
              
              
              131
              
              
              
              1
              
              
              
              4,976
              
              
              
              124
              
              
              
              5,107
              
              
              
              125$
              1,128
              
              
              $
              4
              
              
              $
              20,478
              
              
              $
              320
              
              
              $
              21,606
              
              
              $
              324
  Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
  At
December 31, 2007, three debt securities have been in a continuous
unrealized loss position for less than twelve months.  Six securities
have been in a continuous unrealized loss position for more than twelve
months.  As management has the intent and ability to hold debt
securities until maturity, no declines are deemed to be other than
temporary.
  F-14
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 
  Note
3 - Loans
  Net loans
at December 31, 2007 and 2006 consist of the following:
   
 2007
              
              
              2006(In
      Thousands)Real
      estate loans:Secured
      by one to four family residences
              
              $
              113,267
              
              
              $
              109,786Secured
      by five or more family residences
              
              
              918
              
              
              
              1,040Construction
              
              
              1,114
              
              
              
              380Commercial
              
              
              2,123
              
              
              
              2,745Home
      equity lines of credit
              
              
              6,622
              
              
              
              6,929Other
              
              
              200
              
              
              
              241Total
      Loans
              
              
              124,244
              
              
              
              121,121Net
      deferred loan origination costs
              
              
              401
              
              
              
              338Allowance
      for loan losses
              
              
              (319
              )
              
              
              (322
              )Net
      Loans
              
              $
              124,326
              
              
              $
              121,137
 
  An
analysis of activity in the allowance for loan losses for the years ended
December 31, 2007 and 2006 is as follows:
   
 2007
              
              
              2006(In
      Thousands)Balance
      at January 1
              
              $
              322
              
              
              $
              331Provision
      for loan losses
              
              
              -
              
              
              
              -Loans charged-off
              
              
              (3
              )
              
              
              (9
              )Balance
      at December 31
              
              $
              319
              
              
              $
              322
 
  
 At
December 31, 2007 and 2006, there were no loans considered to be impaired
as defined in Statement of Financial Accounting Standards (“SFAS”) No. 114,
“Accounting by Creditors for Impairment of a Loan,” as amended.
  At
December 31, 2007 and 2006, the Bank had nonaccrual loans of $63,000 and
$171,000, respectively.  There were no loans that were past due 90
days or more and still accruing interest at December 31, 2007 and
2006.
  F-15
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 
  Note
4 - Premises and Equipment
  Premises
and equipment at December 31, 2007 and 2006 are summarized as
follows:
   
 2007
              
              
              2006(In
      Thousands)Premises
              
              $
              2,761
              
              
              $
              1,710Furniture,
      fixtures and equipment
              
              
              1,587
              
              
              
              1,357Construction
      in progress
              
              
              -
              
              
              
              6044,348
              
              
              
              3,671Accumulated
      depreciation and amortization
              
              
              (1,823
              )
              
              
              (1,525
              )$
              2,525
              
              
              $
              2,146
 
  Construction
in progress at December 31, 2006 represents costs incurred in connection
with a new branch facility that opened in Irondequoit, New York in January
2007.
  At
December 31, 2007, the Company was obligated under noncancelable operating
leases for an existing branch in Penfield, New York and the new branch in
Irondequoit.  Future minimum rental payments under these leases for
the next five years are as follows:
   Penfield
              
              
              Irondequoit
              
              
              Total(In
      Thousands)2008
              
              $
              72
              
              
              $
              55
              
              
              $
              1272009
              
              
              72
              
              
              
              55
              
              
              
              1272010
              
              
              72
              
              
              
              55
              
              
              
              1272011
              
              
              72
              
              
              
              55
              
              
              
              1272012
              
              
              72
              
              
              
              63
              
              
              
              135$
              360
              
              
              $
              283
              
              
              $
              643
 
  
 Rent
expense under the Penfield and Irondequoit leases totaled $114,000 and
$70,000 during 2007 and 2006, respectively.
  F-16
 
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 Note
5 - Deposits
  The
components of deposits at December 31, 2007 and 2006 consist of the
following:
   
 2007
              
              
              2006(In
      Thousands)Non-interest
      bearing
              
              $
              3,169
              
              
              $
              3,402NOW
      accounts
              
              
              5,513
              
              
              
              4,974Regular
      savings and demand clubs
              
              
              13,605
              
              
              
              11,889Money
      market
              
              
              10,665
              
              
              
              10,271Individual
      retirement accounts
              
              
              16,157
              
              
              
              15,115Certificates
      of deposit
              
              
              70,049
              
              
              
              62,929$
              119,158
              
              
              $
              108,580
 
  
 As of
December 31, 2007, individual retirement accounts and certificates of
deposit have scheduled maturities as follows (in thousands):
  2008
              
              $
              63,7892009
              
              
              9,8652010
              
              
              5,4562011
              
              
              3,3612012
              
              
              3,735$
              86,206
 
  
 The
aggregate amount of time deposits, each with a minimum denomination of $100,000
was $19,424,000 and $14,343,000 at December 31, 2007 and 2006,
respectively.  Generally, deposits in excess of $100,000 are not
insured by the Federal Deposit Insurance Corporation.
  Interest
expense on deposits for the years ended December 31, 2007 and 2006 is as
follows:
   
 2007
              
              
              2006(In
      Thousands)NOW
      accounts
              
              $
              37
              
              
              $
              20Regular
      savings and demand clubs
              
              
              185
              
              
              
              83Money
      market
              
              
              301
              
              
              
              256Individual
      retirement accounts
              
              
              698
              
              
              
              579Certificates
      of deposit
              
              
              3,100
              
              
              
              2,471$
              4,321
              
              
              $
              3,409
 
  
 F-17
 
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 Note
6 - Short-Term and Long-Term Borrowings
  Short
term and long term borrowings consist of advances from the Federal Home Loan
Bank of New York (FHLB).
  The Bank
has an overnight line of credit and a one-month overnight repricing line of
credit with the FHLB.  Each line has a maximum borrowing limit of
$12,744,000 at December 31, 2007.  At December 31, 2007, the
overnight line bears interest at the federal funds rate plus 11 basis points and
the one-month overnight repricing line bears interest at the federal funds rate
plus 6 basis points.  The lines expire on July 31, 2008 and
are secured by one to four family residential mortgages.  Short term
borrowings on the overnight line totaled $4,200,000 at December 31, 2006
with an interest rate of 5.33%.  There were no borrowings on the lines
at December 31, 2007.
  Long term
borrowings with the FHLB at December 31, 2007 and 2006 are as
follows:
   
 Advance
                  Date
              
              Maturity
                  Date
              
              Current
                Rate
              
              
              2007
              
              
              2006(In
      Thousands)04/08/04
              
              04/09/07
              
              
              2.86
              %
              
              
              -
              
              
              $
              50004/08/04
              
              04/08/08
              
              
              3.34
              %
              
              
              1,500
              
              
              
              1,50011/18/04
              
              11/18/08
              
              
              3.87
              %
              
              
              1,000
              
              
              
              1,00011/29/04
              
              12/01/08
              
              
              4.10
              %
              
              
              1,000
              
              
              
              1,00011/29/04
              
              11/30/09
              
              
              3.94
              %
              
              
              424
              
              
              
              62403/22/05
              
              03/23/09
              
              
              4.60
              %
              
              
              750
              
              
              
              75003/22/05
              
              03/22/10
              
              
              4.73
              %
              
              
              750
              
              
              
              75005/13/05
              
              05/14/07
              
              
              4.14
              %
              
              
              -
              
              
              
              1,00008/18/05
              
              08/18/10
              
              
              4.70
              %
              
              
              1,000
              
              
              
              1,00009/06/05
              
              09/06/11
              
              
              4.53
              %
              
              
              1,000
              
              
              
              1,00009/14/05
              
              09/14/15
              
              
              4.75
              %
              
              
              895
              
              
              
              94511/01/05
              
              11/02/09
              
              
              5.05
              %
              
              
              1,000
              
              
              
              1,00011/01/05
              
              11/01/10
              
              
              4.95
              %
              
              
              629
              
              
              
              81911/16/05
              
              11/18/13
              
              
              5.19
              %
              
              
              1,000
              
              
              
              1,00011/16/05
              
              11/16/12
              
              
              5.18
              %
              
              
              1,000
              
              
              
              1,00011/16/05
              
              11/16/10
              
              
              5.11
              %
              
              
              1,000
              
              
              
              1,00006/05/06
              
              06/06/16
              
              
              5.63
              %
              
              
              1,000
              
              
              
              1,00006/05/06
              
              06/05/14
              
              
              5.60
              %
              
              
              1,000
              
              
              
              1,00008/17/06
              
              08/19/13
              
              
              5.45
              %
              
              
              1,000
              
              
              
              1,00008/17/06
              
              08/17/15
              
              
              5.50
              %
              
              
              1,000
              
              
              
              1,00008/24/06
              
              08/24/11
              
              
              5.39
              %
              
              
              775
              
              
              
              95609/08/06
              
              09/09/13
              
              
              5.32
              %
              
              
              858
              
              
              
              98011/28/06
              
              11/28/11
              
              
              5.00
              %
              
              
              1,000
              
              
              
              1,00012/20/06
              
              01/22/07
              
              
              5.37
              %
              
              
              -
              
              
              
              2,00010/25/07
              
              10/25/10
              
              
              4.52
              %
              
              
              1,000
              
              
              
              -11/27/07
              
              11/27/09
              
              
              4.04
              %
              
              
              1,000
              
              
              
              -11/27/07
              
              11/27/12
              
              
              4.46
              %
              
              
              1,000
              
              
              
              -12/12/07
              
              12/14/09
              
              
              4.09
              %
              
              
              1,000
              
              
              
              -12/12/07
              
              12/12/11
              
              
              4.36
              %
              
              
              1,000
              
              
              
              -12/28/07
              
              12/28/10
              
              
              4.09
              %
              
              
              1,000
              
              
              
              -$
              25,581
              
              
              $
              23,824
 
 F-18
   FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 Note
6 - Short-Term and Long-Term Borrowings (Continued)
  Long term
borrowings are secured by residential mortgages and the Bank’s investment in
FHLB stock.  As of December 31, 2007, $95,966,000 was available
for long term borrowings of which $25,581,000 was outstanding.
  The
maturities of long term borrowings are as follows at December 31, 2007
(amounts in thousands):
  2008
              
              $
              3,5002009
              
              
              4,1742010
              
              
              5,3792011
              
              
              3,7752012
              
              
              2,000Thereafter
              
              
              6,753$
              25,581
 
  
 Note
7 - Income Taxes
  The
provision (benefit) for income taxes for 2007 and 2006 consists of the
following:
   
 2007
              
              
              2006(In
      Thousands)CurrentFederal
              
              $
              (152
              )
              
              $
              104State
              
              
              2
              
              
              
              1Deferred
              
              
              (6
              )
              
              
              6$
              (156
              )
              
              $
              111
 
  
 Items
that give rise to differences between income tax expense included in the
consolidated statements of income and statutory income tax at a rate of 34% were
not material in 2007 or 2006.
  The
Company’s effective tax rate was (35.7%) and 32.3% in 2007 and 2006,
respectively.
  
 F-19
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 
  Note
7 - Income Taxes (Continued)
  Deferred
income tax assets and liabilities resulting from temporary differences are
summarized as follows and are included in other liabilities in the accompanying
consolidated balance sheets at December 31, 2007 and 2006:
   
 2007
              
              
              2006(In
      Thousands)Deferred
      tax assets:Deferred
      loan origination fees
              
              $
              27
              
              
              $
              36Reserve
      for uncollectible interest
              
              
              -
              
              
              
              1Pension
      expense
              
              
              7
              
              
              
              6Allowance
      for loan losses - Federal
              
              
              16
              
              
              
              15Accrued
      bonuses
              
              
              10
              
              
              
              9Charitable
      contributions
              
              
              13
              
              
              
              -State
      tax credits
              
              
              263
              
              
              
              229Other
              
              
              2
              
              
              
              4338
              
              
              
              300Valuation
      allowance
              
              
              (279
              )
              
              
              (229
              )Total
      deferred tax assets, net of valuation allowance
              
              
              59
              
              
              
              71Deferred
      tax liabilities:Depreciation
              
              
              (22
              )
              
              
              (32
              )Unrealized
      gain on securities available for sale
              
              
              (61
              )
              
              
              (183
              )Total
      deferred tax liabilities
              
              
              (83
              )
              
              
              (215
              )Net
      deferred tax liability
              
              $
              (24
              )
              
              $
              (144
              )
   The Bank
has recorded a valuation allowance for mortgage recording tax credits since
anticipated levels of state taxable income makes it more likely than not that
the credits will not be used.
  As a
thrift institution, the Bank is subject to special provisions in the Federal and
New York State income tax laws regarding its allowable income tax bad debt
deductions and related tax basis bad debt reserves.  These reserves
consist of defined base-year amounts for Federal and New York State
purposes.  In accordance with SFAS 109 “Accounting for Income Taxes”
(SFAS 109), deferred income tax liabilities are to be recognized with respect to
any base-year reserves which are to become taxable (or “recaptured”) in the
foreseeable future.
  Under
current income tax laws, the Federal base-year reserve would be subject to
recapture if the Bank pays a cash dividend in excess of earnings and profits or
liquidates.  The New York State base-year reserves would be
subject to recapture if the Bank failed to meet certain definitional tests,
including maintaining a thrift charter.  The Bank does not expect to
take any actions in the foreseeable future that would require the recapture of
any Federal or New York State reserves.
  In
accordance with SFAS 109, deferred tax liabilities have not been recognized with
respect to the Federal base-year reserve of $1,518,000and the New
York State base-year reserve of $5,414,000 and $5,030,000at
  F-20
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
   Note
7 - Income Taxes (Continued)
  December 31,
2007 and  December 31, 2006 respectively since the Bank does not
expect that these amounts will become taxable in the foreseeable
future.  The unrecognized deferred tax liability with respect to the
Federal base-year reserve was $516,000 at December 31, 2007 and at December
31, 2006.  The unrecognized deferred tax liability with respect to the
New York State base-year reserve, net of Federal income tax benefits, was
$254,000 and  $249,000 at December 31, 2007 and December 31, 2006
respectively.
  In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income
Taxes.  This Interpretation requires an entity to analyze each tax
position taken in its tax returns and determine the likelihood that the position
will be realized.  Only tax positions that are “more-likely-than-not”
to be realized can be recognized in an entity’s financial statements. For tax
positions that do not meet this recognition threshold, an entity will record an
unrecognized tax benefit for the difference between the position taken on the
tax return and the amount recognized on the financial statements.  The
Company adopted this Interpretation on January 1, 2007.  The Company
does not have any unrecognized tax benefits at December 31, 2007 or for the year
ended December 31, 2007.  The adoption of FIN 48 did not have any
impact on the Company’s consolidated results of operations and financial
position.  The Company’s policy is to recognize interest and penalties
on unrecognized tax benefits in income tax expense in the Consolidated Statement
of Operations.  The Company’s Federal and New York tax returns,
constituting the returns of the major taxing jurisdictions, are subject to
examination by the taxing authorities for all open years as prescribed by
applicable statute.  No waivers have been executed that would extend
the period subject to examination beyond the period prescribed by
statute.  As of December 31, 2007 there has been no material change in
any uncertain tax position.
  No
recognized tax benefits are expected to arise within the next twelve
months.
  F-21
  FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
  Note
8 - Employee Benefit Plans
  The Bank
has a 401(k) plan for all eligible employees.  Employees are
eligible for participation in the 401(k) Plan after six months of service and
attaining age 21.  The 401(k) Plan allows employees to contribute 1%
to 100% of their annual salary subject to statutory
limitations.  Matching contributions made by the Bank are 100% of the
first 3% of compensation that an employee contributes to the 401(k)
Plan.  In addition, the Bank may make a discretionary contribution of
up to 10% of each eligible employee’s annual base compensation including the
ESOP.  Matching contributions to the 401(k) Plan amounted to $43,000
and $35,000 for the years ended December 31, 2007 and 2006,
respectively.  Discretionary contributions to the 401(k) Plan were
$134,000 and $145,000 for the years ended December 31, 2007 and 2006,
respectively.
  The Bank
sponsors an Employee Stock Ownership Plan (ESOP) for eligible employees who have
attained age 21 and completed one year of employment. The cost of unallocated
ESOP shares is presented in the 2007 consolidated balance sheet as a reduction
of stockholders’ equity.  Allocations to individual accounts are based on
participant compensation and years of service. As shares are committed to be
released to participants, the Company reports compensation expense equal to the
current market price of the shares and the shares become outstanding for
earnings per share computations. The difference between the market price and the
cost of shares committed to be released is recorded as an adjustment to
additional paid-in-capital. Dividends on allocated shares reduce retained
earnings; dividends on unallocated ESOP shares reduce debt and accrued
interest.  In connection with establishing the ESOP in 2007, the ESOP
borrowed $700,000 from the Company to purchase 69,972 common shares of the
Company’s stock.  The loan is being repaid in twenty equal annual
installments through 2026.  The loan bears interest at
8.25%.  Shares are released to participants on a straight line basis
as the loan is repaid and totaled 3,498 shares for the year ended December 31,
2007.  Total expense for the ESOP during 2007 was
$35,000.  At December 31, 2007 the Company had 66,474 unearned ESOP
shares having an aggregate market value of $545,000.
  The Bank
has a supplemental executive retirement plan (SERP) for one of its
executives.  In 2007 and 2006, the expense under the SERP totaled
$31,000 and $19,000 respectively.
  
 Note
9 - Related Party Transactions
  Certain
employees, executive officers and directors are engaged in transactions with the
Bank in the ordinary course of business.  It is the Bank’s policy that
all related party transactions are conducted at “arms length” and all loans and
commitments included in such transactions are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other customers.
  As of
December 31, 2007 and 2006, loans outstanding with related parties were
$766,000 and $803,000, respectively.  During 2007, loan advances and
repayments totaled $42,000 and $79,000, respectively.
  F-22
  FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
 
 Note
10 - Commitments
  The Bank
is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit.  These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
consolidated balance sheets.  The Bank uses the same credit policies
in making commitments and conditional obligations as it does for
on-balance-sheet instruments.  The Bank’s exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and is represented by the contractual notional
amount of those instruments summarized as follows at December 31, 2007 and
2006:
   
 2007
              
              
              2006(In
      Thousands)Commitments
      to extend credit:Commitments to grant
      loans
              
              $
              998
              
              
              $
              1,064Unfunded commitments
      under  lines of credit
              
              
              7,511
              
              
              
              7,876$
              8,509
              
              
              $
              8,940
 
   Commitments
to grant loans at fixed rates at December 31, 2007 totaled $998,000 and had
interest rates that ranged from 5.875% to 6.625%.
  Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
  The Bank
evaluates each customer’s credit worthiness on a case-by-case
basis.  The amount and type of collateral obtained, if deemed
necessary by the Bank upon extension of credit, varies and is based on
management’s credit evaluation of the counterparty.
  Note
11 - Regulatory Matters
  The Bank
is subject to various regulatory capital requirements administered by its
primary federal regulator, the OTS.  Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company’s consolidated financial
statements.  Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific guidelines
that involve quantitative measures of the Bank’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices.  The Bank’s capital amounts and classification are subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
  Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 and tangible capital (as defined) to adjusted total
assets (as defined).  Management believes, as of December 31,
2007 and 2006, that the Bank meets all capital adequacy requirements to which it
is subject. As of December 31, 2007 the most recent notification
from the OTS categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action.  To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1
  F-23
  FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
  Note
11 - Regulatory Matters (Continued)
  leverage
ratios as set forth in the table below.  There are no conditions or
events since that notification that management believes have changed the Bank’s
status as well capitalized.
  As of
December 31, 2007 the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action.  To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table below.  There are no
conditions or events since that notification that management believes have
changed the Bank’s status as well capitalized.
  The
Bank’s actual capital amounts (in thousands) and ratios are presented in the
table below.
   
 Actual
              
              
              For
      Capital Adequacy
                Purposes
              
              
              To
      be Well Capitalized
                under
      Prompt
                Corrective
      Action
                ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio(Dollars
      in Thousands)December
      31, 2007:Total
      risk-based capital (to risk-weighted
      assets)
              
              $
              16,533
              
              
              
              22.23
              %
              
              $
              35,948
              
              
              
              38.0
              %
              
              $
              37,435
              
              
              
              310.0
              %Tier
      1 capital (to risk-weightedassets)
              
              
              16,214
              
              
              
              21.81
              
              
              
              32,974
              
              
              
              34.0
              
              
              
              34,461
              
              
              
              3 6.0Tier
      1 capital (leveraged - to adjustedtotal
      assets)
              
              
              16,214
              
              
              
              9.89
              
              
              
              36,555
              
              
              
              34.0
              
              
              
              38,193
              
              
              
              3 5.0Tangible
      capital (to adjusted totalassets)
              
              
              16,214
              
              
              
              9.89
              
              
              
              32,458
              
              
              
              31.5
              
              
              
              N/A
              
              
              
              N/ADecember
      31, 2006:Total
      risk-based capital (to risk-weighted
      assets)
              
              $
              13,837
              
              
              
              19.40
              %
              
              $
              35,708
              
              
              
              38.0
              %
              
              $
              37,134
              
              
              
              310.0
              %Tier
      1 capital (to risk-weightedassets)
              
              
              13,515
              
              
              
              18.94
              
              
              
              32,854
              
              
              
              34.0
              
              
              
              34,280
              
              
              
              3 6.0Tier
      1 capital (leveraged - to adjustedtotal
      assets)
              
              
              13,515
              
              
              
              8.88
              
              
              
              36,086
              
              
              
              34.0
              
              
              
              37,607
              
              
              
              3 5.0Tangible
      capital (to adjusted totalassets)
              
              
              13,515
              
              
              
              8.88
              
              
              
              32,282
              
              
              
              31.5
              
              
              
              N/A
              
              
              
              N/A
 
 The
following table presents a reconciliation of the Bank’s equity as determined
using accounting principles generally accepted in the United States of America
(“GAAP”) and its regulatory capital amounts as of December 31, 2007 and
2006.
  F-24
  FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
  Note
11 - Regulatory Matters (Continued)
   2007
              
              
              2006(In
      Thousands)Bank
      GAAP equity
              
              $
              16,332
              
              
              $
              13,870Net
      unrealized gains on securities available for sale, net of income
      taxes
              
              
              (118
              )
              
              
              (355
              )Tangible
      capital, core capital and Tier 1 risk-based capital
              
              
              16,214
              
              
              
              13,515Allowance
      for loan losses
              
              
              319
              
              
              
              322Total
      risk-based capital
              
              $
              16,533
              
              
              $
              13,837
 
   At
December 31, 2007 the Company’s consolidated equity totaled $20,149,000 compared
to the Bank’s equity capital of $16,332,000. See Note 13 for details concerning
the Company’s consolidated equity.
  Note
12 - Fair Value of Financial Instruments
  SFAS No.
107, “Disclosure about Fair Value of Financial Instruments” (“SFAS 107”),
requires disclosure of fair value information about financial instruments,
whether or not recognized in the consolidated balance sheets, for which it is
practicable to estimate that value.  In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques.  Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows.  In that regard, the defined fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument.  SFAS
107 excludes certain financial instruments and all non-financial instruments
from its disclosure requirements.  Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Company.
  The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
  Cash,
Due from Banks, and Interest-Bearing Demand Deposits
  The
carrying amounts of these assets approximate their fair values.
  Investment
Securities
  Fair
values for investment securities are based primarily on quoted market
prices.
  Investment
in FHLB Stock
  The
carrying value of FHLB stock approximates its fair value based on the redemption
provisions of the FHLB.
  Loans
  For
variable-rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying amounts.  The fair
values for other loans are estimated using discounted cash flow
analysis,
  F-25
  FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
  Note
12 - Fair Value of Financial Instruments (Continued)
  based on
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.  Loan fair value estimates include
judgments regarding future expected loss experience and risk
characteristics.
  Accrued
Interest Receivable and Payable
  The
carrying amount of accrued interest receivable and payable approximates fair
value.
  Deposits
  The fair
values disclosed for demand deposits (e.g., NOW accounts, non-interest checking,
regular savings and certain types of money market accounts) are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts).  The carrying amounts for variable-rate certificates of
deposit approximate their fair values at the reporting date.  Fair
values for fixed rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
  Borrowings
  The fair
values of long-term borrowings are estimated using discounted cash flow
analyses, based on the Bank’s current incremental borrowing rates for similar
types of borrowing arrangements.  The carrying amount of short-term
borrowings approximate their fair value.
  Off-Balance
Sheet Instruments
  The fair
values for off-balance sheet financial instruments are estimated using the fees
currently charged to enter into similar agreements, taking into account market
interest rates, the remaining terms and present credit worthiness of the
counterparties.
  F-26
  FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
  Note 12 - Fair
Value of Financial Instruments (Continued)
  The
carrying amounts and estimated fair values of the Company’s financial
instruments at December 31, 2007 and 2006 are as follows:
   
 2007
              
              
              2006Carrying
                  Amount
              
              
              Fair
                  Value
              
              
              Carrying
                  Amount
              
              
              Fair
                  ValueFinancial
      assets:Cash and due from
      banks
              
              $
              1,159
              
              
              $
              1,159
              
              
              $
              1,718
              
              
              $
              1,718Interest bearing demand
      deposits
              
              
              8,285
              
              
              
              8,285
              
              
              
              980
              
              
              
              980Securities available for
      sale
              
              
              244
              
              
              
              244
              
              
              
              604
              
              
              
              604Securities held to
      maturity
              
              
              28,550
              
              
              
              28,597
              
              
              
              24,191
              
              
              
              23,873FHLB stock
              
              
              1,405
              
              
              
              1,405
              
              
              
              1,490
              
              
              
              1,490Loans, net
              
              
              124,326
              
              
              
              122,781
              
              
              
              121,137
              
              
              
              119,795Accrued interest
      receivable
              
              
              872
              
              
              
              872
              
              
              
              873
              
              
              
              873Financial
      liabilities:Deposits
              
              
              119,158
              
              
              
              119,664
              
              
              
              108,580
              
              
              
              108,555Short-term
    borrowings
              
              
              -
              
              
              
              -
              
              
              
              4,200
              
              
              
              4,200Long-term
    borrowings
              
              
              25,581
              
              
              
              25,210
              
              
              
              23,824
              
              
              
              25,043Accrued interest
      payable
              
              
              96
              
              
              
              96
              
              
              
              84
              
              
              
              84Off-balance
      sheet instruments:Commitments to extend
      credit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
 
 
 F-27
 
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
  Note
13 - FSB Community Bankshares, Inc. (Parent Company Only) Financial
Information
  Balance
Sheets
   
 December
      312007
              
              
              2006(In
      Thousands)AssetsCash
      and cash equivalents
              
              $
              96
              
              
              $
              10Securities
      held to maturity
              
              
              3,050
              
              
              
              -Investment in banking
      subsidiary
              
              
              16,332
              
              
              
              13,860ESOP
      Loan receivable
              
              
              653
              
              
              
              -Accrued
      interest receivable
              
              
              18
              
              
              
              -Total
      Assets
              
              $
              20,149
              
              
              $
              13,870Stockholders’
      equity
              
              $
              20,149
              
              
              $
              13,870
 
 Statements
of Income
   Year
      Ended December 312007
              
              
              2006(In
      Thousands)Interest
      Income
              
              $
              87
              
              
              $
              -Equity
      in undistributed earnings (loss) of banking subsidiary
              
              
              (368
              )
              
              
              233Net
      Income (loss)
              
              $
              (281
              )
              
              $
              233
 
  
  F-28
 FSB
Community Bankshares, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006
  Note 13 - FSB
Community Bankshares, Inc. (Parent Company Only) Financial Information
(Continued)
 Statements
of Cash Flows
   
 Year
      Ended December 312007
              
              
              2006(In
      Thousands)Cash
      flows from operating activitiesNet
      income (loss)
              
              $
              (281
              )
              
              $
              233Adjustments
      to reconcile net income (loss) to net cash used in operating
      activitiesEquity
      in undistributed (earnings) loss of banking subsidiary
              
              
              368
              
              
              
              (233
              )Increase
      in accrued interest receivable
              
              
              (18
              )
              
              
              -Net
      cash used in operating activities
              
              
              69
              
              
              
              -
 
 Cash
      flows from investing activitiesPurchases
      of securities held to maturity
              
              
              (3,050
              )
              
              
              -Payments
      received on ESOP loan
              
              
              47
              
              
              
              -Net
      cash used in investing activities
              
              
              (3,003
              )
              
              
              -Cash
      flows from financing activitiesNet
      proceeds from common stock offering
              
              
              7,462
              
              
              
              -Cash
      provided to ESOP for purchase of shares
              
              
              (700
              )
              
              
              -Capital
      contributed to banking subsidiary
              
              
              (3,742
              )
              
              
              -Net
      cash provided by financing activities
              
              
              3,020
              
              
              
              -Net
      increase in cash and cash equivalents
              
              
              86
              
              
              
              -Cash
      and cash equivalents - beginning
              
              
              10
              
              
              
              10Cash
      and cash equivalents - ending
              
              $
              96
              
              
              $
              10
   F-29
  Market
for Common Stock
  FSB
Community Bankshares, Inc.’s common stock is quoted on the OTC Bulletin Board
under the trading symbol “FSBC.”
  The
following table sets forth the high and low trading prices for shares of our
common stock for the periods indicated. Since the consummation of our initial
stock offering on August 10, 2007 we have not paid any cash dividends to our
shareholders.   As of December 31, 2007, there were 1,785,000
shares of our common stock issued and outstanding, of which 946,050 shares, or
53.0%, were held by FSB Community Bankshares, MHC, our mutual holding company.
On such date our shares were held by approximately 193 holders of
record.
   Year
      Ended December 31, 2007
                
                High
                
                
                LowFourth
      quarter
                
                $
                11.25
                
                
                $
                8.20Third
      quarter(1)
                
                
                11.25
                
                
                
                8.75(1)           Information
      is from August 10, 2007, the date of the consummation of our initial
      public offering through September 30, 2007.
 
 
 
  STOCKHOLDER
INFORMATION
  
 
 ANNUAL
      MEETING
                  
                  The
      Annual Meeting of Stockholders will be heldat
      2:00 p.m. New York time on May 21, 2008 at thePerinton
      Community Center located at 1350 Turk Hill Road, Fairport, New York
      14450.
                TRANSFER
      AGENT
                  
                  Registrar
      and Transfer Company
                  10
      Commerce Drive
                  Cranford,
      New Jersey 07016
                  
                  If
      you have any questions concerning your stockholder account, please call
      our transfer agent, noted above, at (800) 525-7686. This is the number to
      call if you require a change of address, records or information about lost
      address, records or information about lost
certificates.STOCK
      LISTING
                  
                  The
      Company's Common Stock is quoted on the OTC Bulletin Board under the
      symbol "FSBC."
                ANNUAL
      REPORT ON FORM 10-KSB
                  
                  A
      copy of the Company's Form 10-KSB for theyear
      ended December 31, 2007, will be furnished without charge to stockholders
      as of the record date, upon written request to the Secretary, FSB
      Community Bankshares, Inc. 45 South Main Street, Fairport, New York
      14450.SPECIAL
      COUNSEL
                  
                  
                  Luse
      Gorman Pomerenk & Schick, P.C.
                  5335
      Wisconsin Avenue, N.W., Suite 400
                  Washington,
      D.C. 20015
                INDEPENDENT
      REGISTERED
                  PUBLIC
      ACCOUNTING FIRM
                  
                  Beard
      Miller Company
                  115
      Solar Street, Suite 100
                  Syracuse,
      New York 13204