UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x

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

 

For the quarterly period ended September 30, 2017

 

OR

 

¨

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

 

For the transition period from _______ to _______

 

FSB BANCORP, INC.

(Exact Name of Company as Specified in its Charter)

 

Maryland	001-37831	81-2509654
(State of Other Jurisdiction of Incorporation)	(Commission File No.)	(I.R.S. Employer Identification No.)

 

45 South Main Street, Fairport, NY 14450

(Address of Principal Executive Office) (Zip Code)

 

(585) 377-8970

(Issuer's Telephone Number including area code)

 

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

YES x          NO ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x          NO ¨

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

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

 

As of November 10, 2017, there were 1,935,453 shares issued and outstanding of the registrant’s common stock.

 

 

 

FSB BANCORP, INC.

INDEX

 

			PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets		3
	Consolidated Statements of Income		4-5
	Consolidated Statements of Comprehensive Income		6-7
	Consolidated Statements of Stockholders’ Equity		8
	Consolidated Statements of Cash Flows		9
	Notes to Consolidated Financial Statements		10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		43
Item 4.	Controls and Procedures		43
PART II - OTHER INFORMATION			44
Item 1.	Legal Proceedings		44
Item 1A.	Risk Factors		44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 3.	Defaults upon Senior Securities		44
Item 4.	Mine Safety Disclosures		44
Item 5.	Other information		44
Item 6.	Exhibits		44
SIGNATURES			45

 

 

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

 

FSB Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

 

		September 30,				December 31,
(In thousands, except share and per share data)		2017				2016
ASSETS:
Cash and due from banks		$	1,409			$	1,634
Interest earning demand deposits			5,542				5,773
Total cash and cash equivalents			6,951				7,407
Available-for-sale securities, at fair value			19,053				17,747
Held-to-maturity securities, at amortized cost (fair value of $6,959 and $7,384, respectively)			6,919				7,420
Investment in restricted stock, at cost			3,498				2,886
Loans held for sale			4,180				2,059
Loans			254,291				227,182
Less: Allowance for loan losses			(1,186	)			(990	)
Loans receivable, net			253,105				226,192
Bank owned life insurance			3,743				3,696
Accrued interest receivable			798				652
Premises and equipment, net			3,172				3,175
Other assets			3,165				2,487
Total assets		$	304,584			$	273,721
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest bearing		$	8,016			$	8,423
Interest bearing			191,537				174,511
Total deposits			199,553				182,934
Short-term borrowings			14,500				6,000
Long-term borrowings			55,023				50,813
Official bank checks			2,675				318
Other liabilities			1,520				1,797
Total liabilities			273,271				241,862
Stockholders' equity:
Preferred stock – par value $0.01; 25,000,000 shares authorized, no shares issued and outstanding			-				-
Common stock, par value $0.01; 50,000,000 authorized shares; 1,872,753 and 1,941,688 shares issued and outstanding, respectively			18				19
Paid-in capital			15,314				16,352
Retained earnings			16,376				15,923
Accumulated other comprehensive loss			(71	)			(85	)
Unearned ESOP shares, at cost			(324	)			(350	)
Total stockholders’ equity			31,313				31,859
Total liabilities and stockholders’ equity		$	304,584			$	273,721

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

FSB Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

 

		For the three				For the three
		months ended				months ended
(In thousands, except per share data)		September 30, 2017				September 30, 2016
Interest and dividend income:
Loans, including fees		$	2,621			$	2,221
Securities:
Taxable			80				52
Tax-exempt			27				25
Mortgage-backed securities			26				50
Other			11				10
Total interest and dividend income			2,765				2,358
Interest expense:
Interest on deposits			482				348
Interest on short-term borrowings			23				1
Interest on long-term borrowings			218				165
Total interest expense			723				514
Net interest income			2,042				1,844
Provision for loan losses			84				45
Net interest income after provision for loan losses			1,958				1,799
Other income:
Service fees			43				45
Fee income			34				35
Realized gain on sale of securities			-				36
Increase in cash surrender value of bank owned life insurance			16				17
Realized gain on sale of loans			650				749
Mortgage fee income			244				240
Other			44				40
Total other income			1,031				1,162
Other expense:
Salaries and employee benefits			1,712				1,626
Occupancy			273				248
Data processing costs			80				52
Advertising			28				28
Equipment			135				153
Electronic banking			29				27
Directors’ fees			65				65
Mortgage fees and taxes			43				123
FDIC premium expense			25				42
Audits and tax services			44				48
Other			243				207
Total other expenses			2,677				2,619
Income before income taxes			312				342
Provision for income taxes			110				90
Net income		$	202			$	252
Earnings per common share – basic		$	0.11			$	0.13

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

FSB Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

 

		For the nine				For the nine
		months ended				months ended
(In thousands, except per share data)		September 30, 2017				September 30, 2016
Interest and dividend income:
Loans, including fees		$	7,429			$	6,466
Securities:
Taxable			219				218
Tax-exempt			84				71
Mortgage-backed securities			80				161
Other			35				21
Total interest and dividend income			7,847				6,937
Interest expense:
Interest on deposits			1,282				1,077
Interest on short-term borrowings			64				1
Interest on long-term borrowings			631				528
Total interest expense			1,977				1,606
Net interest income			5,870				5,331
Provision for loan losses			196				135
Net interest income after provision for loan losses			5,674				5,196
Other income:
Service fees			121				116
Fee income			137				135
Realized gain on sale of securities			-				36
Increase in cash surrender value of bank owned life insurance			47				50
Realized gain on sale of loans			1,667				1,609
Mortgage fee income			613				586
Other			134				120
Total other income			2,719				2,652
Other expense:
Salaries and employee benefits			4,825				4,452
Occupancy			801				747
Data processing costs			250				149
Advertising			122				83
Equipment			418				451
Electronic banking			64				83
Directors’ fees			195				188
Mortgage fees and taxes			114				336
FDIC premium expense			77				127
Audits and tax services			137				112
Other			763				557
Total other expenses			7,766				7,285
Income before income taxes			627				563
Provision for income taxes			174				124
Net income		$	453			$	439
Earnings per common share – basic		$	0.24			$	0.23

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

		For the three months ended
(In thousands)		September 30, 2017				September 30, 2016
Net Income		$	202			$	252
Other Comprehensive Income (Loss)
Unrealized holding losses on available-for-sale securities
Unrealized holding losses arising during the period			(8	)			(45	)
Reclassification adjustment for net gains included in net income on securities available-for-sale			-				(24	)
Reclassification adjustment for net gains included in net income on securities held-to-maturity			-				(12	)
Net unrealized loss on available for sale securities			(8	)			(81	)
Accretion of net unrealized loss on securities transferred to held-to-maturity(1)			-				68
Other comprehensive loss, before tax			(8	)			(13	)
Tax effect			(3	)			(5	)
Other comprehensive loss, net of tax			(5	)			(8	)
Comprehensive income		$	197			$	244
Tax Effect Allocated to Each Component of Other Comprehensive Income
Unrealized holding gains arising during the period		$	3			$	16
Reclassification adjustment for net gains included in net income on securities available-for-sale			-				8
Reclassification adjustment for net gains included in net income on securities held-to-maturity			-				4
Accretion of net unrealized loss on securities transferred to held-to-maturity			-				(23	)
Income tax effect related to other comprehensive income (loss)		$	3			$	5

 

The accompanying notes are an integral part of the consolidated financial statements.

 

(1)

The accretion of the unrealized holding losses in accumulated other comprehensive income at the date of transfer partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the date of transfer, and is an adjustment of yield.

 

 

Consolidated Statements of Comprehensive Income

(Unaudited)

 

		For the nine months ended
(In thousands)		September 30, 2017				September 30, 2016
Net Income		$	453			$	439
Other Comprehensive Income
Unrealized holding gains on available-for-sale securities
Unrealized holding gains arising during the period			21				75
Reclassification adjustment for net gains included in net income on securities available-for-sale			-				(24	)
Reclassification adjustment for net gains included in net income on securities held-to-maturity			-				(12	)
Net unrealized gains on available for sale securities			21				39
Accretion of net unrealized loss on securities transferred to held-to-maturity(1)			-				323
Other comprehensive income, before tax			21				362
Tax effect			7				128
Other comprehensive income, net of tax			14				234
Comprehensive income		$	467			$	673
Tax Effect Allocated to Each Component of Other Comprehensive Income
Unrealized holding gains arising during the period		$	(7	)		$	(25	)
Reclassification adjustment for net gains included in net income on securities available-for-sale			-				8
Reclassification adjustment for net gains included in net income on securities held-to-maturity			-				4
Accretion of net unrealized loss on securities transferred to held-to-maturity			-				(115	)
Income tax effect related to other comprehensive income		$	(7	)		$	(128	)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

(1)

The accretion of the unrealized holding losses in accumulated other comprehensive income at the date of transfer partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the date of transfer, and is an adjustment of yield.

 

 

FSB Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

														Accumulated Other
		Common				Paid in				Retained				Comprehensive				Treasury				Unearned
(In thousands, except share and per share data)		Stock				Capital				Earnings				Income (Loss)				Stock				ESOP				Total
Balance, January 1, 2017		$	19			$	16,352			$	15,923			$	(85	)		$	-			$	(350	)		$	31,859
Net income			-				-				453				-				-				-				453
Other comprehensive income, net of tax			-				-				-				14				-				-				14
ESOP shares committed to be released			-				13				-				-				-				26				39
Effect of stock repurchase plan			(1	)			(1,051	)			-				-				-				-				(1,052	)
Balance, September 30, 2017		$	18			$	15,314			$	16,376			$	(71	)		$	-			$	(324	)		$	31,313
Balance, January 1, 2016		$	179			$	7,239			$	14,985			$	(212	)		$	(46	)		$	(385	)		$	21,760
Net income			-				-				439				-				-				-				439
Other comprehensive income, net of tax			-				-				-				234				-				-				234
ESOP shares committed to be released			-				6				-				-				-				26				32
Proceeds of common stock offering and conversion of existing shares, net of expenses			(159	)			9,149				-				-				-				-				8,990
Cancel 5,528 treasury shares			(1	)			(45	)			-				-				46				-				-
Balance, September 30, 2016		$	19			$	16,349			$	15,424			$	22			$	-			$	(359	)		$	31,455

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

FSB Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Nine Months Ended September 30,
(In thousands)		2017				2016
OPERATING ACTIVITIES
Net income		$	453			$	439
Adjustments to reconcile net income to net cash flows from operating activities:
Net amortization of premiums and accretion of discounts on investments			105				296
Gain on sales of securities			-				(36	)
Gain on sale of loans			(1,667	)			(1,609	)
Proceeds from loans sold			54,668				24,188
Loans originated for sale			(55,122	)			(24,301	)
Amortization of net deferred loan origination costs			339				174
Depreciation and amortization			334				332
Provision for loan losses			196				135
Expense related to ESOP			39				32
Deferred income tax benefit			(98	)			(120	)
Earnings on investment in bank owned life insurance			(47	)			(50	)
(Increase) Decrease in accrued interest receivable			(146	)			13
Increase in other assets			(677	)			(273	)
(Decrease) Increase in other liabilities			(186	)			293
Net cash flows from operating activities			(1,809	)			(487	)
INVESTING ACTIVITIES
Purchases of securities available-for-sale			(7,533	)			(11,579	)
Proceeds from maturities and calls of securities available-for-sale			3,500				9,096
Proceeds from sales of securities available-for-sale			-				2,213
Proceeds from principal paydowns on securities available-for-sale			2,667				2,572
Purchases of securities held-to-maturity			(335	)			(932	)
Proceeds from maturities and calls of securities held-to-maturity			715				6,798
Proceeds from sales of securities held-to-maturity			-				393
Proceeds from principal paydowns on securities held-to-maturity			96				351
Net increase in loans			(27,448	)			(12,011	)
Purchase of restricted stock, net			(612	)			(92	)
Purchase of premises and equipment			(331	)			(665	)
Net cash flows from investing activities			(29,281	)			(3,856	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits			16,619				(7,033	)
Proceeds from long-term borrowings			16,500				9,500
Repayments on long-term borrowings			(12,290	)			(11,812	)
Proceeds from short-term borrowings, net			8,500				4,000
Net increase (decrease) in official bank checks			2,357				(619	)
Net proceeds from stock conversion and offering			-				8,990
Effect of stock repurchase plan			(1,052	)			-
Net cash flows from financing activities			30,634				3,026
Change in cash and cash equivalents			(456	)			(1,317	)
Cash and cash equivalents at beginning of period			7,407				6,147
Cash and cash equivalents at end of period		$	6,951			$	4,830
CASH PAID DURING THE PERIOD FOR:
Interest		$	1,962			$	1,612
Income taxes		$	78			$	113

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1: Basis of Presentation

 

The accompanying unaudited consolidated financial statements of FSB Bancorp, Inc., (“FSB Bancorp”), FSB Community Bankshares, Inc. (“FSB Community”), Fairport Savings Bank (the “Bank”) and its other wholly owned subsidiary, Fairport Wealth Management (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of consolidated financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. The results are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any future period. References to the Company prior to July 13, 2016 include FSB Community and not FSB Bancorp, whereas after July 13, 2016 references to the Company include FSB Bancorp and not FSB Community.

 

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management.

 

FSB Bancorp is a Maryland Corporation headquartered in Fairport, New York. On July 13, 2016, FSB Bancorp, completed the conversion and reorganization pursuant to which FSB Community Bankshares, MHC converted to the stock holding company form of organization. FSB Bancorp, the new stock holding company for Fairport Savings Bank, sold 1,034,649 shares of common stock, par value $0.01 per share, at $10.00 per share, for gross offering proceeds of $10.3 million in its stock offering. Additionally, after accounting for conversion related expenses of $1.4 million, which offset gross proceeds, the Company received $8.9 million in net proceeds.

 

Concurrent with the completion of the conversion and reorganization, shares of common stock of FSB Community owned by public stockholders were exchanged for shares of FSB Bancorp’s common stock so that the former public stockholders of FSB Community owned approximately the same percentage of FSB Bancorp’s common stock as they owned of FSB Community’s common stock immediately prior to the conversion, subject to adjustment as disclosed in the prospectus. Stockholders of FSB Community received 1.0884 shares of FSB Bancorp’s common stock for each share of FSB Community’s stock they owned immediately prior to completion of the transaction. Cash in lieu of fractional shares was paid based on the offering price of $10.00 per share. All share and per share information in this report for periods prior to the conversion have been revised to reflect the 1.0884:1 conversion ratio on shares outstanding, including shares held by FSB Community Bankshares, MHC that were not publicly traded.

 

Note 2: New Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This new guidance supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for the Company for annual and interim periods beginning after December 15, 2017, and should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. The Company's implementation efforts include the identification of revenue within the scope of the guidance, as well as evaluation of revenue contracts. The Company's review is ongoing, and the Company will continue to evaluate any impact as additional guidance is issued and as our internal assessment progresses.

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This new guidance supersedes the lease requirements in Topic 840, Leases and is based on the principle that a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. In addition, the guidance requires an entity to separate the lease components from the nonlease components in a contract. The ASU requires disclosures about the amount, timing, and judgments related to a reporting entity's accounting for leases and related cash flows. The standard is required to be applied to all leases in existence as of the date of adoption using a modified retrospective transition approach. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all companies in any interim or annual period. The Company occupies certain offices and uses certain equipment under non-cancelable operating lease agreements, which currently are not reflected in its consolidated statement of condition. The Company expects to recognize lease liabilities and right of use assets associated with these lease agreements; however, the extent of the impact on the Company's consolidated financial statements is currently under evaluation.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This new guidance significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This ASU will replace the "incurred loss" model under existing guidance with an "expected loss" model for instruments measured at amortized cost, and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. This ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. This guidance requires adoption through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for all companies as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the guidance will have on the Company's consolidated financial statements, and expects an increase in the allowance for credit losses resulting from the change to expected losses for the estimated life of the financial asset, including an allowance for debt securities. The amount of the increase in the allowance for credit losses resulting from the new guidance will be impacted by the portfolio composition and asset quality at the adoption date, as well as economic conditions and forecasts at the time of adoption.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The amendments provide guidance on the following eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. This ASU is effective for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. As this guidance only affects the classification within the statement of cash flows, this ASU is not expected to have a material impact on the Company's consolidated financial statements.

 

In March 2017, the FASB issued an Update (ASU 2017-08) to its guidance on “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) related to premium amortization on purchased callable debt securities. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium.  Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period.  If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.  Additionally, in the period of adoption, an entity should provide disclosure about a change in accounting principle.  The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

 

 

Note 3: Earnings per Common Share

 

Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Net income available to common stockholders is net income to FSB Bancorp, Inc. The Company has not granted any restricted stock awards or stock options during the periods ended September 30, 2017 and 2016, and therefore had no potentially dilutive common stock equivalents. Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released.

 

The following tables set forth the calculation of basic earnings per share. Historical share and per share data have been adjusted by the exchange ratio of 1.0884 used in the conversion and offering.

 

		Three months ended
		September 30,
(In thousands, except per share data)		2017				2016
Basic Earnings Per Common Share
Net income available to common stockholders		$	202			$	252
Weighted average common shares outstanding			1,892				1,905
Basic earnings per common share		$	0.11			$	0.13

 

		Nine months ended
		September 30,
(In thousands, except per share data)		2017				2016
Basic Earnings Per Common Share
Net income available to common stockholders		$	453			$	439
Weighted average common shares outstanding			1,903				1,899
Basic earnings per common share		$	0.24			$	0.23

 

 

Note 4: Investment Securities

 

The amortized cost and estimated fair value of investment securities are summarized as follows:

 

		September 30, 2017
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In thousands)		Cost				Gains				Losses				Value
Available-for-Sale Portfolio
U.S. Government and agency obligations		$	10,613			$	1			$	(75	)		$	10,539
Mortgage-backed securities – residential			8,547				24				(57	)			8,514
Total available-for-sale		$	19,160			$	25			$	(132	)		$	19,053
Held-to-Maturity Portfolio
Mortgage-backed securities – residential		$	649			$	10			$	-			$	659
State and municipal securities			6,270				48				(18	)			6,300
Total held-to-maturity		$	6,919			$	58			$	(18	)		$	6,959

 

		December 31, 2016
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(In thousands)		Cost				Gains				Losses				Value
Available-for-Sale Portfolio
U.S. Government and agency obligations		$	8,106			$	3			$	(110	)		$	7,999
Mortgage-backed securities – residential			9,769				42				(63	)			9,748
Total available-for-sale		$	17,875			$	45			$	(173	)		$	17,747
Held-to-Maturity Portfolio
Mortgage-backed securities – residential		$	745			$	13			$	-			$	758
State and municipal securities			6,675				25				(74	)			6,626
Total held-to-maturity		$	7,420			$	38			$	(74	)		$	7,384

 

 

The amortized cost and estimated fair value of debt investments at September 30, 2017 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

 

		Available-for-Sale								Held-to-Maturity
		Amortized								Amortized
(In thousands)		Cost				Fair Value				Cost				Fair Value
Due in one year or less		$	-			$	-			$	998			$	999
Due after one year through five years			8,608				8,546				3,685				3,698
Due after five years through ten years			1,005				1,007				1,587				1,603
Due after ten years			1,000				986				-				-
Sub-total		$	10,613			$	10,539			$	6,270			$	6,300
Mortgage-backed securities – residential			8,547				8,514				649				659
Totals		$	19,160			$	19,053			$	6,919			$	6,959

 

The Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

		September 30, 2017
		Less than Twelve Months												Twelve Months or More												Total
		Number of												Number of												Number of
		Individual				Unrealized				Fair				Individual				Unrealized				Fair				Individual				Unrealized				Fair
(Dollars in thousands)		Securities				Losses				Value				Securities				Losses				Value				Securities				Losses				Value
Available-for-Sale
U.S. Government and agency obligations			3			$	9			$	3,493				5			$	66			$	6,040				8			$	75			$	9,533
Mortgage-backed securities - residential			4				24				3,492				3				33				2,478				7				57				5,970
Totals			7			$	33			$	6,985				8			$	99			$	8,518				15			$	132			$	15,503
Held-to-Maturity
Mortgage-backed securities – residential(1)			1			$	-			$	173				-			$	-			$	-				1			$	-			$	173
State and municipal securities			7				5				924				6				13				1,422				13				18				2,346
Totals			8			$	5			$	1,097				6			$	13			$	1,422				14			$	18			$	2,519

 

		December 31, 2016
		Less than Twelve Months												Twelve Months or More												Total
		Number of												Number of												Number of
		Individual				Unrealized				Fair				Individual				Unrealized				Fair				Individual				Unrealized				Fair
(Dollars in thousands)		Securities				Losses				Value				Securities				Losses				Value				Securities				Losses				Value
Available-for-Sale
U.S. Government and agency obligations			6			$	110			$	6,996				-			$	-			$	-				6			$	110			$	6,996
Mortgage-backed securities - residential			3				49				4,441				2				14				987				5				63				5,428
Totals			9			$	159			$	11,437				2			$	14			$	987				11			$	173			$	12,424
Held-to-Maturity
Mortgage-backed securities – residential(1)			1			$	-			$	178				-			$	-			$	-				1			$	-			$	178
State and municipal securities(1)			14				74				4,275				1				-				45				15				74				4,320
Totals			15			$	74			$	4,453				1			$	-			$	45				16			$	74			$	4,498

 

⁽¹⁾ Aggregate unrealized loss position of these securities is less than $500.

 

The Company conducts a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (“OTTI”). The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the statement of condition date. Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires that credit-related OTTI is recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Non-credit-related OTTI is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of OTTI is made in the consolidated statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI. The gross OTTI would then be offset by the amount of non-credit-related OTTI, showing the net as the impact on earnings.

 

 

There were 29 securities in an unrealized loss position at September 30, 2017, of which 14 have been in loss positions for a period greater than twelve months and 15 have been in loss positions for a period less than twelve months. This compares to 27 securities in an unrealized loss position at December 31, 2016, of which three had been in loss positions for a period greater than twelve months and 24 had been in loss positions for a period less than twelve months. These issuing entities are currently rated Aaa by Moody’s Investor Services and AA+ by Standard and Poors. Among the 14 securities in loss positions for a period greater than twelve months at September 30, 2017, eight were either direct issuances of, or mortgage-backed securities or collateralized mortgage obligations issued by, the following entities sponsored and guaranteed by the United States Government: GNMA, FNMA, and FHLMC. The remaining six securities that have been in a loss position for a period greater than twelve months were issued by a state or political subdivision, primarily local municipalities. The unrealized losses reflected are primarily attributable to changes in interest rates since the securities were acquired.

 

Among the 15 securities in an unrealized loss position at September 30, 2017 for less than twelve months, eight were either direct issuances of, or mortgage-backed securities or collateralized mortgage obligations issued by, the following entities sponsored and guaranteed by the United States Government: FNMA, FHLMC, FHLB and FFCB. The remaining seven securities were issued by a state or political subdivision, primarily local municipalities. The unrealized losses reflected are primarily attributable to changes in interest rates since the securities were acquired. The Company does not intend to sell these securities, nor is it more likely than not, that the Company will be required to sell these securities prior to recovery of the amortized cost. The state and municipal securities are general obligation (G.O.) bonds backed by the full faith and credit of local municipalities. There has never been a default of a New York G.O. in the history of the state. Historical performance does not guarantee future performance, but it does indicate that the risk of loss on default of a G.O. municipal bond for the Company is relatively low. All are paying in accordance with their terms with no deferrals of interest or defaults. As such, management does not believe any individual unrealized loss as of September 30, 2017 represents OTTI.

 

There were no gross realized gains or losses on sales of securities for the three and nine months ended September 30, 2017. There were $24,000 of gross realized gains on sales of securities available-for-sale and $12,000 of gross realized gains on sales of securities held-to-maturity resulting from proceeds of $2.6 million for the three months and nine months ended September 30, 2016. In accordance with accounting guidance, the Company was able to sell securities classified as held-to-maturity after the Company had already collected a substantial portion (at least 85%) of the principal outstanding at acquisition due either to prepayments or to scheduled principal and interest payments on debt securities.

 

As of September 30, 2017 and December 31, 2016, no securities were pledged to secure public deposits or for any other purpose required or permitted by law.

 

Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of investing in, or originating, these types of investments or loans.

 

 

Note 5: Loans

 

Major classifications of loans at the indicated dates are as follows:

 

		September 30,				December 31,
(In thousands)		2017				2016
Real estate loans:
Secured by one-to-four family residences		$	201,711			$	188,573
Secured by multi-family residences			8,602				5,103
Construction			10,295				6,134
Commercial real estate			12,728				8,440
Home equity lines of credit			17,690				16,797
Total real estate loans			251,026				225,047
Commercial and industrial loans			3,203				1,947
Other loans			68				75
Total loans			254,297				227,069
Net deferred loan origination costs			(6	)			113
Less allowance for loan losses			(1,186	)			(990	)
Loans receivable, net		$	253,105			$	226,192

 

The Company originates residential mortgage, commercial, and consumer loans largely to customers throughout Monroe county and the surrounding western New York counties of Erie, Livingston, Ontario, Orleans, Jefferson and Wayne. Although the Company has a diversified loan portfolio, a substantial portion of its borrowers’ abilities to honor their loan contracts is dependent upon the counties’ employment and economic conditions.

 

As of September 30, 2017 and December 31, 2016, residential mortgage loans with a carrying value of $186.6 million and $165.5 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and term borrowings. The Company retains the servicing on most fixed-rate mortgage loans sold and receives a fee based on the principal balance outstanding. Loans serviced for others totaled $131.5 million and $118.6 million at September 30, 2017 and December 31, 2016, respectively. Loan servicing rights are recorded at fair value when loans are sold with servicing rights retained. The fair value of the mortgage servicing rights (“MSRs”) is determined using a method which utilizes servicing income, discount rates, and prepayment speeds relative to the Bank’s portfolio for MSRs and are amortized over the life of the loan. MSRs amounted to $895,000 and $804,000 at September 30, 2017 and December 31, 2016, respectively, and are included in other assets on the consolidated balance sheets.

 

Loan Origination / Risk Management

 

The Company’s lending policies and procedures are presented in Note 3 to the consolidated financial statements included in FSB Bancorp’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2017 and have not changed.

 

To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into two portfolio segments, each with different risk characteristics but with similar methodologies for assessing risk.  Each portfolio segment is broken down into loan classes where appropriate.  Loan classes contain unique measurement attributes, risk characteristics, and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class. 

 

 

The following table illustrates the portfolio segments and classes for the Company’s loan portfolio:

 

Portfolio Segment		Class
Real Estate Loans		Secured by one-to-four family residences
		Secured by multi-family residences
		Construction Commercial real estate Home equity lines of credit
Other Loans		Commercial and industrial
		Other loans

 

The following tables present the classes of the loan portfolio, not including net deferred loan fees, summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated:

 

		As of September 30, 2017
						Special
(In thousands)		Pass				Mention				Substandard				Doubtful				Total
Real estate loans:
Secured by one-to-four family residences		$	198,887			$	-			$	2,824			$	-			$	201,711
Secured by multi-family residences			8,602				-				-				-				8,602
Construction			10,295				-				-				-				10,295
Commercial real estate			12,728				-				-				-				12,728
Home equity lines of credit			17,454				-				236				-				17,690
Total real estate loans			247,966				-				3,060				-				251,026
Commercial & industrial loans			3,137				-				66				-				3,203
Other loans			68				-				-				-				68
Total loans		$	251,171			$	-			$	3,126			$	-			$	254,297

 

		As of December 31, 2016
						Special
(In thousands)		Pass				Mention				Substandard				Doubtful				Total
Real estate loans:
Secured by one-to-four family residences		$	187,079			$	-			$	1,494			$	-			$	188,573
Secured by multi-family residences			5,103				-				-				-				5,103
Construction			6,134				-				-				-				6,134
Commercial real estate			8,440				-				-				-				8,440
Home equity lines of credit			16,498				-				299				-				16,797
Total real estate loans			223,254				-				1,793				-				225,047
Commercial & industrial loans			1,900				-				47				-				1,947
Other loans			75				-				-				-				75
Total loans		$	225,229			$	-			$	1,840			$	-			$	227,069

 

Real estate loans secured by one-to four family residences rated substandard increased $1.3 million, or 89.0%, to $2.8 million at September 30, 2017 from $1.5 million at December 31, 2016 due to eight loans newly categorized as such during the nine months ended September 30, 2017.

 

 

Management has reviewed its loan portfolio and determined that, to the best of its knowledge, no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans.

 

Nonaccrual and Past Due Loans

 

Loans are placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing.

 

Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date. An age analysis of past due loans, segregated by portfolio segment and class of loans, as of September 30, 2017 and December 31, 2016, are detailed in the following tables:

 

		As of September 30, 2017
		30-59 Days				60-89 Days
		Past Due				Past Due				90 Days				Total								Total Loans
(In thousands)		And Accruing				And Accruing				and Over				Past Due				Current				Receivable
Real estate loans:
Secured by one-to-four family residences		$	495			$	-			$	37			$	532			$	201,179			$	201,711
Secured by multi-family residences			-				-				-				-				8,602				8,602
Construction			-				-				-				-				10,295				10,295
Commercial			-				-				-				-				12,728				12,728
Home equity lines of credit			-				-				-				-				17,690				17,690
Total real estate loans			495				-				37				532				250,494				251,026
Commercial & industrial loans			-				-				66				66				3,137				3,203
Other loans			-				-				-				-				68				68
Total loans		$	495			$	-			$	103			$	598			$	253,699			$	254,297

  

		As of December 31, 2016
		30-59 Days				60-89 Days
		Past Due				Past Due				90 Days				Total								Total Loans
(In thousands)		And Accruing				And Accruing				and Over				Past Due				Current				Receivable
Real estate loans:
Secured by one-to-four family residences		$	89			$	-			$	-			$	89			$	188,484			$	188,573
Secured by multi-family residences			-				-				-				-				5,103				5,103
Construction			-				-				-				-				6,134				6,134
Commercial			-				-				-				-				8,440				8,440
Home equity lines of credit			-				-				-				-				16,797				16,797
Total real estate loans			89				-				-				89				224,958				225,047
Commercial & industrial loans			47				-				-				47				1,900				1,947
Other loans			-				-				-				-				75				75
Total loans		$	136			$	-			$	-			$	136			$	226,933			$	227,069

 

Real estate loans secured by one-to four family residences 30-59 days past due and accruing increased $406,000, or 456.2%, to $495,000 at September 30, 2017 from $89,000 at December 31, 2016 due to three loans newly categorized as such during the nine months ended September 30, 2017.

 

 

At September 30, 2017, the Company had one nonaccrual residential mortgage loan for $37,000. At December 31, 2016, the Company had no nonaccrual loans.

 

There was one commercial and industrial loan for $66,000 that was past due 90 days or more and still accruing interest at September 30, 2017 and no loans that were past due 90 days or more and still accruing interest at December 31, 2016. At September 30, 2017 and December 31, 2016, there were no loans considered to be impaired and no troubled debt restructurings.

 

Note 6: Allowance for Loan Losses and Foreclosed Real Estate

 

Summarized in the tables below are changes in the allowance for loan losses for the indicated periods and information pertaining to the allocation of the allowance for loan losses, balances of the allowance for loan losses, loans receivable based on individual, and collective impairment evaluation by loan portfolio class. An allocation of a portion of the allowance to a given portfolio class does not limit the Company’s ability to absorb losses in another portfolio class.

 

		For the three months ended September 30, 2017
		Secured by				Secured by
		one-to-four				multi-family												Home equity
		family residences				residences				Construction				Commercial				lines of credit				Commercial				Other/
(In thousands)		real estate loans				real estate loans				real estate loans				real estate loans				real estate loans				& industrial				Unallocated				Total
Allowance for loan losses:
Beginning Balance		$	690			$	47			$	49			$	106			$	109			$	38			$	63			$	1,102
Charge-offs			-				-				-				-				-				-				-				-
Recoveries			-				-				-				-				-				-				-				-
Provisions			93				18				2				21				2				9				(61	)			84
Ending balance		$	783			$	65			$	51			$	127			$	111			$	47			$	2			$	1,186

 

		For the three months ended September 30, 2016
		Secured by				Secured by
		one-to-four				multi-family												Home equity
		family residences				residences				Construction				Commercial				lines of credit				Commercial				Other/
(In thousands)		real estate loans				real estate loans				real estate loans				real estate loans				real estate loans				& industrial				Unallocated				Total
Allowance for loan losses:
Beginning Balance		$	569			$	39			$	18			$	47			$	105			$	13			$	109			$	900
Charge-offs			-				-				-				-				-				-				-				-
Recoveries			-				-				-				-				-				-				-				-
Provisions			(15	)			-				9				18				3				11				19				45
Ending balance		$	554			$	39			$	27			$	65			$	108			$	24			$	128			$	945

 

		For the nine months ended September 30, 2017
		Secured by				Secured by
		one-to-four				multi-family												Home equity
		family residences				residences				Construction				Commercial				lines of credit				Commercial				Other/
(In thousands)		real estate loans				real estate loans				real estate loans				real estate loans				real estate loans				& industrial				Unallocated				Total
Allowance for loan losses:
Beginning Balance		$	584			$	38			$	31			$	84			$	112			$	28			$	113			$	990
Charge-offs			-				-				-				-				-				-				-				-
Recoveries			-				-				-				-				-				-				-				-
Provisions			199				27				20				43				(1	)			19				(111	)			196
Ending balance		$	783			$	65			$	51			$	127			$	111			$	47			$	2			$	1,186

 

 

		For the nine months ended September 30, 2016
		Secured by				Secured by
		one-to-four				multi-family												Home equity
		family residences				residences				Construction				Commercial				lines of credit				Commercial				Other/
(In thousands)		real estate loans				real estate loans				real estate loans				real estate loans				real estate loans				& industrial				Unallocated				Total
Allowance for loan losses:
Beginning Balance		$	524			$	39			$	6			$	35			$	101			$	11			$	95			$	811
Charge-offs			-				-				-				-				-				-				(1	)			(1	)
Recoveries			-				-				-				-				-				-				-				-
Provisions			30				-				21				30				7				13				34				135
Ending balance		$	554			$	39			$	27			$	65			$	108			$	24			$	128			$	945

 

The Company had no foreclosed real estate at September 30, 2017 or December 31, 2016.

 

At September 30, 2017, the Company had one residential real estate loan for $37,000 in the process of foreclosure and at December 31, 2016, the Company did not have any residential real estate loans in the process of foreclosure.

 

Note 7: Fair Value Measurements

 

Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:

 

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.

 

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

 

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs, minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.

 

 

The following tables summarize assets measured at fair value on a recurring basis as of the indicated dates, segregated by the level of valuation inputs within the hierarchy utilized to measure fair value:

 

		September 30, 2017
(In thousands)		Level 1				Level 2				Level 3				Total Fair Value
Available-for-sale portfolio
U.S. Government and agency obligations		$	-			$	10,539			$	-			$	10,539
Mortgage-backed securities – residential			-				8,514				-				8,514
Total available-for-sale securities		$	-			$	19,053			$	-			$	19,053

 

		December 31, 2016
(In thousands)		Level 1				Level 2				Level 3				Total Fair Value
Available-for-sale portfolio
U.S. Government and agency obligations		$	-			$	7,999			$	-			$	7,999
Mortgage-backed securities – residential			-				9,748				-				9,748
Total available-for-sale securities		$	-			$	17,747			$	-			$	17,747

 

There have been no transfers of assets into or out of any fair value measurement level during the quarter ended September 30, 2017.

 

Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, 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 derived 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.

 

The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. 

 

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

 

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

 

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

 

Cash, Due from Banks, and Interest Earning Demand Deposits

 

The carrying amounts of these assets approximate their fair values.

 

Investment Securities

 

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather relying on the securities’ relationship to other benchmark quoted prices and is considered to be a Level 2 measurement.

 

Investment in Restricted Stock

 

The carrying value of restricted stock, which consists of Federal Home Loan Bank and Atlantic Community Bankers Bank, approximates its fair value based on the redemption provisions of the restricted stock, resulting in a Level 2 classification.

 

Loans

 

The fair values of loans held in portfolio are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans, resulting in a Level 3 classification. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

 

Mortgage loans held for sale in the secondary market are carried at the lower of cost or fair value, resulting in a Level 2 classification. Separate determinations of fair value for residential and commercial loans are made on an aggregate basis. Fair value is determined based solely on the effect of changes in secondary market interest rates and yield requirements from the commitment date to the date of the financial statements.

 

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), resulting in a Level 1 classification. The carrying amounts for variable-rate certificates of deposit approximate their fair values at the reporting date, resulting in a Level 1 classification. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits, resulting in a Level 2 classification.

 

 

Borrowings

 

The fair values of FHLB long-term borrowings are estimated using discounted cash flow analyses, based on the quoted rates for new FHLB advances with similar credit risk characteristics, terms and remaining maturity, resulting in a Level 2 classification.

 

The carrying amounts and fair values of the Company’s financial instruments as of the indicated dates are presented in the following table:

 

				September 30, 2017								December 31, 2016
		Fair Value		Carrying				Estimated				Carrying				Estimated
(In thousands)		Hierarchy		Amounts				Fair Values				Amounts				Fair Values
Financial assets:
Cash and due from banks		1		$	1,409			$	1,409			$	1,634			$	1,634
Interest earning demand deposits		1			5,542				5,542				5,773				5,773
Securities - available-for-sale		2			19,053				19,053				17,747				17,747
Securities - held-to-maturity		2			6,919				6,959				7,420				7,384
Investment in restricted stock		2			3,498				3,498				2,886				2,886
Loans held for sale		2			4,180				4,180				2,059				2,059
Loans, net		3			253,105				252,144				226,192				225,569
Accrued interest receivable		1			798				798				652				652
Financial liabilities:
Demand Deposits, Savings, NOW and MMDA		1			99,222				99,222				94,926				94,926
Time Deposits		2			100,331				100,509				88,008				88,043
Borrowings		2			69,523				69,441				56,813				57,008
Accrued interest payable		1			86				86				71				71

 

 

Note 8: Accumulated Other Comprehensive Income (Loss)

 

Changes in the components of accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the periods indicated are summarized in the table below.

  

		For the three months ended September 30, 2017
(In thousands)		Unrealized Gains and Losses on Available-for-Sale Securities				Unrealized Loss on Securities Transferred to Held-to-Maturity				Total
Beginning balance		$	(66	)		$	-			$	(66	)
Other comprehensive loss before reclassifications			(5	)			-				(5	)
Ending balance		$	(71	)		$	-			$	(71	)

 

		For the three months ended September 30, 2016
(In thousands)		Unrealized Gains and Losses on Available-for-Sale Securities				Securities reclassified from AFS to HTM				Total
Beginning balance		$	75			$	(45	)		$	30
Other comprehensive (loss) income before reclassifications			(53	)			45				(8	)
Ending balance		$	22			$	-			$	22

  

		For the three months ended September 30,
Details about AOCI		2017				2016				Affected Line Item in the Statement of Income
Available for sale securities		$	-			$	24			Realized gain on sale of securities
Held to maturity securities			-				12			Realized gain on sale of securities
			-				(12	)		Provision for Income Taxes
		$	-			$	24			Net Income

 

 

		For the nine months ended September 30, 2017
(In thousands)		Unrealized Gains and Losses on Available-for-Sale Securities				Unrealized Loss on Securities Transferred to Held-to-Maturity				Total
Beginning balance		$	(85	)		$	-			$	(85	)
Other comprehensive income before reclassifications			14				-				14
Ending balance		$	(71	)		$	-			$	(71	)

 

		For the nine months ended September 30, 2016
(In thousands)		Unrealized Gains and Losses on Available-for-Sale Securities				Securities reclassified from AFS to HTM				Total
Beginning balance		$	(4	)		$	(208	)		$	(212	)
Other comprehensive income before reclassifications			26				208				234
Ending balance		$	22			$	-			$	22

  

		For the nine months ended September 30,
Details about AOCI		2017				2016				Affected Line Item in the Statement of Income
Available for sale securities		$	-			$	24			Realized gain on sale of securities
Held to maturity securities			-				12			Realized gain on sale of securities
			-				(12	)		Provision for Income Taxes
		$	-			$	24			Net Income

 

 

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Statement Regarding Forward-Looking Statements

 

Certain statements contained herein are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

·

Credit quality and the effect of credit quality on the adequacy of our allowance for loan losses;

·

Deterioration in financial markets that may result in impairment charges relating to our securities portfolio;

·

Competition in our primary market areas;

·

Changes in interest rates and national or regional economic conditions;

·

Changes in monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

·

Significant government regulations, legislation and potential changes thereto;

·

A reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;

·

Increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;

·

Limitations on our ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations; and

·

Other risks described herein and in the other reports and statements we file with the SEC.

 

The Company disclaims any obligation to revise or update any forward-looking statements contained in this quarterly report on Form 10-Q to reflect future events or developments.

 

Non-GAAP Financial Measures

 

Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including earnings releases, made by registered companies that contain “non-GAAP financial measures.”  GAAP is generally accepted accounting principles in the United States of America.  Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures.  The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP.  When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions like the Company and its subsidiary banks are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP and are not easily reconcilable to the closest comparable GAAP financial measures, even in those cases where a comparable measure exists. The Company follows industry practice in disclosing its financial condition under these various regulatory capital measures, including period-end regulatory capital ratios for itself and its subsidiary banks, in its periodic reports filed with the SEC, and does so without compliance with Regulation G, on the widely-shared assumption that the SEC regards such non-GAAP measures to be exempt from Regulation G.  The Company uses in this Report additional non-GAAP financial measures that are commonly utilized by financial institutions and have not been specifically exempted by the SEC from Regulation G. The Company provides, as supplemental information, such non-GAAP measures included in this Report as described immediately below.

 

Overview

 

The following discussion reviews the Company's financial condition at September 30, 2017 and at December 31, 2016 and the results of operations for the three and nine month periods ended September 30, 2017 and 2016. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other period.

 

 

Our business has traditionally focused on originating one- to four-family residential real estate mortgage loans and home equity lines of credit, and offering retail deposit accounts. Our primary market area consists of Monroe County and the surrounding western New York counties of Erie, Livingston, Ontario, Orleans, Jefferson and Wayne. We continue to expand our commercial lending activities in an effort to improve our interest rate risk exposure through the origination of shorter duration commercial loan products. We intend to generally sell all of the fixed-rate residential real estate loans with terms of 15 years or greater that we originate in order to manage interest rate risk. We continue to evaluate growth opportunities of the investment portfolio, while mainly focusing on higher yielding assets, primarily shorter duration or adjustable rate one- to four-family mortgage loans, commercial real estate loans, and commercial and industrial loans in 2017.

 

Our results of operations depend primarily on our net interest income and, to a lesser extent, other 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 and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of savings accounts, NOW accounts, money market accounts, time deposits and borrowings. Other income consists primarily of realized gains on sale of loans, mortgage fee income, fees and service charges from deposit products, fee income from our financial services subsidiary, earnings on bank owned life insurance and miscellaneous other income. Our results of operations also are affected by our provision for loan losses and other expenses. Other expenses consist primarily of salaries and employee benefits, occupancy, equipment, electronic banking, data processing costs, mortgage fees and taxes, advertising, directors’ fees, FDIC deposit insurance premium expense, audit and tax services, and other miscellaneous 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.

 

Critical Accounting Policies

 

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. The most significant accounting policies followed by the Company are presented in FSB Bancorp's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2017. These policies, along with the disclosures presented in the other financial statement notes filed with the SEC and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. We believe that the most critical accounting policies upon which our financial condition and results of operations depend, involve the most complex subjective decisions or assessments including our policies with respect to our allowance for loan losses, deferred tax assets and the estimation of fair values for accounting and disclosure purposes. These areas could be the most subject to revision as new information becomes available. There have been no significant changes in application of critical accounting policies during the three and nine months ended September 30, 2017.

 

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.

 

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

 

 

The evaluation has specific, general, and unallocated components. The specific component relates to loans that are deemed to be impaired and classified as special mention, substandard, doubtful, or loss. 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 known and inherent losses in the portfolio.

 

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

 

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

 

Estimation of Fair Values. Fair values for securities available-for-sale are obtained from an independent third party pricing service. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management generally makes no adjustments to the fair value quotes provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of impaired loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.

 

Comparison of Financial Condition at September 30, 2017 and at December 31, 2016

 

Total Assets. Total assets increased $30.9 million, or 11.3%, to $304.6 million at September 30, 2017 from $273.7 million at December 31, 2016, primarily due to increases in net loans receivable, securities available-for-sale, other assets, and investment in restricted stock, partially offset by decreases in cash and cash equivalents and securities held-to-maturity.

 

Cash and cash equivalents, primarily interest-earning demand deposits at the Federal Reserve Bank and the Federal Home Loan Bank, decreased by $456,000, or 6.2%, to $7.0 million at September 30, 2017 from $7.4 million at December 31, 2016, as it was used to fund loans.

 

Net loans receivable increased $26.9 million, or 11.9%, to $253.1 million at September 30, 2017 from $226.2 million at December 31, 2016. The Bank continues to focus on loan production as we continue to grow our one-to four-family residential mortgage, construction, and commercial loan portfolios at a measured pace while still maintaining our strong credit quality and strict underwriting standards. One-to four-family residential mortgage loans increased $13.1 million, or 7.0%, to $201.7 million at September 30, 2017 from $188.6 million at December 31, 2016. Construction, primarily residential loans increased $4.2 million, or 67.8%, to $10.3 million at September 30, 2017 from $6.1 million at December 31, 2016. Commercial real estate loans increased $4.3 million, or 50.8%, to $12.7 million at September 30, 2017 from $8.4 million at December 31, 2016. Multi-family residential loans increased $3.5 million, or 68.6%, to $8.6 million at September 30, 2017 from $5.1 million at December 31, 2016. Commercial and industrial loans increased $1.3 million, or 64.5%, to $3.2 million at September 30, 2017 from $1.9 million at December 31, 2016. We anticipate continued growth in loan production throughout the remainder of the year. The Bank originated $83.1 million of residential mortgage loans and sold $53.0 million of such loans in the secondary market as a balance sheet management strategy during the first nine months of 2017 to reduce interest rate risk. The Bank sold these loans at a gain of $1.7 million which was recorded in other income. At September 30, 2017, the Bank was servicing $131.5 million in residential mortgage loans sold to third parties and will realize servicing income on these loans as long as they remain outstanding. At September 30, 2017, the Bank had $4.2 million in loans held for sale, comprised of one- to four-family residential fixed rate conventional, FHA, and VA mortgage loans originated and closed by the Bank in the third quarter of 2017 that have been committed for sale in the secondary market, and will be delivered and sold in the fourth quarter of 2017. Mortgage servicing rights increased $91,000, or 11.3%, to $895,000 at September 30, 2017 compared to $804,000 at December 31, 2016, and are included in other assets on the consolidated balance sheets.

 

 

Securities available-for-sale increased by $1.3 million, or 7.4%, to $19.1 million at September 30, 2017 from $17.7 million at December 31, 2016. The increase was primarily due to purchases of $7.5 million in new securities, mainly U.S. Government and agency obligations and mortgage backed securities and an increase in the fair market value of available-for-sale securities of $21,000, partially offset by calls and principal repayments of $6.2 million and amortization of $80,000 during the first nine months of 2017.

 

Securities held-to-maturity decreased $501,000, or 6.8%, to $6.9 million at September 30, 2017 from $7.4 million at December 31, 2016 due to calls and principal repayments of $811,000 and amortization of $25,000, partially offset by purchases of $335,000 during the first nine months of 2017.

 

Investment in restricted stock increased by $612,000, or 21.2%, to $3.5 million at September 30, 2017 from $2.9 million at December 31, 2016 commensurate with increased borrowings.

 

Other assets increased by $678,000, or 27.3%, to $3.2 million at September 30, 2017 from $2.5 million at December 31, 2016.

 

Deposits and Borrowings. Total deposits increased $16.6 million, or 9.1%, to $199.6 million at September 30, 2017 from $182.9 million at December 31, 2016 primarily due to increases in money market accounts and certificates of deposit from promotional specials to fund our residential and commercial loan growth. Total borrowings from the Federal Home Loan Bank of New York increased $12.7 million, or 22.4%, to $69.5 million at September 30, 2017 from $56.8 million at December 31, 2016 to fund our residential and commercial loan growth. Long-term borrowings increased $4.2 million, or 8.3%, to $55.0 million at September 30, 2017 from $50.8 million at December 31, 2016 due to $16.5 million in new advances partially offset by $12.3 million in principal repayments on our amortizing advances and maturities. The Company increased its short-term borrowings by $8.5 million, or 141.7%, to $14.5 million at September 30, 2017 compared to $6.0 million at December 31, 2016 with the intention of reducing these balances in the fourth quarter of 2017 due to increased deposit growth from additional promotional specials.

 

Stockholders’ Equity. Stockholders’ equity decreased $546,000, or 1.7%, to $31.3 million at September 30, 2017 from $31.9 million at December 31, 2016. The decrease was primarily due to a decrease of $1.1 million in additional paid in capital as a result of share repurchases, partially offset by $453,000 in net income, a decrease of $14,000 in accumulated other comprehensive loss and an increase of $39,000 resulting from the release of ESOP shares from the suspense account during the nine months ended September 30, 2017.

 

Comparison of Operating Results for the Three Months Ended September 30, 2017 and 2016

 

General. Net income decreased $50,000, or 19.8%, to $202,000 for the quarter ended September 30, 2017 from $252,000 for the quarter ended September 30, 2016. The quarter over quarter decrease was attributable to increases in other expense of $58,000, provision for loan losses of $39,000, and provision for income taxes of $20,000 as well as a decrease in other income of $131,000, partially offset by an increase in net interest income of $198,000.

 

Interest and Dividend Income. Total interest and dividend income increased $407,000, or 17.3%, to $2.8 million for the quarter ended September 30, 2017 from $2.4 million for the quarter ended September 30, 2016. The increase resulted from a $33.0 million increase quarter over quarter in average interest-earning assets, primarily residential mortgage and commercial real estate loans, resulting in a 14 basis point increase in the average yield earned on interest-earning assets from 3.76% for the three months ended September 30, 2016 to 3.90% for the three months ended September 30, 2017.

 

Interest income on loans increased $400,000, or 18.0%, to $2.6 million for the quarter ended September 30, 2017 from $2.2 million for the quarter ended September 30, 2016, reflecting a $35.6 million increase in the average balance of loans to $252.9 million for the three months ended September 30, 2017 from $217.3 million for the three months ended September 30, 2016, in addition to a five basis point increase in the average yield earned on loans for the three months ended September 30, 2017 as compared to the same period in 2016. The increase in the average balance of loans was due to our focus on increasing our portfolios of one- to four-family residential mortgages, commercial real estate, and commercial and industrial loans, and to a lesser extent, home equity lines of credit during the three months ended September 30, 2017 as compared to the same period in 2016. The average yield on loans increased to 4.14% for the three months ended September 30, 2017 from 4.09% for the three months ended September 30, 2016, reflecting increases in market interest rates on loan products, primarily commercial mortgages, commercial and industrial, and consumer loans.

 

 

Interest income on taxable investment securities increased $28,000, or 53.9%, to $80,000 for the three months ended September 30, 2017 from $52,000 for the three months ended September 30, 2016. The average balance of taxable investment securities increased $4.7 million, or 56.2%, to $13.1 million for the three months ended September 30, 2017 from $8.4 million for the three months ended September 30, 2016. The average yield on taxable investment securities decreased four basis points to 2.43% during the quarter ended September 30, 2017 as compared to 2.47% for the quarter ended September 30, 2016 due to new purchases of shorter-term lower yielding investment securities replacing calls of modestly higher yielding investment securities. Interest income on mortgage-backed securities decreased $24,000 to $26,000 for the three months ended September 30, 2017, from $50,000 for the three months ended September 30, 2016, reflecting a decrease in the average yield on mortgage-backed securities of 33 basis points to 1.17% for the three months ended September 30, 2017 from 1.50% for the three months ended September 30, 2016 and a decrease in the average balance of mortgage-backed securities of $4.5 million, or 33.8%, to $8.9 million for the three months ended September 30, 2017 from $13.4 million for the three months ended September 30, 2016. The decrease in average yield on mortgage-backed securities was primarily attributable to faster prepayment speeds on the pools of mortgage-backed securities held in portfolio during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. A portion of the cash flow from these investment and mortgage-backed securities was redeployed to fund loan growth. Interest income on tax-exempt state and municipal securities increased $2,000, to $27,000 for the three months ended September 30, 2017, from $25,000 for the three months ended September 30, 2016. The average balance of state and municipal securities increased by $591,000, or 10.6%, from $5.6 million for the three months ended September 30, 2016 to $6.2 million for the three months ended September 30, 2017, partially offset as the average tax equivalent yield decreased by 17 basis points to 2.56% for the three months ended September 30, 2017 from 2.73% for the three months ended September 30, 2016, as higher yielding state and municipal securities matured and were replaced by modestly lower yielding state and municipal securities. Interest income on Fed Funds sold increased $1,000, or 10.0%, to $11,000 for the three months ended September 30, 2017 from $10,000 for the three months ended September 30, 2016. The average yield on Fed Funds sold increased 59 basis points to 1.12% during the quarter ended September 30, 2017 as compared to 0.53% for the quarter ended September 30, 2016, partially offset by a decrease in the average balance of Fed Funds sold of $3.4 million, or 45.5%, to $4.1 million for the three months ended September 30, 2017 from $7.5 million for the three months ended September 30, 2016.

 

Total Interest Expense. Total interest expense increased $209,000, or 40.7%, to $723,000 for the quarter ended September 30, 2017 from $514,000 for the quarter ended September 30, 2016. Total interest expense reflected an increase in interest expense on deposits of $134,000 and an increase in interest expense on borrowings of $75,000 when comparing the quarters ended September 30, 2017 and 2016. The total interest expense reflected an increase in the average cost of interest-bearing liabilities of 20 basis points from 0.95% for the three months ended September 30, 2016 to 1.15% for the three months ended September 30, 2017, in addition to an increase of $34.7 million in average interest-bearing liabilities.

 

Interest expense on deposits increased $134,000, or 38.5%, to $482,000 for the three months ended September 30, 2017 from $348,000 for the three months ended September 30, 2016. The average cost of deposits increased to 1.00% for the three months ended September 30, 2017 from 0.80% for the three months ended September 30, 2016, primarily reflecting higher average balances on promotional money market and certificates of deposit accounts offered during the third quarter of 2017. The average balance of deposits increased $20.1 million, or 11.6%, from $173.5 million for the three months ended September 30, 2016 to $193.6 million for the three months ended September 30, 2017 also primarily due to promotional certificates of deposit and money market accounts offered in the third quarter of 2017. The average cost of certificates of deposit (including individual retirement accounts) increased to 1.39% for the three months ended September 30, 2017 from 1.21% for the three months ended September 30, 2016, in addition to an increase in the average balance of these accounts by $8.1 million to $99.8 million for the three months ended September 30, 2017 from $91.7 million for the three months ended September 30, 2016. The average balance of transaction accounts, our core non-time deposit accounts, increased by $5.7 million to $103.1 million for the three months ended September 30, 2017 from $97.5 million for the three months ended September 30, 2016, along with an increase in the average cost of transaction accounts of 23 basis points to 0.52% for the three months ended September 30, 2017 from 0.29% for the three months ended September 30, 2016 primarily due to promotional money market and certificates of deposit accounts.

 

 

At September 30, 2017, we had $10.6 million of certificates of deposit, including individual retirement accounts, scheduled to mature throughout the remainder of 2017. Based on current market interest rates, we expect that the cost of these deposits upon renewal will be at a similar cost to us as their current contractual rates.

 

Interest expense on borrowings increased $75,000 from $166,000 for the quarter ended September 30, 2016 to $241,000 for the quarter ended September 30, 2017, due to a $14.6 million increase in our average balance of borrowings with the Federal Home Loan Bank from $43.9 million for the three months ended September 30, 2016 to $58.4 million for the three months ended September 30, 2017, along with an increase in the average cost of these funds from 1.52% for the three months ended September 30, 2016 to 1.65% for the three months ended September 30, 2017.

 

Net Interest Income. Net interest income increased $198,000, or 10.7%, to $2.0 million for the quarter ended September 30, 2017 as compared to $1.8 million for the quarter ended September 30, 2016. Net interest income increased primarily due to a shift in the interest-earning asset mix to a greater level of higher yielding residential and commercial loans, while reducing lower yielding investment securities when comparing the quarter ended September 30, 2017 to the same period in 2016. Our net interest rate spread decreased six basis points to 2.75% for the quarter ended September 30, 2017 compared to 2.81% for the quarter ended September 30, 2016. There was an increase in the average cost of our interest-bearing liabilities of 20 basis points from 0.95% for the three months ended September 30, 2016 to 1.15% for the three months ended September 30, 2017, partially offset by a 14 basis point increase in the average yield on our interest-earning assets to 3.90% for the three months ended September 30, 2017 from 3.76% for the three months ended September 30, 2016. Our net interest margin decreased five basis points from 2.94% during the three months ended September 30, 2016 to 2.89% during the three months ended September 30, 2017.

 

Provision for Loan Losses. We establish provisions for loan losses which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses inherent in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan, and the levels of non-performing 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 at least 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 a $84,000 provision for loan losses for the quarter ended September 30, 2017, compared to a $45,000 provision for loan losses recorded for the quarter ended September 30, 2016. The increase in the three months ended September 30, 2017 was the result of additional specific and general provisions deemed necessary to support an increased balance of loans receivable, primarily one- to four-family residential real estate and commercial real estate, and to a lesser extent, multi-family residential real estate, home equity lines of credit, and commercial and industrial loans, as well as a potentially weaker economy. The increase in the specific provision was due to an increase in loans rated substandard which were newly classified as such during the three months ended September 30, 2017.The allowance for loan losses was $1.2 million, or 0.47% of net loans outstanding at September 30, 2017 compared to $945,000, or 0.44% of net loans outstanding, at September 30, 2016. The allowance for loan losses was $990,000, or 0.44% of net loans outstanding at December 31, 2016.

 

Other Income. Other income decreased by $131,000, or 11.3%, to $1.0 million for the three months ended September 30, 2017 compared to $1.2 million for the three months ended September 30, 2016. The decrease in other income was primarily due to decreases in realized gains on sales of loans and realized gains on sales of securities. Realized gains on sales of loans decreased $99,000, or 13.2%, to $650,000 for the three months ended September 30, 2017 from $749,000 for the three months ended September 30, 2016. The decrease in realized gains on sales of loans was primarily attributable to lower volume of mortgage loans sold in the third quarter of 2017 compared to the third quarter of 2016. The decrease in realized gains on sales of securities was due to no sales of securities during the third quarter of 2017 as compared to $36,000 in realized gains on sales of securities in the third quarter of 2016.

 

 

Other Expense. Other expense increased $58,000, or 2.2%, to $2.7 million for the three months ended September 30, 2017 from $2.6 million for the three months ended September 30, 2016. The increase in other expense was primarily attributable to increases in salaries and employee benefits of $86,000, miscellaneous other expense of $36,000, data processing costs of $28,000, and occupancy expense of $25,000, partially offset by a decrease in mortgage fees and taxes of $80,000. Salaries and employee benefits increased $86,000, or 5.3%, to $1.7 million for the three months ended September 30, 2017 from $1.6 million for the three months ended September 30, 2016 primarily due to annual merit increases for existing staff and the increased salary and commission costs associated with additional processing and mortgage origination staff as a result of mortgage loan growth. Miscellaneous other expense increased $36,000, or 17.4%, to $243,000 for the three months ended September 30, 2017 from $207,000 for the three months ended September 30, 2016 due to additional costs related to legal expense and professional services associated with becoming an SEC reporting company beginning in August 2016. Data processing costs increased $28,000, or 53.9%, to $80,000 for the three months ended September 30, 2017 from $52,000 for the three months ended September 30, 2016 primarily due to the additional expense associated with the conversion of our core processing system from in-house hosting to data center hosting beginning in September 2016. Occupancy expense increased $25,000, or 10.1%, to $273,000 for the three months ended September 30, 2017 from $248,000 for the three months ended September 30, 2016 primarily due to the added costs of acquiring additional office space in our Pittsford and Buffalo mortgage origination office locations. Mortgage fees and taxes decreased $80,000, or 65.0%, to $43,000 for the three months ended September 30, 2017 from $123,000 for the three months ended September 30, 2016 due to a recent change in New York State tax law which allowed for a refundable tax credit for mortgage recording tax expensed. Under New York law, a bank that paid special additional mortgage recording tax (“SAMRT”) on residential mortgages in any tax year beginning on or after January 1, 2015, may elect to treat the unused portion of the SAMRT credit on those mortgages as an overpayment of tax to be carried or refunded. Previously, any unused credits were only eligible to be carried forward to future years.

 

Income Taxes. Income tax expense increased $20,000, or 22.2%, to $110,000 for the three months ended September 30, 2017 from $90,000 for the three months ended September 30, 2016. The increase in income tax expense for the three months ended September 30, 2017 as compared to the same period in 2016 was due to the combination of a partial deferred tax asset valuation allowance reversal in the third quarter of 2016 and an increase in permanent differences reflected on the 2016 tax return filed during the third quarter of 2017. The effective tax rate was 35.3% for the three months ended September 30, 2017 compared to 26.3% for the three months ended September 30, 2016.

 

Comparison of Operating Results for the Nine Months Ended September 30, 2017 and 2016

 

General. Net income increased $14,000, or 3.2%, to $453,000 for the nine months ended September 30, 2017 from $439,000 for the nine months ended September 30, 2016. The year over year nine month increase was attributable to increases in net interest income of $539,000 and other income of $67,000, partially offset by increases in other expense of $481,000, provision for loan losses of $61,000, and provision for income taxes of $50,000.

 

Interest and Dividend Income. Total interest and dividend income increased $910,000, or 13.1%, to $7.8 million for the nine months ended September 30, 2017 from $6.9 million for the nine months ended September 30, 2016. The increase resulted from a $26.2 million year over year nine month increase in average interest-earning assets, primarily residential mortgage and commercial real estate loans, resulting in a nine basis point increase in the average yield earned on interest-earning assets from 3.72% for the nine months ended September 30, 2016 to 3.81% for the nine months ended September 30, 2017.

 

Interest income on loans increased $963,000, or 14.9%, to $7.4 million for the nine months ended September 30, 2017 from $6.5 million for the nine months ended September 30, 2016, reflecting a $30.8 million increase in the average balance of loans to $242.7 million for the nine months ended September 30, 2017 from $211.9 million for the nine months ended September 30, 2016, along with a one basis point increase in the average yield earned on loans for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase in the average balance of loans was due to our focus on increasing our portfolios of one- to four-family residential mortgages, commercial real estate, and commercial and industrial loans, and to a lesser extent, home equity lines of credit during the nine months ended September 30, 2017 as compared to the same period in 2016. The average yield on loans increased to 4.08% for the nine months ended September 30, 2017 from 4.07% for the nine months ended September 30, 2016, reflecting increases in market interest rates on loan products, primarily commercial mortgages, commercial and industrial, and consumer loans.

 

 

Interest income on taxable investment securities increased $1,000 to $219,000 for the nine months ended September 30, 2017 from $218,000 for the nine months ended September 30, 2016. The average balance of taxable investment securities increased $1.2 million, or 11.0%, to $12.2 million for the nine months ended September 30, 2017 from $11.0 million for the nine months ended September 30, 2016. The average yield on taxable investment securities decreased 25 basis points to 2.40% for the nine months ended September 30, 2017 as compared to 2.65% for the nine months ended September 30, 2016 due to new purchases of shorter-term lower yielding investment securities replacing calls of higher yielding investment securities. Interest income on mortgage-backed securities decreased $81,000 to $80,000 for the nine months ended September 30, 2017, from $161,000 for the nine months ended September 30, 2016, reflecting a decrease in the average yield on mortgage-backed securities of 36 basis points to 1.14% for the nine months ended September 30, 2017 from 1.50% for the nine months ended September 30, 2016 and a decrease in the average balance of mortgage-backed securities of $4.9 million, or 34.5%, to $9.4 million for the nine months ended September 30, 2017 from $14.3 million for the nine months ended September 30, 2016. The decrease in average yield on mortgage-backed securities was primarily attributable to faster prepayment speeds on the pools of mortgage-backed securities held in portfolio during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. A portion of the cash flow from these investment and mortgage-backed securities was redeployed to fund loan growth. Interest income on tax-exempt state and municipal securities increased $13,000 to $84,000 for the nine months ended September 30, 2017, from $71,000 for the nine months ended September 30, 2016. The average balance of state and municipal securities increased by $1.4 million, or 28.4%, from $5.0 million for the nine months ended September 30, 2016 to $6.5 million for the nine months ended September 30, 2017, partially offset as the average tax equivalent yield decreased by 26 basis points to 2.61% for the nine months ended September 30, 2017 from 2.87% for the nine months ended September 30, 2016, as higher yielding state and municipal securities matured and were replaced by modestly lower yielding state and municipal securities. Interest income on Fed Funds sold increased $14,000 to $35,000 for the nine months ended September 30, 2017 from $21,000 for the nine months ended September 30, 2016. The average yield on Fed Funds sold increased 51 basis points to 0.87% for the nine months ended September 30, 2017 as compared to 0.36% for the nine months ended September 30, 2016, partially offset by a decrease in the average balance of Fed Funds sold of $2.3 million, or 29.8%, to $5.4 million for the nine months ended September 30, 2017 from $7.7 million for the nine months ended September 30, 2016.

 

Total Interest Expense. Total interest expense increased $371,000, or 23.1%, to $2.0 million for the nine months ended September 30, 2017 from $1.6 million for the nine months ended September 30, 2016. Total interest expense reflected an increase in interest expense on deposits of $205,000 and an increase in interest expense on borrowings of $166,000 when comparing the nine months ended September 30, 2017 and 2016. The total interest expense reflected an increase in the average cost of interest-bearing liabilities of 12 basis points from 0.96% for the nine months ended September 30, 2016 to 1.08% for the nine months ended September 30, 2017, in addition to an increase of $21.4 million in average interest-bearing liabilities.

 

Interest expense on deposits increased $205,000, or 19.0%, to $1.3 million for the nine months ended September 30, 2017 from $1.1 million for the nine months ended September 30, 2016. The average cost of deposits increased to 0.93% for the nine months ended September 30, 2017 from 0.81% for the nine months ended September 30, 2016, primarily reflecting higher average balances on a promotional money market account offering during the first nine months of 2017. The average balance of deposits increased $7.4 million, or 4.2%, from $177.2 million for the nine months ended September 30, 2016 to $184.5 million for the nine months ended September 30, 2017 also primarily due to the promotional money market accounts offered in the first nine months of 2017. The average cost of certificates of deposit (including individual retirement accounts) increased to 1.31% for the nine months ended September 30, 2017 from 1.22% for the nine months ended September 30, 2016. The average balance of certificates of deposit (including individual retirement accounts) decreased by $2.8 million to $94.7 million for the nine months ended September 30, 2017 from $97.5 million for the nine months ended September 30, 2016. The average balance of transaction accounts, our core non-time deposit accounts, increased by $7.3 million to $98.4 million for the nine months ended September 30, 2017 from $91.1 million for the nine months ended September 30, 2016, along with an increase in the average cost of transaction accounts of 20 basis points to 0.47% for the nine months ended September 30, 2017 from 0.27% for the nine months ended September 30, 2016 primarily due to promotional money market accounts.

 

Interest expense on borrowings increased $166,000 from $529,000 for the nine months ended September 30, 2016 to $695,000 for the nine months ended September 30, 2017, due to a $14.0 million increase in our average balance of borrowings with the Federal Home Loan Bank from $45.3 million for the nine months ended September 30, 2016 to $59.3 million for the nine months ended September 30, 2017 in order to fund loan growth. The average cost of these funds was 1.56% for the nine months ended September 30, 2017 and 2016.

 

 

Net Interest Income. Net interest income increased $539,000, or 10.1%, to $5.9 million for the nine months ended September 30, 2017 as compared to $5.3 million for the nine months ended September 30, 2016. Net interest income increased primarily due to an increase of $4.8 million in net interest-earning assets to $32.2 million for the nine months ended September 30, 2017 from $27.3 million for the same period in 2016. Our net interest rate spread decreased three basis points to 2.73% for the nine months ended September 30, 2017 compared to 2.76% for the nine months ended September 30, 2016. There was an increase in the average yield on our interest-earning assets of nine basis points from 3.72% for the nine months ended September 30, 2016 to 3.81% for the nine months ended September 30, 2017, partially offset by a 12 basis point increase in the average cost of interest-bearing liabilities to 1.08% for the nine months ended September 30, 2017 from 0.96% for the nine months ended September 30, 2016. Our net interest margin remained flat at 2.86% during the nine months ended September 30, 2017 and 2016.

 

Provision for Loan Losses. We establish provisions for loan losses which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses inherent in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan, and the levels of non-performing 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 at least 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 a $196,000 provision for loan losses for the nine months ended September 30, 2017, compared to a $135,000 provision for loan losses recorded for the nine months ended September 30, 2016. The increase in the nine months ended September 30, 2017 was the result of additional specific and general provisions deemed necessary to support an increased balance of loans receivable, primarily one- to four-family residential real estate and commercial real estate, and to a lesser extent, multi-family residential real estate, home equity lines of credit, and commercial and industrial loans, as well as a potentially weaker economy. The increase in the specific provision was due to an increase in loans rated substandard which were newly classified as such during the nine months ended September 30, 2017. The allowance for loan losses was $1.2 million, or 0.47% of net loans outstanding at September 30, 2017 compared to $945,000, or 0.44% of net loans outstanding, at September 30, 2016. The allowance for loan losses was $990,000, or 0.44% of net loans outstanding at December 31, 2016.

 

Other Income. Other income increased by $67,000, or 2.5%, to $2.7 million for the nine months ended September 30, 2017. The increase in other income was primarily due to realized gains on sales of loans and mortgage fee income, partially offset by a decrease in realized gains on sales of securities. Realized gains on sales of loans increased $58,000, or 3.6%, to $1.7 million for the nine months ended September 30, 2017 from $1.6 million for the nine months ended September 30, 2016. The increase in realized gains on sales of loans was primarily attributable to additional volume of mortgage loans sold in the first nine months of 2017 compared to the same period in 2016. Mortgage fee income increased $27,000, or 4.6%, to $613,000 for the nine months ended September 30, 2017 from $586,000 for the nine months ended September 30, 2016 due to an increase in loan servicing fees from selling additional loans servicing retained in the first nine months of 2017. The decrease in realized gains on sales of securities was due to no sales of securities during the first nine months of 2017 as compared to $36,000 in realized gains on sales of securities in the first nine months of 2016.

 

 

Other Expense. Other expense increased $481,000, or 6.6%, to $7.8 million for the nine months ended September 30, 2017 from $7.3 million for the nine months ended September 30, 2016. The increase in other expense was primarily attributable to increases in salaries and employee benefits of $373,000, miscellaneous other expense of $206,000, data processing costs of $101,000, occupancy expense of $54,000, advertising of $39,000, and audit and tax services of $25,000, partially offset by decreases in mortgage fees and taxes of $222,000 and FDIC premium expense of $50,000. Salaries and employee benefits increased $373,000, or 8.4%, to $4.8 million for the nine months ended September 30, 2017 from $4.5 million for the nine months ended September 30, 2016 primarily due to annual merit increases for existing staff and the increased salary and commission costs associated with additional processing and mortgage origination staff as a result of mortgage loan growth. Miscellaneous other expense increased $206,000, or 37.0%, to $763,000 for the nine months ended September 30, 2017 from $557,000 for the nine months ended September 30, 2016 due to additional costs related to legal expense and professional services associated with becoming an SEC reporting company in the second half of 2016. Data processing costs increased $101,000, or 67.8%, to $250,000 for the nine months ended September 30, 2017 from $149,000 for the nine months ended September 30, 2016 primarily due to the additional expense associated with the conversion of our core processing system from in-house hosting to data center hosting in the third quarter of 2016. Occupancy expense increased $54,000, or 7.2%, to $801,000 for the nine months ended September 30, 2017 from $747,000 for the nine months ended September 30, 2016 primarily due to the added costs of acquiring additional office space in our Pittsford and Buffalo mortgage origination office locations. Advertising increased $39,000, or 47.0%, to $122,000 for the nine months ended September 30, 2017 from $83,000 for the nine months ended September 30, 2016 due to a promotional deposit gathering campaign strategically focused on branch deposit growth in 2017. Audit and tax services increased $25,000, or 22.3%, to $137,000 for the nine months ended September 30, 2017 from $112,000 for the nine months ended September 30, 2016 due to increased costs associated with becoming an SEC reporting company in the second half of 2016. Mortgage fees and taxes decreased $222,000, or 66.1%, to $114,000 for the nine months ended September 30, 2017 from $336,000 for the nine months ended September 30, 2016 due to a recent change in New York State tax law which allowed for a refundable tax credit for mortgage recording tax expensed. Under New York law, a bank that paid special additional mortgage recording tax (“SAMRT”) on residential mortgages in any tax year beginning on or after January 1, 2015, may elect to treat the unused portion of the SAMRT credit on those mortgages as an overpayment of tax to be carried or refunded. Previously, any unused credits were only eligible to be carried forward to future years. FDIC premium expense decreased $50,000, or 39.4%, to $77,000 for the nine months ended September 30, 2017 from $127,000 for the nine months ended September 30, 2016 primarily due to a revision in the calculation method resulting in a decreased assessment rate in 2017.

 

Income Taxes. Income tax expense increased $50,000, or 40.3%, from $124,000 for the nine months ended September 30, 2016 to $174,000 for the nine months ended September 30, 2017. The increase in income tax expense in the nine months ended September 30, 2017 as compared to the same period in 2016 was due to the combination of a partial deferred tax asset valuation allowance reversal in the first nine months of 2016 and an increase in permanent differences reflected on the 2016 tax return filed during the third quarter of 2017. The effective tax rate was 27.8% for the nine months ended September 30, 2017 compared to 22.0% for the nine months ended September 30, 2016.

 

 

Average balances and yields. The following tables set forth average balance sheets, average yields and costs and certain other information for the periods 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 accreted or amortized to interest income or interest expense.

 

		For the three months September 30,
		2017												2016
										Average												Average
		Average								Yield /				Average								Yield /
(Dollars in thousands)		Balance				Interest				Cost(5)				Balance				Interest				Cost(5)
Interest-earning assets:
Loans		$	252,932			$	2,621				4.14	%		$	217,293			$	2,221				4.09	%
Federal funds sold			4,100				11				1.12				7,523				10				0.53
Taxable investment securities			13,145				80				2.43				8,414				52				2.47
Mortgage-backed securities			8,904				26				1.17				13,448				50				1.50
State and municipal securities(1)			6,162				40				2.56				5,571				38				2.73
Total interest-earning assets		$	285,243			$	2,778				3.90	%		$	252,249			$	2,371				3.76	%
Noninterest-earning assets:
Other assets		$	10,838											$	10,409
Total assets		$	296,081											$	262,658
Interest-bearing liabilities:
NOW accounts		$	31,092			$	24				0.30	%		$	29,028			$	21				0.29	%
Passbook savings			27,436				35				0.50				28,720				32				0.44
Money market savings			35,258				75				0.85				24,050				18				0.30
Individual retirement accounts			7,096				20				1.11				7,338				15				0.83
Certificates of deposit			92,740				328				1.42				84,360				262				1.24
Federal Home Loan Bank advances			58,430				241				1.65				43,859				166				1.52
Total interest-bearing liabilities		$	252,052			$	723				1.15	%		$	217,355			$	514				0.95	%
Noninterest-bearing liabilities:
Demand deposits		$	9,353											$	15,658
Other liabilities			2,799												4,335
Total liabilities		$	264,204											$	237,348
Stockholders' equity		$	31,877											$	25,310
Total liabilities & stockholders' equity		$	296,081											$	262,658
Net interest income						$	2,055											$	1,857
Interest rate spread(2)											2.75	%											2.81	%
Net interest-earning assets(3)		$	33,191											$	34,894
Net interest margin(4)							2.89	%											2.94	%
Ratio of average interest-earning assets to average interest-bearing liabilities			113.17	%											116.05	%

 

(1)

Tax-exempt interest income is presented on a tax equivalent basis using a 34% federal tax rate. The unadjusted average yield on tax-exempt securities was 1.69% and 1.80% for the quarters ended September 30, 2017 and 2016, respectively. The unadjusted interest income on tax-exempt securities was $27,000 and $25,000 for the quarters ended September 30, 2017 and 2016, respectively.

(2)

Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4)

Net interest margin represents net interest income divided by total interest-earning assets.

(5)

Annualized.

 

 

		For the nine months ended September 30,
		2017												2016
										Average												Average
		Average								Yield /				Average								Yield /
(Dollars in thousands)		Balance				Interest				Cost(5)				Balance				Interest				Cost(5)
Interest-earning assets:
Loans		$	242,668			$	7,429				4.08	%		$	211,853			$	6,466				4.07	%
Federal funds sold			5,385				35				0.87				7,671				21				0.36
Taxable investment securities			12,177				219				2.40				10,967				218				2.65
Mortgage-backed securities			9,366				80				1.14				14,300				161				1.50
State and municipal securities(1)			6,455				126				2.61				5,028				108				2.87
Total interest-earning assets		$	276,051			$	7,889				3.81	%		$	249,819			$	6,974				3.72	%
Noninterest-earning assets:
Other assets		$	10,783											$	9,974
Total assets		$	286,834											$	259,793
Interest-bearing liabilities:
NOW accounts		$	29,457			$	65				0.30	%		$	28,133			$	54				0.25	%
Passbook savings			26,947				80				0.40				27,822				80				0.39
Money market savings			33,414				205				0.82				23,736				51				0.29
Individual retirement accounts			7,063				54				1.02				7,583				50				0.88
Certificates of deposit			87,657				878				1.34				89,902				842				1.25
Federal Home Loan Bank advances			59,341				695				1.56				45,303				529				1.56
Total interest-bearing liabilities		$	243,879			$	1,977				1.08	%		$	222,479			$	1,606				0.96	%
Noninterest-bearing liabilities:
Demand deposits		$	8,626											$	11,457
Other liabilities			2,063												2,462
Total liabilities		$	254,568											$	236,398
Stockholders' equity		$	32,266											$	23,395
Total liabilities & stockholders' equity		$	286,834											$	259,793
Net interest income						$	5,912											$	5,368
Interest rate spread(2)											2.73	%											2.76	%
Net interest-earning assets(3)		$	32,172											$	27,340
Net interest margin(4)							2.86	%											2.86	%
Ratio of average interest-earning assets to average interest-bearing liabilities			113.19	%											112.29	%

 

(1)

Tax-exempt interest income is presented on a tax equivalent basis using a 34% federal tax rate. The unadjusted average yield on tax-exempt securities was 1.72% and 1.90% for the nine months ended September 30, 2017 and 2016, respectively. The unadjusted interest income on tax-exempt securities was $84,000 and $71,000 for the nine months ended September 30, 2017 and 2016, respectively.

(2)

Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4)

Net interest margin represents net interest income divided by total interest-earning assets.

(5)

Annualized.

 

 

Rate/Volume Analysis

 

The following tables present the effects of changing rates and volumes on our net interest income for the periods 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 these tables, 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.

 

		Three months ended September 30,
		2017 vs. 2016
		Increase/(Decrease) Due to
										Total
										Increase
(In thousands)		Volume				Rate				(Decrease)
Interest and dividend income:
Loans		$	372			$	28			$	400
Federal funds sold			(1	)			2				1
Taxable investment securities			29				(1	)			28
Mortgage-backed securities			(15	)			(9	)			(24	)
State and municipal securities(1)			5				(3	)			2
Total interest and dividend income			390				17				407
Interest expense:
NOW accounts			2				1				3
Passbook savings			(1	)			4				3
Money market savings			12				45				57
Individual retirement accounts			(1	)			6				5
Certificates of deposit			27				39				66
Federal home loan bank advances			60				15				75
Total interest expense			99				110				209
Net change in net interest income		$	291			$	(93	)		$	198

 

(1)

Tax-exempt interest income is presented on a tax equivalent basis using a 34% federal tax rate.

 

 

		Nine months ended September 30,
		2017 vs. 2016
		Increase/(Decrease) Due to
										Total
										Increase
(In thousands)		Volume				Rate				(Decrease)
Interest and dividend income:
Loans		$	947			$	16			$	963
Federal funds sold			(4	)			18				14
Taxable investment securities			7				(6	)			1
Mortgage-backed securities			(48	)			(33	)			(81	)
State and municipal securities(1)			26				(8	)			18
Total interest and dividend income			928				(13	)			915
Interest expense:
NOW accounts			2				9				11
Money market savings			28				126				154
Individual retirement accounts			(3	)			7				4
Certificates of deposit			(19	)			55				36
Federal home loan bank advances			166				-				166
Total interest expense			174				197				371
Net change in net interest income		$	754			$	(210	)		$	544

 

(1)

Tax-exempt interest income is presented on a tax equivalent basis using a 34% federal tax rate.

 

Loan and Asset Quality and Allowance for Loan Losses

 

The following table represents information concerning the aggregate amount of nonperforming assets at the indicated dates:

 

		September 30,				December 31,				September 30,
(Dollars In thousands)		2017				2016				2016
Nonaccrual loans:
Residential mortgage loans		$	37			$	-			$	-
Home equity lines of credit			-				-				18
Total nonaccrual loans			37				-				18
Total nonperforming loans			37				-				18
Total nonperforming assets		$	37			$	-			$	18
Nonperforming loans to total loans			0.01	%			0.00	%			0.01	%
Nonperforming assets to total assets			0.01	%			0.00	%			0.01	%

 

Nonperforming assets include nonaccrual loans, non-accruing TDRs, and foreclosed real estate. The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more. At September 30, 2017 there was one commercial and industrial loan that was past due 90 days or more and still accruing interest. Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. At the dates indicated above, the Company had no TDRs outstanding.

 

 

As indicated in the table above, nonperforming assets at September 30, 2017 were $37,000, an increase of $37,000 from the $0 balance reported at December 31, 2016. At September 30, 2017, the Company had one non-performing residential mortgage for $37,000 and at December 31, 2016, the Company had no non-performing loans. At September 30, 2016, the Company had one non-performing home equity line of credit for $18,000. At the dates indicated above, the Company had no foreclosed real estate.

 

The allowance for loan losses represents management’s estimate of the probable losses inherent in the loan portfolio as of the date of the balance sheet. The allowance for loan losses was $1.2 million and $990,000 at September 30, 2017 and December 31, 2016, respectively. The Company reported an increase in the ratio of the allowance for loan losses to gross loans to 0.47% at September 30, 2017 as compared to 0.44% at December 31, 2016. Management performs a quarterly evaluation of the allowance for loan losses based on quantitative and qualitative factors and has determined that the current level of the allowance for loan losses is adequate to absorb the losses in the loan portfolio as of September 30, 2017.

 

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 Company does not separately identify individual consumer and residential loans for impairment disclosures unless subject to a troubled debt restructuring.

 

At September 30, 2017 and December 31, 2016, the Company did not have loans which were deemed to be impaired.

 

Management has identified potential credit problems which may result in the borrowers not being able to comply with the current loan repayment terms and which may result in it being included in future impaired loan reporting. Management has identified potential problem loans totaling $3.1 million as of September 30, 2017 as compared to $1.8 million at December 31, 2016. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired. Total potential problem loans increased between these two dates, as the Company reported an increase of $1.3 million in loans rated substandard. The increase in loans classified as substandard was due to eight residential mortgage loans which were newly categorized as such during the nine months ended September 30, 2017. These loans were not criticized as of December 31, 2016. Based on current information available at September 30, 2017, these loans were re-evaluated for their range of potential losses and reclassified accordingly.

 

Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations of a short-term nature. 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.

 

Our primary sources of funds consist of deposit inflows, loan repayments, borrowings from the Federal Home Loan Bank of New York, maturities and principal repayments of securities, and loan and securities 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 20.0% or greater. For the quarter ended September 30, 2017, our liquidity ratio averaged 28.8%. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2017.

 

 

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 September 30, 2017, cash and cash equivalents totaled $7.0 million.

 

At September 30, 2017, we had $22.5 million in loan commitments outstanding. In addition to commitments to originate loans, we had $17.7 million in unused lines of credit outstanding to borrowers. Certificates of deposit (including individual retirement accounts comprised solely of certificates of deposit), due within one year of September 30, 2017 totaled $55.2 million, or 55.1% of our certificates of deposit (including individual retirement accounts) and 27.7% 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, and Federal Home Loan Bank borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the existing certificates of deposit due on or before September 30, 2018. 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.

 

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of New York, which provides an additional source of funds. Federal Home Loan Bank borrowings increased by $12.7 million, to $69.5 million at September 30, 2017, from $56.8 million at December 31, 2016. At September 30, 2017, we had the ability to borrow approximately $159.3 million from the Federal Home Loan Bank of New York, of which $69.5 million had been advanced.

 

We also have a repurchase agreement with Raymond James Financial providing an additional $10.0 million in liquidity.  Funds obtained under the repurchase agreement are secured by our U.S Government and agency obligations.  There were no advances outstanding under the repurchase agreement at September 30, 2017 or December 31, 2016.

 

Capital

 

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 September 30, 2017, Fairport Savings Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

 

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.  The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. For 2017, the capital conservation buffer requirement is 1.25% of risk-weighted assets.

 

 

Fairport Savings Bank’s capital amounts and ratios as of the indicated dates are presented in the following table.

 

Minimum

To Be "Well-

Minimum

Capitalized"

Well-Capitalized

For Capital

Under Prompt

With Buffer, Fully

Actual

Adequacy Purposes

Corrective Provisions

Phased in for 2019

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2017

Total Core Capital (to Risk-Weighted Assets)

$

29,964

16.41

%

$

³14,605

³8.0

%

$

³18,256

³10.0

%

$

³19,169

³10.5

%

Tier 1 Capital (to Risk-Weighted Assets)

28,778

15.76

³10,953

³6.0

³14,605

³8.0

³15,517

³8.5

Tier 1 Common Equity (to Risk-Weighted Assets)

28,778

15.76

³8,215

³4.5

³11,866

³6.5

³12,779

³7.0

Tier 1 Capital (to Assets)

28,778

9.82

³11,721

³4.0

³14,651

³5.0

³14,651

³5.0

As of December 31, 2016:

Total Core Capital (to Risk-Weighted Assets)

$

29,264

18.45

%

$

³12,689

³8.0

%

$

³15,861

³10.0

%

$

³16,654

³10.5

%

Tier 1 Capital (to Risk-Weighted Assets)

28,274

17.83

³9,516

³6.0

³12,689

³8.0

³13,482

³8.5

Tier 1 Common Equity (to Risk-Weighted Assets)

28,274

17.83

³7,137

³4.5

³10,309

³6.5

³11,102

³7.0

Tier 1 Capital (to Assets)

28,274

10.70

³10,572

³4.0

³13,214

³5.0

³13,214

³5.0

 

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 September 30, 2017 and December 31, 2016, we had $16.1 million and $15.2 million, respectively, of commitments to grant loans, $6.4 million and $5.0 million, respectively, of unadvanced portions of construction loans, and $17.7 million and $17.6 million, respectively, of unfunded commitments under lines of credit. We had two commercial letters of credit for $217,000 at September 30, 2017 and two commercial letters of credit for $110,000 at December 31, 2016.

 

Impact of Inflation and Changing Prices

 

Our consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“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.

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

 

A smaller reporting company is not required to provide the information relating to this item.

 

Item 4 – Controls and Procedures

 

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1 – Legal Proceedings

 

As of September 30, 2017, the Company is not currently a named party in a legal proceeding, the outcome of which would have a material effect on the financial condition or results of operations of the Company.

 

Item 1A – Risk Factors

 

A smaller reporting company is not required to provide the information relating to this item.

 

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

 

The following table provides certain information with regard to shares repurchased by the Company in the third quarter of 2017.

 

Period		(a) Total Number of Shares Purchased				(b) Average Price Paid per Share				(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)				(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
July 1 — July 31, 2017			-			$	-				-				-
August 1 — August 31, 2017			13,000			$	15.24				13,000				84,084
September 1 — September 30, 2017			55,935			$	15.26				55,935				28,149
Total			68,935			$					68,935

 

(1) The Company’s Board of Directors authorized its first stock repurchase program on July 27, 2017 to acquire up to 97,084 shares, or 5.0% of the Company’s then outstanding common stock.  Repurchases will be made from time to time depending on market conditions and other factors, and will be conducted through open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission.  There is no guarantee as to the exact number of shares to be repurchased by the Company.

 

Item 3 – Defaults Upon Senior Securities

 

None

 

Item 4 – Mine Safety Disclosures

 

Not applicable

 

Item 5 – Other Information

 

None

 

Item 6 – Exhibits

 

Exhibit No.		Description
31.1		Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
31.2		Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
32		Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer
101		The following materials from FSB Bancorp, Inc. Form 10-Q for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Financial Condition, (iii) Consolidated Statements of Cash Flows, and (iv) related notes

 

 

SIGNATURES

 

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

  

	FSB BANCORP, INC. (registrant)
November 13, 2017	/s/ Dana C. Gavenda
	Dana C. Gavenda
	Chief Executive Officer
November 13, 2017	/s/ Kevin D. Maroney
	Kevin D. Maroney
	President and Chief Financial Officer