FSB Bancorp, Inc.
April 21, 2017
Dear Stockholder,
Our ability to enhance our capital position in mid-2016 with a well-received second-step stock offering has positioned
the Bank to maintain the asset generation growth we have experienced over the past several years. As we deploy our
additional capital we will be seeking to expand our asset generation capacity in our primary markets.
In the current interest rate environment we feel fortunate that our interest rate spreads have not markedly deteriorated.
As reflected in the operating results below the strategic initiatives we have been following, expanded residential lending
and measured growth in our commercial lending efforts are producing positive results. We expect that the momentum
we have created will be maintained throughout the coming year.
Total assets increased at a measurable pace by $17.6 million, or 7.0% from $255.8 million at December 31,
2015 to $273.7 million at December 31, 2016.
Net Loans receivable grew by $24.4 million, or 12.1% from $201.8 million at December 31, 2015 to $226.2
million at December 31, 2016.
Deposits decreased by $2.6 million, or 1.4%, from $185.6 million at December 31, 2015 to $182.9 million at
December 31, 2016 due to management’s decision to price certificates of deposit at lower rates for non-
relationship customers.
Total borrowings from the Federal Home Loan Bank of New York increased $10.7 million, or 23.3%, to $56.8
million at December 31, 2016 from $46.1 million at December 31, 2015 in order to assist with funding the loan
growth in 2016.
Stockholders’ equity increased $10.1 million, or 46.4%, to $31.9 million at December 31, 2016 from $21.8
million at December 31, 2015 due primarily to the completion of the second-step conversion in July 2016.
Net income increased by $425,000 to $938,000 in 2016 from $513,000 in 2015. The increase in income was
mainly attributable to increases in net interest income and other income, partially offset by increases in other
expense, the provision for loan losses, and interest tax expense.
The credit quality of our loan portfolio remained strong with no non-performing loans at December 31, 2016 as
compared to one non-performing residential mortgage loan, one non-performing home equity line of credit,
and one non-performing checking line of credit totaling $82,000 at December 31, 2015.
Our Buffalo residential lending effort continues to show positive results. We are continuing to seek additional
origination resources in that market. We have begun to source commercial loans on a limited basis in the Buffalo
market thereby furthering our asset diversification both by product and by market.
As we enhance our loan origination capacity and raise our goals for loan growth we continue to employ the same
conservative underwriting standards that have helped us to maintain our outstanding loan portfolio. Loans we choose to
hold in our portfolio and loans that we sell into the secondary market receive the same diligent review for underwriting.
The Board of Directors, the FSB staff members, and I appreciate the continued confidence you have shown in us and in
our commitment to building a bank that is driven by long term value objectives.
Sincerely,
Dana C. Gavenda
President and Chief Executive Officer
TABLE OF CONTENTS
Message to Our Shareholders ................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations .............................. 1
Market for Common Stock ................................................................................................................................ 19
Stockholder Information .................................................................................................................................... 20
Report of Independent Registered Public Accounting Firm .............................................................................. 21
Consolidated Balance Sheets ............................................................................................................................. 22
Consolidated Statements of Income .................................................................................................................. 23
Consolidated Statements of Comprehensive Income (Loss) ............................................................................. 24
Consolidated Statements of Stockholders’ Equity ............................................................................................ 25
Consolidated Statements of Cash Flows ...................................................................................................... 26-27
Notes to Consolidated Financial Statements ..................................................................................................... 28
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion and analysis reflects our consolidated financial statements and other
relevant statistical data, and is intended to enhance your understanding of our financial condition
and results of operations. The information in this section has been derived from the audited
consolidated financial statements that appear beginning on page 22 of this Annual Report. You
should read the information in this section in conjunction with the business and financial
information regarding FSB Bancorp and the financial statements provided in this Annual Report.
All financial information presented in this Annual Report prior to July 13, 2016 is the
information of the Company’s predecessor, FSB Community Bankshares, Inc.
Overview
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. In 2015, we shifted attention to
expand our commercial loan department by adding a second commercial lender in an effort to
improve our interest rate risk exposure with shorter commercial loan duration products, as well
as higher yielding assets. In March 2015, we expanded our mortgage origination footprint and
opened a new mortgage office in Buffalo, New York. In the low interest rate environment
experienced throughout 2016 and 2015, management continued to sell all of the fixed-rate
residential real estate loans with terms of 15 years or greater that we originated in order to
manage interest rate risk. The low interest rate environment in 2016 and 2015 has resulted in
management’s decision to decrease the amount of investment securities and to redeploy the
funds available from the decrease in the investment portfolio into higher-yielding assets,
primarily shorter duration or adjustable one- to four-family mortgage, construction, and
commercial real estate loans in 2016. The increase in the loan portfolio balances in 2016 did
increase loan interest income despite lower average yields on the overall loan portfolio.
At December 31, 2016, the Company had $273.7 million in consolidated assets, an
increase of $17.9 million, or 7.0%, from $255.8 million at December 31, 2015. During 2016, we
continued to focus on loan production, particularly with respect to residential mortgage loans as
well as construction, commercial real estate, and commercial and industrial loans. The credit
quality of our loan portfolio remains strong and significantly better than peers. At December 31,
2016, we had no non-performing loans and at December 31, 2015, we had three non-performing
loans totaling $82,000.
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 sales of loans and securities, mortgage fee income, fees and service charges from
1
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 expense. Other expense consists 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. For the year ended
December 31, 2016, we had net income of $938,000 compared to net income of $513,000 for the
year ended December 31, 2015. The year over year increase in earnings of $425,000 was
attributable to increases in net interest income and other income, partially offset by increases in
other expense, provision for loan losses, and income tax expense.
Stock Offering and Conversion. FSB Bancorp, Inc. announced on July 13, 2016 that it
completed the conversion and reorganization pursuant to which FSB Community Bankshares,
MHC has converted to the stock holding company form of organization. The Company raised
$8.9 million in net proceeds from its stock offering.
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. 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.
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
Overly optimistic assumptions or negative changes to assumptions could
properties.
significantly affect the valuation of a property securing a loan and the related allowance
determined. Management carefully reviews the assumptions supporting such appraisals to
determine that the resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly evaluation of the adequacy of the allowance for loan
losses. We consider a variety of factors in establishing this estimate including, but not limited to,
2 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 specific and general losses in the portfolio.
Actual loan losses may be significantly more than the allowance we have established
which could have a material negative effect on our financial results.
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.
Business Strategy
Fairport Savings Bank, a wholly owned banking subsidiary of FSB Bancorp, was
established in 1888 and has been operating continuously since that time. We are committed to
meeting the financial needs of the communities we serve, primarily the greater Rochester, New
York metropolitan area, and are dedicated to providing personalized superior service to our
customers. In recent years, the business of banking has changed rapidly, requiring extensive
investment in technology as well as significantly increased compliance expenses to address the
substantial regulatory changes enacted as a result of the great recession. We recognize that to
continue to meet the needs of our customers and to provide a competitive return to our
3 stockholders, we will need to continue to grow, by both expanding our historical residential
lending business and diversifying our lending efforts. Our principal strategies to achieve these
goals are as follows:
Continuing to Emphasize Residential Real Estate Lending. Historically we
have emphasized the origination of one- to four-family residential loans within
Monroe County and the surrounding counties of Livingston, Ontario, Orleans and
Wayne. As of December 31, 2016, 83.0% of our loan portfolio consisted of one-
to four-family residential loans. We intend to continue to emphasize originations
of loans secured by one- to four-family residential real estate, holding in portfolio
loans that are either adjustable-rate or have fixed-rates with terms of less than 15
years and selling longer-term fixed-rate one- to four-family residential real estate
loans in the secondary market to increase other income.
Expanding Our Commercial Banking Market Share. We offer a variety of
lending and deposit products for commercial banking customers in our markets.
We have invested heavily in developing our commercial loan department over the
last three years by recruiting and hiring talented commercial loan officers and
enhancing our commercial product offerings. We seek to develop broad customer
deposit and loan relationships based on our service and competitive pricing while
maintaining a conservative approach to lending and sound asset quality. We
intend to focus our efforts on the needs of small and medium sized businesses in
our market, focusing on commercial real estate, multi-family, and construction
loans while gradually growing our portfolio of commercial and industrial loans as
well as Small Business Administration guaranteed loans.
Maintaining High Asset Quality. We believe that strong asset quality is critical to
the long-term financial success of a small community bank. We attribute our high
asset quality to maintaining conservative underwriting standards, the diligence of
our loan collection personnel, and the stability of our local economy. At
December 31, 2016, we had no non-performing loans and our ratio of allowance
for loan losses to total loans was 0.44%. Over the last five years, we have
charged off only $17,000. Because substantially all of our loans are secured by
real estate, and our level of non-performing loans has been low in recent years, we
believe that our allowance for loan losses is adequate to absorb the probable
losses inherent in our loan portfolio.
Managing Our Interest Rate Risk. To improve our interest rate risk, in recent
years we have reduced the fixed-rate loan originations added to our loan portfolio
by selling most fixed-rate residential mortgages with terms of 15 years or greater
in the secondary market. We also invest a portion of funds received from loan
payments and repayments in shorter term and intermediate term, liquid
investment securities and securities classified as available-for-sale including U.S.
Government agency debt obligations and mortgage-backed securities. We
emphasize marketing our lower cost passbook, savings and checking accounts,
money market accounts and increasing the duration whenever possible of our
lower cost certificates of deposit and Federal Home Loan Bank borrowings.
4
Offering A Wide Selection Of Non-Deposit Investment Products and Services.
Fairport Wealth Management, a wholly owned subsidiary of Fairport Savings
Bank, offers a broad range of investment, insurance, and financial products. We
have a dedicated investment representative that evaluates the needs of clients to
determine the suitable investment and insurance solutions to meet their short and
long-term wealth management goals. In 2016, Fairport Wealth Management had
fee income of $169,000 and we intend to continue to emphasize these investment,
insurance, and financial products to our customers.
5
Selected Consolidated Financial and Other Data
Selected Financial Condition Data:
Total assets ..................................
Cash and cash equivalents ...........
Securities available-for-sale.........
Securities held-to-maturity ..........
Loans held for sale……………...
Loans, net ....................................
Deposits .......................................
Borrowings ..................................
Stockholders’ equity ....................
At December 31,
2016
At December 31,
2015
(In thousands)
$ 273,721
7,407
17,747
7,420
2,059
226,192
182,934
56,813
31,859
$ 255,807
6,147
19,968
12,979
3,880
201,830
185,561
46,092
21,760
For the Year Ended
December 31,
2016
2015
(In thousands)
Selected Operating Data:
Interest and dividend income………………………...
Interest expense………………………………………
Net interest income………………………………..
Provision for loan losses……………………………..
Net interest income after provision for loan losses
Other income…………………………………………
Other expense………………………………………..
Income before income taxes…………………
Provision for income taxes…………………
Net income ………………………………….
$ 9,317
2,156
7,161
180
6,981
3,655
9,370
1,266
328
$ 938
$ 8,920
1,995
6,925
158
6,767
2,835
8,953
649
136
$ 513
6
At or For the Year
Ended December
31,
2016
2015
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets ...................................................
Return on average equity ..................................................
Interest rate spread (1) .......................................................
Net interest margin (2) ......................................................
Efficiency ratio (3) ............................................................
Other income to average total assets .................................
Other expense to average total assets ..............................
Average interest-earning assets to average
0.36%
3.62%
2.76%
2.87%
88.10%
1.40%
3.59%
0.21%
2.36%
2.83%
2.91%
93.24%
1.14%
3.59%
interest-bearing liabilities .............................................
113%
109%
Asset Quality Ratios:
Non-performing assets as a percent of total assets ...........
Non-performing loans as a percent of total loans .............
Allowance for loan losses as a percent of non-
0.00%
0.00%
0.03%
0.04%
performing loans ...........................................................
Allowance for loan losses as a percent of total loans .......
0.00% 994.92%
0.40%
0.44%
Capital Ratios:
Total risk-based capital (to risk-weighted assets) .............
Tier 1 leverage (core) capital (to adjusted tangible
18.45%
15.12%
assets) ............................................................................
10.70%
7.85%
Common Equity Tier 1 capital (to risk-weighted
assets) ............................................................................
Tier 1 risk-based capital (to risk-weighted assets) ...........
Average equity to average total assets ..............................
17.83%
17.83%
9.92%
14.53%
14.53%
8.73%
Other Data:
Number of full service offices ..........................................
5
5
(1) Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing
liabilities for the year.
(2) The net interest margin represents net interest income as a percent of average interest-earning assets for the year.
(3) The efficiency ratio represents other expense divided by the sum of net interest income after provision for loan loss and other income.
Comparison of Financial Condition at December 31, 2016 and 2015
Total Assets. Total assets increased $17.9 million, or 7.0%, to $273.7 million at
December 31, 2016 from $255.8 million at December 31, 2015, primarily reflecting increases in
net loans receivable and cash and cash equivalents, partially offset by decreases in securities
available-for-sale, securities held-to-maturity, and loans held for sale.
Cash and cash equivalents increased by $1.3 million, or 20.5%, to $7.4 million at
December 31, 2016 from $6.1 million at December 31, 2015, in order to maintain a strong liquidity
position in anticipation of funding loan commitments in the first quarter of 2017.
Net loans receivable increased $24.4 million, or 12.1%, to $226.2 million at December 31,
2016 from $201.8 million at December 31, 2015. The Bank continues to focus on loan production
as we continue to grow our residential mortgage, construction, commercial real estate, and
commercial loan portfolios at a measured pace while still maintaining strict underwriting
standards. Residential mortgage loans increased $11.5 million, or 6.5%, to $188.6 million at
7
December 31, 2016 from $177.0 million at December 31, 2015. Construction loans increased
$4.9 million, or 390.3%, to $6.1 million at December 31, 2016 from $1.3 million at December
31, 2015. Commercial real estate loans increased $4.9 million, or 139.6%, to $8.4 million at
December 31, 2016 from $3.5 million at December 31, 2015. Commercial and industrial loans
increased $1.1 million, or 128.3%, to $1.9 million at December 31, 2016 from $853,000 at
December 31, 2015. The Bank originated $116.3 million of residential mortgage loans and sold
$74.0 million in conventional mortgage loans and correspondent FHA and VA mortgages in the
secondary market to reduce interest rate risk. The mortgage loans serviced for others increased by
$32.7 million, or 38.1%, to $118.6 million at December 31, 2016 compared to $85.9 million at
December 31, 2015.
Securities available-for-sale decreased by $2.2 million, or 11.1%, to $17.7 million at
December 31, 2016 from $20.0 million at December 31, 2015. The decrease was primarily due to
maturities and calls of $9.0 million, $2.3 million in mortgage-backed securities sales, $3.3 million
in mortgage-backed securities principal repayments, $98,000 in net amortization of premiums and
accretion of discounts, and a $122,000 decrease in the fair value of securities available-for-sale,
partially offset by purchases of $12.6 million. Securities held-to-maturity decreased $5.6 million,
or 42.8%, to $7.4 million at December 31, 2016 from $13.0 million at December 31, 2015 due to
maturities and calls of $7.0 million, $381,000 in mortgage-backed securities sales, $407,000 of
principal repayments on mortgage-backed securities, and $22,000 in net amortization of premiums
and accretion of discounts, partially offset by purchases of $2.2 million in state and municipal
securities.
Mortgage loans held for sale decreased by $1.8 million, or 46.9%, to $2.1 million at
December 31, 2016 compared to $3.9 million at December 31, 2015 due to a lower volume of
loans closed and committed for sale at December 31, 2016 compared to December 31, 2015.
Deposits and Borrowings. Total deposits decreased $2.6 million, or 1.4%, to $182.9
million at December 31, 2016 from $185.6 million at December 31, 2015. The decrease in our
deposits reflected a $13.5 million decrease in certificates of deposit, including individual
retirement accounts, partially offset by a $1.4 million increase in non-interest bearing checking
accounts and a $9.4 million increase in interest-bearing transaction accounts. The decrease was a
result of management’s pricing of lower rates for non-relationship customers in the continued
low interest rate environment partially offset by an increase in core deposits including checking,
savings, and money market accounts as the Company continues to focus on full service long term
client relationships. Total borrowings from the Federal Home Loan Bank of New York increased
$10.7 million, or 23.3%, to $56.8 million at December 31, 2016 from $46.1 million at December
31, 2015 in order to assist with funding the loan growth in 2016.
Stockholders’ Equity. Stockholders’ equity increased $10.1 million, or 46.4%, to $31.9
million at December 31, 2016 from $21.8 million at December 31, 2015 due primarily to the
completion of the second-step conversion in July 2016. The increase resulted from an increase in
additional paid in capital of $9.1 million from the net proceeds from our common stock offering,
$938,000 in net income, an increase of $127,000 in accumulated other comprehensive income, an
increase of $46,000 from canceling treasury stock shares associated with our second-step
conversion, and an increase of $35,000 resulting from the release of ESOP shares from the
suspense account, partially offset by a decrease of $160,000 in common stock to adjust to the par
8 value of FSB Bancorp, Inc. common stock of $0.01 per share from $0.10 per share par value of
FSB Community Bankshares, Inc. common stock. The Bank’s capital ratios continue to classify
Fairport Savings Bank as a well capitalized bank, the highest standard of capital rating as defined
by the Bank’s regulators.
Comparison of Operating Results for the Years Ended December 31, 2016 and 2015
General. Net income increased $425,000, or 82.9%, to $938,000 for the year ended
December 31, 2016 from $513,000 for the year ended December 31, 2015. The year over year
increase in earnings was attributable to an increase in net interest income of $236,000 and an
$820,000 increase in other income, partially offset by an increase in other expense of $417,000, a
$22,000 increase in the provision for loan losses, and an increase in income tax expense of
$192,000.
Interest and Dividend Income. Total interest and dividend income increased $397,000,
or 4.5%, to $9.3 million for the year ended December 31, 2016 from $8.9 million for the year
ended December 31, 2015. The interest and dividend income increase resulted from an $11.4
million increase year over year in average interest-earning assets, primarily loans, despite a 1 basis
point decrease in the average yield on interest-earning assets from 3.74% for 2015 to 3.73% for
2016.
Interest income on loans, including fees, increased $599,000, or 7.4%, to $8.7 million for
2016 from $8.1 million for 2015, reflecting an increase in the average balance of loans to $215.1
million for 2016 from $197.9 million for 2015, despite a modest 4 basis points lower average yield
on loans. The increase in the average balance of loans was due to our focus on increasing our
portfolio of one- to four-family residential, construction, commercial real estate, and commercial
and industrial loans. The average yield on loans decreased to 4.06% for 2016 from 4.10% for 2015,
reflecting decreases in market interest rates on most loan products, primarily fixed-rate residential
mortgages.
Interest income on taxable investment securities decreased $204,000 to $269,000 in 2016,
from $473,000 in 2015. The average balance of taxable investment securities decreased $6.3
million, or 37.1%, to $10.7 million in 2016 from $17.0 million in 2015 as a portion of the cash
flow from the portfolio was redeployed to fund loan growth and the average yield on investment
securities decreased to 2.52% in 2016 from 2.78% in 2015. Yields on investment securities
decreased with new purchases at lower yields replacing higher yielding maturing investments.
Interest income on mortgage-backed securities decreased $21,000 to $202,000 in 2016, from
$223,000 in 2015, reflecting a decrease in the average balance of mortgage-backed securities of
$2.6 million, or 16.1%, to $13.5 million in 2016 from $16.0 million in 2015, partially offset by an
increase in the average yield on mortgage-backed securities of 11 basis points to 1.50% in 2016
from 1.39% in 2015. Interest income on federal funds sold increased $17,000, or 283.3%, to
$23,000 in 2016, from $6,000 in 2015. The average balance of federal funds sold increased by $2.7
million for the year and the average yield increased by 19 basis points to 0.35% for 2016 from
0.16% for 2015. Interest income on tax-exempt securities increased $6,000 to $99,000 in 2016,
from $93,000 in 2015. The average balance of tax-exempt securities increased by $424,000, or
8.6%, to $5.4 million in 2016 from $4.9 million in 2015, partially offset by a decrease in the
average yield of five basis points to 2.80% in 2016, from 2.85% in 2015 on a tax equivalent basis.
9 Total Interest Expense. Total interest expense increased $161,000, or 8.1%, to $2.2
million for the year ended December 31, 2016 from $2.0 million for the year ended December 31,
2015. The increase in total interest expense resulted from a 6 basis point increase in the average
cost of interest-bearing liabilities from 0.91% for 2015 to 0.97% for 2016, as a result of higher
interest rates paid on deposits, primarily promotional certificates of deposit and money market
accounts. In addition, the average balance of interest-bearing liabilities increased $3.7 million, or
1.7%, to $222.7 million for 2016 from $219.0 million for 2015.
Interest expense on deposits increased $184,000, or 14.7%, to $1.4 million for 2016 from
$1.3 million for 2015 due primarily to increases in the average rate and balances of our deposits.
The weighted average rate of deposits increased to 0.82% for 2016 from 0.74% for 2015 as a result
of promotional certificates of deposit rates to grow branch deposits. In addition, the average
balance of our deposits increased $5.4 million, or 3.2%, to $175.7 million for 2016 from $170.3
million for 2015 due to increases in promotional certificates of deposit and money market
accounts. The average balance on transaction accounts, traditionally our lower costing deposit
accounts, increased by $7.5 million to $91.0 million for 2016 from $83.5 million for 2015, with a
decrease in the average cost of transaction accounts of three basis points to 0.25% in 2016 from
0.28% in 2015. Additionally, the average balance of certificates of deposit (including individual
retirement accounts) traditionally our higher cost deposits, increased by $1.7 million to $95.2
million in 2016 from $93.5 million in 2015 with an increase in the average cost of certificates of
deposit accounts by 12 basis points to 1.22% in 2016 from 1.10% in 2015.
Interest expense on Federal Home Loan Bank borrowings decreased $23,000, or 3.1%, to
$720,000 for the year ended December 31, 2016 from $743,000 for the year ended December 31,
2015. The decrease in interest expense was caused by a decrease in our average balance of Federal
Home Loan Bank borrowings totaling $47.0 million for 2016 compared to $48.7 million for 2015
while the average cost remained flat at 1.53%.
Net Interest Income. Net interest income increased $236,000, or 3.4%, to $7.2 million for
the year ended December 31, 2016 from $6.9 million for the year ended December 31, 2015. The
increase in net interest income despite a decrease in net interest margin was primarily due to
substantially higher average balances in loans year over year, together with modest increases in
the average balances of federal funds sold and state and municipal securities when comparing
2016 to 2015. Net interest-earning assets increased to $28.4 million for 2016 from $20.8 million
for 2015. The growth of the bank continues to focus on loan production, particularly with respect
to residential mortgage, construction, commercial real estate, and commercial and industrial
loans. Our net interest margin for the year ended December 31, 2016 decreased four basis points
to 2.87% from 2.91% for the year ended December 31, 2015. The average cost of interest-
bearing liabilities was negatively impacted by a modest increase in the average cost of interest-
bearing deposit accounts due to promotional certificates of deposit and money market accounts.
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
10 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
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 $180,000 provision for loan
losses for the year ended December 31, 2016 compared to a $158,000 provision for loan losses
for the year ended December 31, 2015. The rationale for the increase in 2016 was the result of
additional general provisions deemed necessary to support the growth in our residential
mortgage, construction, commercial real estate, and commercial and industrial loan portfolios as
well as a potentially weaker economy. The allowance for loan losses was $990,000, or 0.44% of
net loans outstanding, at December 31, 2016 compared to $811,000, or 0.40% of net loans
outstanding, at December 31, 2015. In 2016 we had $1,000 in net-charge-offs as compared to
2015 where we had no net-charge-offs.
Other Income. Other income increased by $820,000, or 28.9%, to $3.7 million for 2016
from $2.8 million for 2015. The increase resulted primarily from increases in realized gains on
the sales of loans and mortgage fee income, partially offset by decreases in realized gains on the
sales of securities and fee income. A substantial portion of the year over year increase was in
realized gains on the sale of loans which increased $774,000, or 52.4% to $2.3 million in 2016
from $1.5 million in 2015, and an increase in mortgage fee income of $182,000, or 28.8%, to
$814,000 in 2016 from $632,000 in 2015 due to an increase in mortgage loan volume in 2016.
Realized gains on the sale of securities decreased by $70,000, or 66.0%, to $36,000 in 2016 from
$106,000 in 2015. Fee income from Fairport Wealth Management decreased by $59,000, or
25.9%, to $169,000 in 2016 from $228,000 in 2015 due to a decrease in sales volume.
Other Expense. Other expense increased $417,000, or 4.7%, to $9.4 million in 2016
from $9.0 million in 2015. The increase was primarily the result of increases in salaries and
employee benefits of $723,000, other miscellaneous expense of $82,000, directors’ fees of
$66,000, audit and taxes of $55,000, and data processing costs of $27,000, partially offset by
decreases in mortgage fees and taxes of $551,000 and FDIC premium expense of $19,000. The
increase in salaries and employee benefits was primarily due to normal annual merit increases for
existing staff, the increased salary and commission costs associated with additional processing
and mortgage origination staff as a result of mortgage loan growth, and an increase in incentive
accruals due to projections to achieve financial targets for 2016 compared to lower incentive
accruals that were projected in 2015. Miscellaneous other expense increased due to increases in
legal expense and professional services. Legal expense increased due to the increased costs
associated with becoming an SEC reporting company in 2016. Professional services increased
due to project management fees related to the relocation of our Buffalo mortgage office in
addition to adding temporary staffing in our Buffalo mortgage office, an increase in the cost of
an external commercial loan analyst as a result of the growth in our commercial loan portfolio,
and increased costs associated with becoming an SEC reporting company in 2016. The decrease
in mortgage fees and taxes was due to a recent change in New York State tax law which allowed
for a refundable tax credit for mortgage recording tax expensed during the years ended
December 31, 2015 and 2016. 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
11 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.
Provision for Income Taxes. Provision for income taxes was $328,000 for 2016, an
increase of $192,000 compared to provision for income taxes of $136,000 for 2015. The
effective tax rate was 25.9% in 2016 compared to 20.9% in 2015. The increase was primarily
due to higher income before income taxes comparing the years ended December 31, 2016 and
December 31, 2015. The Company’s lower effective tax rate compared to statutory rates for
2016 and 2015, resulted from a reduction in income tax expense due to the increase in the cash
surrender value of our bank-owned life insurance and municipal bond interest income, which are
tax exempt for Federal income tax purposes.
12
Average balances and yields. The following table sets forth average balance sheets,
average yields and costs and certain other information at and for the years indicated. All average
balances are daily average balances. Non-accrual loans were included in the computation of
average balances, but have been reflected in the table as loans carrying a zero yield. The yields
set forth below include the effect of deferred fees, discounts and premiums that are accreted or
amortized to interest income or interest expense.
For the Years Ended December 31,
2016
Interest
Income/
Expense
Average
Balance
Yield/
Cost
Average
Balance
2015
Interest
Income/
Expense
Yield/
Cost
Interest-earning assets:
Loans, including fees ..........................
Federal funds sold ...............................
Securities-taxable ................................
Mortgage-backed securities ................
Securities-tax-exempt (1) ...................
Total interest-earning assets ...........
Noninterest-earning assets ..................
Total assets .....................................
$ 215,142
6,495
10,687
13,468
5,372
251,164
10,012
$ 261,176
Interest-bearing liabilities:
$ 8,724
23
269
202
150
9,368
4.06%
0.35
2.52
1.50
2.80
3.73
NOW accounts ....................................
Passbook savings .................................
Money market savings ........................
Individual retirement accounts ............
Certificates of deposit .........................
Borrowings ..........................................
$ 28,437
27,410
24,643
7,442
87,806
46,990
Total interest-bearing
74
102
100
64
1,096
720
0.26
0.37
0.41
0.86
1.25
1.53
$ 197,945
3,819
16,995
16,049
4,948
239,756
9,417
$ 249,173
$ 26,681
28,651
21,480
9,942
83,574
48,675
$ 8,125
6
473
223
141
8,968
4.10%
0.16
2.78
1.39
2.85
3.74
36
127
63
105
921
743
0.14
0.44
0.29
1.06
1.10
1.53
liabilities .....................................
222,728
2,156
0.97%
219,002
1,995
0.91%
Noninterest-bearing liabilities:
Demand deposits ....................
Other ....................................................
Total liabilities ...........................
Stockholders’ equity ............................
Total liabilities and stockholders’
10,534
2,004
235,266
25,910
equity ..........................................
$ 261,176
6,704
1,725
227,431
21,742
$ 249,173
Net interest income .............................
Interest rate spread (2) .........................
Net interest-earning assets (3) .............
Net interest margin (4) ........................
Average interest-earning assets to
average interest-bearing liabilities ..
_____________________
$ 28,436
$ 7,212
$ 6,973
$ 20,754
2.76%
2.87%
107%
2.83%
2.91%
109%
(1) Tax-exempt interest income is presented on a tax equivalent basis using a 34% federal tax rate.
(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.
13
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest
income for the years indicated. The rate column shows the effects attributable to changes in rate
(changes in rate multiplied by prior volume). The volume column shows the effects attributable
to changes in volume (changes in volume multiplied by prior rate). The net column represents
the sum of the prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately, based on the changes
due to rate and the changes due to volume.
For the
Years Ended December 31,
2016 vs. 2015
Increase (Decrease)
Due to
Volume
Rate
Net
(In thousands)
$
675
6
(163)
(41)
11
$
(76)
11
(41)
20
(2)
$ 599
17
(204)
(21)
9
488
(88)
400
3
(5)
10
(23)
48
(23)
10
35
(20)
27
(18)
127
-
151
38
(25)
37
(41)
175
(23)
161
Interest-earning assets:
Loans, including fees ................
Federal funds sold .....................
Securities-taxable ......................
Mortgage-backed securities ......
Securities-tax-exempt(1)...........
Total interest-earning
assets .....................................
Interest-bearing liabilities:
NOW accounts ..........................
Passbook savings ......................
Money market savings .............
Individual retirement accounts .
Certificates of deposit ...............
Borrowings ................................
Total interest-bearing
liabilities ................................
Net change in net interest income
_____________________
$
478
$ (239)
$
239
(1)Tax-exempt interest income is presented on a tax equivalent basis using a 34%
federal tax rate.
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently,
our most significant form of market risk is interest rate risk. Our assets, consisting primarily of
mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a
result, a principal part of our business strategy is to manage interest rate risk and limit the
exposure of our net interest income to changes in market interest rates. Accordingly, we have an
asset/liability management committee which is responsible for evaluating the interest rate risk
inherent in our assets and liabilities, for determining the level of risk that is appropriate, given
our business strategy, operating environment, capital, liquidity and performance objectives, and
for managing this risk consistent with the guidelines approved by the Board of Directors.
14
We intend to continue to manage our interest rate risk in order to control the exposure of
our earnings and capital to changes in interest rates. As part of our ongoing asset-liability
management, we intend to use the following strategies to manage our interest rate risk.
(i)
(ii)
(iii)
(iv)
invest in shorter to medium-term repricing and/or maturing securities whenever
the market allows;
emphasize the marketing of our passbook, savings and checking accounts and
increasing the duration of our certificates of deposit;
sell a portion of our long-term, fixed-rate one- to four-family residential real
estate mortgage loans;
increase our commercial loan portfolio with shorter term, higher yielding loan
products; and
(v) maintain a strong capital position.
In 2016, we sold $74.0 million of mortgage loan originations including $41.3 million of
conventional conforming fixed-rate residential mortgages and $32.7 million of correspondent
FHA and VA mortgage loans to improve our interest rate risk position in the event of increases
in market interest rates. We intend to continue to originate and, subject to market conditions, sell
long term (terms of 15 years or greater) fixed-rate one- to four-family residential real estate
loans.
Interest Rate Risk Management
Our earnings and the market value of our assets and liabilities are subject to fluctuations
caused by changes in the level of interest rates. We manage the interest rate sensitivity of our
interest-earning assets and interest-bearing liabilities in an effort to minimize the adverse effects
of changes in the interest rate environment. The majority of our assets are long-term fixed-rate
mortgage loans that do not reprice as quickly as our deposits, therefore we would experience a
significant decrease in our net interest income in the event of an inversion of the yield curve. We
have $63.4 million in certificates of deposit accounts (including individual retirement accounts)
that are scheduled to mature during 2017. If we retain these deposits it most likely will be at a
similar cost to us as their current contractual rates.
Additionally, shortening the average maturity of our interest-earning assets by increasing
our investments in shorter term loans, as well as loans with variable rates of interest, helps to
better match the maturities and interest rates of our assets and liabilities, thereby reducing the
exposure of our net interest income to changes in market interest rates. By following these
strategies, we believe that we are better-positioned to react to changes in market interest rates.
We have an Asset/Liability Management Committee to coordinate all aspects involving
asset/liability management. The committee establishes and monitors the volume, maturities,
pricing and mix of assets and funding sources with the objective of managing assets and funding
15
sources to provide results that are consistent with liquidity, growth, risk limits and profitability
goals.
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.
The Company strives to optimize the funding of the balance sheet, continually balancing
the stability and cost factors of our various funding sources. To achieve this goal, the Company
maintains a funding strategy that provides effective diversification in the sources and tenor of
funding. The objective is a funding mix diversified across a full range of retail as well as secured
and unsecured wholesales sources of funds. In general, funding concentrations (including
specific retail products) will be avoided to prevent over-reliance on any one source, maintaining
an appropriately diverse mix of existing and potential future funding sources. The Company may
use this variety of funding sources to manage the funding cost or balance the interest rate risk
position.
These sources will include, but not be limited to retail deposit growth, Fed Funds
purchased, brokered deposits, wholesale funding, dealer repos, and other short-term alternatives.
Management will ensure access to these sources is being actively managed, monitored, and
tested. Alternatively, if necessary the Company may liquidate assets or take other measures
consistent with the Contingency Funding Plan.
Our primary sources of funds consist of deposit inflows, loan repayments, advances from
the Federal Home Loan Bank of New York, maturities and principal repayments of securities,
and loan sales. While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by
general interest rates, economic conditions and competition. Our asset/liability management
committee is responsible for establishing and monitoring our liquidity targets and strategies in
order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit
withdrawals of our customers as well as unanticipated contingencies. We seek to maintain a
liquidity ratio of 20.0% or greater. For the year ended December 31, 2016, our liquidity ratio
averaged 30.2%. We believe that we have enough sources of liquidity to satisfy our short and
long-term liquidity needs as of December 31, 2016.
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.
16 Excess liquid assets are invested generally in interest-earning deposits, short and
intermediate-term securities and federal funds sold. Our most liquid assets are cash and cash
equivalents. The levels of these assets are dependent on our operating, financing, lending, and
investing activities during any given period. At December 31, 2016, cash and cash equivalents
totaled $7.4 million.
At December 31, 2016, we had $15.2 million in loan commitments outstanding and $5.0
in additional unadvanced portion of construction loans. In addition to commitments to originate
loans, we had $17.6 million in unused lines of credit to borrowers. Certificates of deposit
(including individual retirement accounts) comprised solely of certificates of deposits, due within
one year of December 31, 2016 totaled $63.4 million, or 72.0% of our certificates of deposit
(including individual retirement accounts) and 34.7% 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, including certificates of deposit, and Federal Home Loan Bank advances.
Depending on market conditions, we may be required to pay higher rates on such deposits or
other borrowings than we currently pay on the certificates of deposit due on or before December
31, 2017. 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 advances increased by $10.7 million to $56.8 million at December 31,
2016, compared to $46.1 million at December 31, 2015. At December 31, 2016, we had the
ability to borrow approximately $144.7 million from the Federal Home Loan Bank of New York,
of which $56.8 million had been advanced.
The Company also has a repurchase agreement with Raymond James Financial providing
an additional $10.0 million in liquidity. Funds obtained under the repurchase agreement are
secured by the Company’s U.S Government and agency obligations. There were no advances
outstanding under the repurchase agreement at December 31, 2016 or 2015.
Fairport Savings Bank is subject to various regulatory capital requirements, including a
risk-based capital measure. The risk-based capital guidelines include both a definition of capital
and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-
balance sheet items to broad risk categories. At December 31, 2016, Fairport Savings Bank
exceeded all regulatory capital requirements and was considered “well capitalized” under
regulatory guidelines. See Note 12 of the notes to the consolidated financial statements.
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.
17 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 unused lines of credit may expire without being drawn upon. Therefore, the total commitment
amounts do not necessarily represent future cash requirements. The amount of collateral obtained,
if it is deemed necessary by us, is based on our credit evaluation of the customer.
At December 31, 2016 and 2015, we had $15.2 million and $11.8 million, respectively, of
commitments to grant loans, $5.0 million and $1.3 million, respectively, of unadvanced portion of
construction loans, and $17.6 million and $15.8 million, respectively, of unfunded commitments
under lines of credit.
For additional information, see Note 11 of the notes to our consolidated financial
statements.
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.
Impact of Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the
notes to the consolidated financial statements.
18
Market for Common Stock
FSB Bancorp, Inc.’s common stock is traded on the Nasdaq Capital Market under the
trading symbol “FSBC.”
The following table sets forth the high and low trading prices for our shares of common
stock for the periods indicated. Information from before July 13, 2016 reflects the stock price
information of FSB Bancorp’s predecessor, FSB Community Bankshares, Inc., whose shares
were quoted on the OTC Pink under the trading symbol “FSBC.” On July 13, 2016, each share of
FSB Community common stock not held by its mutual holding company, FSB Community
Bankshares, MHC, was converted to 1.0884 shares of FSB Bancorp common stock.
Accordingly, we have adjusted the share prices prior to July 13, 2016 to reflect the 1.0884
exchange rate. As of December 31, 2016, there were 1,941,688 shares of our common stock
issued and outstanding. On such date our shares were held by approximately 194 holders of
record. The Company has never paid cash dividends.
Year Ended December 31, 2016
High
Low
Fourth quarter
Third quarter
Second quarter
First quarter
$
14.90
13.70
12.33
12.82
$
12.50
11.93
11.59
9.19
Year Ended December 31, 2015
High
Fourth quarter
Third quarter
Second quarter
First quarter
$
11.26
9.19
9.05
9.18
Low
$
8.35
7.81
8.50
8.41
19
STOCKHOLDER INFORMATION
ANNUAL MEETING
TRANSFER AGENT
The Annual Meeting of Stockholders will be held
at 2:00 p.m., New York time on Wednesday, May
24, 2017 at the Perinton Community Center located
at 1350 Turk Hill Road, Fairport, New York 14450.
Computershare Investor Services
PO Box 30170
College Station, Texas 77842-3170
www.computershare.com/investor
If you have any questions concerning your
stockholder account, please call our transfer agent,
noted above, at (800) 368-5948. This is the number
to call if you require a change of address or need
records or information about lost certificates.
STOCK LISTING
ANNUAL REPORT
The Company's Common Stock is traded on the
Nasdaq Capital Market under the symbol “FSBC.”
SPECIAL COUNSEL
A copy of the Company's Annual Report for the
year ended December 31, 2016 will be furnished
without charge to stockholders as of the record
date, upon written request to the Secretary, FSB
Bancorp, Inc., 45 South Main Street, Fairport, New
York 14450.
INDEPENDENT AUDITOR
Luse Gorman, PC
5335 Wisconsin Avenue, N.W., Suite 780
Washington, D.C. 20015
Bonadio & Co., LLP
115 Solar Street, Suite 100
Syracuse, New York 13204
20
21
FSB Bancorp, Inc.
Consolidated Balance Sheets
December 31, 2016 and 2015
Assets
Cash and due from banks
Interest-earning demand deposits
Cash and Cash Equivalents
Securities available-for-sale
Securities held-to-maturity (fair value 2016 $7,384; 2015 $13,222)
Investment in FHLB stock
Loans held for sale
Loans, net of allowance for loan losses (2016 $990; 2015 $811)
Bank owned life insurance
Accrued interest receivable
Premises and equipment, net
Other assets
2016
2015
(Dollars in Thousands,
except share and per share data)
$ 1,634
5,773
7,407
17,747
7,420
2,886
2,059
226,192
3,696
652
3,175
2,487
$ 1,550
4,597
6,147
19,968
12,979
2,388
3,880
201,830
3,629
655
2,744
1,587
Total Assets
$273,721
$255,807
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest-bearing
Interest bearing
Total Deposits
Borrowings
Official bank checks
Other liabilities
Total Liabilities
Stockholders’ Equity
Preferred stock, par value $0.01 and no par value; 25,000,000 and
1,000,000 shares authorized, no shares issued and outstanding
Common stock; par value $0.01 and $0.10; 50,000,000 and 10,000,000
shares authorized; 1,941,688 and 1,785,000 shares issued; 1,941,688
and 1,779,472 shares outstanding in 2016 and 2015, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock at cost, 2016-0 shares, 2015-5,528 shares
Unearned ESOP shares – at cost
Total Stockholders’ Equity
$ 8,423
174,511
182,934
56,813
318
1,797
$ 6,974
178,587
185,561
46,092
1,114
1,280
241,862
234,047
-
-
19
16,352
15,923
(85)
-
(350)
31,859
179
7,239
14,985
(212)
(46)
(385)
21,760
Total Liabilities and Stockholders’ Equity
$273,721
$255,807
The accompanying notes are an integral part of the consolidated financial statements.
22
FSB Bancorp, Inc.
Consolidated Statements of Income
Years Ended December 31, 2016 and 2015
Interest and Dividend Income
Loans, including fees
Securities - taxable
Securities - tax exempt
Mortgage-backed securities
Other
Total Interest and Dividend Income
Interest Expense
Deposits
Short-term borrowings
Long-term borrowings
Total Interest Expense
Net Interest Income
Provision for loan losses
Net Interest Income after Provision for loan losses
Other Income
Service fees
Fee income
Realized gain on sale of securities
Increase in cash surrender value of bank owned life insurance
Realized gain on sale of loans
Mortgage fee income
Other
Total Other Income
Other Expense
Salaries and employee benefits
Occupancy
Data processing costs
Advertising
Equipment
Electronic banking
Directors’ fees
Mortgage fees and taxes
FDIC premium expense
Audit and tax services
Professional services
Other
Total Other Expense
Income before Income Taxes
Provision for Income Taxes
Net Income
Basic earnings per common share
The accompanying notes are an integral part of the consolidated financial statements.
2016
2015
(Dollars in Thousands,
Except Per Share Data)
$8,724
269
99
202
23
9,317
1,436
9
711
2,156
7,161
180
6,981
157
169
36
67
2,252
814
160
3,655
6,095
1,006
186
125
611
115
249
(127)
138
141
168
663
9,370
1,266
328
$ 938
$ 0.49
$8,125
473
93
223
6
8,920
1,252
7
736
1,995
6,925
158
6,767
159
228
106
74
1,478
632
158
2,835
5,372
1,004
159
126
596
97
183
424
157
86
105
644
8,953
649
136
$ 513
$ 0.27
23
FSB Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2016 and 2015
Net Income
Other Comprehensive Income (Loss)
Change in unrealized holding losses on securities available-for-sale
Accretion of net unrealized losses on securities transferred from
available-for-sale(1)
Reclassification adjustment for realized gains on securities available-for-sale
included in net income
Reclassification adjustment for realized gains on securities held-to-maturity
included in net income
Other Comprehensive Income (Loss), Before Tax
Income Tax (Provision) Benefit Related to Other Comprehensive
Income (Loss)
Other Comprehensive Income, Net of Tax
Comprehensive Income
2016
2015
(In Thousands)
$ 938
$ 513
(86)
(96)
323
32
(24)
(64)
(12)
201
(42)
(170)
(74)
127
$ 1,065
184
14
$ 527
Tax Effect Allocated to Each Component of Other Comprehensive Income (Loss)
Change in unrealized holding losses on securities available-for-sale
Accretion of net unrealized losses on securities transferred from
available-for-sale
Reclassification adjustment for realized gains on securities available-for-sale
included in net income
Reclassification adjustment for realized gains on securities held-to-maturity
included in net income
$ 29
$ 33
(115)
115
8
21
4
$ (74)
15
$ 184
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.
24
FSB Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2016 and 2015
Common
Stock
Paid-In
Capital
Retained
Earnings
(In Thousands, except share and per share data)
Accumulated Other
Comprehensive Loss
Treasury
Stock
Unearned
ESOP Shares
Total
Balance - January 1, 2015
$ 179
$ 7,239
$ 14,472
$ (226)
$ (40)
$ (420)
$ 21,204
Net income
Other comprehensive income, net
Effect of employee stock ownership
plan, net
ESOP shares committed to be released
-
-
-
-
-
-
-
-
513
-
-
-
-
14
-
-
-
-
(6)
-
-
-
-
35
513
14
(6)
35
Balance - December 31, 2015
179
7,239
14,985
(212)
(46)
(385)
21,760
Net income
Other comprehensive income, net
ESOP shares committed to be released
-
-
-
-
-
9
Proceeds of common stock offering
and conversion of existing shares,
net of expenses
Cancel 5,528 treasury shares
(159)
(1)
9,149
(45)
938
-
-
-
-
-
127
-
-
-
-
-
-
-
46
-
-
35
-
-
938
127
44
8,990
-
Balance - December 31, 2016
$ 19
$ 16,352
$ 15,923
$ (85)
$ -
$ (350)
$ 31,859
The accompanying notes are an integral part of the consolidated financial statements.
25
FSB Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2016 and 2015
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash flows from operating activities:
Net amortization of premiums and accretion of discounts on investments
Net gain on sales of securities
Gain on sale of loans
Proceeds from loans sold
Loans originated for sale
Amortization of net deferred loan origination costs
Depreciation and amortization
Provision for loan losses
Expense related to ESOP
Deferred income tax benefit
Earnings on investment in bank owned life insurance
Decrease in accrued interest receivable
Increase in other assets
Increase in other liabilities
Net Cash Flows From Operating Activities
Cash Flows from Investing Activities
Purchases of securities available-for-sale
Proceeds from maturities and calls of securities available-for-sale
Proceeds from sales of securities available-for-sale
Proceeds from principal paydowns on securities available-for-sale
Purchases of securities held-to-maturity
Proceeds from maturities and calls of securities held-to-maturity
Proceeds from sales of securities held-to-maturity
Proceeds from principal paydowns on securities held-to-maturity
Net increase in loans
(Purchase) redemption of Federal Home Loan Bank stock, net
Purchase of premises and equipment
Net Cash Flows From Investing Activities
Cash Flows from Financing Activities
Net (decrease) increase in deposits
Proceeds from long-term borrowings
Repayments on long-term borrowings
Net increase (decrease) in short-term borrowings
Purchase of treasury stock
Net proceeds from stock conversion and offering
Net (decrease) increase in official bank checks
Net Cash Flows From Financing Activities
Change in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning
Cash and Cash Equivalents - Ending
The accompanying notes are an integral part of the consolidated financial statements.
2016
2015
(In Thousands)
$ 938
$ 513
327
(36)
(2,252)
76,220
(72,147)
249
444
180
44
(116)
(67)
3
(900)
675
3,562
(12,579)
11,285
2,213
1,106
(2,204)
7,334
393
26
(24,791)
(498)
(875)
(18,590)
(2,627)
19,000
(14,279)
6,000
-
8,990
(796)
16,288
1,260
6,147
412
(106)
(1,478)
87,336
(86,777)
128
453
158
35
(116)
(74)
-
(399)
165
250
(9,133)
4,000
2,574
4,174
(1,243)
4,307
856
542
(13,286)
61
(361)
(7,509)
10,254
12,500
(12,833)
(1,500)
(6)
-
656
9,071
1,812
4,335
$ 7,407
$ 6,147
26
FSB Bancorp, Inc.
Consolidated Statements of Cash Flows (Continued)
Supplementary Cash Flows Information
Interest paid
Taxes paid
The accompanying notes are an integral part of the consolidated financial statements.
$ 2,145
$ 1,994
$ 306
$ -
27
FSB Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
On December 17, 2003, Fairport Savings Bank’s (the “Bank”) depositors approved a Plan of Reorganization (the
“Plan”) from a Federal Mutual Savings Bank to a Federal Mutual Holding Company. Under the Plan, effective
January 14, 2005, FSB Community Bankshares, MHC (the “Mutual Holding Company”) was incorporated under the
laws of the United States as a mutual holding company. Also under the Plan, FSB Community Bankshares, Inc.
(“FSB Community”) was incorporated and became a wholly-owned subsidiary of the Mutual Holding Company. In
addition, effective January 14, 2005, the Bank completed its reorganization whereby the Bank converted to a stock
savings bank and became a wholly-owned subsidiary of the Company.
In August 2007, the Company completed its minority stock offering of 47% of the aggregate total voting stock of the
Company. In connection with the minority stock offering, 1,785,000 shares of common stock were issued, of which
838,950 shares were sold, including 69,972 issued to the Company’s Employee Stock Ownership Plan (ESOP), at $10
per share raising net proceeds of $7.4 million. The stock was offered to the Bank’s eligible depositors, the Bank’s
ESOP, and the public. Additionally, the Company issued 946,050 shares, or 53% of its common stock, to the Mutual
Holding Company.
On March 2, 2016, the Boards of Directors of the FSB Community Bankshares, Inc. (“FSB Community”), FSB
Community Bankshares, MHC (the “M-H-C”), and Fairport Savings Bank (the “Bank”) unanimously adopted a Plan
of Conversion of FSB Community Bankshares, MHC pursuant to which FSB Community Bankshares, MHC
undertook a “second-step” conversion and now no longer exists. The Bank reorganized from a two-tier mutual
holding company structure to a fully public stock holding company structure effective July 13, 2016, and, as a result is
now the wholly-owned subsidiary of FSB Bancorp, Inc. (the “Company”). 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.
FSB Bancorp, the new stock holding company for Fairport Savings Bank, sold 1,034,649 shares of common stock 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 the Company’s common stock so that the former public
stockholders of FSB Community owned approximately the same percentage of the Company’s common stock as they
owned of FSB Community’s common stock immediately prior to the conversion. Stockholders of FSB Community
received 1.0884 shares of the Company’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 these financial statements 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. As a result of the offering and the exchange of
shares, the Company has 1,941,688 shares outstanding as of December 31, 2016.
On July 13, 2016, FSB Community Bankshares, MHC reorganized from a two-tier mutual holding company structure
to a fully public stock holding company structure.
In accordance with Board of Governors of the Federal Reserve System regulations, at the time of the reorganization,
the Company substantially restricted retained earnings by establishing a liquidation account. The liquidation account
will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after
conversion. The Bank has established a parallel liquidation account to support the Company’s liquidation account in
the event the Company does not have sufficient assets to fund its obligations under its liquidation account. The
liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying
deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts. In the
28
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Organization and Nature of Operations (Continued)
event of a complete liquidation of the Bank or the Company, each account holder will be entitled to receive a
distribution in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay
dividends if those dividends would reduce equity capital below the required liquidation account amount.
The Company provides a variety of financial services to individuals and corporate customers through its wholly-
owned subsidiary, Fairport Savings Bank. The Bank’s operations are conducted in five branches located in Monroe
County, New York. The Company and the Bank are subject to the regulations of certain regulatory authorities and
undergo periodic examinations by those regulatory authorities.
The Company’s principal business consists of originating one-to-four-family residential real estate mortgages, home
equity loans and lines of credit and to a lesser extent, originations of commercial real estate, multi-family,
construction, commercial and industrial, and other consumer loans. The Company has four mortgage origination
offices located in Pittsford, New York, Watertown, New York, Greece, New York, and Buffalo, New York.
The Bank also provides non-deposit investment services to its customers through its wholly-owned subsidiary,
Fairport Wealth Management. Previous to January 15, 2016, Fairport Wealth Management was known as Oakleaf
Services Corporation. The results of operations of Fairport Wealth Management are not material to the consolidated
financial statements.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company, the Bank and Fairport Wealth
Management. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and expense during the reporting period.
Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant
changes in the near term relate to the determination of the allowance for loan losses, deferred tax assets, and the
estimation of fair values for accounting and disclosure purposes.
The Company is subject to the regulations of various governmental agencies. The Company also undergoes periodic
examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations,
amounts of required loss allowances, and operating restrictions resulting from the regulators’ judgements based on
information available to them at the time of their examinations.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within Monroe, Livingston, Ontario, Orleans, Wayne,
and Erie Counties, New York. Note 2 discusses the types of securities that the Company invests in. The
concentration of credit by type of loan is set forth in Note 3. Although the Bank has a diversified loan portfolio, its
debtors’ ability to honor their contracts is primarily dependent upon the real estate and general economic conditions in
those areas.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, balances due from
banks and interest-earning demand deposits (with an original maturity of three months or less).
29
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Securities
The Company classifies investment securities as either available-for-sale or held-to-maturity. The Company does not
hold any securities considered to be trading. Available-for-sale securities are reported at fair value, with net unrealized
gains and losses reflected as a separate component of stockholders’ equity, net of the applicable income tax effect.
Held-to-maturity securities are those that the Company has the ability and intent to hold until maturity and are
reported at amortized cost.
Gains or losses on investment security transactions are based on the amortized cost of the specific securities sold.
Premiums and discounts on securities are amortized and accreted into income using the interest method over the
period to maturity.
When the fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis, an
assessment is made at the balance sheet date as to whether other-than-temporary impairment (“OTTI”) is present.
The Company considers numerous factors when determining whether potential OTTI exists and the period over which
the debt security is expected to recover. The principal factors considered are (1) the length of time and the extent to
which the fair value has been less than amortized cost basis, (2) the financial condition of the issuer (and guarantor, if
any) and adverse conditions specifically related to the security industry or geographic area, (3) failure of the issuer of
the security to make scheduled interest or principal payments, (4) any changes to the rating of a security by a rating
agency, and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any
of its agencies.
For debt securities, OTTI is considered to have occurred if (1) the Company intends to sell the security, (2) it is more
likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or (3) if
the present value of expected cash flows is not sufficient to recover the entire amortized cost basis or carrying value.
For debt securities, credit-related OTTI is recognized in earnings while noncredit-related OTTI on securities not
expected to be sold is recognized in other comprehensive income (loss). Credit-related OTTI is measured as the
difference between the present value of an impaired security’s expected cash flows and its amortized cost basis or
carrying value. Noncredit-related OTTI is measured as the difference between the fair value of the security and its
amortized cost, or carrying value, less any credit-related losses recognized. For securities classified as held-to-
maturity, the amount of OTTI recognized in other comprehensive income (loss) is accreted to the credit-adjusted
expected cash flow amounts of the securities over future periods.
Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk
associated with certain investment securities, it is at least reasonably possible that changes in the values of investment
securities will occur in the near term and that such changes could materially affect the amounts reported in the
accompanying financial statements.
Federal Home Loan Bank of New York
Federal law requires a member institution of the Federal Home Loan Bank System to hold stock of its district Federal
Home Loan Bank (“FHLB”) according to a predetermined formula. This restricted stock is carried at cost.
Management’s determination of whether this investment is impaired is based on their assessment of the ultimate
recoverability of its cost rather than by recognizing temporary declines in value. The determination of whether a
decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of the decline in
net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has
persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such
payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory
changes on institutions and, accordingly, on the customer base of the FHLB.
No impairment charges were recorded related to the FHLB stock during 2016 or 2015.
30
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Loans Held for Sale
Mortgage loans held for sale in the secondary market are carried at the lower of cost or fair value. 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 consolidated financial statements. Realized gains and losses on sales are computed
using the specific identification method.
Loan Servicing Rights
The Company retains the servicing on most conventional fixed-rate mortgage loans sold and receives a fee based on
the principal balance outstanding.
Loans serviced for others totaled $118,565,000 and $85,858,000 at December 31, 2016 and 2015, respectively.
The Company also sells correspondent FHA and VA mortgage loans, servicing released.
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 $804,000 and $561,000 at December 31, 2016 and 2015, respectively, and are included in other assets on
the consolidated balance sheets. In 2016, $268,000 was capitalized and $25,000 was amortized. In 2015, $227,000
was capitalized with $32,000 amortized.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off
generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan
losses, and net deferred origination fees and costs. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related
loan yield using the interest method over the estimated life of the loan.
The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90
days past due or management has serious doubts about further collectability of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is well
secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is
reversed. Interest received on nonaccrual loans generally is either applied against principal or reported as interest
income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in
doubt.
Allowance for Loan Losses
The allowance for loan losses (the “Allowance”) is established as losses are estimated to have occurred in the loan
portfolio. The allowance for loan losses is recorded through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the loan is uncollectable. Subsequent recoveries,
if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s
periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
31
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
The allowance consists of specific, general and unallocated components. The specific component relates to loans that
are deemed impaired and classified as either 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 the following qualitative factors: effects of changes in lending policies; national
and/or local economic trends and conditions; trends in volume and terms of loans; experience, ability, and depth of
management; levels and trends of delinquencies, non-accruals and classified loans; quality of institutions loan review
system; collateral value for collateral dependent loans; concentrations of credit; and competition, legal and regulatory
requirements on level of estimated credit losses. An unallocated component is maintained to cover uncertainties that
could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the
margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and
general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that 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.
In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the
Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on
their judgements about information available to them at the time of their examination, which may not be currently
available to management. Based on management’s comprehensive analysis of the loan portfolio, management
believes the current level of the allowance for loan losses is adequate.
Bank Owned Life Insurance
The Company holds life insurance policies on a key executive. Bank owned life insurance is recorded at the amount
that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted
for other charges or other amounts due that are probable at settlement.
Premises and Equipment
Premises and equipment are stated at cost. Depreciation and amortization are computed on the straight-line basis over
the shorter of the estimated useful lives or lease terms (in the case of leasehold improvements) of the related assets.
Estimated useful lives are generally 20 to 30 years for premises and 3 to 10 years for furniture and equipment.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated
selling costs at the date of foreclosure. Any write-downs based on the asset’s fair value at date of acquisition are
charged to the allowance for loan losses. After foreclosure, property held for sale is carried at the lower of the new
basis or fair value less any costs to sell. Costs of significant property improvements are capitalized, whereas costs
relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent
32
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Foreclosed Real Estate (Continued)
write-downs are recorded as a charge to earnings, if necessary, to reduce the carrying value of the property to the
lower of its cost or fair value less cost to sell. The Company had no foreclosed real estate at December 31, 2016 and
2015. At December 31, 2016 and 2015, the Company did not have any residential real estate loans in the process of
foreclosure.
Income Taxes
Income taxes are provided for the tax effects of certain transactions reported in the consolidated financial statements.
Income taxes consist of taxes currently due plus deferred taxes related primarily to temporary differences between the
financial reporting and income tax basis of the allowance for loan losses, premises and equipment, certain state tax
credits, and deferred loan origination costs. The deferred tax assets and liabilities represent the future tax return
consequences of the temporary differences, which will either be taxable or deductible when the assets and liabilities
are recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of
commitments to extend credit. Such financial instruments are recorded in the consolidated balance sheets when they
are funded.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
33
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in earnings.
Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities,
are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such
items, along with net income, are components of comprehensive income (loss).
Accumulated other comprehensive gain (loss) represents the sum of these items, with the exception of net income, as
of the balance sheet date and is represented in the table below.
Accumulated Other Comprehensive Loss By Component:
Unrealized losses on securities available-for-sale
Tax effect
Net unrealized losses on securities available-for-sale
Unrealized losses on securities transferred to held-to-maturity
Tax effect
Net unrealized losses on securities transferred to held-to-maturity
Accumulated other comprehensive loss
Earnings Per Common Share
As of December 31,
2016
2015
$ (128)
43
(85)
$ (6)
2
(4)
-
-
-
$ (85)
(323)
115
(208)
$ (212)
Basic earnings per common 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 of the Company. The Company has not granted any restricted stock awards or stock
options and, during the years ended December 31, 2016 and 2015, had no potentially dilutive common stock
equivalents.
Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares
outstanding for purposes of calculating basic earnings per common share until they are committed to be released. The
average common shares outstanding were 1,901,023 and 1,893,582 for the years ended December 31, 2016 and
December 31, 2015 respectively. Historical share and per share data have been adjusted by the exchange ratio of
1.0884 used in the conversion and offering.
Treasury Stock
Treasury stock was recorded using the cost method and accordingly was presented as a reduction of stockholders’
equity. All treasury stock shares associated with our common stock have been cancelled as a result of the stock
conversion and reorganization that occurred in July 2016.
Reclassifications
Amounts in the prior year’s consolidated financial statements have been reclassified whenever necessary to conform
to the current year’s presentation. Such reclassifications had no impact on stockholders’ equity or net income as
previously reported.
34
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
New Accounting Pronouncements
ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. This new guidance
clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business
affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments in
this Update affect all reporting entities that must determine whether they have acquired or sold a business.
Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes,
and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business
usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in
operating a set are not required if market participants can acquire the set and continue to produce outputs, for
example, by integrating the acquired set with their own inputs and processes.
The amendments in this Update provide a screen to determine when a set is not a business. The screen requires that
when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single
identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of
transactions that need to be further evaluated.
If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must
include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create
output and (2) remove the evaluation of whether a market participant could replace missing elements. The
amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are
present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although
outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the
Board has developed more stringent criteria for sets without outputs.
Lastly, the amendments in this Update narrow the definition of the term output so that the term is consistent with how
outputs are described in Topic 606.
The Company should apply the amendments in this Update to annual periods beginning after December 15, 2017,
including interim periods within those periods. The amendments in this Update should be applied prospectively on or
after the effective date. No disclosures are required at transition.
ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint
Ventures (Topic 323), Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016
and November 17, 2016 EITF Meetings. This new guidance provides the SEC staff view that a registrant should
evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosuresFN2 about
the potential material effects of those ASUs on the financial statements when adopted. Consistent with Topic 11.M, if
a registrant does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced in this
announcement is expected to have on the financial statements, then in addition to making a statement to that effect,
that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing
the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In
this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the
accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current
accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the
significant implementation matters yet to be addressed.
ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. This new
guidance simplifies the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill
impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to
determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and
35
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
New Accounting Pronouncements (Continued)
liabilities) following the procedure that would be required in determining the fair value of assets acquired and
liabilities assumed in a business combination.
Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment
test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the
loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity
should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit
when measuring the goodwill impairment loss, if applicable.
The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform
a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.
Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount
of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.
An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative
impairment test is necessary. This Update also includes amendments to the Overview and Background Sections of the
Codification (as discussed in Part II of the amendments) as part of the Board’s initiative to unify and improve the
Overview and Background Sections across Topics and Subtopics. These changes should not affect the related
guidance in these Subtopics.
An entity should apply the amendments in this Update on a prospective basis. An entity is required to disclose the
nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the
first annual period and in the interim period within the first annual period when the entity initially adopts the
amendments in this Update.
A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments
in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15,
2019.
A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any
interim goodwill impairment tests in fiscal years beginning after December 15, 2020.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January
1, 2017.
Change in Accounting Estimate
Due to a change in New York State tax law, mortgage recording tax expensed during the years ended December 31,
2016 and 2015 are now a refundable tax credit, at the election of the tax payer. Under New York law, a bank that
paid special additional mortgage recording tax (“SAMRT”) on residential mortgages in any year beginning on or
before January 1, 2015, may elect to treat the unused portion of the SAMRT credit on those mortgages as
overpayment of tax to be carried forward or refunded. Previously, any unused credit was only eligible to be carried
forward to future years. The Company made this election on December 20, 2016 and its impact was as follows:
Income from continuing operations $627,000
Net income $464,000
Net income per share $0.24
36
FSB Bancorp, Inc.
Note 2 - Securities
The amortized cost and estimated fair value of securities with gross unrealized gains and losses at December 31, 2016
and 2015 are as follows:
December 31, 2016:
Available-for-Sale:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
U.S. Government and agency obligations
Mortgage-backed securities - residential
$ 8,106
9,769
$ 3
42
$ (110)
(63)
$ 7,999
9,748
Held-to-Maturity:
Mortgage-backed securities - residential
$ 745
$ 13
$ -
$ 758
$ 17,875
$ 45
$ (173)
$ 17,747
U.S. Government and agency
obligations
State and municipal securities
December 31, 2015:
Available-for-Sale:
-
6,675
-
25
-
(74)
-
6,626
$ 7,420
$ 38
$ (74)
$ 7,384
U.S. Government and agency obligations
Mortgage-backed securities - residential
$ 6,000
13,974
$ -
101
$ (32)
(75)
$ 5,968
14,000
Held-to-Maturity:
Mortgage-backed securities - residential
$ 1,535
$ 39
$ -
$ 1,574
$ 19,974
$ 101
$ (107)
$ 19,968
U.S. Government and agency
obligations
State and municipal securities
6,793
4,651
129
76
-
(1)
6,922
4,726
$ 12,979
$ 244
$ (1)
$ 13,222
Mortgage-backed securities consist of securities that are issued by Fannie Mae (“FNMA”), Freddie Mac (“FHLMC”),
Ginnie Mae (“GNMA”), and are collateralized by residential mortgages. U.S. Government and agency obligations
include notes and bonds with both fixed and variable rates. State and municipal securities consist of government
obligation and revenue bonds.
37
FSB Bancorp, Inc.
Note 2 - Securities (Continued)
The amortized cost and estimated fair value by contractual maturity of debt securities at December 31, 2016 are
shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call
or prepay obligations.
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
(In Thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities -
residential
$ -
6,106
1,000
1,000
9,769
$ 17,875
$ -
6,022
1,003
974
9,748
$ 17,747
$ 755
3,643
2,277
-
745
$ 7,420
$ 756
3,637
2,233
-
758
$ 7,384
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 in 2016 resulting from proceeds of $2,606,000. There were $64,000 of
gross realized gains on sales of securities available-for-sale and $42,000 of gross realized gains on sales of securities
held-to-maturity in 2015 resulting from proceeds of $3,430,000. In accordance with accounting guidance, the
Company was able to sell securities classified as held-to-maturity in 2016 and 2015 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.
No securities were pledged to secure public deposits or for any other purpose required or permitted by law at
December 31, 2016 and 2015.
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.
38
FSB Bancorp, Inc.
Note 2 - Securities (Continued)
The following table shows gross unrealized losses and fair value, aggregated by investment category and length of
time the individual securities have been in a continuous unrealized loss position, at December 31, 2016 and 2015:
2016:
Available-for-Sale
U.S. Government and
agency obligations
Mortgage-backed
securities - residential
2016:
Held-to-Maturity
Mortgage-backed
securities - residential(1)
State and municipal
Securities(1)
2015:
Available-for-Sale
U.S. Government and
agency obligations
Mortgage-backed
securities - residential
Less than 12 Months
Gross
Unrealized
Losses
Fair
Value
12 Months or More
Gross
Unrealized
Losses
Fair
Value
(In Thousands)
Total
Fair
Value
Gross
Unrealized
Losses
$ 6,996
$ 110
$ -
$ -
$ 6,996
$ 110
4,441
49
987
14
5,428
63
$ 11,437
$ 159
$ 987
$ 14
$ 12,424
$ 173
$ 178
$ -
$ -
$ -
$ 178
$ -
4,275
74
45
-
4,320
74
$ 4,453
$ 74
$ 45
$ -
$ 4,498
$ 74
$ 5,968
$ 32
$ -
$ -
$ 5,968
$ 32
6,283
61
821
14
7,104
75
$ 12,251
$ 93
$ 821
$ 14
$ 13,072
$ 107
2015:
Held-to-Maturity
Mortgage-backed
securities - residential(1) $ - $ -
State and municipal
Securities(1)
455
-
$ -
$ -
$ -
$ -
126
1
581
1
$ 455
$ -
$ 126
$ 1
$ 581
$ 1
(1) Aggregate unrealized loss position of these securities is less than $500.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation. In 2016 and 2015, the Company did not
record an other-than-temporary impairment charge.
At December 31, 2016, six U.S. Government and agency obligations, four residential mortgage-backed securities and
14 state and municipal securities were in a continuous unrealized loss position for less than twelve months. At
December 31, 2016, two residential mortgage-backed securities and one state and municipal security were in a
continuous unrealized loss position for more than twelve months. The debt securities and residential mortgage-backed
securities were issued by U.S. Government sponsored agencies. All are paying in accordance with their terms with no
deferrals of interest or defaults. Because the decline in fair value is attributable to changes in interest rates, not credit
39
FSB Bancorp, Inc.
Note 2 - Securities (Continued)
quality, and because management does not intend to sell and will not be required to sell these securities prior to
recovery or maturity, no declines are deemed to be other-than-temporary. 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 and with no deferrals of interest or defaults. Because the decline in fair value is
attributable to changes in interest rates, not credit quality, and because management does not intend to sell and will
not be required to sell these securities prior to recovery or maturity, no declines are deemed to be other-than-
temporary.
Note 3 – Loans and The Allowance for Loan Losses
Net loans at December 31, 2016 and 2015 consist of the following:
Real estate loans:
Secured by one- to four-family residences
Secured by multi-family residences
Construction
Commercial real estate
Home equity lines of credit
Commercial & industrial
Other loans
Total Loans
Net deferred loan origination costs
Allowance for loan losses
Net Loans
2016
2015
(In Thousands)
$188,573
5,103
6,134
8,440
16,797
1,947
75
$177,037
5,146
1,251
3,522
14,523
853
61
227,069
202,393
113
(990)
248
(811)
$226,192
$201,830
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
Other Loans
Secured by one-to-four family residences
Secured by multi-family residences
Construction
Commercial real estate
Home equity lines of credit
Commercial and industrial
Other loans
40
FSB Bancorp, Inc.
Note 3 – Loans and The Allowance for Loan Losses (Continued)
The Company’s primary lending activity is the origination of one- to four-family residential real estate mortgage
loans. At December 31, 2016, $188.6 million, or 83.0%, of the total loan portfolio consisted of one- to four-family
residential real estate mortgage loans compared to $177.0 million, or 87.5%, of the total loan portfolio at December
31, 2015.
The Company offers home equity lines of credit, which are primarily secured by a second mortgage on one- to four-
family residences. At December 31, 2016, home equity lines of credit totaled $16.8 million, or 7.4%, of total loans
receivable compared to $14.5 million, or 7.2%, of total loans receivable at December 31, 2015.
The underwriting standards for home equity lines of credit include a determination of the applicant’s credit history, an
assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of
the collateral securing the loan. The combined loan-to-value ratio (first and second mortgage liens) for home equity
lines of credit is generally limited to 90%. The Company originates home equity lines of credit without application
fees or borrower-paid closing costs. Home equity lines of credit are offered with adjustable-rates of interest indexed to
the prime rate, as reported in The Wall Street Journal.
Multi-family residential loans generally are secured by rental properties. Multi-family real estate loans are offered
with fixed and adjustable interest rates. Loans secured by multi-family real estate totaled $5.1 million, or 2.2%, of the
total loan portfolio at December 31, 2016 compared to $5.1 million, or 2.5%, of the total loan portfolio at December
31, 2015. Multi-family real estate loans are originated for terms of up to 20 years. Adjustable-rate multi-family real
estate loans are tied to the average yield on U.S. Treasury securities, subject to periodic and lifetime limitations on
interest rate changes.
Loans secured by multi-family real estate generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of
loans. Furthermore, the repayment of loans secured by multi-family real estate typically depends upon the successful
operation of the real estate property securing the loans. If the cash flow from the project is reduced, the borrower’s
ability to repay the loan may be impaired.
The Company originates construction loans for the purchase of developed lots and for the construction of single-
family residences. At December 31, 2016, construction loans totaled $6.1 million, or 2.7%, of total loans receivable
compared to $1.3 million, or 0.6%, at December 31, 2015. At December 31, 2016, the additional unadvanced portion
of these construction loans totaled $5.0 million compared to $1.3 million at December 31, 2015. Construction loans
are offered
their personal residences by a qualified builder
to
(construction/permanent loans).
the construction of
individuals for
Before making a commitment to fund a construction loan, the Company requires an appraisal of the property by an
independent licensed appraiser. The Company generally also reviews and inspects each property before disbursement
of funds during the term of the construction loan.
Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied
real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value
of the property at completion of construction compared to the estimated cost (including interest) of construction and
other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to
advance additional funds beyond the amount originally committed in order to protect the value of the property.
Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property
with a value that is insufficient to assure full repayment of the loan.
Commercial real estate loans are secured by office buildings, mixed use properties, places of worship and other
commercial properties. Loans secured by commercial real estate totaled $8.4 million, or 3.7%, of the Company’s total
41
FSB Bancorp, Inc.
Note 3 – Loans and The Allowance for Loan Losses (Continued)
loan portfolio at December 31, 2016 compared to $3.5 million, or 1.7%, of our total loan portfolio at December 31,
2015.
The Company generally originates adjustable-rate commercial real estate loans with maximum terms of up to 15
years. The maximum loan-to-value ratio of commercial real estate loans is 80%.
Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve
greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of
related borrowers. Repayment of these loans depends to a large degree on the results of operations and management
of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater
extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of these
loans makes them more difficult for management to monitor and evaluate.
The commercial and industrial product set includes loans to individuals or businesses on an installment basis secured
by vehicles, equipment or other durable goods for which the loans were made, loans for and secured by machinery
and/or equipment for which a legitimate resale market exists, lines of credit to businesses and individuals, and
unsecured loans to businesses and individuals on a short-term basis. At December 31, 2016, these loans totaled $1.9
million, or 0.9%, of the total loan portfolio compared to $853,000, or 0.4%, at December 31, 2015.
These loans carry a higher risk than commercial real estate loans by the nature of the underlying collateral, which can
be business assets such as equipment and accounts receivable. To reduce the risk, management also attempts to
secure secondary collateral, such as real estate, and obtain personal guarantees of the borrowers. To further reduce
risk and enhance liquidity, these loans generally carry variable rates of interest, repricing in five year periods, and
have a maturity of ten years or less.
In 2014, the Company applied and was approved as an SBA lender. SBA acts as a loan guarantor and these loans are
generally for commercial business purposes versus real estate. The Company follows the Small Business
Administration lending guidelines regarding eligibility, underwriting etc. as stated in SBA’s most current version of
SOP 50 10 SBA’s Lender and Development Company Loan Program.
The Company offers a variety of other loans secured by property other than real estate. At December 31, 2016, these
other loans totaled $75,000, or 0.1%, of the total loan portfolio compared to other loans totaling $61,000, or 0.1%, of
the total loan portfolio at December 31, 2015. These loans include automobile, passbook, overdraft protection and
unsecured loans. Due to the relative immateriality of other loans, the Company’s risk associated with these loans is
not considered significant.
42
FSB Bancorp, Inc.
Note 3 – Loans and The Allowance for Loan Losses (Continued)
The following table sets forth the allowance for loan losses allocated by loan class and the activity in the allowance
for loan losses for the years ending December 31, 2016 and 2015. The allowance for loan losses allocated to each
class is not necessarily indicative of future losses in any particular class and does not restrict the use of the allowance
to absorb losses in other classes.
Secured by 1-4
family residential
Secured by multi-
family residential
Construction
Commercial
(In Thousands)
At December 31, 2016
Beginning Balance
Charge Offs
Recoveries
Provisions
Ending Balance (1)
At December 31, 2015
Beginning Balance
Charge Offs
Recoveries
Provisions
Ending Balance (1)
$524
-
-
60
$584
$448
-
-
76
$524
$39
-
-
(1)
$38
$29
-
-
10
$39
$6
-
-
25
$31
$6
-
-
-
$6
$35
-
-
49
$84
$14
-
-
21
$35
(1)All Loans are collectively evaluated for impairment.
Home
Equity
Lines of
Credit
$101
-
-
11
$112
$87
-
-
14
$101
Commercial
& Industrial
Other/
Unallocated
$11
-
-
17
$28
$1
-
-
10
$11
$95
(1)
-
19
$113
$68
-
-
27
$95
Total
$811
(1)
-
180
$990
$653
-
-
158
$811
The Company’s policies, consistent with regulatory guidelines, provide for the classification of loans that are
considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is
inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those assets characterized by the distinct possibility that the Company will sustain some
loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those
classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or
portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as
assets is not warranted. Assets that do not expose the Company to risk sufficient to warrant classification in one of
the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be
designated as special mention.
When the Company classifies assets as pass a portion of the related general loss allowances is allocated to such assets
as deemed prudent. The allowance for loan losses is the amount estimated by management as necessary to absorb
credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date.
The Company’s determination as to the classification of its assets and the amount of its loss allowances are subject to
review by its principal state regulator, the New York State Department of Financial Services, which can require that
the Company establish additional loss allowances. The Company regularly reviews its asset portfolio to determine
whether any assets require classification in accordance with applicable regulations.
At December 31, 2016 and 2015, there were no loans considered to be impaired and no troubled debt restructurings.
43
FSB Bancorp, Inc.
Note 3 – Loans and The Allowance for Loan Losses (Continued)
The following table presents the risk category of loans by class at December 31, 2016 and 2015:
2016
One- to four-family residential
Multi-family residential
Construction
Commercial real estate
Home equity lines of credit
Commercial & industrial
Other loans
Total
2015
One- to four-family residential
Multi-family residential
Construction
Commercial real estate
Home equity lines of credit
Commercial & industrial
Other loans
Total
Pass
$ 187,079
5,103
6,134
8,440
16,498
1,900
75
$ 225,229
$ 175,885
5,146
1,251
3,522
14,223
853
60
$ 200,940
Special
Mention
$ -
-
-
-
-
-
-
$ -
$ -
-
-
-
-
-
-
$ -
Substandard
(In Thousands)
$ 1,494
-
-
-
299
47
-
$ 1,840
$ 1,152
-
-
-
300
-
-
$ 1,452
Doubtful
Total
$ -
-
-
-
-
-
-
$ -
$ -
-
-
-
-
-
1
$ 1
$188,573
5,103
6,134
8,440
16,797
1,947
75
$227,069
$177,037
5,146
1,251
3,522
14,523
853
61
$202,393
At December 31, 2016, the Company had no non-accrual loans and at December 31, 2015, the Company had one non-
accrual residential mortgage loan for $63,000, one non-accrual home equity line of credit for $18,000, and one non-
accrual checking line of credit for $1,000. There were no loans that were past due 90 days or more and still accruing
interest at December 31, 2016 and 2015. Interest on non-accrual loans that would have been earned if loans were
accruing interest was immaterial for 2015.
44
FSB Bancorp, Inc.
Note 3 – Loans and The Allowance for Loan Losses (Continued)
Delinquent Loans. 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 December 31, 2016 and December 31, 2015, are detailed in the following table:
30-59 Days
Past Due
60-89 Days
Past Due
Greater than
90 Days
Total Past
Due
Current
Total Loans
Receivable
(In thousands)
2016
Real estate loans:
One- to four-family
residential ..................................
Multi-family residential ...........
Construction ..............................
Commercial ...............................
Home equity lines of credit ......
Commercial & industrial ...............
Other loans ......................................
Total .........................................
$ 89
-
-
-
-
47
-
$ 136
$ -
-
-
-
-
-
-
$ -
$ -
-
-
-
-
-
-
$ -
$ 89
-
-
-
-
47
-
$ 136
$ 188,484
5,103
6,134
8,440
16,797
1,900
75
$ 226,933
$ 188,573
5,103
6,134
8,440
16,797
1,947
75
$ 227,069
2015
Real estate loans:
One- to four-family
residential ..................................... $ 118
Multi-family residential ..............
-
Construction ................................
-
Commercial .................................
-
Home equity lines of credit ........
-
Commercial & industrial ..................
-
9
Other loans ........................................
Total .......................................... $ 127
$ -
-
-
-
-
-
-
$ -
$ 63
-
-
-
18
-
1
$ 82
$ 181
-
-
-
18
-
10
$ 209
$ 176,856
5,146
1,251
3,522
14,505
853
51
$ 202,184
$ 177,037
5,146
1,251
3,522
14,523
853
61
$ 202,393
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.
Note 4 - Premises and Equipment
Premises and equipment at December 31, 2016 and 2015 are summarized as follows:
Premises
Furniture and equipment
Accumulated depreciation and amortization
2016
2015
(In Thousands)
$4,355
3,628
7,983
(4,808)
$3,175
$4,305
2,803
7,108
(4,364)
$2,744
45
FSB Bancorp, Inc.
Note 4 - Premises and Equipment (Continued)
At December 31, 2016, the Company was obligated under non-cancelable operating leases for existing branches in
Penfield, Irondequoit, Webster, and Perinton, New York and for four mortgage origination offices in Watertown,
Pittsford, Greece, and Buffalo, New York. Rent expense under leases totaled $429,000 during 2016. Rent expense
under the same non-cancelable operating leases, which includes the Canandaigua mortgage origination office which
was terminated on December 31, 2015, totaled $418,000 during 2015. Future minimum rental payments under these
leases for the next five years and thereafter are as follows (in thousands):
Years ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total
Note 5 - Deposits
$ 442
433
433
390
368
1,933
$ 3,999
The components of deposits at December 31, 2016 and 2015 consist of the following:
Non-interest bearing
NOW accounts
Regular savings, tax escrow and demand clubs
Money market
Individual retirement accounts
Certificates of deposit
2016
2015
(In Thousands)
$ 8,423
29,725
26,655
30,123
6,975
81,033
$ 6,974
28,751
27,306
21,029
8,252
93,249
$182,934
$185,561
As of December 31, 2016, individual retirement accounts and certificates of deposit have scheduled maturities as follows
(in thousands):
2017
2018
2019
2020
2021
$ 63,383
18,931
1,947
2,029
1,718
$ 88,008
The aggregate amount of time deposits, each with a minimum denomination of $250,000 was $7,746,000 and
$11,100,000 at December 31, 2016 and 2015, respectively. Under the Dodd-Frank Act, deposit insurance per account
owner is $250,000.
46
FSB Bancorp, Inc.
Note 5 – Deposits (Continued)
Interest expense on deposits for the years ended December 31, 2016 and 2015 is as follows:
NOW accounts
Regular savings and demand clubs
Money market
Individual retirement accounts
Certificates of deposit
2016
2015
(In Thousands)
$ 74
102
100
64
1,096
$ 36
127
63
105
921
$ 1,436
$ 1,252
47
FSB Bancorp, Inc.
Note 6 - Borrowings
Borrowings consist of advances from the Federal Home Loan Bank of New York (FHLB).
The following table sets forth the contractual maturities of borrowings with the FHLB as of December 31:
Advance
Date
Maturity
Date
Current
Rate
2016
2015
(In Thousands)
06/05/06
04/25/12
08/16/12
09/05/12
11/06/12
11/27/12
12/19/12
12/27/12
12/27/12
01/04/13
01/15/13
01/22/13
01/22/13
01/22/13
02/12/13
02/20/13
02/20/13
07/02/13
07/22/13
09/19/13
09/19/13
01/21/14
01/21/14
03/20/14
03/24/14
07/21/14
07/21/14
07/21/14
08/06/14
08/21/14
08/21/14
10/02/14
10/15/14
11/28/14
12/31/14
12/31/14
01/14/15
01/21/15
01/21/15
04/13/15
05/20/15
05/20/15
06/25/15
06/25/15
06/06/16
04/25/17
08/16/17
09/05/19
11/06/17
11/27/17
12/19/19
12/27/16
12/27/17
01/04/19
01/16/18
01/23/17
01/22/18
01/22/19
02/12/16
02/21/20
02/21/23
07/02/18
07/23/18
09/19/18
09/16/16
01/22/18
01/22/19
03/20/19
03/24/17
07/21/21
07/22/19
07/23/18
08/06/18
08/22/16
08/21/19
10/04/21
10/15/21
11/29/21
12/31/19
01/02/18
01/14/20
01/21/20
01/21/21
04/13/20
05/20/20
05/20/22
06/25/20
06/26/17
5.63 %
1.03 %
1.00 %
1.13 %
0.86 %
1.12 %
1.20 %
0.97 %
0.89 %
1.52 %
1.18 %
0.96 %
1.20 %
1.44 %
0.79 %
1.28 %
1.77 %
1.35 %
1.27 %
1.37 %
1.14 %
1.72 %
1.45 %
1.50 %
1.32 %
1.94 %
2.08 %
1.79 %
1.80 %
0.92 %
2.12 %
2.00 %
1.69 %
1.90 %
1.63 %
1.52 %
1.73 %
1.79 %
1.97 %
1.74 %
1.52 %
1.91 %
1.65 %
1.14 %
-
128
306
829
407
1,000
902
-
220
1,000
1,000
1,000
1,000
1,000
-
475
646
682
681
375
-
1,000
442
714
1,500
682
500
1,000
1,000
-
1,000
1,434
715
1,455
626
1,000
1,500
500
500
1,000
708
796
725
1,000
1,000
433
711
1,115
810
1,000
1,187
1,000
422
1,000
1,000
1,000
1,000
1,000
1,500
618
742
1,083
1,083
575
2,000
1,000
642
1,012
1,500
820
500
1,000
1,000
1,000
1,000
1,709
853
1,730
823
1,000
1,500
500
500
1,000
903
933
920
1,000
48
FSB Bancorp, Inc.
Note 6 – Borrowings (Continued)
Advance
Date
10/29/15
10/29/15
01/27/16
01/27/16
02/12/16
02/12/16
08/24/16
08/24/16
09/21/16
09/21/16
09/30/16
10/28/16
11/04/16
11/17/16
11/17/16
11/17/16
11/28/16
12/08/16
12/21/16
12/21/16
12/30/16
Maturity
Date
Current
Rate
2016
2015
(In Thousands)
10/29/20
10/29/20
01/27/21
01/27/23
02/13/23
02/13/23
08/24/17
08/24/18
03/21/17
09/21/17
03/30/17
10/28/20
11/04/21
11/17/21
11/17/21
11/17/23
11/29/19
12/08/17
06/21/17
12/23/19
01/03/17
1.51 %
1.90 %
1.92 %
1.87 %
1.66 %
2.04 %
1.01 %
1.22 %
0.83 %
1.06 %
0.79 %
1.57 %
1.72 %
2.13 %
1.78 %
2.07 %
1.78 %
1.22 %
0.95 %
1.91 %
0.74 %
1,579
1,000
1,000
888
898
500
1,000
1,000
1,000
2,000
1,000
1,000
2,000
1,000
1,000
1,000
1,500
1,000
1,000
1,000
3,000
1,968
1,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$56,813
$46,092
Borrowings are secured by residential mortgages with a carrying amount of $165,546,000 at December 31, 2016 and
the Company’s investment in FHLB stock. As of December 31, 2016, $90,868,000 was available for borrowings. At
December 31, 2015, the carrying amount of borrowings secured by residential mortgages was $168,199,000 and
$100,860,000 was available for new borrowings.
The following table sets forth the contractual maturities of all FHLB borrowings at December 31, 2016 (dollars in
thousands):
2017
2018
2019
2020
2021
Thereafter
Contractual
Maturity
$ 15,562
8,737
9,513
8,488
9,785
4,728
$ 56,813
Weighted
Average Rate
0.98%
1.46
1.62
1.65
1.88
2.27
1.49%
The Company also has a repurchase agreement with Raymond James providing an additional $10 million in liquidity
collateralized by the Company’s U.S. Government and agency obligations. There were no advances outstanding under the
repurchase agreement at December 31, 2016 and 2015. Securities are not pledged until the borrowing is initiated.
49
FSB Bancorp, Inc.
Note 7 - Income Taxes
The provision for income taxes for 2016 and 2015 consists of the following:
Current
Federal
State
Deferred
2016
2015
(In Thousands)
$ 439
4
(115)
$ 328
$ 247
5
(116)
$ 136
The Company’s effective tax rate was 26% and 21% in 2016 and 2015, respectively. The effective tax rate primarily
reflects the impact of non-tax interest and dividends from tax exempt securities, as well as a partial release of a
component of the deferred tax asset valuation allowance during 2016.
Items that give rise to differences between income tax expense included in the consolidated statements of income and
taxes computed by applying the statutory federal tax at a rate of 34% in 2016 or 2015 included the following (dollars in
thousands):
Amount
Federal Tax at a Statutory rate
State taxes, net of Federal provision
Change in valuation allowance
Nontaxable interest and dividend income
Other items
Income tax provision
$ 431
119
(178)
(44)
-
$ 328
2016
% of Pre-tax
Income
34%
9
(14)
(3)
-
26%
2015
Amount
$ 221
(223)
182
(44)
-
$ 136
% of Pre-tax
Income
34%
(34)
28
(7)
-
21%
50
FSB Bancorp, Inc.
Note 7 - Income Taxes (Continued)
Deferred income tax assets and liabilities resulting from temporary differences are summarized as follows and are
included in other assets at December 31, 2016 and at December 31, 2015 in the accompanying consolidated balance
sheets:
Deferred tax assets:
Deferred loan origination fees
Allowance for loan losses - Federal
State tax credits
Depreciation
Supplemental Executive Retirement Plan
Other-than-temporary impairment loss on securities
Unrealized loss on securities available for sale and transferred to
held to maturity
Net operating loss
Other
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Mortgage servicing rights
Total deferred tax liabilities
2016
2015
(In Thousands)
$ 95
379
1,102
64
290
-
43
159
-
2,132
(1,318)
814
(308)
(308)
$ 43
314
1,381
81
226
22
117
-
1
2,185
(1,507)
678
(217)
(217)
Net deferred tax asset
$ 506
$ 461
The Company has recorded a valuation allowance for mortgage recording tax credits incurred before 2015 as well as
state tax deductions since anticipated levels of future state taxable income makes it more likely than not that all of
these tax benefits will not be used. Beginning in 2015, the New York State Special Additional Mortgage Recording
Tax Credit became a refundable credit. To the extent that the credit exceeds the Company’s New York State tax
liability, any remaining credit will be refunded to the Company. In addition, a valuation allowance in the amount of
$88,000 was established in 2010 against a portion of the allowance for loan loss because future realization of the full
tax benefit of that deferred tax asset was deemed to be unlikely. After fully utilizing its Federal Net Operating Loss
(“NOL”) carryforward during 2013 and realizing increased and consistent current taxable income over the past 3
years, management determined that half (or $44,000) of that component of the valuation allowance should be reversed
during 2015, with the remaining to be reversed in 2016.
As a thrift institution, the Bank is subject to special provisions in the income tax laws regarding its allowable income
tax bad debt deduction and related tax basis bad debt reserves. Deferred income tax liabilities are to be recognized
with respect to any base-year reserves which are to become taxable (or "recaptured") in the foreseeable future.
Under current income tax laws, the base-year reserves would be subject to recapture if the Company pays a cash
dividend in excess of earnings and profits or liquidates. The Bank does not expect to take any actions in the
foreseeable future that would require the recapture of any Federal reserves. As a result, a deferred tax liability has not
been recognized with respect to the Federal base-year reserve of $1,518,000 at December 31, 2016 and 2015, because
the Bank does not expect that this amount will become taxable in the foreseeable future. The unrecognized deferred
tax liability with respect to the Federal base-year reserve was $516,000 at December 31, 2016 and 2015. It is more
51
FSB Bancorp, Inc.
Note 7 - Income Taxes (Continued)
likely than not that this liability will never be incurred because, as noted above, the Bank does not expect to take any
action in the future that would result in this liability being incurred.
The Company's Federal and New York State tax returns, constituting the returns of the major taxing jurisdictions, are
subject to examination by the taxing authorities for 2013, 2014, and 2015 as prescribed by applicable statute. No
waivers have been executed that would extend the period subject to examination beyond the period prescribed by
statute.
Note 8 – Accumulated Other Comprehensive Loss
Changes in the components of accumulated other comprehensive loss (“AOCI”), net of tax, for the periods indicated
are summarized in the table below, in thousands.
Beginning balance
Other comprehensive (loss) income before reclassifications
Amounts reclassified from AOCI
Unrealized Gains
and Losses on
Available for
Sales Securities
$ (4)
(57)
(24)
Unrealized Losses
on Securities
Transferred to
Held to Maturity
$ (208)
208
-
Total
$ (212)
151
(24)
Ending balance
$ (85)
$ -
$ (85)
For the year ended December 31, 2015
Unrealized Gains
and Losses on
Available for
Sales Securities
$ 129
(63)
(70)
Unrealized Losses
on Securities
Transferred to
Held to Maturity
$ (355)
147
-
Total
$ (226)
84
(70)
Beginning balance
Other comprehensive (loss) income before reclassifications
Amounts reclassified from AOCI
Ending balance
$ (4)
$ (208)
$ (212)
52
FSB Bancorp, Inc.
Note 8 – Accumulated Other Comprehensive Income (Loss) (Continued)
The following table presents the amounts reclassified out of each component of AOCI for the indicated annual period
in thousands:
For the year ended December 31,
Details about AOCI
2016
2015 Affected Line Item in the Statement of Income
Available for sale securities
Held to maturity securities
$ 24
12
(12)
$ 24
$ 64 Realized gain on sale of securities
42 Realized gain on sale of securities
(36) Provision for Income Taxes
$ 70 Net Income
Note 9 - Employee Benefit Plans
The Bank has a 401(k) plan for all eligible employees. Employees are eligible for participation in the 401(k) Plan after
one year of service and attaining age 21. The 401(k) Plan allows employees to contribute 1% to 100% of their annual
salary subject to statutory limitations. Matching contributions made by the Bank are 100% of the first 6% of
compensation that an employee contributes to the 401(k) Plan. In addition, the Bank may make a discretionary
contribution as a percentage of each eligible employee’s annual base compensation including the value of ESOP shares
allocated. Matching contributions to the 401(k) Plan amounted to $189,000 and $174,000 for the years ended
December 31, 2016 and 2015, respectively. Discretionary contributions to the 401(k) Plan were $77,000 and $72,000
for the years ended December 31, 2016 and 2015, respectively.
The Bank sponsors an Employee Stock Ownership Plan (ESOP) for eligible employees who have attained age 21 and
completed one year of employment. The cost of shares not committed to be released is presented in the accompanying
consolidated balance sheets as a reduction of stockholders’ equity. Allocations to individual accounts are based on
participant compensation. As shares are committed to be released to participants, the Company reports compensation
expense equal to the current market price of the shares and the shares become outstanding for earnings per share
computations. The difference between the market price and the cost of shares committed to be released is recorded as
an adjustment to additional paid-in-capital. Any dividends on allocated shares reduce retained earnings. Any dividends
on unallocated ESOP shares reduce debt and accrued interest. In connection with establishing the ESOP in 2007, the
ESOP borrowed $700,000 from FSB Community to purchase 69,972 common shares of FSB Community’s stock. The
loan is being repaid in twenty equal annual installments through 2026. The loan bears interest at the prime rate.
Shares are released to participants on a straight line basis as the loan is repaid and totaled 3,498 shares for each of the
years ended December 31, 2016 and December 31, 2015. Total expense for the ESOP was $44,000 and $35,000 for
the years ended December 31, 2016 and 2015, respectively. At December 31, 2016, the Company had 34,986
unearned ESOP shares having an aggregate market value of $496,801.
The Bank has a supplemental executive retirement plan (SERP) for two of its executives. All benefits provided under
the SERP are unfunded and, as these executives retire, the Company will make payments to participants. The Company
has recorded $759,000 and $621,000 at December 31, 2016 and 2015 respectively, for the SERP in other liabilities. In
2016 and 2015, the expense under the SERP totaled $138,000 and $125,000, respectively.
53
FSB Bancorp, Inc.
Note 10 - Related Party Transactions
Certain employees, executive officers and directors are engaged in transactions with the Bank in the ordinary course of
business. It is the Bank’s policy that all related party transactions are conducted at “arms length” and all loans and
commitments included in such transactions are made in the ordinary course of business, on substantially the same
terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons
not related to the Bank and do not involve more than the normal risk of collectability or present other unfavorable
terms.
As of December 31, 2016 and 2015, loans outstanding with related parties were $596,000 and $168,000, respectively.
During 2016, there were new loans of $651,000, sales of $166,000, and repayments totaled $57,000.
Note 11 - Commitments
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit. These
instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated balance sheets. The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. The Bank’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the
contractual amount of those instruments summarized as follows at December 31, 2016 and 2015:
Commitments to extend credit:
Commitments to grant loans
Unadvanced portion of construction loans
Unfunded commitments under lines of credit
2016
2015
(In Thousands)
$ 15,199
5,009
17,587
$ 10,415
1,338
15,803
$37,795
$27,556
Commitments to grant loans at fixed-rates at December 31, 2016 totaled $10,802,000 and had interest rates that ranged
from 3.00% to 5.00%.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Bank upon extension of credit, varies and is based on management’s credit
evaluation of the counterparty.
In the ordinary course of business, the Bank sells residential mortgage loans to third parties and in certain limited
situations, such as in the event of an early payment default, the Bank retains credit risk exposure on those residential
mortgage loans and may be required to repurchase them or to indemnify guarantors for certain losses. The Bank may
also be required to repurchase residential mortgage loans when representations and warranties made by the Bank in
connection with those sales are breached. When a residential mortgage loan sold to an investor fails to perform
according to its contractual terms, the investor will typically review the loan file to search for errors that may have
been made in the process of originating the loan. If errors were discovered and it is determined that such errors
constitute a breach of a representation or warranty made to the investor in connection with the Bank’s sale of the
residential mortgage loan, the Bank will be required to either repurchase the loan or indemnify the investor for losses
54
FSB Bancorp, Inc.
Note 11 – Commitments (Continued)
sustained. The bank has not been required to repurchase any residential mortgage loans or indemnify any investors for
any such errors.
Note 12 - Regulatory Matters
The Bank is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative
measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classification are subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total, Tier 1 capital (as defined), and Common Equity Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 to adjusted total assets (as defined).
Management believes that, as of December 31, 2016 and 2015, the Bank met all capital adequacy requirements to
which it was subject. As of December 31, 2016, the most recent notification categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based, and Tier 1 leverage ratios as
set forth in the following table. There are no conditions or events since that notification that management believes
have changed the Bank’s status as well capitalized.
The Bank’s actual capital amounts and ratios are presented in the table below.
Minimum
For Capital
Minimum
To Be "Well-
Capitalized"
Under Prompt
Actual
Adequacy Purposes Corrective Provisions
Well-Capitalized
With Buffer, Fully
Phased in for 2019
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount Ratio
$29,264 18.45% $12,689 8.0% $15,861 10.0%
$16,654 10.5%
28,274 17.83
9,516 6.0
12,689
8.0
13,482 8.5
28,274 17.83
28,274 10.70
7,137 4.5
10,572 4.0
10,309
13,214
6.5
5.0
11,102 7.0
13,214 5.0
$20,757 15.12%
$10,980 8.0%
$13,725 10.0%
19,946 14.53
8,235 6.0
10,980
8.0
19,946 14.53
7.85
19,946
6,176 4.5
10,167 4.0
8,921
12,709
6.5
5.0
(Dollars in thousands)
As of December 31, 2016
Total Core Capital (to Risk-Weighted
Assets)
Tier 1 Capital (to Risk-Weighted
Assets)
Tier 1 Common Equity (to Risk-
Weighted Assets)
Tier 1 Capital (to Assets)
As of December 31, 2015:
Total Core Capital (to Risk-Weighted
Assets)
Tier 1 Capital (to Risk-Weighted
Assets)
Tier 1 Common Equity (to Risk-
Weighted Assets)
Tier 1 Capital (to Assets)
The FRB has issued a policy guidance regarding the payment of dividends by bank holding companies. In general,
the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate
of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality
55
FSB Bancorp, Inc.
Note 12 - Regulatory Matters (Continued)
and overall financial condition. FRB guidance provides for prior regulatory review of capital distributions in certain
circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid
over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is
inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to
pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect
the ability of FSB Bancorp to pay dividends or otherwise engage in capital distributions.
Note 13 - Fair Value Measurement and Fair Values of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company’s assets and liabilities; however, there
are inherent weaknesses in any estimation technique. Therefore, for substantially all assets and liabilities, the fair
value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales
transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-
ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to
those respective dates. As such, the estimated fair values of assets and liabilities subsequent to the respective
reporting dates may be different than the amounts reported at each year-end.
Accounting guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical
unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for
substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and
unobservable (i.e. supported with little or no market activity).
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the
fair value measurement.
56
FSB Bancorp, Inc.
Note 13 - Fair Value Measurement and Fair Values of Financial Instruments(Continued)
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair
value hierarchy used are as follows at December 31:
2016
Total
Level 1
Level 2
Level 3
(In Thousands)
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
$ -
2015
Total
Level 1
Level 2
Level 3
U.S. Government and agency obligations
$ 5,968
$ -
$ 5,968
$ -
Mortgage-backed securities - residential
14,000
-
14,000
-
Total Available-for-Sale Securities
$19,968
$ -
$19,968
$ -
There were no securities transferred out of level 2 securities available-for-sale during the twelve months ended
December 31, 2016. No assets or liabilities have been measured on a non-recurring basis at December 31, 2016 or
2015.
Required disclosures include fair value information about financial instruments, whether or not recognized in the
consolidated balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In
that regard, the 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. Certain financial instruments and all non-financial
instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
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 following methods
and assumptions were used to estimate the fair values of certain of the Company’s assets and liabilities at December
31, 2016 and 2015.
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.
57
FSB Bancorp, Inc.
Note 13 - Fair Value Measurement and Fair Values of Financial Instruments (Continued)
Investment in FHLB Stock
The carrying value of FHLB stock approximates its fair value based on the redemption provisions of the FHLB stock,
resulting in a Level 2 classification.
Loans and Loans Held for Sale
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.
58
FSB Bancorp, Inc.
Note 13 - Fair Value Measurement and Fair Values of Financial Instruments (Continued)
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 estimated fair values of the Company’s financial instruments at December 31, 2016 and
2015 are as follows:
Fair
Value
Hierarchy
Financial assets:
Cash and due from banks
Interest bearing demand deposits
Securities available for sale
Securities held to maturity
Investment in FHLB stock
Loans held for sale
Loans, net
Accrued interest receivable
Financial liabilities:
Deposits
Borrowings
Accrued interest payable
1
1
2
2
2
2
3
1
1/2
2
1
2016
2015
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(In Thousands)
$ 1,634
5,773
17,747
7,420
2,886
2,059
226,192
652
$ 1,634
5,773
17,747
7,384
2,886
2,059
225,569
652
$ 1,550
4,597
19,968
12,979
2,388
3,880
201,830
655
$ 1,550
4,597
19,968
13,222
2,388
3,880
201,886
655
182,934
56,813
71
182,969
57,008
71
185,561
46,092
60
185,332
46,447
60
59
FSB Bancorp, Inc.
Note 14 - FSB Bancorp, Inc. (Parent Company Only) Financial Information
Balance Sheets
Assets
Cash and cash equivalents
Securities available-for-sale
Investment in banking subsidiary
ESOP loan receivable
Accrued interest receivable
Total Assets
Liabilities and Stockholders’ Equity
Total Liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Statements of Income
Interest Income
Other Expense
Equity in undistributed earnings of banking subsidiary
Net Income
December 31
2016
2015
(In Thousands)
$ 2,881
-
28,610
398
-
$ 31,889
$ 265
1,000
20,085
431
9
$ 21,790
$ 30
$ 30
31,859
21,760
$ 31,889
$ 21,790
Year Ended December 31
2016
2015
(In Thousands)
$ 20
(89)
1,007
$ 53
(37)
497
$ 938
$ 513
60
FSB Bancorp, Inc.
Note 14 - FSB Bancorp, Inc. (Parent Company Only) Financial Information (Continued)
Statements of Cash Flows
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash flows from
operating activities
Equity in undistributed earnings of banking subsidiary
Decrease in accrued interest receivable
Net decrease in other liabilities
Net cash flows from operating activities
Cash flows from investing activities
Proceeds to banking subsidiary
Proceeds from maturities and calls of securities available-for-sale
Payments received on ESOP loan
Net cash flows from investing activities
Cash flows from financing activities
Proceeds from stock conversion and offering
Net cash flows from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents - beginning
Year Ended December 31
2016
2015
(In Thousands)
$ 938
$ 513
(1,007)
8
-
(61)
(7,300)
1,000
33
(6,267)
8,944
8,944
2,616
265
(497)
16
(16)
16
(1,938)
1,938
32
32
-
-
48
217
Cash and cash equivalents - ending
$ 2,881
$ 265
61