April 23, 2018
Dear Stockholder,
On behalf of the Board of Directors, the Executive Management Team, and all the dedicated staff at FSB Bancorp, Inc. (the
“Company”), I am pleased to write my first stockholder letter to report the 2017 financial performance of the Company.
This has been a year of transition as the longtime CEO and President Dana Gavenda retired as of December 31, 2017,
with myself becoming the President of the Company in October 2017 and later promoted to CEO on January 1, 2018. We
also hired Michael Giancursio in October 2017 as Executive Vice President and Chief Lending Officer to oversee all lending
functions within the bank. These executive leadership changes together with the current executive team in place, will
support our efforts to execute our business plan and prudently manage the Bank.
With the changes in leadership for the Company, our philosophy and strategy will continue to focus on maintaining exceptional
credit quality, driven by disciplined risk and credit management combined with strict underwriting standards. This philosophy
was enhanced with the addition of the Chief Lending Officer as well as hiring experienced credit administration staff to
achieve our ongoing lending objectives. Our ultimate goal is to protect the assets of the Company and enhance stockholder
value. When measuring our past due loans against our peer group, we are substantially better with minimal delinquent
loans. At December 31, 2017, we had two non-accrual residential mortgage loans for $153,000 and no foreclosed real
estate.
As a traditional community bank, we now have an infrastructure in place to competitively deliver a vast array of commercial
lending products including Small Business Loans (SBA) and a full product set of residential mortgage and consumer loans
to be competitive in all of our markets. The Bank continues to focus on loan production as we continue to primarily grow
our residential mortgage, construction, and commercial loan portfolios at a measured pace while still maintaining our
exceptional credit quality and strict underwriting standards. Net loans receivable increased $36.5 million, or 16.2%, to
$262.7 million at December 31, 2017 from $226.2 million at December 31, 2016. Residential mortgage loans increased
$18.3 million, or 9.7%, to $206.9 million at December 31, 2017 from $188.6 million at December 31, 2016. Multi-family
residential loans increased $5.5 million, or 108.7%, to $10.7 million at December 31, 2017 from $5.1 million at December
31, 2016. Commercial real estate loans increased $6.4 million, or 75.4%, to $14.8 million at December 31, 2017 from $8.4
million at December 31, 2016. Construction loans increased $4.6 million, or 75.3%, to $10.8 million at December 31, 2017
from $6.1 million at December 31, 2016. Commercial and industrial loans increased $1.7 million, or 89.0%, to $3.7 million
at December 31, 2017 from $1.9 million at December 31, 2016. The Bank originated $108.4 million of residential mortgage
loans for the year ended December 31, 2017 and sold $70.1 million of mortgage loans in the secondary market as a balance
sheet management strategy to reduce interest rate risk. Our branches with experienced and knowledgeable staff meet our
customer needs and demands, with continued deposit growth anticipated in order for us to continually invest these funds
in the commercial and retail lending markets that we serve. The Company experienced deposit growth in all branches in
2017 with continued focus on growing core deposits, resulting in an increase in total deposits, primarily money market and
certificates of deposit of $33.8 million, or 18.5%, to $216.7 million at December 31, 2017 from $182.9 million at December
31, 2016. The focus on retail banking coupled with commercial real estate and commercial and industrial lending will provide
opportunities to reduce the cost of our capital and gradually improve our profitability. This is the foundation that strategically
plays an important role in building long-term and sustainable stockholder value in the years ahead.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law by President Trump which reduced the corporate
federal tax rates from a maximum 35% to 21%, among other changes. Accounting rules required the Bank to reduce the
value of net deferred tax assets to reflect the new 21% tax rate when the legislation was enacted. As a result, the value of
our net deferred tax assets was reduced by $228,000 and recorded as additional tax expense in the fourth quarter. This was
a one-time nonrecurring event that will not affect our efforts to accelerate long term profitability. The Company expects lower
taxes to augment profitability in 2018 and beyond. The significant tax rate reduction in the future will aid in our strategy of
measured growth and stockholder return.
Balance sheet integrity is essential to reinforce the core competency and long-term financial performance of our Bank.
Management intends to continue to add low-risk assets to reduce the exposure to significant charge-offs and related legal
expenses. The Company intends to continue on a steady growth pattern as we market and promote our innovative banking
capabilities. We will continue to evaluate opportunities to grow our Bank and we look forward to reporting on our progress
in 2018. The Bank’s regulatory capital ratios continue to reflect its strong capital position. At December 31, 2017, Fairport
Savings Bank’s total Tier 1 leverage capital ratio was 9.51%, Tier 1 capital ratio was 15.51%, total capital ratio was16.18%,
and common equity Tier 1 capital ratio was 15.51% percent.
In summary, the past twelve months have been centered on creating the right employee structure going forward, enhanced
lending product sets, and continuing to maintain a secure IT system for our Bank. The culture within our Bank continues to
be strong with loyal and dedicated staff that participates in the local community events within the areas in which we serve.
This is an exciting time at Fairport Savings Bank as we will focus and execute our new strategic plan to enhance stockholder
value in a methodical business driven, employee and customer focused manner.
Respectively Yours,
Kevin D. Maroney
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 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
(This page has been left blank intentionally)
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.
Overview
Our business has traditionally focused on originating one- to four-family residential real
estate mortgage loans, home equity lines of credit, and offering retail deposit accounts. In recent
years, we have expanded our mortgage origination footprint and opened new mortgage offices in
Cheektowaga and Lewiston, New York. Our primary market area now consists of Monroe
County and the surrounding western New York counties of Erie, Livingston, Ontario, Orleans,
Jefferson, Niagara, and Wayne. Management has made the decision to deploy available funds
from deposit and borrowing growth into higher-yielding assets, primarily commercial loan
products and adjustable rate one- to four-family mortgage and construction loans in 2017.
Increases in the loan portfolio balances as well as modestly higher average yields on the overall
loan portfolio resulted in higher interest income in 2017. More recently, we shifted attention to
expand our commercial loan department in an effort to improve our interest rate risk exposure
with shorter duration commercial loan products, as well as higher yielding assets. In October
2017, we hired a Chief Lending Officer to manage and oversee the growth of our loan portfolio
and supervise credit administration to continue to maintain our high asset quality.
At December 31, 2017, the Company had $314.6 million in consolidated assets, an
increase of $40.9 million, or 15.0%, from $273.7 million at December 31, 2016. During 2017,
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,
2017, we had two non-performing residential mortgages loan for $153,000 and no non-
performing loans at December 31, 2016.
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
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
1
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, 2017, we had net income of $290,000 compared to net income of $938,000 for the
year ended December 31, 2016. The Company’s financial results for the year ended December
31, 2017 reflected two notable non-recurring items which contributed to the decrease in net
income of $648,000 in 2017 as compared to 2016, which were a $280,000 decrease in the
mortgage recording tax credit and a $228,000 increase in income tax expense due to the Tax
Cuts and Jobs Act (the “Tax Act”) that was enacted on December 22, 2017, which reduced the
corporate federal income tax rate from 34% to 21% and caused a reevaluation of net deferred tax
assets. Generally accepted accounting principles requires that the impact of the provisions of the
Tax Act be accounted for in the period of enactment. The increase in mortgage expense was due
to a change in New York State tax law which allowed for a refundable tax credit for mortgage
recording tax expensed during the year ended December 31, 2016, which resulted in a complete
reversal of all mortgage recording tax expensed with a credit of $627,000 for the year ended
December 31, 2016 which did not recur in 2017. The year over year decrease in earnings of
$648,000 was attributable to increases in other expense, income tax expense, and provision for
loan losses as well as a decrease in other income, partially offset by an increase in net interest
income.
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
properties.
Overly optimistic assumptions or negative changes to assumptions could
significantly affect the valuation of a property securing a loan and the related allowance
determined. Management carefully reviews the assumptions supporting such appraisals to
determine that the resulting values reasonably reflect amounts realizable on the related loans.
2
Management performs a quarterly evaluation of the adequacy of the allowance for loan
losses. We consider a variety of factors in establishing this estimate including, but not limited to,
current economic conditions, delinquency statistics, geographic concentrations, the adequacy of
the underlying collateral, the financial strength of the borrower, results of internal loan reviews
and other relevant factors. This evaluation is inherently subjective as it requires material
estimates by management that may be susceptible to significant change based on changes in
economic and real estate market conditions.
The 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. The Tax
Act was signed into law in December 2017 which reduced the corporate federal statutory tax rate
from 34% to 21%. U.S. GAAP requires the impact of the Tax Act to be accounted for in the
period of enactment. As such, the Company was required to write down the value of its net
deferred tax assets as of December 31, 2017 to reflect the reduction in the corporate tax rate for
future periods.
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.
3
Business Strategy
Fairport Savings Bank, a wholly owned banking subsidiary of FSB Bancorp, Inc. has
been serving the Fairport and surrounding communities since 1888. Among the most significant
initiatives implemented over the past decade has been the Bank’s conversion from a mutual
institution to a stock company. The conversion process enabled the Bank to raise additional
capital to successfully support its growth and expansion strategies. We are committed to
meeting the financial needs of the communities we serve, primarily the greater Rochester and
Buffalo, New York metropolitan areas, and are dedicated to providing personalized superior
service to our customers. 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 in recent years. We recognize that to continue to meet the
needs of our customers and to provide a competitive return to our stockholders, we will need to
continue to grow, by both expanding our residential lending business and diversifying our
lending efforts. Instead of concentrating solely on residential mortgage lending, the Bank now
offers a full complement of financial services, including commercial and industrial, commercial
real estate, and small business administration (“SBA”) loans and deposit services to small
businesses in our primary service areas. 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, New York. More recently the Bank has expanded its lending efforts to
include the counties of Erie and Niagara, New York. As of December 31, 2017,
78.3% 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 four years by recruiting and hiring talented commercial loan officers,
including our recent hire of a new Chief Lending Officer, and enhancing our
commercial product offerings. We grew our commercial loan portfolio, which
includes commercial real estate, multi-family, and commercial and industrial
loans, $13.6 million, or 88.1% to $29.1 million at December 31, 2017 from $15.5
million at December 31, 2016. 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.
4
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, 2017, we had two non-performing residential mortgages loan for
$153,000 and our ratio of allowance for loan losses to total loans was 0.48%.
Over the last five years, we have charged off only $1,000. 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.
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 2017, Fairport Wealth Management had
fee income of $174,000 and we intend to continue to emphasize these investment,
insurance, and financial products to our customers. In May 2017, Fairport
Savings Bank partnered with Insuritas, the nation’s premier provider of turn-key
insurance agencies for financial institutions. This new partnership with Insuritas
allows the Company to provide a comprehensive suite of insurance products for
our customers and the community we serve.
Continuing to Grow Customer Relationships and Core Deposits.
As we continue to grow our core deposits we remain committed to developing
and maintaining full service long term customer relationships by offering
competitive products while providing exceptional customer service. In 2017, total
deposits grew $33.8 million, or 18.5%, to $216.7 million at December 31, 2017
from $182.9 million at December 31, 2016. At December 31, 2017, our
transaction accounts grew $8.5 million, or 8.9%, to $103.4 million compared to
$94.9 million at December 31, 2016. At December 31, 2017, certificates of
deposit, including individual retirement accounts increased $25.3 million, or 28.7%
to $113.3 million compared to $88.0 million at December 31, 2016 with
preferential rates given to relationship 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,
2017
At December 31,
2016
(In thousands)
$ 314,630
10,397
18,313
6,575
2,770
262,711
216,691
64,447
31,219
$ 273,721
7,407
17,747
7,420
2,059
226,192
182,934
56,813
31,859
For the Year Ended
December 31,
2017
2016
(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 ………………………………….
$ 10,732
2,778
7,954
271
7,683
3,576
10,521
738
448
$ 290
$ 9,317
2,156
7,161
180
6,981
3,655
9,370
1,266
328
$ 938
6
At or For the Year
Ended December
31,
2017
2016
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
0.10%
0.91%
2.71%
2.85%
93.45%
1.23%
3.61%
0.36%
3.62%
2.76%
2.87%
88.10%
1.40%
3.59%
interest-bearing liabilities .............................................
113%
113%
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-
0.05%
0.06%
performing loans ...........................................................
Allowance for loan losses as a percent of total loans .......
825.59%
0.48%
0.00%
0.00%
0.00%
0.44%
Capital Ratios:
Total risk-based capital (to risk-weighted assets).............
Tier 1 leverage (core) capital (to adjusted tangible
16.18%
18.45%
assets) ............................................................................
9.51%
10.70%
Common Equity Tier 1 capital (to risk-weighted
assets) ............................................................................
Tier 1 risk-based capital (to risk-weighted assets) ...........
Average equity to average total assets..............................
15.51%
15.51%
10.92%
17.83%
17.83%
9.92%
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, 2017 and 2016
Total Assets. Total assets increased $40.9 million, or 15.0%, to $314.6 million at
December 31, 2017 from $273.7 million at December 31, 2016, primarily reflecting increases in
net loans receivable, cash and cash equivalents, loans held for sale, and securities available-for-
sale, partially offset by a decrease in securities held-to-maturity.
Cash and cash equivalents increased by $3.0 million, or 40.4%, to $10.4 million at
December 31, 2017 from $7.4 million at December 31, 2016, in order to maintain a strong liquidity
position in anticipation of funding loan commitments in the first quarter of 2018.
Net loans receivable increased $36.5 million, or 16.2%, to $262.7 million at December 31,
2017 from $226.2 million at December 31, 2016. The Bank continues to focus on loan production
as we continue to primarily grow our residential mortgage, construction, and commercial loan
portfolios at a measured pace while still maintaining our credit quality and strict underwriting
7
standards. Residential mortgage loans increased $18.3 million, or 9.7%, to $206.9 million at
December 31, 2017 from $188.6 million at December 31, 2016. Multi-family residential loans
increased $5.5 million, or 108.7%, to $10.7 million at December 31, 2017 from $5.1 million at
December 31, 2016. Commercial real estate loans increased $6.4 million, or 75.4%, to $14.8
million at December 31, 2017 from $8.4 million at December 31, 2016. Construction loans
increased $4.6 million, or 75.3%, to $10.8 million at December 31, 2017 from $6.1 million at
December 31, 2016. Commercial and industrial loans increased $1.7 million, or 89.0%, to $3.7
million at December 31, 2017 from $1.9 million at December 31, 2016. The Bank originated
$108.4 million of residential mortgage loans and sold $70.1 million in conventional mortgage
loans and correspondent FHA and VA mortgages in the secondary market to reduce interest rate
risk in 2017. The mortgage loans serviced for others increased by $13.9 million, or 11.7%, to
$132.4 million at December 31, 2017 compared to $118.6 million at December 31, 2016.
Mortgage loans held for sale increased by $711,000, or 34.5%, to $2.8 million at December
31, 2017 compared to $2.1 million at December 31, 2016 due to a higher volume of loans closed
and committed for sale at December 31, 2017 compared to December 31, 2016.
Securities available-for-sale increased by $566,000, or 3.2%, to $18.3 million at December
31, 2017 from $17.7 million at December 31, 2016. The increase was primarily due to purchases of
$7.5 million in new securities, mainly U.S. Government and agency obligations and mortgage
backed securities, partially offset by maturities and calls of $3.5 million, $3.3 million in mortgage-
backed securities principal repayments, $102,000 in net amortization of premiums and accretion of
discounts, and an $80,000 decrease in the fair value of securities available-for-sale. Securities
held-to-maturity decreased $845,000, or 11.4%, to $6.6 million at December 31, 2017 from $7.4
million at December 31, 2016 due to maturities and calls of $1.3 million, $108,000 of principal
repayments on mortgage-backed securities, and $34,000 in net amortization of premiums and
accretion of discounts, partially offset by purchases of $547,000 in state and municipal securities.
Deposits and Borrowings. The Company experienced deposit growth in all branches in
2017 with continued focus on growing core deposits and building full service long term client
relationships, resulting in an increase in total deposits, primarily money market and certificates of
deposit of $33.8 million, or 18.5%, to $216.7 million at December 31, 2017 from $182.9 million
at December 31, 2016. The increase in our deposits reflected a $25.3 million increase in
certificates of deposit, including individual retirement accounts, a $7.6 million increase in money
market accounts, and a $2.1 million increase in interest-bearing checking accounts, partially offset
by a $1.2 million decrease in savings accounts and a $38,000 decrease in non-interest bearing
checking accounts. Total borrowings from the Federal Home Loan Bank of New York increased
$7.6 million, or 13.4%, to $64.4 million at December 31, 2017 from $56.8 million at December 31,
2016. Long-term borrowings increased $634,000, or 1.3%, to $51.4 million at December 31, 2017
from $50.8 million at December 31, 2016 due to $16.5 million in new advances partially offset by
$15.8 million in principal repayments on our amortizing advances and maturities in 2017. Short-
term borrowings increased by $7.0 million, or 116.7%, to $13.0 million at December 31, 2017
compared to $6.0 million at December 31, 2016 with the intention of reducing these balances in
the first quarter of 2018 due to increased deposit growth from additional promotional specials. The
increases in both deposits and FHLB borrowings were used to fund the additional growth in the
loan portfolio in 2017.
8
Stockholders’ Equity. Total stockholders’ equity decreased $640,000, or 2.0%, to $31.2
million at December 31, 2017 from $31.9 million at December 31, 2016 due to a $911,000
decrease in additional paid in capital related to shares of FSB Bancorp, Inc. stock repurchased by
the Company, and a $80,000 increase in accumulated other comprehensive loss, partially offset
by a $317,000 increase in retained earnings due to $290,000 in net income and a $27,000
reclassification of other comprehensive income and a $34,000 increase resulting from the release
of ESOP shares from the suspense account. FSB Bancorp Inc. announced on July 27, 2017 that
the Board of Directors had adopted its first stock repurchase program. Under the repurchase
program, the Company may repurchase up to 97,084 shares of its common stock, or
approximately 5% of its outstanding shares. As of December 31, 2017, the Company had
repurchased 69,535 shares at an average price of $15.30 per share. On September 27, 2017, the
Board of Directors of the Company approved restricted stock and stock option grants to senior
management and directors of the Company, pursuant to the terms of the 2017 Equity Incentive
Plan (the “Plan”). The Plan was approved previously by the Company’s shareholders on August
29, 2017. An aggregate of 152,080 stock options and 62,700 shares of restricted stock were
granted. The main purpose of the stock repurchases was to fund these stock-based compensation
plans. Generally, the grants to senior management and directors vest over a five year period 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, 2017 and 2016
General. Net income decreased $648,000, or 69.1%, to $290,000 for the year ended
December 31, 2017 from $938,000 for the year ended December 31, 2016. The year over year
decrease in earnings was attributable to an increase in other expense of $1.2 million, a $120,000
increase in income tax expense, a $91,000 increase in the provision for loan losses, and a
decrease of $79,000 in other income, partially offset by a $793,000 increase in net interest
income.
Interest and Dividend Income. Total interest and dividend income increased $1.4
million, or 15.2%, to $10.7 million for the year ended December 31, 2017 from $9.3 million for the
year ended December 31, 2016. The interest and dividend income increase resulted from a $29.8
million increase year over year in average interest-earning assets, primarily loans, in addition to an
11 basis point increase in the average yield on interest-earning assets from 3.73% for 2016 to
3.84% for 2017.
Interest income on loans, including fees, increased $1.4 million, or 16.4%, to $10.2 million
for 2017 from $8.7 million for 2016, reflecting an increase in the average balance of loans to
$247.7 million for 2017 from $215.1 million for 2016, in addition to a four basis point increase in
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 increased to 4.10% for 2017 from
4.06% for 2016, reflecting increases in market interest rates on most loan products, primarily
commercial and consumer loans as a result of upward repricing for adjustable rate loans in a rising
interest rate environment.
9
Interest income on taxable investment securities increased $35,000 to $304,000 in 2017,
from $269,000 in 2016. The average balance of taxable investment securities increased $1.9
million, or 17.5%, to $12.6 million in 2017 from $10.7 million in 2016 although the average yield
on investment securities decreased 10 basis points to 2.42% in 2017 from 2.52% in 2016. The
average yields on investment securities decreased due to new purchases of shorter term lower
yielding securities replacing calls of higher yielding investment securities. Interest income on
mortgage-backed securities decreased $86,000 to $116,000 in 2017, from $202,000 in 2016,
reflecting a decrease in the average balance of mortgage-backed securities of $4.2 million, or
31.2%, to $9.3 million in 2017 from $13.5 million in 2016 in addition to a decrease in the average
yield on mortgage-backed securities of 25 basis points to 1.25% in 2017 from 1.50% in 2016. The
average yield continues to be affected by low long-term rates and the impact of higher premium
amortization resulting from faster national prepayment speeds on mortgage-backed securities.
Interest income on federal funds sold increased $22,000, or 104.5%, to $45,000 in 2017, from
$23,000 in 2016 as the average yield on federal funds sold increased by 54 basis points to 0.89%
for 2017 from 0.35% for 2016, partially offset by the decrease in the average balance of federal
funds sold of $1.4 million for 2017 as compared to 2016. Interest income on tax-exempt securities
increased $11,000 to $110,000 in 2017 from $99,000 in 2016. The average balance of tax-exempt
securities increased by $1.0 million, or 18.7%, to $6.4 million in 2017 from $5.4 million in 2016,
partially offset by a decrease in the average yield of tax-exempt securities of 18 basis points to
2.62% in 2017, from 2.80% in 2016 on a tax equivalent basis.
Total Interest Expense. Total interest expense increased $622,000, or 28.9%, to $2.8
million for the year ended December 31, 2017 from $2.2 million for the year ended December 31,
2016. The increase in total interest expense resulted from a 15 basis point increase in the average
cost of interest-bearing liabilities from 0.97% for 2016 to 1.12% for 2017, as a result of higher
interest rates paid on deposits, primarily promotional certificates of deposit and money market
accounts along with an increase in interest rates on Federal Home Loan Bank borrowings. In
addition, the average balance of interest-bearing liabilities increased $26.4 million, or 11.8%, to
$249.1 million for 2017 from $222.7 million for 2016.
Interest expense on deposits increased $375,000, or 26.1%, to $1.8 million for 2017 from
$1.4 million for 2016 due primarily to increases in the average cost and balances of our deposits.
The weighted average rate of deposits increased to 0.96% for 2017 from 0.82% for 2016 as a result
of promotional certificates of deposit and higher money market rates to grow branch deposits. In
addition, the average balance of our deposits increased $12.9 million, or 7.4%, to $188.7 million
for 2017 from $175.7 million for 2016 primarily due to increases in promotional certificates of
deposit and money market accounts. The average balance on transaction accounts, traditionally our
lower costing deposit accounts consisting of checking, savings, and money market accounts
increased by $8.0 million to $99.0 million for 2017 from $91.0 million for 2016, with an increase
in the average cost of transaction accounts of 18 basis points to 0.48% in 2017 from 0.30% in
2016. Additionally, the average balance of certificates of deposit (including individual retirement
accounts) traditionally our higher cost deposits, increased by $2.9 million to $98.2 million in 2017
from $95.2 million in 2016 with an increase in the average cost of certificates of deposit accounts
of 14 basis points to 1.36% in 2017 from 1.22% in 2016.
Interest expense on Federal Home Loan Bank borrowings increased $247,000, or 34.3%, to
$967,000 for the year ended December 31, 2017 from $720,000 for the year ended December 31,
10
2016. The increase in interest expense on Federal Home Loan Bank borrowings was caused by an
increase in our average balance of Federal Home Loan Bank borrowings totaling $60.5 million for
2017 compared to $47.0 million for 2016 along with an increase in the average cost of these funds
of seven basis points from 1.53% in 2016 to 1.60% in 2017.
Net Interest Income. Net interest income increased $793,000, or 11.1%, to $8.0 million
for the year ended December 31, 2017 from $7.2 million for the year ended December 31, 2016.
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 taxable investment securities and state and municipal securities when
comparing 2017 to 2016. Net interest-earning assets increased to $31.9 million for 2017 from
$28.4 million for 2016. 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, 2017
decreased two basis points to 2.85% from 2.87% for the year ended December 31, 2016. The
average cost of interest-bearing liabilities was negatively impacted by an increase in the average
cost of interest-bearing deposit accounts due to promotional certificates of deposit and money
market accounts as well as an increase in the average cost of Federal Home Loan Bank
borrowings.
Provision for Loan Losses. We establish provisions for loan losses which are charged to
operations in order to maintain the allowance for loan losses at a level we consider necessary to
absorb credit losses inherent in the loan portfolio that are both probable and reasonably estimable
at the balance sheet date. In determining the level of the allowance for loan losses, we consider
past and current loss experience, evaluations of real estate collateral, current economic
conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to
repay a loan, and the levels of non-performing and other classified loans. The amount of the
allowance is based on estimates and the ultimate losses may vary from such estimates as more
information becomes available or conditions change. We assess the allowance for loan losses on
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 $271,000 provision for loan
losses for the year ended December 31, 2017 compared to a $180,000 provision for loan losses
for the year ended December 31, 2016. The rationale for the increase in 2017 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 $1.3 million or 0.48%
of net loans outstanding, at December 31, 2017 compared to $990,000, or 0.44% of net loans
outstanding, at December 31, 2016. In 2017 we had no net-charge-offs compared to 2016 where
we had $1,000 in net-charge-offs.
Other Income. Other income decreased by $79,000, or 2.2%, to $3.6 million for 2017
from $3.7 million for 2016. The decrease resulted primarily from decreases in realized gains on
the sales of loans and the realized gains on sales of securities, partially offset by an increase in
mortgage fees. A substantial portion of the year over year decrease was in realized gains on the
sale of loans which decreased $106,000, or 4.7% to $2.1 million in 2017 from $2.3 million in
2016 due to a decrease in mortgage loan volume in 2017. The decrease in realized gains on sales
11
of securities was due to no sales of securities in 2017 compared to $36,000 in realized gains on
sales of securities in 2016. Mortgage fee income increased by $31,000, or 3.8%, to $845,000 in
2017 from $814,000 in 2016 due to an increase in loan servicing revenue from selling additional
loans servicing retained and an increase in commercial loan fees from additional volume in 2017.
Other Expense. Other expense increased $1.2 million, or 12.3%, to $10.5 million in
2017 from $9.4 million in 2016. The increase was primarily the result of increases in salaries
and employee benefits of $514,000, mortgage fees and taxes of $271,000, data processing costs
of $162,000, other miscellaneous expense of $156,000, and occupancy expense of $63,000,
partially offset by decreases in equipment expense of $48,000 and FDIC premium expense of
$35,000. The increase in salaries and employee benefits was primarily due to annual merit
increases for existing staff, the increased salary costs associated with additional processing staff
to support mortgage operations, and the expense related to the issuance of restricted stock awards
and options to senior management and the Board of Directors in the fourth quarter of 2017. The
increase in mortgage expense was due to a 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, which resulted in a complete reversal of all mortgage recording tax expensed
during those years with a credit of $627,000 for the year ended December 31, 2016 which did
not recur in 2017. Data processing costs increased primarily due to the end of first year
promotional pricing associated with the conversion of our core processing system from in-house
hosting to data center hosting beginning in September 2016. Miscellaneous other expense
increased due to additional costs related to legal expense and professional services associated
with becoming an SEC reporting company in the second half of 2016. Occupancy expense
increased primarily due to the added costs of acquiring additional office space in our Pittsford
and Buffalo mortgage origination office locations and additional office building depreciation
expense. Equipment expense decreased due to the elimination of a software maintenance
agreement that was no longer required in 2017 due to the conversion of our core processing
system from in-house hosting to data center hosting in 2016. FDIC premium expense decreased
primarily due to a revision in the calculation method resulting in a decreased assessment rate in
2017.
Provision for Income Taxes. Provision for income taxes was $448,000 for 2017, an
increase of $120,000 compared to a provision for income taxes of $328,000 for 2016. The
effective tax rate was 60.7% in 2017 compared to 25.9% in 2016. The increase was primarily
due to the Tax Act that was enacted on December 22, 2017, which reduced the corporate federal
income tax rate from 34% to 21% and caused a reevaluation of net deferred tax assets. Generally
accepted accounting principles requires that the impact of the provisions of the Tax Act be
accounted for in the period of enactment. As such, the additional expense was largely
attributable to the reduction in carrying value of net deferred tax assets, primarily unrealized
losses on available-for-sale securities, reflecting lower future tax benefits resulting from the
lower corporate tax rates.
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,
2017
Interest
Income/
Expense
Average
Balance
Yield/
Cost
Average
Balance
2016
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 .....................................
$ 247,704
5,068
12,563
9,264
6,377
280,976
10,849
$ 291,825
Interest-bearing liabilities:
NOW accounts ....................................
Passbook savings .................................
Money market savings ........................
Individual retirement accounts ............
Certificates of deposit .........................
Borrowings ..........................................
$ 29,659
26,488
34,330
7,081
91,103
60,457
Total interest-bearing
liabilities .....................................
249,118
Noninterest-bearing liabilities:
Demand deposits ....................
Other ....................................................
Total liabilities ...........................
Stockholders’ equity ............................
Total liabilities and stockholders’
8,526
2,325
259,969
31,856
equity ..........................................
$ 291,825
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 ..
$ 31,858
$ 10,157
45
304
116
167
10,789
4.10%
0.89
2.42
1.25
2.62
3.84
0.30
0.39
0.83
1.05
1.38
1.60
89
103
284
75
1,260
967
2,778
$ 215,142
6,495
10,687
13,468
5,372
251,164
10,012
$ 261,176
$ 28,437
27,410
24,643
7,442
87,806
46,990
$ 8,724
23
269
202
150
9,368
4.06%
0.35
2.52
1.50
2.80
3.73
74
102
100
64
1,096
720
0.26
0.37
0.41
0.86
1.25
1.53
1.12%
222,728
2,156
0.97%
10,534
2,004
235,266
25,910
$ 261,176
$ 8,011
$ 7,212
$ 28,436
2.72%
2.85%
113%
2.76%
2.87%
113%
_____________________
(1) Tax-exempt interest income is presented on a tax equivalent basis using a 34% federal tax rate for the years ended December 31, 2017 and
(2)
2016.
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,
2017 vs. 2016
Increase (Decrease)
Due to
Volume
Rate
Net
(In thousands)
$
1,345
(4)
45
(56)
26
$
88
26
(10)
(30)
(9)
$ 1,433
22
35
(86)
17
1,356
65
1,421
3
(2)
51
(3)
44
213
306
12
3
133
14
120
34
316
15
1
184
11
164
247
622
$
1,050
$ (251)
$
799
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
_____________________
(1)Tax-exempt interest income is presented on a tax equivalent basis using a 34%
federal tax rate for the years ended December 31, 2017 and 2016.
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 money market, 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 2017, we sold $70.1 million of mortgage loan originations including $35.3 million of
conventional conforming fixed-rate residential mortgages and $34.8 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 $55.7 million in certificates of deposit accounts (including individual retirement accounts)
that are scheduled to mature during 2018. If we retain these deposits it most likely will be at a
higher cost to us than 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, 2017, our liquidity ratio
averaged 31.6%. We believe that we have enough sources of liquidity to satisfy our short and
long-term liquidity needs as of December 31, 2017.
We regularly adjust our investments in liquid assets based upon our assessment of:
(i)
expected loan demand;
(ii)
expected deposit flows;
(iii)
yields available on interest-earning deposits and securities; and
(iv)
the objectives of our asset/liability management program.
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, 2017, cash and cash equivalents
totaled $10.4 million.
At December 31, 2017, we had $12.4 million in loan commitments outstanding and $5.9
in additional unadvanced portion of construction loans. In addition to commitments to originate
loans, we had $17.5 million in unused lines of credit to borrowers. Certificates of deposit
(including individual retirement accounts) comprised solely of certificates of deposits, due within
one year of December 31, 2017 totaled $55.7 million, or 49.2% of our certificates of deposit
(including individual retirement accounts) and 25.7% 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, 2018. We believe, however, based on past experience that a significant portion of such
deposits will remain with us. We have the ability to attract and retain deposits by adjusting the
interest rates offered.
Liquidity management is both a daily and long-term function of business management. If
we require funds beyond our ability to generate them internally, borrowing agreements exist with
the Federal Home Loan Bank of New York, which provides an additional source of funds.
Federal Home Loan Bank advances increased by $7.6 million to $64.4 million at December 31,
2017, compared to $56.8 million at December 31, 2016. At December 31, 2017, we had the
ability to borrow approximately $166.2 million from the Federal Home Loan Bank of New York,
of which $64.4 million had been advanced.
The Company also has a repurchase agreement with Raymond James 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, 2017 and 2016. In addition to the
repurchase agreement with Raymond James, the Company also has an unsecured line of credit
through Atlantic Community Bankers Bank which would provide an additional $5.0 million in
liquidity. There were no draws or outstanding balances from the line of credit at December 31,
2017 and 2016.
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, 2017, 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.
17
Off-Balance Sheet Arrangements
In the ordinary course of business, Fairport Savings Bank is a party to credit-related
financial instruments with off-balance sheet risk to meet the financing needs of our customers.
These financial instruments include commitments to extend credit. We follow the same credit
policies in making commitments as we do for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. The commitments
for 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, 2017 and 2016, we had $12.4 million and $15.2 million, respectively, of
commitments to grant loans, $5.9 million and $5.0 million, respectively, of unadvanced portion of
construction loans, and $17.5 million and $17.6 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, 2017, there were 1,934,853 shares of our common stock
issued and outstanding. On such date our shares were held by approximately 183 holders of
record. The Company has never paid cash dividends.
Year Ended December 31, 2017
High
Low
Fourth quarter
Third quarter
Second quarter
First quarter
$
17.75
16.72
15.10
14.84
$
15.30
14.60
14.21
13.97
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
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
23, 2018 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, 2017 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
432 N. Franklin St., Suite 60
Syracuse, New York 13204
20
FSB Bancorp, Inc.
21
FSB Bancorp, Inc.
Consolidated Balance Sheets
December 31, 2017 and 2016
Assets
Cash and due from banks
Interest-earning demand deposits
Total Cash and Cash Equivalents
Securities available-for-sale, at fair value
Securities held-to-maturity, at amortized cost (fair value of 2017 $6,588;
2016 $7,384)
Investment in restricted stock, at cost
Loans held for sale
Loans, net of allowance for loan losses (2017 $1,261; 2016 $990)
Bank owned life insurance
Accrued interest receivable
Premises and equipment, net
Other assets
2017
2016
(Dollars in Thousands,
except share and per share data)
$ 1,672
8,725
10,397
18,313
6,575
3,270
2,770
262,711
3,758
824
3,064
2,948
$ 1,634
5,773
7,407
17,747
7,420
2,886
2,059
226,192
3,696
652
3,175
2,487
Total Assets
$314,630
$273,721
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest-bearing
Interest bearing
Total Deposits
Short-term borrowings
Long-term borrowings
Official bank checks
Other liabilities
Total Liabilities
Stockholders’ Equity
Preferred stock, par value $0.01; 25,000,000 shares authorized, no shares
issued and outstanding
Common stock; par value $0.01; 50,000,000 shares authorized; 1,934,853
and 1,941,688 shares outstanding in 2017 and 2016, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Unearned ESOP shares – at cost
Total Stockholders’ Equity
$ 8,385
208,306
216,691
13,000
51,447
929
1,344
$ 8,423
174,511
182,934
6,000
50,813
318
1,797
283,411
241,862
-
19
15,441
16,240
(165)
(316)
31,219
-
19
16,352
15,923
(85)
(350)
31,859
Total Liabilities and Stockholders’ Equity
$314,630
$273,721
The accompanying notes are an integral part of the consolidated financial statements.
22
FSB Bancorp, Inc.
Consolidated Statements of Income
Years Ended December 31, 2017 and 2016
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.
2017
2016
(Dollars in Thousands,
Except Per Share Data)
$10,157
304
110
116
45
10,732
1,811
102
865
2,778
7,954
271
7,683
164
174
-
62
2,146
845
185
3,576
6,609
1,069
348
162
563
93
261
144
103
182
217
770
10,521
738
448
$ 290
$ 0.15
$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
23
FSB Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2017 and 2016
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
Reclassification of effect of tax rate change on other comprehensive 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
2017
2016
(In Thousands)
$ 290
$ 938
(53)
(86)
-
323
-
(24)
-
(27)
(80)
(12)
-
201
-
(80)
$ 210
(74)
127
$ 1,065
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
-
-
(115)
8
-
$ -
4
$ (74)
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, 2017 and 2016
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, 2016
$ 179
$ 7,239
$ 14,985
$ (212)
$ (46)
$ (385)
$ 21,760
Net income
Other comprehensive income, net
ESOP shares committed to be released
Proceeds of common stock offering
and conversion of existing shares,
net of expenses
Cancel 5,528 treasury shares
-
-
-
-
-
9
(159)
9,149
(1)
(45)
938
-
-
-
-
-
127
-
-
-
-
-
-
-
46
-
-
35
-
-
938
127
44
8,990
-
Balance - December 31, 2016
19
16,352
15,923
(85)
-
(350)
31,859
Net income
Other comprehensive loss, net
-
-
-
-
290
-
-
(53)
Reclassification of effect of tax rate
change on other comprehensive
income (1)
ESOP shares committed to be released
Stock based compensation
Effect of stock repurchase plan
-
-
1
(1)
-
18
132
(1,061)
27
-
-
-
(27)
-
-
-
-
-
-
-
-
-
-
-
-
34
-
-
290
(53)
-
52
133
(1,062)
Balance - December 31, 2017
$ 19
$ 15,441
$ 16,240
$ (165)
$ -
$ (316)
$ 31,219
(1) Reclassification adjustment from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from
the newly enacted Federal corporate income tax rate of 21% in accordance with the early adoption of ASU 2018-02.
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, 2017 and 2016
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 expense (benefit)
Earnings on investment in bank owned life insurance
(Increase) decrease in accrued interest receivable
Increase in other assets
(Decrease) 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 of restricted stock, net
Purchase of premises and equipment
Net Cash Flows From Investing Activities
Cash Flows from Financing Activities
Net increase (decrease) in deposits
Proceeds from long-term borrowings
Repayments on long-term borrowings
Net increase in short-term borrowings
Net proceeds from stock conversion and offering
Stock based compensation
Effect of stock repurchase plan
Net increase (decrease) 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.
2017
2016
(In Thousands)
$ 290
$ 938
136
-
(2,146)
72,249
(70,814)
353
473
271
52
160
(62)
(172)
(461)
(585)
(256)
(7,533)
3,500
-
3,284
(547)
1,250
-
108
(37,143)
(384)
(362)
(37,827)
33,757
16,501
(15,867)
7,000
-
133
(1,062)
611
41,073
2,990
7,407
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
$ 10,397
$ 7,407
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.
$ 2,755
$ 2,145
$ 361
$ 306
27
FSB Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
On March 2, 2016, the Boards of Directors of the FSB Community Bankshares, Inc. (“FSB Community”), FSB
Community Bankshares, MHC (the “MHC”), and Fairport Savings Bank (the “Bank”) unanimously adopted a Plan of
Conversion of FSB Community Bankshares, MHC pursuant to which the 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”).
FSB Bancorp, Inc., the new stock holding company for the 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. As a result of the offering and the exchange of shares, the Company had 1,941,688 shares
outstanding as of December 31, 2016.
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
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 five mortgage origination
offices located in Pittsford, New York, Watertown, New York, Greece, New York, Lewiston, 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.
28
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Organization and Nature of Operations (Continued)
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,
Jefferson, Niagara, 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).
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
29
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Securities (Continued)
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.
Restricted Stock
Restricted equity securities are held as a long-term investment and value is determined based on the ultimate
recoverability of the par value. Impairment of these investments is evaluated quarterly and is a matter of judgment
that reflects management’s view of the issuer’s long-term performance, which includes factors such as the following:
its operating performance; the severity and duration of declines in the fair value of its net assets related to its capital
stock amount; its commitment to make payments required by law or regulation and the level of such payments in
relation to its operating performance; and its liquidity and funding position. After evaluating these considerations, the
Company concluded that the par value of these investments will be recovered and, as such, has not recognized any
impairment on its holdings of restricted equity securities during the current year.
The Company holds restricted stock from Federal Home Loan Bank and Atlantic Community Bankers Bank.
No impairment charges were recorded related to the restricted stock during 2017 or 2016.
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 $132,427,000 and $118,565,000 at December 31, 2017 and 2016, respectively.
The Company also sells correspondent FHA and VA mortgage loans, servicing released.
30
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Loan Servicing Rights (Continued)
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 $892,000 and $804,000 at December 31, 2017 and 2016, respectively, and are included in other assets on
the consolidated balance sheets. In 2017, $131,000 was capitalized and $43,000 was amortized. In 2016, $268,000
was capitalized with $25,000 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.
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.
31
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the
loan agreement. Factors considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at
the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the
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
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, 2017 and
2016. At December 31, 2017 the Company had one residential mortgage loan for $37,000 in the process of
foreclosure and at December 31, 2016 the Company had no 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
32
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Income Taxes (Continued)
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. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”)
was enacted which reduced the corporate federal income tax rate from 34% to 21% and caused a reevaluation of net
deferred tax assets. Generally accepted accounting principles requires that the impact of the provisions of the Tax Act
be accounted for in the period of enactment. 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.
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.
As of December 31,
2017
2016
Accumulated Other Comprehensive Loss By Component:
Unrealized losses on securities available-for-sale
Tax effect
Net unrealized losses on securities available-for-sale
$ (208)
43
(165)
$ (128)
43
(85)
Accumulated other comprehensive loss
$ (165)
$ (85)
33
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
Earnings Per Common Share
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. Diluted earnings per share is computed in
a similar manner to that of basic earnings per share except that the weighted-average number of common shares
outstanding is increased to include the number of incremental common shares that would have been outstanding if all
potentially dilutive common shares (such as stock options) issued became vested during the period. Net income
available to common stockholders is net income of the Company. The Company announced on July 27, 2017 that the
Board of Directors had adopted its first stock repurchase program. Under the repurchase program, the Company may
repurchase up to 97,084 shares of its common stock, or approximately 5% of its then outstanding shares. As of
December 31, 2017, the Company had repurchased 69,535 shares at an average price of $15.30 per share. On
September 27, 2017, the Board of Directors of the Company approved restricted stock and stock option grants to
senior management and the directors of the Company, pursuant to the terms of the 2017 Equity Incentive Plan (the
“Plan”). The Plan was approved previously by the Company’s stockholders on August 29, 2017. An aggregate of
152,080 stock options and 62,700 shares of restricted stock were granted. The grants to senior management and
directors vest over a five year period in equal annual installments, with the first installment vesting on the first
anniversary date of the grant and succeeding installments on each anniversary thereafter, through 2022. The Company
did not grant any restricted stock awards or stock options for the year ended December 31, 2016.
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 1,899,473 and 1,899,552 for the years ended December 31, 2017 and
December 31, 2016 respectively.
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.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”)
(ASU 2014-09) to amend its guidance on “Revenue from Contracts with Customers (Topic 606). The objective of the
ASU is to align the recognition of revenue with the transfer of promised goods or services provided to customers in an
amount that reflects the consideration which the entity expects to be entitled in exchange for those goods or services.
This ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. In August
2015, the FASB issued an amendment (ASU 2015-14) which defers the effective date of this new guidance by one
year. More detailed implementation guidance on Topic 606 was issued in March 2016 (ASU 2016-08), April 2016
(ASU 2016-10), May 2016 (ASU 2016-12), December 2016 (ASU 2016-20), February 2017 (ASU 2017-05), and
September 2017 (ASU-2017-13) and the effective date and transition requirements for these ASUs are the same as the
effective date and transition requirements of ASU 2014-09. The amendments in ASU 2014-09 are effective for public
business entities for annual periods, beginning after December 15, 2017. The Company expects to adopt the revenue
recognition guidance beginning January 1, 2018. A significant amount of the Company’s revenues are derived from
net interest income on financial assets and liabilities, which are excluded from the scope of the amended
guidance. With respect to noninterest income, the Company has identified revenue streams within the scope of the
guidance and is in the final stages of its accounting analysis of the underlying contracts. The Company does not
34
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
New Accounting Pronouncements (Continued)
presently expect that changes in the timing of revenue recognition will be material to the amount of annual revenue
recognized by the Company.
In August 2014, the FASB issued an amendment (ASU 2014-14) to its guidance on “Receivables – Troubled Debt
Restructurings by Creditors (Subtopic 310-40)”. The objective of the ASU is to reduce the diversity in how creditors
classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure, to provide
more decision-useful information about a creditor’s foreclosed mortgage loans that are expected to be recovered, at
least in part, through government guarantees. The amendments in this Update are effective for public business
entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.
Public entities would be permitted to elect to early adopt for annual reporting periods beginning after December 15,
2016. The adoption of this guidance is not expected to have a material impact on our consolidated results of
operations or financial position.
In January 2016, the FASB issued an Update (ASU 2016-01) to its guidance on “Financial Instruments (Subtopic 825-
10)”. This amendment addresses certain aspects of recognition, measurement, presentation, and disclosure of
financial instruments. These amendments require equity securities to be measured at fair value with changes in the
fair value to be recognized through net income. The amendments also simplify the impairment assessment of equity
investments without readily determinable fair values by requiring assessment for impairment qualitatively at each
reporting period. For public business entities, the amendments in this Update are effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. Early adoption of the amendments in
this Update is not permitted. The adoption of this guidance is not expected to have a material impact on our
consolidated results of operations or financial position.
In February 2016, the FASB issued an Update (ASU 2016-02) to its guidance on “Leases (Topic 842)”. The new
leases standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of
more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments.
For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of
underlying asset, not to recognize an ROU asset or lease liability. The new leases standard requires a lessor to classify
leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP. Classification depends on the
same five criteria used by lessees plus certain additional factors.
The subsequent accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for
sales-type leases, direct financing leases, and operating leases. However, the new standard updates certain aspects of
the lessor accounting model to align it with the new lessee accounting model, as well as with the new revenue
standard under Topic 606. Lessees and lessors are required to provide certain qualitative and quantitative disclosures
to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The amendments are effective for public business entities for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. Early adoption is permitted. The adoption of this ASU will result
in a gross up of the Consolidated Statements of Financial Condition for right-of-use assets and associated lease
liabilities for operating leases in which the Company is the lessee. The Company is evaluating the significance and
other effects of adoption on the consolidated financial statements and related disclosures. The adoption of this
guidance is not expected to have a material impact on our consolidated results of operations. Branch building leases
have been reviewed and are considered immaterial to the financial statements; there are no equipment leases to
consider.
In March 2016, the FASB issued an Update (ASU 2016-09) to its guidance on “Compensation – Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting”. This amendment is intended to
simplify the accounting for stock compensation. The areas for simplification in this Update involve several aspects of
the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the
amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods
35
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
New Accounting Pronouncements (Continued)
within those annual periods. The adoption of this guidance did not have a material impact on our consolidated results
of operations or financial position.
In June 2016, the FASB issued an Update (ASU 2016-13) to its guidance on “Financial Instruments – Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires credit losses on most
financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss
model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit
losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected
extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of
initial recognition of that instrument. The ASU also replaces the current accounting model for purchased credit
impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than
insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar
manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the
allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost
basis. The subsequent accounting for PCD financial assets is the same expected loss model described above. Further,
the ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt
securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to
sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis. For
public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this
Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update
through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which
the guidance is effective (that is, a modified-retrospective approach). The Company is currently evaluating the
potential impact on our consolidated results of operations or financial position. The initial adjustment will not be
reported in earnings and therefore will not have any material impact on our consolidated results of operations, but it is
expected that it will have an impact on our consolidated financial position at the date of adoption of this Update. At
this time, we have not calculated the estimated impact that this Update will have on our Allowance for Loan Losses,
however, we anticipate it will have a significant impact on the methodology process we utilize to calculate the
allowance. Alternative methodologies and software vendors are currently being considered. Data requirements and
integrity are being reviewed and enhancements incorporated into standard processes. The Company is in the early
stages of evaluation and implementation of the guidance.
In August 2016, the FASB issued an Update (ASU 2016-15) which clarifies how certain cash receipts and cash
payments are presented and classified in the statement of cash flows. The amendments are intended to reduce
diversity in practice. The amendment covers the following cash flows: Cash payments for debt prepayment or
extinguishment costs will be classified in financing activities. Upon settlement of zero-coupon bonds and bonds with
insignificant cash coupons, the portion of the payment attributable to imputed interest will be classified as an
operating activity, while the portion of the payment attributable to principal will be classified as a financing activity.
Cash paid by an acquirer that isn’t soon after a business combination for the settlement of a contingent consideration
liability will be separated between financing activities and operating activities. Cash payments up to the amount of the
contingent consideration liability recognized at the acquisition date will be classified in financing activities; any
excess will be classified in operating activities. Cash paid soon after the business combination will be classified in
investing activities. Cash proceeds received from the settlement of insurance claims will be classified on the basis of
the related insurance coverage (that is, the nature of the loss). Cash proceeds from lump-sum settlements will be
classified based on the nature of each loss included in the settlement. Cash proceeds received from the settlement of
corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies will be classified as cash
inflows from investing activities. Cash payments for premiums on COLI and BOLI may be classified as cash outflows
for investing, operating, or a combination of both. A transferor’s beneficial interest obtained in a securitization of
financial assets will be disclosed as a noncash activity, and cash received from beneficial interests will be classified in
investing activities. Distributions received from equity method investees will be classified using either a cumulative
36
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
New Accounting Pronouncements (Continued)
earnings approach or a look- through approach as an accounting policy election. The ASU contains additional
guidance clarifying when an entity should separate cash receipts and cash payments and classify them into more than
one class of cash flows (including when reasonable judgment is required to estimate and allocate cash flows) versus
when an entity should classify the aggregate amount into one class of cash flows on the basis of predominance. The
amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017. Early adoption is permitted. If an entity early adopts the amendments in an
interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim
period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is
currently evaluating the potential impact of adoption of this ASU on our consolidated results of operations or financial
position.
In November 2016, the FASB issued an Update (ASU 2016-18) to its guidance on “Statement of Cash Flows (Topic
230) Restricted Cash” addresses diversity in practice from entities classifying and presenting transfers between cash
and restricted cash as operating, investing or financing activities or as a combination of those activities in the
statement of cash flows. The ASU requires entities to show the changes in the total cash, cash equivalents, restricted
cash and restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories
will no longer be presented in the Statement of Cash Flows. ASU 2016-18 is effective for the fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted provided all
amendments are adopted in the same period. Management is evaluating the effect that this guidance will have on
consolidated financial statements and disclosures.
In March 2017, the FASB issued an Update (ASU 2017-08) to its guidance on “Receivables – Nonrefundable Fees
and Other Costs (Subtopic 310-20) related to premium amortization on purchased callable debt securities. The
amendments in this Update shorten the amortization period for certain callable debt securities held at a premium.
Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not
require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For
public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.
If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning
of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a
modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning
of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosure about a change
in accounting principle. The adoption of this guidance is not expected to have a material impact on our consolidated
results of operations or financial position.
In May 2017, the FASB issued an Update (ASU 2017-09) to its guidance on “Compensation - Stock Compensation
(Topic 718)” such that an entity must apply modification accounting to changes in the terms or conditions of a share-
based payment award unless all of the following criteria are met: (1) The fair value of the modified award is the same
as the fair value of the original award immediately before the modification. The standard indicates that if the
modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not
required to estimate the value immediately before and after the modification. (2) The vesting conditions of the
modified award are the same as the vesting conditions of the original award immediately before the modification. (3)
The classification of the modified award as an equity instrument or a liability instrument is the same as the
classification of the original award immediately before the modification. The amendments are effective for all entities
for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is
permitted, including adoption in an interim period. The Company is currently evaluating the potential impact of
adoption of this ASU on our consolidated results of operations or financial position.
In February 2018, the FASB issued an Update (ASU 2018-02) to its guidance on “Income Statement—Reporting
Comprehensive Income (Topic 220).” The amendments in this Update allow a reclassification for the so-called
stranded tax effects in accumulated other comprehensive income (loss) resulting from the reduction in the federal
37
FSB Bancorp, Inc.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies (Continued)
New Accounting Pronouncements (Continued)
corporate income tax rate to 21% made by the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law by
the President on December 22, 2017. ASU 2018-02 amends accounting standards to allow reclassification to retained
earnings of the effects of remeasuring deferred tax liabilities and deferred tax assets relating to items remaining within
accumulated other comprehensive income (loss) as a result of the Tax Act. The amount of the reclassification is the
difference between the amount initially charged or credited directly to other comprehensive income (loss) at the
previously enacted U.S. federal corporate income tax rate and the amount that would have been charged or credited
directly to other comprehensive income (loss) by applying the newly enacted 21% rate, but excluding the effect of any
valuation allowance previously charged to income from continuing operations. ASU 2018-02 is effective for all
entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early
adoption is permitted, for public business entities for reporting periods for which financial statements have not yet
been issued and should be applied retrospectively to each period in which the effect of the change in the U.S. federal
corporate income tax rate is recognized. The Company has elected to early adopt ASU 2018-02 and it is reflected in
the accompanying financial statements.
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 in 2016 was as
follows:
Income from continuing operations $627,000
Net income $464,000
Net income per share $0.24
38
FSB Bancorp, Inc.
Note 2 - Securities
The amortized cost and estimated fair value of securities with gross unrealized gains and losses at December 31, 2017
and 2016 are as follows:
December 31, 2017:
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
$ 10,612
7,909
$ -
19
$ (142)
(85)
$ 10,470
7,843
Held-to-Maturity:
Mortgage-backed securities - residential
State and municipal securities
$ 637
5,938
$ 9
41
$ -
(37)
$ 646
5,942
$ 18,521
$ 19
$ (227)
$ 18,313
$ 6,575
$ 50
$ (37)
$ 6,588
December 31, 2016:
Available-for-Sale:
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
State and municipal securities
$ 745
6,675
$ 13
25
$ -
(74)
$ 758
6,626
$ 17,875
$ 45
$ (173)
$ 17,747
$ 7,420
$ 38
$ (74)
$ 7,384
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.
39
FSB Bancorp, Inc.
Note 2 - Securities (Continued)
The amortized cost and estimated fair value by contractual maturity of debt securities at December 31, 2017 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
$ -
8,607
1,005
1,000
7,909
$ 18,521
$ -
8,489
1,001
980
7,843
$ 18,313
$ 839
3,302
1,797
-
637
$ 6,575
$ 837
3,294
1,811
-
646
$ 6,588
There were no realized gains on sales of securities in 2017. There were $24,000 of gross realized gains on sales of
securities available-for-sale and $12,000 of gross realized gains on sales of securities held-to-maturity in 2016
resulting from proceeds of $2,606,000. In accordance with accounting guidance, the Company was able to sell
securities classified as held-to-maturity in 2016 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, 2017 and 2016.
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.
40
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, 2017 and 2016:
2017:
Available-for-Sale
U.S. Government and
agency obligations
Mortgage-backed
securities - residential
2017:
Held-to-Maturity
Mortgage-backed
securities – residential(1)
State and municipal
Securities
2016:
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
$ 4,472
$
34
$ 5,999
$ 108
$ 10,471
$ 142
2,459
23
3,435
62
5,894
85
$ 6,931
$
57
$ 9,434
$
170
$ 16,365
$ 227
$ -
$
-
$ 171
$
-
$ 171
$
-
1,574
16
1,331
21
2,905
37
$ 1,574
$ 16
$ 1,502
$ 21
$ 3,076
$ 37
$ 6,996
$ 110
$
-
$ -
$ 6,996
$ 110
4,441
49
987
14
5,428
63
$ 11,437
$
159
$ 987
$
14
$ 12,424
$ 173
2016:
Held-to-Maturity
Mortgage-backed
securities – residential(1) $ 178 $ -
State and municipal
Securities(1)
4,275
74
$ -
$
-
$ 178
$
-
45
-
4,320
74
$ 4,453
$ 74
$ 45
$ -
$ 4,498
$ 74
(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 2017 and 2016, the Company did not
record an other-than-temporary impairment charge.
At December 31, 2017, four U.S. Government and agency obligations, four residential mortgage-backed securities
and 10 state and municipal securities were in a continuous unrealized loss position for less than twelve months. At
December 31, 2017, five U.S. Government and agency obligations, five residential mortgage-backed securities and
five state and municipal securities 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.
41
FSB Bancorp, Inc.
Note 2 - Securities (Continued)
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 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, 2017 and 2016 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 (fees) costs
Allowance for loan losses
Net Loans
2017
2016
(In Thousands)
$206,894
10,650
10,750
14,803
17,127
3,679
70
$188,573
5,103
6,134
8,440
16,797
1,947
75
263,973
227,069
(1)
(1,261)
113
(990)
$262,711
$226,192
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 & industrial
Other loans
42
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, 2017, $206.9 million, or 78.3%, of the total loan portfolio consisted of one- to four-family
residential real estate mortgage loans compared to $188.6 million, or 83.0%, of the total loan portfolio at December
31, 2016.
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, 2017, home equity lines of credit totaled $17.1 million, or 6.5%, of total loans
receivable compared to $16.8 million, or 7.4%, of total loans receivable at December 31, 2016.
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 $10.7 million, or 4.0%, of
the total loan portfolio at December 31, 2017 compared to $5.1 million, or 2.2%, of the total loan portfolio at
December 31, 2016. 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, 2017, construction loans totaled $10.8 million, or 4.1%, of total loans receivable
compared to $6.1 million, or 2.7%, at December 31, 2016. At December 31, 2017, the additional unadvanced portion
of these construction loans totaled $5.9 million compared to $5.0 million at December 31, 2016. 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 $14.8 million, or 5.6%, of the Company’s
43
FSB Bancorp, Inc.
Note 3 – Loans and The Allowance for Loan Losses (Continued)
total loan portfolio at December 31, 2017 compared to $8.4 million, or 3.7%, of our total loan portfolio at December
31, 2016.
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, 2017, these loans totaled $3.7
million, or 1.4%, of the total loan portfolio compared to $1.9 million, or 0.9%, at December 31, 2016.
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, 2017, these
other loans totaled $70,000, or 0.1%, of the total loan portfolio compared to other loans totaling $75,000, or 0.1%, of
the total loan portfolio at December 31, 2016. 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.
44
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, 2017 and 2016. 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, 2017
Beginning Balance
Charge Offs
Recoveries
Provisions
Ending Balance (1)
At December 31, 2016
Beginning Balance
Charge Offs
Recoveries
Provisions
Ending Balance (1)
$584
-
-
232
$816
$524
-
-
60
$584
$38
-
-
42
$80
$39
-
-
(1)
$38
$31
-
-
23
$54
$6
-
-
25
$31
$84
-
-
64
$148
$35
-
-
49
$84
Home
Equity
Lines of
Credit
$112
-
-
(5)
$107
$101
-
-
11
$112
Commercial
& Industrial
Other/
Unallocated
Total
$28
-
-
19
$47
$11
-
-
17
$28
$113
-
-
(104)
$9
$95
(1)
-
19
$113
$990
-
-
271
$1,261
$811
(1)
-
180
$990
(1)All Loans are collectively evaluated for impairment.
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, 2017 and 2016, there were no loans considered to be impaired and no troubled debt restructurings.
45
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, 2017 and 2016:
2017
One- to four-family residential
Multi-family residential
Construction
Commercial real estate
Home equity lines of credit
Commercial & industrial
Other loans
Total
2016
One- to four-family residential
Multi-family residential
Construction
Commercial real estate
Home equity lines of credit
Commercial & industrial
Other loans
Total
Pass
$ 203,815
10,650
10,750
14,803
16,897
3,679
70
$ 260,664
$ 187,079
5,103
6,134
8,440
16,498
1,900
75
$ 225,229
Special
Mention
$ 116
Substandard
(In Thousands)
$ 2,963
-
-
-
-
-
-
-
-
-
230
-
-
$ 116
$ 3,193
$ -
-
-
-
-
-
-
$ -
$ 1,494
-
-
-
299
47
-
$ 1,840
Doubtful
Total
$ -
-
-
-
-
-
-
$ -
$ -
-
-
-
-
-
-
$ -
$206,894
10,650
10,750
14,803
17,127
3,679
70
$263,973
$188,573
5,103
6,134
8,440
16,797
1,947
75
$227,069
At December 31, 2017, the Company had two non-accrual residential mortgage loans for $153,000 and no non-
accrual loans at December 31, 2016. There were no loans that were past due 90 days or more and still accruing
interest at December 31, 2017 and 2016. Interest on non-accrual loans that would have been earned if loans were
accruing interest was immaterial for 2017.
46
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, 2017 and December 31, 2016, 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)
2017
Real estate loans:
One- to four-family
residential ..................................
Multi-family residential ...........
Construction ..............................
Commercial ...............................
Home equity lines of credit ......
Commercial & industrial ...............
Other loans ......................................
Total .........................................
$ 699
-
-
-
-
-
-
$ 699
$ -
-
-
-
-
-
-
$ -
$ 153
-
-
-
-
-
-
$ 153
$ 852
-
-
-
-
-
-
$ 852
$ 206,042
10,650
10,750
14,803
17,127
3,679
70
$ 263,121
$ 206,894
10,650
10,750
14,803
17,127
3,679
70
$ 263,973
2016
Real estate loans:
One- to four-family
residential ..................................... $ 89
-
Multi-family residential ..............
-
Construction ................................
-
Commercial .................................
Home equity lines of credit ........
-
47
Commercial & industrial ..................
-
Other loans ........................................
Total .......................................... $ 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
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, 2017 and 2016 are summarized as follows:
Premises
Furniture and equipment
Accumulated depreciation and amortization
2017
2016
(In Thousands)
$4,946
3,356
8,302
(5,238)
$3,064
$4,355
3,628
7,983
(4,808)
$3,175
47
FSB Bancorp, Inc.
Note 4 - Premises and Equipment (Continued)
At December 31, 2017, the Company was obligated under non-cancelable operating leases for existing branches in
Penfield, Irondequoit, Webster, and Perinton, New York and for five mortgage origination offices in Watertown,
Pittsford, Greece, Lewiston, and Buffalo, New York. Rent expense under leases totaled $448,000 during 2017. Rent
expense under the same non-cancelable operating leases, with the exception of the Lewiston mortgage origination
office which was opened in November 2017, totaled $429,000 during 2016. Future minimum rental payments under
these leases for the next five years and thereafter are as follows (in thousands):
Years ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
Note 5 - Deposits
$ 449
439
390
368
307
1,626
$ 3,579
The components of deposits at December 31, 2017 and 2016 consist of the following:
Non-interest bearing
NOW accounts
Regular savings, tax escrow and demand clubs
Money market
Individual retirement accounts
Certificates of deposit
2017
2016
(In Thousands)
$ 8,385
31,807
25,413
37,772
7,069
106,245
$ 8,423
29,725
26,655
30,123
6,975
81,033
$216,691
$182,934
As of December 31, 2017, individual retirement accounts and certificates of deposit have scheduled maturities as follows
(in thousands):
2018
2019
2020
2021
2022
$ 55,737
31,514
20,067
4,136
1,860
$ 113,314
The aggregate amount of time deposits, each with a minimum denomination of $250,000 was $13,342,000 and
$7,746,000 at December 31, 2017 and 2016, respectively. Under the Dodd-Frank Act, deposit insurance per account
owner is $250,000.
48
FSB Bancorp, Inc.
Note 5 – Deposits (Continued)
Interest expense on deposits for the years ended December 31, 2017 and 2016 is as follows:
NOW accounts
Regular savings and demand clubs
Money market
Individual retirement accounts
Certificates of deposit
2017
2016
(In Thousands)
$ 89
103
284
75
1,260
$ 74
102
100
64
1,096
$ 1,811
$ 1,436
49
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
2017
2016
(In Thousands)
04/25/12
08/16/12
09/05/12
11/06/12
11/27/12
12/19/12
12/27/12
01/04/13
01/15/13
01/22/13
01/22/13
01/22/13
02/20/13
02/20/13
07/02/13
07/22/13
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
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
10/29/15
10/29/15
01/27/16
01/27/16
02/12/16
02/12/16
04/25/17
08/16/17
09/05/19
11/06/17
11/27/17
12/19/19
12/27/17
01/04/19
01/16/18
01/23/17
01/22/18
01/22/19
02/21/20
02/21/23
07/02/18
07/23/18
09/19/18
01/22/18
01/22/19
03/20/19
03/24/17
07/21/21
07/22/19
07/23/18
08/06/18
08/21/19
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
10/29/20
10/29/20
01/27/21
01/27/23
02/13/23
02/13/23
1.03 %
1.00 %
1.13 %
0.86 %
1.12 %
1.20 %
0.89 %
1.52 %
1.18 %
0.96 %
1.20 %
1.44 %
1.28 %
1.77 %
1.35 %
1.27 %
1.37 %
1.72 %
1.45 %
1.50 %
1.32 %
1.94 %
2.08 %
1.79 %
1.80 %
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 %
1.51 %
1.90 %
1.92 %
1.87 %
1.66 %
2.04 %
-
-
539
-
-
613
-
1,000
1,000
-
1,000
1,000
331
547
274
275
171
1,000
240
411
-
541
500
1,000
1,000
1,000
1,153
574
1,175
427
1,000
1,500
500
500
1,000
509
658
527
-
1,185
1,000
1,000
751
761
500
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
1,579
1,000
1,000
888
898
500
50
FSB Bancorp, Inc.
Note 6 – Borrowings (Continued)
Advance
Date
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
01/04/17
01/19/17
03/24/17
03/24/17
07/24/17
07/24/17
07/24/17
08/31/17
08/31/17
09/11/17
09/11/17
09/27/17
09/27/17
10/04/17
11/27/17
12/04/17
12/08/17
12/11/17
12/11/17
12/29/17
Maturity
Date
Current
Rate
2017
2016
(In Thousands)
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
01/04/19
01/21/20
03/24/22
03/25/24
07/24/20
07/26/21
07/25/22
08/31/18
08/31/21
09/11/20
09/12/22
09/27/18
09/27/22
04/04/18
05/29/18
03/05/18
04/09/18
01/11/18
03/12/18
01/02/18
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 %
1.62 %
1.91 %
2.00 %
2.28 %
1.88 %
2.03 %
1.94 %
1.55 %
1.96 %
1.80 %
2.07 %
1.66 %
2.28 %
1.50 %
1.76 %
1.59 %
1.64 %
1.55 %
1.61 %
1.53 %
-
1,000
-
-
-
1,000
2,000
1,000
807
866
1,500
-
-
1,000
-
1,500
1,000
1,309
1,367
1,000
1,000
936
1,000
1,000
1,000
1,500
1,500
1,000
1,500
3,500
1,500
1,000
1,500
1,500
2,500
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Borrowings are secured by residential mortgages with a carrying amount of $190,382,000 at December 31, 2017 and
the Company’s investment in FHLB stock. As of December 31, 2017, $101,788,000 was available for borrowings. At
December 31, 2016, the carrying amount of borrowings secured by residential mortgages was $165,546,000 and
$90,868,000 was available for new borrowings.
$64,447
$56,813
51
FSB Bancorp, Inc.
Note 6 – Borrowings (Continued)
The following table sets forth the contractual maturities of all FHLB borrowings at December 31, 2017 (dollars in
thousands):
2018
2019
2020
2021
2022
Thereafter
Contractual
Maturity
$ 23,220
9,730
10,553
10,750
5,403
4,791
$ 64,447
Weighted
Average Rate
1.57%
1.66
1.72
1.90
2.05
2.00
1.73%
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, 2017 and 2016. Securities are not pledged until the borrowing is initiated. In
addition to the repurchase agreement with Raymond James, the Company also has an unsecured line of credit through
Atlantic Community Bankers Bank which would provide an additional $5 million in liquidity. There were no draws or
outstanding balances from the line of credit at December 31, 2017 and 2016.
Note 7 - Income Taxes
The provision for income taxes for 2017 and 2016 consists of the following:
Current
Federal
State
Deferred
2017
2016
(In Thousands)
$ 279
4
165
$ 448
$ 439
4
(115)
$ 328
During 2017, the Tax Act was signed into law. The most significant impact of the Act is the reduction in the corporate
federal income tax rate from a maximum rate of 35% to 21% beginning in 2018. As a result, the Company revalued its
deferred tax assets and liabilities at its new effective tax rate and recorded a net adjustment of $228,000 to income tax
expense to reduce the carrying value of the net deferred tax assets. The Company’s effective tax rate was 61% and
26% in 2017 and 2016, 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, and a reduction in tax rates, as part of the Act.
52
FSB Bancorp, Inc.
Note 7 - Income Taxes (Continued)
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 2017 or 2016 included the following (dollars in
thousands):
Amount
Federal Tax at a Statutory rate
State taxes, net of Federal provision
Change in tax rate
Change in valuation allowance
Nontaxable interest and dividend income
Other items
Income tax provision
$ 252
(108)
228
106
(42)
12
$ 448
2017
% of Pre-tax
Income
34%
(15)
31
14
(6)
3
61%
2016
Amount
$ 431
119
-
(178)
(44)
-
$ 328
% of Pre-tax
Income
34%
9
-
(14)
(3)
-
26%
Deferred income tax assets and liabilities resulting from temporary differences are summarized as follows and are
included in other assets at December 31, 2017 and at December 31, 2016 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
Unrealized loss on securities available for sale and transferred to
held to maturity
Net operating loss
Stock compensation
Other
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Depreciation
Mortgage servicing rights
Total deferred tax liabilities
2017
2016
(In Thousands)
$ 92
330
1,075
-
208
44
270
14
1
2,034
(1,424)
610
(9)
(233)
(242)
$ 95
379
1,102
64
290
43
159
-
-
2,132
(1,318)
814
-
(308)
(308)
Net deferred tax asset
$ 368
$ 506
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
53
FSB Bancorp, Inc.
Note 7 - Income Taxes (Continued)
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 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, 2017 and 2016, 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 $319,000 at December 31, 2017. It is more 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 2014, 2015, and 2016 as prescribed by applicable statute. No
waivers have been executed that would extend the period subject to examination beyond the period prescribed by
statute.
54
FSB Bancorp, Inc.
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
For the year ended December 31, 2017
Unrealized Gains
and Losses on
Available for
Sales Securities
$ (85)
(80)
-
Total
$ (85)
(80)
-
Ending balance
$ (165)
$ (165)
For the year ended December 31, 2016
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)
Beginning balance
Other comprehensive (loss) income before reclassifications
Amounts reclassified from AOCI
Ending balance
$ (85)
$ -
$ (85)
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 Affected Line Item in the Statement of Income
Available for sale securities
Held to maturity securities
$ 24 Realized gain on sale of securities
12 Realized gain on sale of securities
(12) Provision for Income Taxes
$ 24 Net Income
There were no amounts reclassified out of AOCI for the year ended December 31, 2017.
55
FSB Bancorp, Inc.
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 $225,000 and $189,000 for the years ended
December 31, 2017 and 2016, respectively. Discretionary contributions to the 401(k) Plan were $85,000 and $77,000
for the years ended December 31, 2017 and 2016, 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 3,808 shares for each of the
years ended December 31, 2017 and December 31, 2016. Total expense for the ESOP was $52,000 and $44,000 for
the years ended December 31, 2017 and 2016, respectively. At December 31, 2017, the Company had 34,271
unearned ESOP shares having an aggregate market value of $582,607.
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 $797,000 and $759,000 at December 31, 2017 and 2016 respectively, for the SERP in other liabilities. In
2017 and 2016, the expense under the SERP totaled $38,000 and $138,000, respectively.
On September 27, 2017, the Board of Directors of the Company approved the grant of restricted stock awards to its
Directors and executive officers under the 2017 Equity Incentive Plan that was approved at the special meeting of
stockholders on August 29, 2017 when 77,668 shares were authorized for award. A total of 21,380 restricted stock
awards were granted to the 11 external directors of the Company and a total of 41,320 restricted stock awards, in total,
were granted to three executive officers. The awards will vest ratably over five years (20% per year for each year of
the participant’s service with the Company).
The Bank also has a stock-based compensation plan which allows the Company to issue up to 194,168 stock options.
On October 2, 2017 and October 30, 2017, the Board of Directors granted a combined total of 152,080 options to buy
stock under the plan at exercise prices of $16.72 and $16.69, the fair value of the stock as of October 2nd and October
30th, respectively. These options have a 10-year term and are vested over a five year period.
56
FSB Bancorp, Inc.
Note 9 - Employee Benefit Plans (Continued)
A summary of the Company’s stock option activity and related information for its option plans for the years ended
December 31, 2017 and 2016 is as follows:
Outstanding at beginning of year
Grants
Exercised
Outstanding at year end
2017
2016
Options
-
152,080
-
152,080
Weighted Average
Exercise Price Per
Share
$ -
16.72
-
$ 16.72
Options
-
-
-
-
Weighted Average
Exercise Price Per
Share
$ -
-
-
$ -
Exercisable at year end
-
$ -
-
$ -
The grants to senior management and directors vest over a five year period in equal annual installments, with the first
installment vesting on the first anniversary date of the grant and succeeding installments on each anniversary
thereafter, through 2022.
The compensation expense of the awards is based on the fair value of the instruments on the date of grant. The
Company recorded compensation expense in the amount of $132,000 for the year ended December 31, 2017 and is
expected to record $269,000 in 2018 through 2022.
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, 2017 and 2016, loans outstanding with related parties were $560,000 and $596,000, respectively.
During 2017, there were no new loans or sales and repayments totaled $36,000.
57
FSB Bancorp, Inc.
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, 2017 and 2016:
Commitments to extend credit:
Commitments to grant loans
Unadvanced portion of construction loans
Unfunded commitments under lines of credit
2017
2016
(In Thousands)
$ 12,397
5,945
17,523
$ 15,199
5,009
17,587
$35,865
$37,795
Commitments to grant loans at fixed-rates at December 31, 2017 totaled $10,836,000 and had interest rates that ranged
from 3.25% to 5.25%.
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. We had two commercial letters of credit
for $414,000 at December 31, 2017 and two commercial letters of credit for $110,000 at December 31, 2016.
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
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.
58
FSB Bancorp, Inc.
Note 12 - Regulatory Matters (Continued)
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, 2017 and 2016, the Bank met all capital adequacy requirements to
which it was subject. As of December 31, 2017, 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
$30,230 16.18% $14,946 8.0% $18,683 10.0%
$19,617 10.5%
28,969 15.51
11,210 6.0
14,946
8.0
15,881 8.5
28,969 15.51
9.51
28,969
8,407 4.5
12,183 4.0
12,144
15,229
6.5
5.0
13,078 7.0
15,229 5.0
$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
28,274
17.83
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
(Dollars in thousands)
As of December 31, 2017
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, 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)
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
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-
59
FSB Bancorp, Inc.
Note 13 - Fair Value Measurement and Fair Values of Financial Instruments(Continued)
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.
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:
2017
Total
Level 1
Level 2
Level 3
(In Thousands)
U.S. Government and agency obligations
$10,470
$ -
$10,470
$ -
Mortgage-backed securities - residential
7,843
-
7,843
-
Total Available-for-Sale Securities
$18,313
$ -
$18,313
$ -
2016
Total
Level 1
Level 2
Level 3
U.S. Government and agency obligations
$ 7,999
$
-
$ 7,999
$ -
Mortgage-backed securities - residential
9,748
-
9,748
-
Total Available-for-Sale Securities
$17,747
$ -
$17,747
$ -
There were no securities transferred out of level 2 securities available-for-sale during the twelve months ended
December 31, 2017. No assets or liabilities have been measured on a non-recurring basis at December 31, 2017 or
2016.
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.
60
FSB Bancorp, Inc.
Note 13 - Fair Value Measurement and Fair Values of Financial Instruments(Continued)
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, 2017 and 2016.
Cash, Due from Banks, and Interest-Earning Demand Deposits
The carrying amounts of these assets approximate their fair values.
Investment Securities
The fair value of securities available-for-sale (carried at fair value) and held-to-maturity (carried at amortized cost) are
determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities
without relying exclusively on quoted market prices for the specific securities but rather relying on the securities’
relationship to other benchmark quoted prices and is considered to be a Level 2 measurement.
Investment in Restricted Stock
The carrying value of restricted stock, which consists of Federal Home Loan Bank and Atlantic Community Bankers
Bank, approximates its fair value based on the redemption provisions of the restricted stock, resulting in a Level 2
classification.
Loans 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.
61
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, 2017 and
2016 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 restricted 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
2017
2016
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(In Thousands)
$ 1,672
8,725
18,313
6,575
3,270
2,770
262,711
824
216,691
64,447
94
$ 1,672
8,725
18,313
6,588
3,270
2,770
261,588
824
216,878
64,502
94
$ 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
182,934
56,813
71
182,969
57,008
71
62
FSB Bancorp, Inc.
Note 14 - FSB Bancorp, Inc. (Parent Company Only) Financial Information
Balance Sheets
Assets
Cash and cash equivalents
Investment in banking subsidiary
ESOP loan 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
2017
2016
(In Thousands)
$ 1,717
29,171
365
$ 31,253
$ 2,881
28,610
398
$ 31,889
$ 34
$ 30
31,219
31,859
$ 31,253
$ 31,889
Year Ended December 31
2017
2016
(In Thousands)
$ 29
(301)
562
$ 20
(89)
1,007
$ 290
$ 938
63
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
Stock based compensation
Decrease in accrued interest receivable
Net increase 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
Purchase of common stock
Net cash flows from financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents - beginning
Year Ended December 31
2017
2016
(In Thousands)
$ 290
$ 938
(562)
133
-
4
(135)
-
-
33
33
-
(1,062)
(1,062)
(1,164)
2,881
(1,007)
-
8
-
(61)
(7,300)
1,000
33
(6,267)
8,944
-
8,944
2,616
265
Cash and cash equivalents - ending
$ 1,717
$ 2,881
64
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