Company Quick10K Filing
Quick10K
FSB Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$17.50 2 $34
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
8-K 2019-10-29 Earnings, Exhibits
8-K 2019-07-31 Earnings, Exhibits
8-K 2019-05-22 Shareholder Vote
8-K 2019-04-30 Earnings, Exhibits
8-K 2019-03-27 Officers
8-K 2019-01-30 Earnings, Exhibits
8-K 2018-10-31 Earnings, Exhibits
8-K 2018-07-25 Amendment
8-K 2018-05-23 Shareholder Vote
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-01-31 Earnings, Exhibits
PBCT People's United Financial 5,553
BKU Bankunited 3,058
SBT Sterling Bancorp 478
WSBF Waterstone Financial 472
HTBI Hometrust Bancshares 455
BFIN Bankfinancial 278
NRIM Northrim Bancorp 242
FSFG First Savings Financial Group 137
KFFB Kentucky First Federal Bancorp 66
EFBI Eagle Financial Bancorp 26
FSBC 2019-09-30
Part I - Financial Information
Item 1 - Consolidated Financial Statements
Note 1: Basis of Presentation
Note 2: New Accounting Pronouncements
Note 3: Earnings per Common Share
Note 4: Investment Securities
Note 5: Loans
Note 6: Allowance for Loan Losses and Foreclosed Real Estate
Note 7: Fair Value Measurements
Note 8: Accumulated Other Comprehensive Loss
Note 9: Other Income
Note 10: Stock-Based Compensation
Note 11: Leases
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Mine Safety Disclosures
Item 5 - Other Information
Item 6 - Exhibits
EX-31.1 tm1919480d1_ex31-1.htm
EX-31.2 tm1919480d1_ex31-2.htm
EX-32 tm1919480d1_ex32.htm

FSB Bancorp Earnings 2019-09-30

FSBC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tm1919480d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

OR

 

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

 

For the transition period from _______ to _______

 

FSB BANCORP, INC.

(Exact Name of Company as Specified in its Charter)

 

Maryland

(State of Other Jurisdiction
of Incorporation)

 

001-37831

(Commission File No.)

 

81-2509654

(I.R.S. Employer
Identification No.)

 

45 South Main Street, Fairport, NY 14450

(Address of Principal Executive Office) (Zip Code)

 

(585) 381-4040

(Issuer's Telephone Number including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  

Trading

Symbol(s)

  Name of each exchange on which registered
Common Stock, $0.01 par value   FSBC   The Nasdaq Stock Market LLC

 

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

 

YES x         NO ¨

 

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

 

YES x         NO ¨

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x  
    Smaller reporting company x
    Emerging growth company x

 

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

 

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

 

As of November 12, 2019, there were 1,940,661 shares issued and outstanding of the registrant’s common stock.

 

 

 

 

 

 

FSB BANCORP, INC.

INDEX

 

    PAGE NO.
PART I - FINANCIAL INFORMATION  
       
Item 1. Consolidated Financial Statements (Unaudited)    
  Consolidated Balance Sheets   3
  Consolidated Statements of Income (Loss)   4-5
  Consolidated Statements of Comprehensive Income (Loss)   6-7
  Consolidated Statements of Stockholders’ Equity   8-9
  Consolidated Statements of Cash Flows   10
  Notes to Consolidated Financial Statements   11-33
       
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   34-49
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   50
       
Item 4. Controls and Procedures   50
       
PART II - OTHER INFORMATION   50-51
       
Item 1. Legal Proceedings   50
Item 1A. Risk Factors   50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   51
Item 3. Defaults upon Senior Securities   51
Item 4. Mine Safety Disclosures   51
Item 5. Other information   51
Item 6. Exhibits   51
     
SIGNATURES   52

 

 

 

 

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

 

FSB Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

 

   September 30,   December 31, 
(In thousands, except share and per share data)  2019   2018 
ASSETS:          
Cash and due from banks  $1,485   $1,581 
Interest earning demand deposits   3,731    4,710 
Total cash and cash equivalents   5,216    6,291 
Available-for-sale securities, at fair value   18,000    18,331 
Held-to-maturity securities, at amortized cost (fair value of $6,137 and $6,030, respectively)   6,011    6,052 
Investment in restricted stock, at cost   2,961    3,637 
Loans held for sale   3,690    2,133 
Loans   278,447    283,302 
Less: Allowance for loan losses   (1,736)   (1,561)
Loans receivable, net   276,711    281,741 
Bank owned life insurance   3,864    3,819 
Accrued interest receivable   912    876 
Premises and equipment, net   2,506    2,731 
Operating lease right-of-use assets   2,199    - 
Other assets   2,740    2,658 
Total assets  $324,810   $328,269 
           
LIABILITIES AND STOCKHOLDERS' EQUITY:          
Deposits:          
Non-interest bearing  $11,401   $10,947 
Interest bearing   221,482    211,668 
Total deposits   232,883    222,615 
Short-term borrowings   2,000    13,750 
Long-term borrowings   54,262    58,076 
Official bank checks   268    863 
Operating lease liabilities   2,401    - 
Other liabilities   1,079    1,452 
Total liabilities   292,893    296,756 
Stockholders' equity:          
Preferred stock – par value $0.01; 25,000,000 authorized shares; no shares issued and outstanding   -    - 
Common stock, par value $0.01; 50,000,000 authorized shares; 1,940,661 shares issued and outstanding   19    19 
Paid-in capital   15,998    15,746 
Retained earnings   16,175    16,212 
Accumulated other comprehensive loss   (20)   (183)
Unearned ESOP shares, at cost   (255)   (281)
Total stockholders’ equity   31,917    31,513 
Total liabilities and stockholders' equity  $324,810   $328,269 

 

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

 

- 3 -

 

 

FSB Bancorp, Inc.

Consolidated Statements of Income (Loss)

(Unaudited)

 

   For the three   For the three 
   months ended   months ended 
(In thousands, except per share data)  September 30, 2019   September 30, 2018 
Interest and dividend income:          
Loans, including fees  $3,079   $3,023 
Securities:          
Taxable   118    105 
Tax-exempt   27    26 
Mortgage-backed securities   26    28 
Other   34    14 
Total interest and dividend income   3,284    3,196 
Interest expense:          
Interest on deposits   924    689 
Interest on short-term borrowings   8    43 
Interest on long-term borrowings   336    328 
Total interest expense   1,268    1,060 
Net interest income   2,016    2,136 
Provision for loan losses   75    75 
Net interest income after provision for loan losses   1,941    2,061 
Other income:          
Service fees   38    38 
Fee income   4    36 
Increase in cash surrender value of bank owned life insurance   15    16 
Realized gain on sale of loans   278    461 
Mortgage fee income   173    218 
Other   46    47 
Total other income   554    816 
Other expense:          
Salaries and employee benefits   1,594    1,711 
Occupancy   252    268 
Data processing costs   124    119 
Advertising   21    24 
Equipment   132    129 
Electronic banking   28    26 
Directors’ fees   42    46 
Mortgage fees and taxes   75    229 
FDIC premium (credit) expense   (2)   31 
Audits and tax services   19    70 
Professional services   45    64 
Other   158    219 
Total other expenses   2,488    2,936 
Income (loss) before income taxes   7    (59)
Provision (benefit) for income taxes   5    (9)
Net income (loss)  $2   $(50)
Earnings (loss) per common share – basic and diluted  $0.00   $(0.03)

 

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

 

- 4 -

 

 

FSB Bancorp, Inc.

Consolidated Statements of Income (Loss)

(Unaudited)

 

   For the nine   For the nine 
   months ended   months ended 
(In thousands, except per share data)  September 30, 2019   September 30, 2018 
Interest and dividend income:          
Loans, including fees  $9,252   $8,736 
Securities:          
Taxable   366    296 
Tax-exempt   79    78 
Mortgage-backed securities   82    103 
Other   84    35 
Total interest and dividend income   9,863    9,248 
Interest expense:          
Interest on deposits   2,568    1,855 
Interest on short-term borrowings   125    127 
Interest on long-term borrowings   1,010    841 
Total interest expense   3,703    2,823 
Net interest income   6,160    6,425 
Provision for loan losses   175    225 
Net interest income after provision for loan losses   5,985    6,200 
Other income:          
Service fees   104    107 
Fee income   14    109 
Increase in cash surrender value of bank owned life insurance   45    46 
Realized gain on sale of loans   620    1,098 
Mortgage fee income   443    588 
Other   126    151 
Total other income   1,352    2,099 
Other expense:          
Salaries and employee benefits   4,559    4,903 
Occupancy   797    822 
Data processing costs   336    323 
Advertising   63    116 
Equipment   397    412 
Electronic banking   81    84 
Directors’ fees   145    151 
Mortgage fees and taxes   175    344 
FDIC premium expense   64    81 
Audits and tax services   110    165 
Professional services   144    164 
Other   506    618 
Total other expenses   7,377    8,183 
Income (loss) before income taxes   (40)   116 
Provision (benefit) for income taxes   (3)   24 
Net income (loss)  $(37)  $92 
Earnings (loss) per common share – basic and diluted  $(0.02)  $0.05 

 

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

 

- 5 -

 

 

FSB Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   For the three months ended 
(In thousands)  September 30,
2019
   September 30,
2018
 
Net Income (Loss)  $2   $(50)
           
Other Comprehensive Income (Loss)          
           
Unrealized holding gains (losses) on available-for-sale securities          
Unrealized holding gains (losses) arising during the period   26    (25)
Net unrealized gain (loss) on available-for-sale securities   26    (25)
           
Other comprehensive income (loss), before tax   26    (25)
Tax expense (benefit)   5    (5)
Other comprehensive income (loss), net of tax   21    (20)
Comprehensive income (loss)  $23   $(70)
           
           
Tax Expense (Benefit) Allocated to Each Component of Other Comprehensive Income (Loss)          
Unrealized holding gains (losses) arising during the period  $5   $(5)
Income tax expense (benefit) related to other comprehensive income (loss)  $5   $(5)

 

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

 

- 6 -

 

 

FSB Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   For the nine months ended 
(In thousands)  September 30,
2019
   September 30,
2018
 
Net Income (Loss)  $(37)  $92 
           
Other Comprehensive Income (Loss)          
           
Unrealized holding gains (losses) on available-for-sale securities          
Unrealized holding gains (losses) arising during the period   206    (148)
Net unrealized gain (loss) on available-for-sale securities   206    (148)
           
Other comprehensive income (loss), before tax   206    (148)
Tax expense (benefit)   43    (31)
Other comprehensive income (loss), net of tax   163    (117)
Comprehensive income (loss)  $126   $(25)
           
           
Tax Expense (Benefit) Allocated to Each Component of Other Comprehensive Income (Loss)          
Unrealized holding gains (losses) arising during the period  $43   $(31)
Income tax expense (benefit) related to other comprehensive income (loss)  $43   $(31)

 

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

 

- 7 -

 

 

FSB Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

               Accumulated
Other
         
   Common   Paid-in   Retained   Comprehensive   Unearned     
(In thousands, except share and per share data)  Stock   Capital   Earnings   Loss   ESOP   Total 
Three Months Ended September 30, 2019                              
Balance, July 1, 2019  $19   $15,914   $16,173   $(41)  $(264)  $31,801 
                               
Net income   -    -    2    -    -    2 
                               
Other comprehensive income, net of tax   -    -    -    21    -    21 
                               
ESOP shares committed to be released   -    8    -    -    9    17 
                               
Stock-based compensation   -    76    -    -    -    76 
                               
Balance, September 30, 2019  $19   $15,998   $16,175   $(20)  $(255)  $31,917 
                               
Three Months Ended September 30, 2018                              
Balance, July 1, 2018  $19   $15,615   $16,219   $(262)  $(298)  $31,293 
                               
Net loss   -    -    (50)   -    -    (50)
                               
Other comprehensive loss, net of tax   -    -    -    (20)   -    (20)
                               
ESOP shares committed to be released   -    8    -    -    8    16 
                               
Stock-based compensation   -    79    -    -    -    79 
                               
Balance, September 30, 2018  $19   $15,702   $16,169   $(282)  $(290)  $31,318 

 

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

 

- 8 -

 

 

FSB Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

               Accumulated
Other
         
   Common   Paid-in   Retained   Comprehensive   Unearned     
(In thousands, except share and per share data)  Stock   Capital   Earnings   Loss   ESOP   Total 
Nine Months Ended September 30, 2019                              
Balance, January 1, 2019  $19   $15,746   $16,212   $(183)  $(281)  $31,513 
                               
Net loss   -    -    (37)   -    -    (37)
                               
Other comprehensive income, net of tax   -    -    -    163    -    163 
                               
ESOP shares committed to be released   -    24    -    -    26    50 
                               
Stock-based compensation   -    228    -    -    -    228 
                               
Balance, September 30, 2019  $19   $15,998   $16,175   $(20)  $(255)  $31,917 
                               
Nine Months Ended September 30, 2018                              
Balance, January 1, 2018  $19   $15,441   $16,077   $(165)  $(316)  $31,056 
                               
Net income   -    -    92    -    -    92 
                               
Other comprehensive loss, net of tax   -    -    -    (117)   -    (117)
                               
ESOP shares committed to be released   -    30    -    -    26    56 
                               
Stock-based compensation   -    231    -    -    -    231 
                               
Balance, September 30, 2018  $19   $15,702   $16,169   $(282)  $(290)  $31,318 

 

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

 

- 9 -

 

 

FSB Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Nine Months Ended September 30, 
(In thousands)  2019   2018 
OPERATING ACTIVITIES          
Net income (loss)  $(37)  $92 
Adjustments to reconcile net income (loss) to net cash flows from operating activities:          
Net amortization of premiums and accretion of discounts on investments   60    68 
Gain on sale of loans   (620)   (1,098)
Proceeds from loans sold   27,609    46,229 
Loans originated for sale   (28,546)   (47,023)
Amortization of net deferred loan origination costs   -    20 
Depreciation and amortization   321    338 
Provision for loan losses   175    225 
Expense related to ESOP   50    56 
Stock-based compensation   228    231 
Deferred income tax benefit   (12)   (10)
Earnings on investment in bank owned life insurance   (45)   (46)
Increase in accrued interest receivable   (36)   (112)
Increase in other assets   (82)   (71)
(Decrease) Increase  in other liabilities   (203)   154 
Net cash flows from operating activities   (1,138)   (947)
INVESTING ACTIVITIES          
Purchases of securities available-for-sale   (8,000)   (500)
Proceeds from maturities and calls of securities available-for-sale   6,999    - 
Proceeds from principal paydowns on securities available-for-sale   1,495    1,591 
Purchases of securities held-to-maturity   -    (415)
Proceeds from maturities and calls of securities held-to-maturity   -    460 
Proceeds from principal paydowns on securities held-to-maturity   24    173 
Net decrease (increase) in loans   4,855    (16,599)
Purchase of restricted stock   (414)   (1,387)
Redemption of restricted stock   1,090    932 
Purchase of premises and equipment   (96)   (127)
Net cash flows from investing activities   5,953    (15,872)
FINANCING ACTIVITIES          
Net increase in deposits   10,268    2,693 
Proceeds from borrowings   17,646    46,550 
Repayments on borrowings   (33,209)   (37,201)
Net (decrease) increase in official bank checks   (595)   345 
Net cash flows from financing activities   (5,890)   12,387 
Change in cash and cash equivalents   (1,075)   (4,432)
Cash and cash equivalents at beginning of period   6,291    10,397 
Cash and cash equivalents at end of period  $5,216   $5,965 
CASH PAID DURING THE PERIOD FOR:          
Interest  $3,752   $2,761 
Income taxes  $-   $336 

 

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

 

- 10 -

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1: Basis of Presentation

 

The accompanying unaudited consolidated financial statements of FSB Bancorp, Inc. (“FSB Bancorp”), Fairport Savings Bank (the “Bank”), and its other wholly-owned subsidiary, Fairport Wealth Management (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of consolidated financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. The results are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any future period.

 

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

 

Note 2: New Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This new guidance supersedes the lease requirements in Topic 840, Leases and is based on the principle that a lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. In addition, the guidance requires an entity to separate the lease components from the nonlease components in a contract. The ASU requires disclosures about the amount, timing, and judgments related to a reporting entity's accounting for leases and related cash flows. The standard is required to be applied to all leases in existence as of the date of adoption using a modified retrospective transition approach. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this ASU on January 1, 2019 and has recognized lease liabilities and right-of-use assets associated with these lease agreements.

 

The new guidance requires lessees to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months.  While the guidance requires all leases to be recognized in the balance sheet, there continues to be a differentiation between finance leases and operating leases for purposes of income statement recognition and cash flow statement presentation.  For finance leases, interest on the lease liability and amortization of the right-of-use asset will be recognized separately in the consolidated statement of income.  Repayments of principal on those lease liabilities will be classified within financing activities and payments of interest on the lease liability will be classified within operating activities in the statement of cash flows.  For operating leases, a single lease cost is recognized in the consolidated statement of income and allocated over the lease term, generally on a straight-line basis.  All cash payments are presented within operating activities in the statement of cash flows. The accounting applied by lessors is largely unchanged from existing GAAP, however, the guidance eliminates the accounting model for leveraged leases for leases that commence after the effective date of the guidance.

 

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In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This new guidance significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This ASU will replace the "incurred loss" model under existing guidance with an "expected loss" model for instruments measured at amortized cost, and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. This ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. This guidance requires adoption through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This ASU was originally effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption was permitted for all companies as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

 

In July 2019, the FASB decided to add a project to its technical agenda to propose staggered effective dates for certain accounting standards, including ASU 2016-13.  The FASB has proposed an approach that ASU 2016-13 will still be effective for Public Business Entities that are SEC filers, excluding smaller reporting companies such as the Company, for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.  For all other entities, including smaller reporting companies like the Company, ASU 2016-13 will now be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.   For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies).  The FASB is currently in the process of drafting a proposed ASU for this project to be voted upon by FASB members after a 30 day comment period.  The Company is currently a smaller reporting company, and if this proposal is approved and becomes effective, the Company’s expected adoption date for ASU 2016-13 would change from calendar year 2020 to calendar year 2023, including interim periods within those years. The Company is currently evaluating the impact the guidance will have on the Company's consolidated financial statements, and expects an increase in the allowance for credit losses resulting from the change to expected losses for the estimated life of the financial asset, including an allowance for debt securities. The amount of the increase in the allowance for credit losses resulting from the new guidance will be impacted by the portfolio composition and asset quality at the adoption date, as well as economic conditions and forecasts at the time of adoption. The Company is currently running a second model concurrently in 2019 and does not anticipate a material impact to the consolidated financial statements.

 

In March 2017, the FASB issued an Update (ASU 2017-08) to its guidance on “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) related to premium amortization on purchased callable debt securities. The amendments in this update shorten the amortization period for certain callable debt securities held at a premium.  Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  For public companies, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  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 did not have a material impact on our consolidated results of operations or financial position.

 

In August 2018, the FASB has issued Accounting Standards Update (ASU) No. 2018-15, Intangibles—Goodwill and Other—Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, a consensus of the FASB Emerging Issues Task Force, which amends the FASB ASC to provide guidance on accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. In April 2015, the FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which provided guidance to customers concerning whether a cloud computing arrangement (e.g., software, platform, or infrastructure offered as a service) includes a software license. Pursuant to that guidance, (1) if a cloud computing arrangement includes a software license, the software license element of the arrangement should be accounted for in a manner consistent with the acquisition of other software licenses, or (2) if the arrangement does not include a software license, then the arrangement should be accounted for as a service contract, with the fees associated with the hosting element (service) of the arrangement expensed as they are incurred.

 

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Following the issuance of ASU No. 2015-05, constituents requested that the FASB provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. Accordingly, because U.S. GAAP do not contain explicit guidance on accounting for such costs, and to address the resulting diversity in practice, the FASB has issued ASU No. 2018-15 to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Note that the guidance on accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in ASU No. 2018-15. The amended guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years.

 

Note 3: 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 reflect the assumed exercise and conversion of dilutive stock options and unvested restricted stock. In periods of loss, basic earnings per common share and diluted earnings per share are the same due to the fact that the inclusion of any of the dilutive shares will result in an anti-dilutive impact, driven by the loss. Net income available to common stockholders is net income of the Company. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released. The Company did not grant any restricted stock awards or stock options during the nine months ended September 30, 2019. An aggregate of 20,000 stock options and 8,400 shares of restricted stock were granted to senior management during the nine months ended September 30, 2018. The grants to senior management 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 2023. Vesting will automatically accelerate in the event of a participant’s death, disability, or involuntary termination following a change in control.

 

The following tables set forth the calculation of basic and diluted earnings per share.

 

   Three months ended 
   September 30, 
(In thousands, except per share data)  2019   2018 
Basic and Diluted Earnings (Loss) Per Common Share          
Net income (loss) available to common stockholders  $2   $(50)
Weighted average basic common shares outstanding   1,861    1,911 
Weighted average diluted common shares outstanding   1,873    1,911 
Earnings (loss) per common share – basic and diluted  $0.00   $(0.03)

 

   Nine months ended 
   September 30, 
(In thousands, except per share data)  2019   2018 
Basic and Diluted Earnings (Loss) Per Common Share          
Net income (loss) available to common stockholders  $(37)  $92 
Weighted average basic common shares outstanding   1,859    1,909 
Weighted average diluted common shares outstanding   1,859    1,909 
Earnings (loss) per common share – basic and diluted  $(0.02)  $0.05 

 

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Note 4: Investment Securities

 

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

 

   September 30, 2019 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available-for-Sale Portfolio                    
U.S. Government and agency obligations  $13,610   $1   $(14)  $13,597 
Mortgage-backed securities – residential   4,416    17    (30)   4,403 
Total available-for-sale  $18,026   $18   $(44)  $18,000 
Held-to-Maturity Portfolio                    
Mortgage-backed securities – residential  $434   $7   $-   $441 
State and municipal securities   5,577    119    -    5,696 
Total held-to-maturity  $6,011   $126   $-   $6,137 

 

   December 31, 2018 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available-for-Sale Portfolio                    
U.S. Government and agency obligations  $12,610   $7   $(162)  $12,455 
Mortgage-backed securities – residential   5,953    24    (101)   5,876 
Total available-for-sale  $18,563   $31   $(263)  $18,331 
Held-to-Maturity Portfolio                    
Mortgage-backed securities – residential  $458   $6   $(1)  $463 
State and municipal securities   5,594    29    (56)   5,567 
Total held-to-maturity  $6,052   $35   $(57)  $6,030 

 

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The amortized cost and estimated fair value of debt investments at September 30, 2019 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

 

   Available-for-Sale   Held-to-Maturity 
   Amortized       Amortized     
(In thousands)  Cost   Fair Value   Cost   Fair Value 
Due in one year or less  $-   $-   $1,563   $1,565 
Due after one year through five years   10,610    10,597    2,418    2,446 
Due after five years through ten years   3,000    3,000    1,596    1,685 
Sub-total  $13,610   $13,597   $5,577   $5,696 
Mortgage-backed securities – residential   4,416    4,403    434    441 
Totals  $18,026   $18,000   $6,011   $6,137 

 

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

 

   September 30, 2019 
   Less than Twelve Months   Twelve Months or More   Total 
   Number of           Number of           Number of         
   Individual   Unrealized   Fair   Individual   Unrealized   Fair   Individual   Unrealized   Fair 
(Dollars in thousands)  Securities   Losses   Value   Securities   Losses   Value   Securities   Losses   Value 
Available-for-Sale                                             
U.S. Government and agency obligations   1   $4   $1,000    5   $10   $6,595    6   $14   $7,595 
Mortgage-backed securities – residential(1)   1    -    139    4    30    3,162    5    30    3,301 
Totals   2   $4   $1,139    9   $40   $9,757    11   $44   $10,896 
Held-to-Maturity                                             
Mortgage-backed securities – residential     -   $      -   $-    -   $      -   $-    -   $-   $- 
State and municipal securities(1)   1    -    340    -    -    -    1    -    340 
Totals   1   $-   $340    -   $-   $-    1   $-   $340 

 

   December 31, 2018 
   Less than Twelve Months   Twelve Months or More   Total 
   Number of           Number of           Number of         
   Individual   Unrealized   Fair   Individual   Unrealized   Fair   Individual   Unrealized   Fair 
(Dollars in thousands)  Securities   Losses   Value   Securities   Losses   Value   Securities   Losses   Value 
Available-for-Sale                                             
U.S. Government and agency obligations   -   $   -   $-    8   $162   $9,445    8   $162   $9,445 
Mortgage-backed securities – residential(1)   1    -    203    4    101    3,749    5    101    3,952 
Totals   1   $-   $203    12   $263   $13,194    13   $263   $13,397 
Held-to-Maturity                                             
Mortgage-backed securities – residential   -   $-   $-    1   $1   $165    1   $1   $165 
State and municipal securities   3    4    1,039    15    52    3,021    18    56    4,060 
Totals   3   $4   $1,039    16   $53   $3,186    19   $57   $4,225 

 

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

 

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

 

There were 12 securities in an unrealized loss position at September 30, 2019, of which nine have been in loss positions for a period greater than twelve months and three have been in a loss position for a period less than twelve months. This compares to 32 securities in an unrealized loss position at December 31, 2018, of which 28 had been in loss positions for a period greater than twelve months and four had been in loss positions for a period less than twelve months. These issuing entities are currently rated Aaa by Moody’s Investor Services and AA+ by Standard and Poors. Among the nine securities in loss positions for a period greater than twelve months at September 30, 2019, all were either direct issuances of, or mortgage-backed securities or collateralized mortgage obligations issued by, the following entities sponsored and guaranteed by the United States Government: GNMA, FNMA, and FHLMC. The unrealized losses reflected are primarily attributable to changes in interest rates since the securities were acquired.

 

Among the three securities in an unrealized loss position at September 30, 2019 for less than twelve months, two were either direct issuances of, or mortgage-backed securities or collateralized mortgage obligations issued by, the following entities sponsored and guaranteed by the United States Government: FAMCA and FHLMC. The remaining security that has been in a loss position for a period less than twelve months was issued by a local municipality. The unrealized loss reflected is primarily attributable to changes in interest rates since the securities were acquired. The Company does not intend to sell these securities, nor is it more likely than not, that the Company will be required to sell these securities prior to recovery of the amortized cost. As such, management does not believe any individual unrealized loss as of September 30, 2019 represents OTTI.

 

There were no realized gains or losses on sales of securities for the three or nine months ended September 30, 2019 and September 30, 2018.

 

As of September 30, 2019 and December 31, 2018, no securities were pledged to secure public deposits or for any other purpose required or permitted by law.

 

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

 

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Note 5: Loans

 

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

 

   September 30,   December 31, 
(In thousands)  2019   2018 
Real estate loans:          
Secured by one-to-four family residences  $215,400   $221,602 
Secured by multi-family residences   10,973    10,241 
Construction   5,706    4,898 
Commercial real estate   21,961    22,492 
Home equity lines of credit   17,101    16,766 
Total real estate loans   271,141    275,999 
Commercial and industrial loans   7,296    7,290 
Other loans   47    50 
Total loans   278,484    283,339 
Net deferred loan origination fees   (37)   (37)
Less allowance for loan losses   (1,736)   (1,561)
Loans receivable, net  $276,711   $281,741 

 

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

 

As of September 30, 2019 and December 31, 2018, residential mortgage loans with a carrying value of $196.2 million and $201.9 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York under a blanket collateral agreement to secure the Company’s line of credit and term borrowings. The Company retains the servicing on conventional fixed-rate mortgage loans sold to Freddie Mac and receives a fee based on the principal balance outstanding. Loans serviced for others totaled $115.7 million and $123.8 million at September 30, 2019 and December 31, 2018, respectively. Loan servicing rights are recorded at fair value when loans are sold with servicing rights retained. The fair value of the mortgage servicing rights (“MSRs”) is determined using a method which utilizes servicing income, discount rates, and prepayment speeds relative to the Bank’s portfolio for MSRs and are amortized over the life of the loan. MSRs amounted to $722,000 and $812,000 at September 30, 2019 and December 31, 2018, respectively, and are included in other assets on the consolidated balance sheets.

 

Loan Origination / Risk Management

 

The Company’s lending policies and procedures are presented in Note 4 to the consolidated financial statements included in FSB Bancorp’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2019 and have not changed.

 

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

 

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

 

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

 

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

 

   As of September 30, 2019 
       Special             
(In thousands)  Pass   Mention   Substandard   Doubtful   Total 
Real estate loans:                         
Secured by one-to-four family residences  $212,434   $184   $2,782   $             -   $215,400 
Secured by multi-family residences   10,973    -    -    -    10,973 
Construction   5,706    -    -    -    5,706 
Commercial real estate   20,061    697    1,203    -    21,961 
Home equity lines of credit   16,931    -    170    -    17,101 
Total real estate loans   266,105    881    4,155    -    271,141 
Commercial & industrial loans   7,221    30    45    -    7,296 
Other loans   47    -    -    -    47 
Total loans  $273,373   $911   $4,200   $-   $278,484 

 

   As of December 31, 2018 
       Special             
(In thousands)  Pass   Mention   Substandard   Doubtful   Total 
Real estate loans:                         
Secured by one-to-four family residences  $218,222   $494   $2,886   $        -   $221,602 
Secured by multi-family residences   10,241    -    -    -    10,241 
Construction   4,898    -    -    -    4,898 
Commercial real estate   21,313    931    248    -    22,492 
Home equity lines of credit   16,565    -    201    -    16,766 
Total real estate loans   271,239    1,425    3,335    -    275,999 
Commercial & industrial loans   7,245    -    45    -    7,290 
Other loans   50    -    -    -    50 
Total loans  $278,534   $1,425   $3,380   $-   $283,339 

 

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Commercial real estate loans rated special mention decreased $234,000, or 25.1%, to $697,000 at September 30, 2019 from $931,000 at December 31, 2018 due to two commercial mortgage loans paying as agreed, partially offset by one loan newly categorized as special mention as a result of delinquency during the nine months ended September 30, 2019. Real estate loans secured by one-to four family residences rated special mention decreased $310,000, or 62.8%, to $184,000 at September 30, 2019 from $494,000 at December 31, 2018 due to a mortgage loan payoff, partially offset by the addition of one new loan newly categorized as special mention as a result of delinquency during the nine months ended September 30, 2019. Commercial and industrial loans rated special mention increased $30,000 to $30,000 at September 30, 2019 from $0 at December 31, 2018 due to the addition of two loans newly categorized as special mention as a result of delinquency during the nine months ended September 30, 2019. Commercial real estate loans rated substandard increased $955,000, or 385.1%, to $1.2 million at September 30, 2019 from $248,000 at December 31, 2018 due to one loan becoming downgraded to substandard as a result of delinquency and after an annual financial statement review of the borrower was performed during the nine months ended September 30, 2019.

 

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.

 

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Nonaccrual and Past Due Loans

 

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

 

Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date. An age analysis of past due loans, segregated by portfolio segment and class of loans, as of September 30, 2019 and December 31, 2018, are detailed in the following tables:

 

As of September 30, 2019
   30-59 Days   60-89 Days   90 Days   Total       Total Loans 
(In thousands)  Past Due   Past Due   and Over   Past Due   Current   Receivable 
Real estate loans:                              
Secured by one-to-four family residences  $332   $819   $55   $1,206   $214,194   $215,400 
Secured by multi-family residences   -    -    -    -    10,973    10,973 
Construction   -    -    -    -    5,706    5,706 
Commercial   -    1,653    248    1,901    20,060    21,961 
Home equity lines of credit   50    -    -    50    17,051    17,101 
Total real estate loans   382    2,472    303    3,157    267,984    271,141 
Commercial & industrial loans   30    -    45    75    7,221    7,296 
Other loans   -    -    -    -    47    47 
Total loans  $412   $2,472   $348   $3,232   $275,252   $278,484 

 

As of December 31, 2018
   30-59 Days   60-89 Days   90 Days   Total       Total Loans 
(In thousands)  Past Due   Past Due   and Over   Past Due   Current   Receivable 
Real estate loans:                              
Secured by one-to-four family residences  $227   $349   $55   $631   $220,971   $221,602 
Secured by multi-family residences   -    -    -    -    10,241    10,241 
Construction   -    -    -    -    4,898    4,898 
Commercial   248    -    -    248    22,244    22,492 
Home equity lines of credit   147    -    -    147    16,619    16,766 
Total real estate loans   622    349    55    1,026    274,973    275,999 
Commercial & industrial loans   -    -    45    45    7,245    7,290 
Other loans   -    -    -    -    50    50 
Total loans  $622   $349   $100   $1,071   $282,268   $283,339 

 

Real estate loans secured by one-to four family residences 30-59 days past due increased $105,000, or 46.3%, to $332,000 at September 30, 2019 from $227,000 at December 31, 2018 due to the delinquency of three mortgage loans, partially offset by two mortgage loans paying as agreed and one mortgage loan payoff during the nine months ended September 30, 2019. Home equity lines of credit 30-59 days past due decreased $97,000, or 66.0%, to $50,000 at September 30, 2019 from $147,000 at December 31, 2018 due to the one home equity line of credit paying as agreed, partially offset by the delinquency of one home equity line of credit during the nine months ended September 30, 2019. Commercial & industrial loans 30-59 days past due increased $30,000 to $30,000 at September 30, 2019 from $0 at December 31, 2018 due to the delinquency of two commercial & industrial loans during the nine months ended September 30, 2019. Real estate loans secured by one-to four family residences 60-89 days past due increased $470,000, or 134.7%, to $819,000 at September 30, 2019 from $349,000 at December 31, 2018 due to the delinquency of two mortgage loans, partially offset by two mortgage loans paying as agreed during the nine months ended September 30, 2019. Commercial loans 60-89 days past due increased $1.7 million to $1.7 million at September 30, 2019 from $0 at December 31, 2018 due to the delinquency of two commercial loans during the nine months ended September 30, 2019. Commercial loans 90 days and over increased $248,000 to $248,000 at September 30, 2019 from $0 at December 31, 2018 due to the delinquency of one commercial loan during the nine months ended September 30, 2019. This loan was previously classified as 30-59 days delinquent at December 31, 2018.

 

- 20 -

 

 

Nonaccrual loans, segregated by class of loan, were as follows:

 

   September 30,   December 31, 
(In thousands)  2019   2018 
Residential mortgage loans:          
Secured by one-to-four family residences  $55   $55 
    55    55 
Commercial loans:          
Real estate   944    - 
Commercial and industrial loans   45    45 
    989    45 
Consumer loans:          
Home equity lines of credit   -    - 
    -    - 
Total nonaccrual loans  $1,044   $100 

 

There were no loans that were past due 90 days or more and still accruing interest at September 30, 2019 and December 31, 2018. At September 30, 2019 and December 31, 2018, there were no troubled debt restructurings.

 

The following table summarizes impaired loans information by portfolio class as of and for the nine months ended September 30, 2019 and as of and for the year ended December 31, 2018:

 

          As of September 30, 2019  
(In thousands)   Recorded
Investment
    Unpaid
Principal
Balance
    Related
Allowance
    Average
Recorded
Investment
 
With an allowance recorded:                                
Commercial real estate   $ 944     $ 944     $ 180     $ 950  
Commercial & industrial loans     45       45       30       45  
Total loans   $ 989     $ 989     $ 210     $ 995  

 

            As of December 31, 2018    
(In thousands)     Recorded
Investment
      Unpaid
Principal
Balance
      Related
Allowance
      Average
Recorded
Investment
 
With an allowance recorded:                                
Commercial real estate   $      -     $       -     $      -     $      -  
Commercial & industrial loans           -       -       -       -  
Total loans   $       -     $      -     $ -     $ -  

 

Interest income recognized on impaired loans was immaterial at September 30, 2019.

 

- 21 -

 

 

 

Note 6: Allowance for Loan Losses and Foreclosed Real Estate

 

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

 

   For the three months ended September 30, 2019 
   Secured by   Secured by                         
  

one-to-four

   multi-family           Home equity             
   family residences   residences   Construction   Commercial   lines of credit   Commercial   Other/     
(In thousands)  real estate loans   real estate loans   real estate loans   real estate loans   real estate loans   & industrial   Unallocated   Total 
Allowance for loan losses:                                        
Beginning Balance  $805   $74   $20   $482   $105   $125   $50   $1,661 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Provisions (Credits)   20    8    9    (2)   (3)   (1)   44    75 
Ending balance  $825   $82   $29   $480   $102   $124   $94   $1,736 
Ending balance: related to loans individually evaluated for impairment   -    -    -    180    -    30    -    210 
Ending balance: related to loans collectively evaluated for impairment  $825   $82   $29   $300   $102   $94   $94   $1,526 
Loans receivables:                                        
Ending balance  $215,400   $10,973   $5,706   $21,961   $17,101   $7,296   $47   $278,484 
Ending balance: related to loans individually evaluated for impairment   -    -    -    944    -    45                 -    989 
Ending balance: related to loans collectively evaluated for impairment  $215,400   $10,973   $5,706   $21,017   $17,101   $7,251   $47   $277,495 

 

- 22 -

 

 

   For the three months ended September 30, 2018 
   Secured by   Secured by                         
   one-to-four   multi-family           Home equity             
   family residences   residences   Construction   Commercial   lines of credit   Commercial   Other/     
(In thousands)  real estate loans   real estate loans   real estate loans   real estate loans   real estate loans   & industrial   Unallocated   Total 
Allowance for loan losses:                                        
Beginning Balance  $803   $78   $33   $211   $103   $54   $129   $1,411 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Provisions (Credits)   85    -    (2)   53    1    19    (81)   75 
Ending balance  $888   $78   $31   $264   $104   $73   $48   $1,486 
Ending balance: related to loans individually evaluated for impairment   -    -    -    -    -    -    -    - 
Ending balance: related to loans collectively evaluated for impairment  $888   $78   $31   $264   $104   $73   $48   $1,486 
Loans receivables:                                        
Ending balance  $219,841   $10,337   $6,277   $21,650   $17,012   $5,399   $56   $280,572 
Ending balance: related to loans individually evaluated for impairment   -    -    -    -    -    -    -    - 
Ending balance: related to loans collectively evaluated for impairment  $219,841   $10,337   $6,277   $21,650   $17,012   $5,399   $56   $280,572 

 

   For the nine months ended September 30, 2019 
   Secured by   Secured by                         
   one-to-four   multi-family           Home equity             
   family residences   residences   Construction   Commercial   lines of credit   Commercial   Other/     
(In thousands)  real estate loans   real estate loans   real estate loans   real estate loans   real estate loans   & industrial   Unallocated   Total 
Allowance for loan losses:                                        
Beginning Balance  $866   $77   $24   $284   $103   $97   $110   $1,561 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Provisions (Credits)   (41)   5    5    196    (1)   27    (16)   175 
Ending balance  $825   $82   $29   $480   $102   $124   $94   $1,736 
Ending balance: related to loans individually evaluated for impairment   -    -    -    180    -    30    -    210 
Ending balance: related to loans collectively evaluated for impairment  $825   $82   $29   $300   $102   $94   $94   $1,526 
Loans receivables:                                        
Ending balance  $215,400   $10,973   $5,706   $21,961   $17,101   $7,296   $47   $278,484 
Ending balance: related to loans individually evaluated for impairment   -    -    -    944    -    45    -    989 
Ending balance: related to loans collectively evaluated for impairment  $215,400   $10,973   $5,706   $21,017   $17,101   $7,251   $47   $277,495 

 

- 23 -

 

 

    

For the nine months ended September 30, 2018

  
    Secured by    Secured by                               
    one-to-four    multi-family              Home equity                
    family residences     residences    Construction    Commercial    lines of credit    Commercial    Other/      
(In thousands)   real estate loans    real estate loans    real estate loans    real estate loans    real estate loans    & industrial    Unallocated    Total 
Allowance for loan losses:                                        
Beginning Balance  $816   $80   $54   $148   $107   $47   $9   $1,261 
Charge-offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Provisions (Credits)   72    (2)   (23)   116    (3)   26    39    225 
Ending balance  $888   $78   $31   $264   $104   $73   $48   $1,486 
Ending balance: related to loans individually evaluated for impairment   -    -    -    -    -    -    -    - 
Ending balance: related to loans collectively evaluated for impairment  $888   $78   $31   $264   $104   $73   $48   $1,486 
Loans receivables:                                        
Ending balance  $219,841   $10,337   $6,277   $21,650   $17,012   $5,399   $56   $280,572 
Ending balance: related to loans individually evaluated for impairment   -    -    -    -    -    -    -    - 
Ending balance: related to loans individually evaluated for impairment  $219,841   $10,337   $6,277   $21,650   $17,012   $5,399   $56   $280,572 

 

The Company had no foreclosed real estate at September 30, 2019 or December 31, 2018.

 

At September 30, 2019, the Company had one commercial real estate loan for $248,000 and one residential real estate loan for $55,000 in the process of foreclosure and at December 31, 2018, the Company had one residential real estate loan for $55,000 in the process of foreclosure.

 

Note 7: Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

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

 

- 24 -

 

 

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

 

   September 30, 2019 
(In thousands)  Level 1   Level 2   Level 3   Total Fair Value 
Available-for-sale portfolio                    
U.S. Government and agency obligations  $     -   $13,597   $       -   $13,597 
Mortgage-backed securities – residential   -    4,403    -    4,403 
Total available-for-sale securities  $-   $18,000   $-   $18,000 

 

   December 31, 2018 
(In thousands)  Level 1   Level 2   Level 3   Total Fair Value 
Available-for-sale portfolio                           
U.S. Government and agency obligations  $-   $12,455   $        -   $12,455 
Mortgage-backed securities – residential   -    5,876    -    5,876 
Total available-for-sale securities  $-   $18,331   $-   $18,331 

 

The Company had the following assets measured at fair value on a nonrecurring basis as of September 30, 2019 and December 31, 2018:

 

   September 30, 2019 
(In thousands)  Level 1   Level 2   Level 3   Total Fair Value 
Impaired loans  $        -   $-   $779   $779 
Loans held for sale  $-   $3,690   $-   $3,690 
Total loans  $-   $3,690   $779   $4,469 

 

   December 31, 2018 
(In thousands)  Level 1   Level 2   Level 3   Total Fair Value 
Impaired loans  $      -   $-   $-   $     - 
Loans held for sale  $-   $2,133   $       -   $2,133 
Total loans  $-   $2,133   $-   $2,133 

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value at the indicated date:

 

   Quantitative Information about Level 3 Fair Value Measurements
At September 30, 2019  Valuation
Techniques
  Unobservable Input  Range
(Weighted Avg.)
Impaired loans  Appraisal of collateral  Appraisal Adjustments  23.6% - 28.9% (27.3%)
   (Sales Approach)  Costs to Sell  6.1% - 50.7% (19.0%)

 

There have been no transfers of assets into or out of any fair value measurement level during the nine months ended September 30, 2019.

 

Required disclosures include fair value information of 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 derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

 

- 25 -

 

 

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

 

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

 

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end. FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the financial assets and liabilities were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

 

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

 

Cash, Due from Banks, and Interest Earning Demand Deposits

 

The carrying amounts of these assets approximate their fair values.

 

Investment Securities

 

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

 

Investment in Restricted Stock

 

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

 

Loans

 

The fair values of loans, held in portfolio are estimated using discounted cash flow analyses. The discount rate considers a market participant’s cost of funds, liquidity premiums, capital charges, servicing charges, and expectations of future rate movements (for variable rate 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, and adjusted for potential defaulted loans.

 

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 consolidated financial statements.

 

- 26 -

 

 

Impaired Loans

 

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy. The Company had no unsecured impaired loans as of September 30, 2019 and December 31, 2018.

 

Accrued Interest Receivable and Payable

 

The carrying amount of accrued interest receivable and payable approximates fair value.

 

Deposits

 

The fair values disclosed for demand deposits (e.g., NOW accounts, non-interest checking, regular savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts), resulting in a Level 1 classification. The carrying amounts for variable-rate certificates of deposit approximate their fair values at the reporting date, resulting in a Level 1 classification. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits, resulting in a Level 2 classification.

 

Borrowings

 

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

 

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

 

       September 30, 2019   December 31, 2018 
   Fair Value   Carrying   Estimated   Carrying   Estimated 
(In thousands)  Hierarchy   Amounts   Fair Values   Amounts   Fair Values 
Financial assets:                         
Cash and due from banks   1   $1,485   $1,485   $1,581   $1,581 
Interest earning demand deposits   1    3,731    3,731    4,710    4,710 
Securities - available-for-sale   2    18,000    18,000    18,331    18,331 
Securities - held-to-maturity   2    6,011    6,137    6,052    6,030 
Investment in restricted stock   2    2,961    2,961    3,637    3,637 
Loans held for sale   2    3,690    3,690    2,133    2,133 
Loans, net   3    276,711    287,796    281,741    280,173 
Accrued interest receivable   1    912    912    876    876 
                          
Financial liabilities:                         
Demand deposits, savings, NOW and MMDA   1    96,799    96,799    98,681    98,681 
Time deposits   2    136,084    136,367    123,934    124,182 
Borrowings   2    56,262    57,084    71,826    71,086 
Accrued interest payable   1    119    119    168    168 

 

- 27 -

 

 

Note 8: Accumulated Other Comprehensive Loss

 

Changes in the components of accumulated other comprehensive loss, net of tax, for the periods indicated are summarized in the table below.

 

   For the three months ended September 30, 2019 
(In thousands)  Unrealized Gains (Losses) on
Available-for-Sale Securities
   Total 
Beginning balance  $(41)  $(41)
Other comprehensive income   21    21 
Ending balance  $(20)  $(20)

 

   For the three months ended September 30, 2018 
(In thousands)  Unrealized Losses on Available-
for-Sale Securities
   Total 
Beginning balance  $(262)  $(262)
Other comprehensive loss   (20)   (20)
Ending balance  $(282)  $(282)

 

 

   For the nine months ended September 30, 2019 
(In thousands)  Unrealized Gains (Losses) on
Available-for-Sale Securities
   Total 
Beginning balance  $(183)  $(183)
Other comprehensive income   163    163 
Ending balance  $(20)  $(20)

 

 

   For the nine months ended September 30, 2018 
(In thousands)  Unrealized Losses on Available-
for-Sale Securities
   Total 
Beginning balance  $(165)  $(165)
Other comprehensive loss   (117)   (117)
Ending balance  $(282)  $(282)

 

- 28 -

 

 

Note 9: Other Income

 

The Company has included the following table regarding the Company’s other income for the periods presented. All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Other Income. The following tables present the Company’s sources of Other Income for the three and nine months ended September 30, 2019 and 2018. Items outside the scope of ASC 606 are noted as such.

 

 

   For the three   For the three 
   months ended   months ended 
(In thousands)  September 30,
2019
   September 30,
2018
 
Service fees          
Deposit related fees  $18   $18 
Insufficient funds fee   20    20 
Total service fees   38    38 
Fee income          
Securities commission income   2    9 
Insurance commission income   2    27 
Total insurance and securities commission income   4    36 
Card income          
Debit card interchange fee income   38    37 
ATM fees   8    9 
Total card income   46    46 
Mortgage fee income and realized gain on sales of loans*          
Residential mortgage loan origination fees   66    94 
Commercial loan fees   33    49 
Loan servicing income   74    75 
Realized gain on sales of residential mortgage loans   278    461 
Total mortgage fee income and realized gain on sales of loans   451    679 
Bank owned life insurance   15    16 
Other miscellaneous income   -    1 
Total non-interest income  $554   $816 

*Outside scope of ASC 606

 

- 29 -

 

 

   For the nine
months ended
   For the nine
months ended
 
(In thousands)  September 30,
2019
   September 30,
2018
 
Service fees          
Deposit related fees  $49   $45 
Insufficient funds fee   55    62 
Total service fees   104    107 
Fee income          
Securities commission income   6    36 
Insurance commission income   8    73 
Total insurance and securities commission income   14    109 
Card income          
Debit card interchange fee income   103    108 
ATM fees   23    24 
Total card income   126    132 
Mortgage fee income and realized gain on sales of loans*          
Residential mortgage loan origination fees   156    262 
Commercial loan fees   62    81 
Loan servicing income   225    245 
Realized gain on sales of residential mortgage loans   620    1,051 
Realized gain on sale of SBA loan   -    47 
Total mortgage fee income and realized gain on sales of loans   1,063    1,686 
Bank owned life insurance   45    46 
Other miscellaneous income   -    19 
Total non-interest income  $1,352   $2,099 

*Outside scope of ASC 606

 

The Company recognizes revenue as it is earned. The following is a discussion of key revenues within the scope of the new revenue guidance:

 

  · Service fees – Revenue from fees on deposit accounts is earned through the presentation of an individual item for processing for insufficient funds fees or customer initiated activities or passage of time for deposit related fees.
     
  · Fee income – Fee income is earned through commissions on insurance and securities sales and earned at a point in time.
     
  · Card income – Card income consists of interchange fees from consumer debit card networks and other card related services. Interchange rates are set by the card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.
     
  · Mortgage fee income and realized gain on sales of loans – Revenue from mortgage fee income and realized gain on sales of loans is earned through the origination of residential and commercial mortgage loans and the sales of one-to-four family residential mortgage loans and government guaranteed portions of SBA loans and is recognized as transactions occur.

 

- 30 -

 

 

Note 10: Stock-Based Compensation

 

A summary of the Company’s stock option activity and related information for its option plans for the nine months ended September 30, 2019 and 2018 is as follows:

 

   For the nine months ended
September 30, 2019
 
   Options   Weighted Average
Exercise Price Per
Share
 
Outstanding at beginning of year   172,080   $16.82 
Grants   -    - 
Exercised   -    - 
Outstanding at quarter end   172,080   $16.82 
           
Exercisable at quarter end   34,416   $16.82 

 

  

For the nine months ended
September 30, 2018

 
   Options  

Weighted Average
Exercise Price Per
Share

 
Outstanding at beginning of year   152,080   $16.72 
Grants   20,000    17.58 
Exercised   -    - 
Outstanding at quarter end   172,080   $16.82 
           
Exercisable at quarter 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 2023. Vesting will automatically accelerate in the event of a participant’s death, disability, or involuntary termination following a change in control.

 

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 $76,000 for the three months ended September 30, 2019 and $228,000 for the nine months ended September 30, 2019. The Company recorded compensation expense in the amount of $79,000 for the three months ended September 30, 2018 and $231,000 for the nine months ended September 30, 2018.

 

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Note 11: Leases

 

The Company occupies certain banking and mortgage origination offices under noncancelable operating lease agreements which were not reflected on the consolidated balance sheet at December 31, 2018.  Upon adoption of ASC Topic 842, Leases, on January 1, 2019, the Company recorded an asset of $2.3 million and a corresponding liability in the amount of $2.6 million on the consolidated balance sheets, as a result of recognizing operating lease right-of-use assets and operating lease liabilities on the consolidated balance sheets. The Company elected to adopt the transition relief under ASC Topic 842 using the modified retrospective transition method. All lease agreements are accounted for as operating leases. The Company has no unamortized initial direct costs related to the establishment of these lease agreements as of January 1, 2019. We have elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

 

Our leases have remaining lease terms that vary from less than one year up to 12 years, some of which include options to extend the leases for various renewal periods. All options to renew are included in the current lease term when we believe it is reasonably certain that the renewal options will be exercised.

 

The components of the lease expense are as follows:

 

   For the three months 
   ended September 30, 
(In thousands)  2019 
Operating lease cost  $97 
Short-term lease cost   17 
Total  $114 

 

   For the nine months 
   ended September 30, 
(In thousands)  2019 
Operating lease cost  $291 
Short-term lease cost   52 
Total  $343 

 

Supplemental cash flow information related to leases was as follows:

   For the nine months 
   ended September 30, 
(In thousands)  2019 
Cash paid for amount included in the measurement of operating lease liabilities:     
Operating cash flows from operating leases  $291 

 

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Supplemental consolidated balance sheet information related to leases was as follows:

   For the nine months 
   ended September 30, 
(In thousands, except lease term and discount rate)  2019 
Operating Leases     
Operating lease right-of-use assets  $2,199 
Operating lease liabilities  $2,401 
      
Weighted Average Remaining Lease Term     
Operating Leases   8.8 years 
      
Weighted Average Discount Rate     
Operating Leases   3.52%

 

Maturities of operating lease liabilities were as follows:

 

Year Ending December 31,    
(In thousands)    
2019  $79 
2020   318 
2021   313 
2022   252 
2023   194 
Thereafter   1,245 
Total minimum lease payments  $2,401 

 

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

 

Statement Regarding Forward-Looking Statements

 

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

  ·Credit quality and the effect of credit quality on the adequacy of our allowance for loan losses;
 ·Deterioration in financial markets that may result in impairment charges relating to our securities portfolio;
 ·Competition in our primary market areas;
 ·Changes in interest rates and national or regional economic conditions;
 ·Changes in monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;
 ·Significant government regulations, legislation and potential changes thereto;
 ·A reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;
 ·Increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;
 ·Limitations on our ability to expand consumer product and service offerings due to potential stricter consumer protection laws and regulations; and
 ·Other risks described herein and in the other reports and statements we file with the Securities and Exchange Commission (the “SEC”).

 

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

 

Overview

 

The following discussion reviews the Company's financial condition at September 30, 2019 and at December 31, 2018 and the results of operations for the three and nine month periods ended September 30, 2019 and 2018. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any other period.

 

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 borrowings growth into higher-yielding assets, primarily residential and commercial loan products in 2019. 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.

 

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

 

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Critical Accounting Policies

 

Critical accounting policies are defined as those that involve significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. The most significant accounting policies followed by the Company are presented in FSB Bancorp's Annual Report on Form 10-K filed with the SEC on March 27, 2019. These policies, along with the disclosures presented in the other consolidated financial statement notes filed with the SEC and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. We believe that the most critical accounting policies upon which our financial condition and results of operations depend, involve the most complex subjective decisions or assessments including our policies with respect to our allowance for loan losses, deferred tax assets and the estimation of fair values for accounting and disclosure purposes. These areas could be the most subject to revision as new information becomes available. There have been no significant changes in application of critical accounting policies during the nine months ended September 30, 2019.

 

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 consolidated balance sheet date. The amount of the allowance is based on significant estimates, and the ultimate losses may vary from such estimates as more information becomes available or conditions change. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions used and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

 

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

 

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

 

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

 

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

 

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

 

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

 

Comparison of Financial Condition at September 30, 2019 and at December 31, 2018

 

Total Assets. Total assets decreased $3.5 million, or 1.1%, to $324.8 million at September 30, 2019 from $328.3 million at December 31, 2018, primarily due to decreases in net loans receivable, cash and cash equivalents, investment in restricted stock, and securities available-for-sale, partially offset by an increase in right of use asset.

 

Net loans receivable decreased $5.0 million, or 1.8%, to $276.7 million at September 30, 2019 from $281.7 million at December 31, 2018. One-to-four family real estate loans decreased $6.2 million, or 2.8%, to $215.4 million at September 30, 2019 from $221.6 million at December 31, 2018 due to amortization and maturities. The Bank will continue to focus its efforts on loan production as we look to primarily grow our residential mortgage and commercial loan portfolios at a measured pace while still maintaining our strong credit quality and strict underwriting standards. The Bank originated $43.3 million of residential mortgage loans for the nine months ended September 30, 2019 compared to $70.7 million for the nine months ended September 30, 2018. The Bank sold $27.0 million of mortgage loans in the secondary market during the nine months ended September 30, 2019 compared to $44.4 million during the nine months ended September 30, 2018 as a balance sheet management strategy to reduce interest-rate risk. The Bank sold these loans at a gain of $620,000 which was recorded in other income for the nine months ended September 30, 2019 compared to $1.1 million for the nine months ended September 30, 2018. At September 30, 2019, the Bank was servicing $115.7 million in residential mortgage loans sold to Freddie Mac and will realize servicing income on these loans as long as they remain outstanding. At September 30, 2019, the Bank had $3.7 million in loans held for sale, comprised of one- to four-family residential fixed rate conventional, FHA, and USDA mortgage loans originated and closed by the Bank in the third quarter of 2019 that have been committed for sale in the secondary market, and will be delivered and sold in the fourth quarter of 2019. Mortgage servicing rights decreased $91,000, or 11.1%, to $722,000 at September 30, 2019 compared to $812,000 at December 31, 2018, and are included in other assets on the consolidated balance sheets due to an increased number of loan payoffs in addition to a lower volume of loans sold with servicing retained.

 

Cash and cash equivalents decreased by $1.1 million, or 17.1%, to $5.2 million at September 30, 2019 from $6.3 million at December 31, 2018 due to funding residential and commercial loan originations during the first nine months of 2019.

 

Investment in restricted stock decreased by $676,000, or 18.6%, to $3.0 million at September 30, 2019 from $3.6 million at December 31, 2018 due to decreased borrowings from the Federal Home Loan Bank of New York.

 

Securities available-for-sale decreased by $331,000, or 1.8%, to $18.0 million at September 30, 2019 from $18.3 million at December 31, 2018. The decrease was due to principal repayments and calls of $8.5 million and amortization of $43,000, partially offset by purchases of $8.0 million in new securities of U.S. Government and agency obligations and an increase in the fair market value of available-for-sale securities of $206,000 due to the decrease in market interest rates during the first nine months of 2019.

 

Operating lease right of use asset increased by $2.2 million at September 30, 2019 from $0 at December 31, 2018 due to the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) on January 1, 2019 which requires recognition of operating lease liabilities and operating lease right of use assets associated with lease agreements.

 

Deposits and Borrowings. Total deposits increased $10.3 million, or 4.6%, to $232.9 million at September 30, 2019 from $222.6 million at December 31, 2018. Certificates of deposit (including individual retirement accounts) increased $12.2 million, or 9.8%, to $136.1 million at September 30, 2019 from $123.9 million at December 31, 2018 due to rate promotions. Transaction accounts decreased $1.9 million, or 1.9%, to $96.8 million at September 30, 2019 from $98.7 million at December 31, 2018. Total borrowings from the Federal Home Loan Bank of New York decreased $15.6 million, or 21.7%, to $56.3 million at September 30, 2019 from $71.8 million at December 31, 2018. Long-term borrowings decreased $3.8 million, or 6.6%, to $54.3 million at September 30, 2019 from $58.1 million at December 31, 2018 due to $11.3 million in principal repayments on our amortizing advances and maturities partially offset by $7.5 million in new advances. The Company decreased its short-term borrowings by $11.8 million, or 85.5%, to $2.0 million at September 30, 2019 compared to $13.8 million at December 31, 2018 due to excess cash as a result of an increase in deposits.

 

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Stockholders’ Equity. Stockholders’ equity increased $404,000, or 1.3%, to $31.9 million at September 30, 2019 from $31.5 million at December 31, 2018. The increase was primarily due to a $228,000 increase in additional paid in capital as a result of stock based compensation, an increase of $50,000 resulting from the release of ESOP shares from the suspense account, and a decrease of $163,000 in accumulated other comprehensive loss due to an increase in the fair market value of our available-for-sale securities during the nine months ended September 30, 2019, partially offset by a $(37,000) net loss.

 

Comparison of Operating Results for the Three Months Ended September 30, 2019 and 2018

 

General. Net income increased $52,000 to $2,000 for the quarter ended September 30, 2019 from a loss of $(50,000) for the quarter ended September 30, 2018. The quarter-over-quarter increase was attributable to a decrease in other expense of $448,000, partially offset by decreases in other income of $262,000 and net interest income of $120,000, and an increase in provision for income taxes of $14,000.

 

Interest and Dividend Income. Total interest and dividend income increased $88,000, or 2.8%, to $3.3 million for the quarter ended September 30, 2019 from $3.2 million for the quarter ended September 30, 2018. The increase resulted from a $3.2 million increase quarter over quarter in average interest-earning assets, primarily Fed Funds sold, and a seven basis point increase in the average yield earned on interest-earning assets from 4.10% for the three months ended September 30, 2018 to 4.17% for the three months ended September 30, 2019 due to rising interest rates.

 

Interest income on loans increased $56,000, or 1.9%, to $3.1 million for the quarter ended September 30, 2019 from $3.0 million for the quarter ended September 30, 2018, reflecting a $137,000 increase in the average balance of loans to $281.6 million for the three months ended September 30, 2019 from $281.5 million for the three months ended September 30, 2018, in addition to a seven basis point increase in the average yield earned on loans for the three months ended September 30, 2019 as compared to the same period in 2018. The average yield on loans increased to 4.37% for the three months ended September 30, 2019 from 4.30% for the three months ended September 30, 2018, reflecting increases in market interest rates on new loan products, primarily residential mortgages, commercial mortgages, and home equity lines of credit, in addition to upward repricing for adjustable rate loans.

 

Interest income on taxable investment securities increased $13,000, or 12.4%, to $118,000 for the three months ended September 30, 2019 from $105,000 for the three months ended September 30, 2018. The average balance of taxable investment securities increased $2.0 million, or 14.0%, to $16.2 million for the three months ended September 30, 2019 from $14.2 million for the three months ended September 30, 2018. The average yield on taxable investment securities decreased four basis points to 2.92% during the quarter ended September 30, 2019 as compared to 2.96% for the quarter ended September 30, 2018 as new purchases of moderately lower-yielding investment securities replaced calls of higher-yielding investment securities. Interest income on mortgage-backed securities decreased $2,000, or 7.1%, to $26,000 for the three months ended September 30, 2019 from $28,000 for the three months ended September 30, 2018. The average balance of mortgage-backed securities decreased $2.0 million, or 27.7%, to $5.2 million for the three months ended September 30, 2019 from $7.1 million for the three months ended September 30, 2018. The average yield on mortgage-backed securities increased 39 basis points to 1.98% for the three months ended September 30, 2019 from 1.59% for the three months ended September 30, 2018 as a result of slower prepayment speeds on the pools of mortgage-backed securities held in portfolio during the three months ended September 30, 2019 compared to the three months ended September 30, 2018. A portion of the cash flow from these investment and mortgage-backed securities was redeployed to fund loan originations. Interest income on tax-exempt state and municipal securities increased $1,000, or 3.9%, to $27,000 for the three months ended September 30, 2019 from $26,000 for the three months ended September 30, 2018. The average tax equivalent yield on state and municipal securities increased 11 basis points to 2.39% for the three months ended September 30, 2019 from 2.28% for the three months ended September 30, 2018, as lower yielding state and municipal securities matured and were replaced by modestly higher yielding state and municipal securities. The average balance of state and municipal securities decreased by $296,000, or 5.0%, from $5.9 million for the three months ended September 30, 2018 to $5.6 million for the three months ended September 30, 2019. Interest income on Fed Funds sold increased $20,000, or 142.9%, to $34,000 for the three months ended September 30, 2019 from $14,000 for the three months ended September 30, 2018. The increase in Fed Funds sold was attributable to an increase in the average yield on Fed Funds sold of 41 basis points to 2.00% during the quarter ended September 30, 2019 as compared to 1.59% for the quarter ended September 30, 2018 due to the Federal Reserve’s increase of the Fed funds rate in addition to an increase in the average balance of Fed Funds sold of $3.3 million, or 96.0%, to $6.8 million for the three months ended September 30, 2019 from $3.5 million for the three months ended September 30, 2018.

 

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Interest Expense. Total interest expense increased $208,000, or 19.6%, to $1.3 million for the quarter ended September 30, 2019 from $1.1 million for the quarter ended September 30, 2018. Total interest expense reflected an increase in interest expense on deposits of $235,000, partially offset by a decrease in interest expense on borrowings of $27,000 when comparing the quarters ended September 30, 2019 and 2018. The total interest expense reflected an increase in the average cost of interest-bearing liabilities of 29 basis points from 1.53% for the three months ended September 30, 2018 to 1.82% for the three months ended September 30, 2019, in addition to an increase of $567,000 in average interest-bearing liabilities.

 

Interest expense on deposits increased $235,000, or 34.1%, to $924,000 for the three months ended September 30, 2019 from $689,000 for the three months ended September 30, 2018. The average cost of deposits increased to 1.66% for the three months ended September 30, 2019 from 1.31% for the three months ended September 30, 2018, primarily reflecting increases in the average cost of our higher rate promotional certificates of deposit and savings accounts offered during the third quarter of 2019. The average balance of deposits increased $11.1 million, or 5.3%, from $211.1 million for the three months ended September 30, 2018 to $222.2 million for the three months ended September 30, 2019 due to higher rate promotional certificates of deposit offered in the third quarter of 2019. The average cost of certificates of deposit (including individual retirement accounts) increased to 2.29% for the three months ended September 30, 2019 from 1.77% for the three months ended September 30, 2018, in addition to an increase in the average balance of these accounts by $16.9 million to $134.1 million for the three months ended September 30, 2019 from $117.2 million for the three months ended September 30, 2018. The average cost of transaction accounts, our core non-time deposit accounts, decreased by three basis points to 0.63% for the three months ended September 30, 2019 from 0.66% for the three months ended September 30, 2018 primarily due to a decrease in the average balance of transaction accounts of $4.0 million to $100.3 million for the three months ended September 30, 2019 from $104.3 million for the three months ended September 30, 2018.

 

At September 30, 2019, we had $25.7 million of certificates of deposit, including individual retirement accounts, scheduled to mature throughout the remainder of 2019. Based on current market interest rates, we expect that the cost of these deposits upon maturity will be at a slightly lower cost, if renewed, than their current contractual rates.

 

Interest expense on borrowings decreased $27,000, or 7.3%, from $371,000 for the quarter ended September 30, 2018 to $344,000 for the quarter ended September 30, 2019, due to a $10.5 million decrease in our average balance of borrowings with the Federal Home Loan Bank from $67.0 million for the three months ended September 30, 2018 to $56.5 million for the three months ended September 30, 2019, partially offset by an increase in the average cost of these funds from 2.22% for the three months ended September 30, 2018 to 2.44% for the three months ended September 30, 2019 as a result of an increase in market interest rates.

 

Net Interest Income. Net interest income decreased $120,000, or 5.6%, to $2.0 million for the quarter ended September 30, 2019 as compared to $2.1 million for the quarter ended September 30, 2018. Net interest income decreased primarily due to an increase in the average balance of our interest bearing liabilities, specifically certificates of deposit in addition to increases in the average cost of our certificates of deposit and savings accounts, partially offset by a higher average balance and average yield on our interest-earning assets when comparing the quarter ended September 30, 2019 to the same period in 2018. Our net interest rate spread decreased 23 basis points to 2.35% for the quarter ended September 30, 2019 from 2.58% for the quarter ended September 30, 2018. There was a 29 basis point increase in the average cost of our interest-bearing liabilities from 1.53% for the three months ended September 30, 2018 to 1.82% for the three months ended September 30, 2019, partially offset by a seven basis point increase in the average yield on our interest-earning assets to 4.17% for the three months ended September 30, 2019 from 4.10% for the three months ended September 30, 2018. Our net interest margin decreased 18 basis points to 2.56% during the three months ended September 30, 2019 from 2.74% during the three months ended September 30, 2018.

 

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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 consolidated balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan, and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for loan losses on at least a quarterly basis and make provisions for loan losses in order to maintain the allowance.

 

Based on our evaluation of the above factors, we recorded a $75,000 provision for loan losses for the quarters ended September 30, 2019 and 2018. The allowance for loan losses was $1.7 million, or 0.62% of net loans outstanding at September 30, 2019 compared to $1.5 million, or 0.53% of net loans outstanding, at September 30, 2018. The allowance for loan losses was $1.6 million, or 0.55% of net loans outstanding at December 31, 2018.

 

Other Income. Other income decreased by $262,000, or 32.1%, to $554,000 for the three months ended September 30, 2019 compared to $816,000 for the three months ended September 30, 2018. The decrease in other income was primarily attributable to decreases in realized gains on sales of loans of $183,000, mortgage fee income of $45,000, and fee income of $32,000. Realized gains on sales of loans decreased $183,000, or 39.7%, to $278,000 for the three months ended September 30, 2019 from $461,000 for the three months ended September 30, 2018. The decrease in realized gains on sales of loans was primarily due to lower volume of residential mortgage loans sold in the third quarter of 2019 compared to the third quarter of 2018. Mortgage fee income decreased by $45,000, or 20.6%, to $173,000 for the three months ended September 30, 2019 compared to $218,000 for the three months ended September 30, 2018 due to lower volume of residential mortgage loans originated in the third quarter of 2019 compared to the third quarter of 2018. Fee income from Fairport Wealth Management decreased by $32,000, or 88.9%, to $4,000 for the three months ended September 30, 2019 from $36,000 for the three months ended September 30, 2018 due to a decrease in non-deposit investment product sales in the third quarter of 2019 compared to the third quarter of 2018.

 

Other Expense. Other expense decreased $448,000, or 15.3%, to $2.5 million for the three months ended September 30, 2019 from $2.9 million for the three months ended September 30, 2018. The decrease in other expense was primarily due to decreases in mortgage fees and taxes of $154,000, salaries and employee benefits of $117,000, other miscellaneous expenses of $61,000, audits and taxes of $51,000, and FDIC premium expense of $33,000. Mortgage fees and taxes decreased $154,000, or 67.3%, to $75,000 for the three months ended September 30, 2019 from $229,000 for the three months ended September 30, 2018 due to a $159,000 change in accounting estimate to adjust the outstanding balance of previously recorded special additional mortgage recording tax credits in 2018. Salaries and employee benefits decreased $117,000, or 6.8%, to $1.6 million for the three months ended September 30, 2019 from $1.7 million for the three months ended September 30, 2018 as a result of a decrease in commission expense due to lower volume of residential loan originations in the third quarter of 2019 compared to the third quarter of 2018. Other miscellaneous expenses decreased $61,000, or 27.9%, to $158,000 for the three months ended September 30, 2019 from $219,000 for the three months ended September 30, 2018 as a result of an increase in legal expenses associated with the Company’s restatement of its 2017 audited consolidated financial statements and its first quarter 2018 unaudited consolidated financial statements as a result of the Company incorrectly claiming a tax credit for residential mortgages on properties located in Erie County in 2018. Audits and taxes decreased $51,000, or 72.9%, to $19,000 for the three months ended September 30, 2019 from $70,000 for the three months ended September 30, 2018 as a result of increased expenses related to the same prior year restatement. FDIC premium expense decreased $33,000, or 106.5%, to a benefit of $(2,000) for the three months ended September 30, 2019 from $31,000 for the three months ended September 30, 2018 as a result of the application of the Bank’s Small Bank Assessment Credits (“credits”) due to the fact that the Deposit Insurance Fund reserve ratio exceeded the 1.38 percent level which allowed the credits to be applied to the Bank’s payment for the second quarter assessment period of 2019 payable in the third quarter of 2019.

 

Income Taxes. Income tax expense increased $14,000, or 155.6%, to $5,000 for the three months ended September 30, 2019 from a benefit of $(9,000) for the three months ended September 30, 2018. The increase in income tax expense for the three months ended September 30, 2019 as compared to the same period in 2018 was due to higher income before income taxes. The effective tax rate was 71.4% for the three months ended September 30, 2019 compared to 15.3% for the three months ended September 30, 2018. The increase in effective tax rate was due to lower income for the three months ended September 30, 2019 and similar amounts of permanent tax differences compared to the three months ended September 30, 2018.