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.

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

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.

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.

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
			Unpaid				Average
	Recorded		Principal		Related		Recorded
(In thousands)	Investment		Balance		Allowance		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

Unpaid

Average

Recorded

Principal

Recorded

(In thousands)

Investment

Balance

Allowance

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.