Description

FSB Bancorp ("FSB" or "Company") is a bank holding company that operates primarily through Fairpoint Savings Bank ("Savings"), a New York bank.  In July 2016, FSB completed its second step conversion from a mutual holding company structure to a stock holding company structure.  As part of this transaction, the Company raised ~$10 million in an IPO at $10.00 per share.  Its shares currently trade at $16.70, which is 1.02x tangible book value.  I think Savings is too small to generate an adequate return on equity, so FSB's board may look to sell the Company on or soon after the 3 year anniversary of the IPO.  To wit, the Company entered into change in control agreements with several officers in late 2017 and early 2018.  

Monroe County (where Savings primarily operates) has reasonably concentrated deposit market share.  The top 6 banks (M&T, JP Morgan, KeyCorp, Citizens, BAML and Canandaigua National) have ~90% share.  Then the rest is split between Greater Rochester Bancorp, Financial Institutions Inc, FSB and Tompkins Financial.  FSB's <2% share could be attractive to one of the smaller players at a small deposit premium.

At quarter end, Savings had $327 million of assets, of which $220 million were single family real estate mortgages.  Savings originates its real estate loans in its handful of branches and loan origination offices.  Typically Savings holds on balance sheet loans that are either adjustable rate or have fixed rates with terms of less than 15 years.  It typically sells the fixed rate 30 year mortgages that it originates.  Savings is also growing its commercial loan portfolio, which includes commercial real estate, multi-family and commercial and industrial loans.  Savings' interest-earning assets had an average yield of 4.1%.

At quarter end, Savings had $296 million of liabilities, of which $219 million were deposits ($117 million were time deposits and $103 million were demand deposits, savings, NOW and MMDA accounts).  Savings interest-bearing liabilities had an average cost of 1.5%.

Savings generates a 2.7% NIM.  However, it is subscale and requires a 90%+ efficiency ratio.  It is well capitalized with a CET1 ratio of 15% and a total RBC ratio of 16%.  With its cost structure and underleveraged balance sheet, Savings generates a low single digit return on equity.  But, at this price, I think it's probably hard to lose money and an acquisition would likely include a reasonable control premium.

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This is not investing advice.

Catalyst

time, M&A