FSB Bancorp, Inc. (Form: 10-K, Received: 03/30/2020 15:03:53)

FSB BANCORP, INC.

/s/ Kevin D. Maroney

Kevin D. Maroney

President and Chief Executive Officer

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2019

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

For the transition period from to

Commission File Number: 001-37831

FSB BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	81-2509654
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

45 South Main Street, Fairport, New York	14450
(Address of principal executive offices)	(Zip Code)

(585) 381-4040

(Registrant’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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and 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 Act). Yes ¨ No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the closing price of the common stock on June 30, 2019, was $32.4 million.

As of March 27, 2020, there were 1,940,661 outstanding shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

2019 Annual Report to Stockholders (Part II)

TABLE OF CONTENTS

ITEM 1.	BUSINESS	1

ITEM 1A.	RISK FACTORS	30

ITEM 1B.	UNRESOLVED STAFF COMMENTS	30

ITEM 2.	PROPERTIES	31

ITEM 3.	LEGAL PROCEEDINGS	31

ITEM 4.	MINE SAFETY DISCLOSURES	31

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	32

ITEM 6.	SELECTED FINANCIAL DATA	33

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	33

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	33

ITEM 9A.	CONTROLS AND PROCEDURES	33

ITEM 9B.	OTHER INFORMATION	34

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	34

ITEM 11.	EXECUTIVE COMPENSATION	36

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	43

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	45

ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	45

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	46

ITEM 16.	FORM 10-K SUMMARY	47

PART I

ITEM 1.

BUSINESS

Forward Looking Statements

This Annual Report on Form 10-K contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “would,” “should,” “could” or “may,” and words of similar meaning. These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of FSB Bancorp, Inc.’s management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

general economic conditions, either nationally or in our market areas, that are worse than expected;

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

our ability to access cost-effective funding;

fluctuations in real estate values and both residential and commercial real estate market conditions;

demand for loans and deposits in our market area;

our ability to implement and change our business strategies;

competition among depository and other financial institutions;

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

adverse changes in the securities or secondary mortgage markets;

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;

the impact of the Dodd-Frank Act and the implementing regulations;

changes in the quality or composition of our loan or investment portfolios;

technological changes that may be more difficult or expensive than expected;

the inability of third party providers to perform as expected;

our ability to manage market risk, credit risk and operational risk in the current economic environment;

our ability to enter new markets successfully and capitalize on growth opportunities;

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

changes in consumer spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

our ability to retain key employees;

our compensation expense associated with equity allocated or awarded to our employees;

changes in the financial condition, results of operations or future prospects of issuers of securities that we own;

the effect of the outbreak of the Coronavirus on our business and the local economy;

the actual results of our proposed merger with and into Evans Bancorp, Inc. (“Evans”) could vary materially as a result of a number of factors, including the possibility that various closing conditions for the transaction may not be satisfied or waived, and the merger agreement could be terminated under certain circumstances;

the potential impact of the announcement of the proposed merger with and into Evans on relationships with third parties, including customers, employees and competitors;

business disruption following the proposed merger with and into Evans;

difficulties and delays in integrating FSB Bancorp and Evans businesses or fully realizing cost savings and other benefits; and

delays in closing the merger with and into Evans.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

FSB Bancorp, Inc.

FSB Bancorp, Inc. (“FSB Bancorp” or the “Company”) is a Maryland corporation. The Company owns all of the outstanding shares of common stock of Fairport Savings Bank (the “Bank”), its banking subsidiary. At December 31, 2019, the Company had consolidated assets of $323.3 million, total deposits of $235.6 million, and stockholders’ equity of $31.5 million. FSB Bancorp’s common stock is traded on the Nasdaq Capital Market under the symbol “FSBC.” The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

On July 13, 2016, FSB Bancorp completed its second step conversion from the mutual-holding company structure to the stock-holding company structure, including a related public offering of common stock, and is now fully publicly owned. The Company sold 1,034,649 shares of common stock at $10.00 per share and raised gross proceeds of approximately $10.3 million in its stock offering. Additionally, in connection with the conversion, the Bank revoked its election for its holding company to be regulated as a savings and loan holding company pursuant to Section 10(l) of the Home Owners Loan Act. Consequently, the Company is regulated as a bank holding company under the Bank Holding Company Act of 1956.

Concurrent with the completion of the conversion and reorganization, shares of common stock of the Company’s predecessor, FSB Community Bankshares, Inc. (“FSB Community”) owned by public stockholders were exchanged for shares of FSB Bancorp’s common stock, so that the former public stockholders of FSB Community owned approximately the same percentage of FSB Bancorp’s common stock as they owned of FSB Community’s common stock immediately prior to the conversion. Stockholders of FSB Community received 1.0884 shares of FSB Bancorp common stock for each share of FSB Community’s stock they owned immediately prior to completion of the transaction. All financial information presented in this Annual Report on Form 10-K for periods before July 13, 2016 relates to the Company’s predecessor, FSB Community.

The Company’s principal office is located at 45 South Main Street, Fairport, New York, 14450. Our website address is www.fairportsavingsbank.com. Our Annual Report on Form 10-K is available on our website under the “About Us” and “Investor Relations” tabs. Information on this website is not and should not be considered part of this Annual Report on Form 10-K.

Fairport Savings Bank

Fairport Savings Bank is a New York-chartered savings bank established in 1888 and headquartered in Fairport, New York. The Bank conducts business from its main office in Fairport and through four branch offices located in Penfield, Irondequoit, Webster and Perinton, New York, all of which are located in the greater Rochester metropolitan area. Fairport Savings Bank also operates loan origination offices in Pittsford, New York, in the Rochester metropolitan area, as well as in Buffalo and Watertown, New York. Fairport Savings Bank is subject to regulation and supervision by the New York State Department of Financial Services and the Federal Deposit Insurance Corporation.

The Bank’s principal business consists of originating one- to four-family residential real estate mortgage loans and home equity lines of credit, and to a lesser but increasing extent, commercial real estate, multi-family and construction loans. We also offer commercial and industrial loans and other consumer loans. In 2017, we hired a Chief Lending Officer to manage and oversee the growth of our loan portfolio and supervise credit administration to continue to maintain our high asset quality. Our principal source of funds are the retail deposit products we offer to the general public in the areas surrounding our branch offices. We also utilize borrowings as a source of funds. Our revenues are derived primarily from interest on loans and, to a lesser extent, interest on investment and municipal securities and mortgage-backed securities. We also generate revenues from other income, including realized gains on sales of loans associated with loan production generated from our loan origination offices, deposit fees and service charges, realized gains on sales of securities, earnings on bank owned life insurance and loan fees. Additionally, we derive a portion of our other income through Fairport Wealth Management, our subsidiary that offers non-deposit investments such as annuities, insurance products and mutual funds as well as asset management.

Proposed Merger with Evans Bancorp, Inc.

On December 19, 2019, FSB Bancorp and Evans entered into a merger agreement (the “Merger Agreement”) that provides that FSB Bancorp will merge with and into Evans, with Evans remaining as the surviving corporation in a multi-step merger transaction (the “Merger”). Following the Merger, Fairport Savings Bank will merge with and into Evans Bank, with Evans Bank remaining as the surviving bank (the “Bank Merger”).

At the effective time of the Merger, each outstanding share of FSB Bancorp common stock will be converted into the right to receive, at the election of such holder, either (i) 0.4394 shares of Evans common stock, or (ii) $17.80 in cash, together with cash in lieu of fractional shares, if any. All such elections are subject to adjustment on a pro rata basis, so that approximately 50% of the aggregate merger consideration paid to FSB Bancorp stockholders will be the cash consideration and approximately 50% will be the stock consideration.

The completion of the Merger is subject to customary closing conditions, including approval by FSB Bancorp’s stockholders and the receipt of regulatory approvals or waivers from the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the New York State Department of Financial Services. On March 18, 2020, the Office of the Comptroller of the Currency issued its approval for the Bank Merger. On March 20, 2020, the Federal Reserve Bank of New York issued its waiver for the Merger.

Market Area

Our market area primarily consists of Monroe County, New York, and to a lesser extent, the surrounding counties in Western New York. Monroe County is a suburban market dominated by the city of Rochester, the third largest city in the State of New York. In 2018, Monroe County had a population of 742,000. The Monroe County economy is largely dependent on several large manufacturing companies, as well as sizeable higher education and health care facilities centered in Rochester. The University of Rochester and Strong Memorial Hospital were two of the largest employers in the Rochester area in 2019. Rochester is also home to a number of international businesses, including Bausch & Lomb and Paychex. Additionally, Xerox, while no longer headquartered in Rochester, has its principal offices and manufacturing facilities in Monroe County. As of December 2019, the unemployment rate for Monroe County was 4.3%, as compared to a 3.7% rate for the State of New York and the national average of 3.4%.

Competition

We face intense competition in our market area both in making loans and attracting deposits. Our market area has a high concentration of financial institutions, including large money center and regional banks, community banks and credit unions. We face additional competition for deposits from money market funds, brokerage firms, mutual funds and insurance companies. Most of our competitors are significantly larger institutions with greater financial and managerial resources and higher lending limits. Additionally, some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Our primary strategy for increasing and retaining our customer base is to offer competitive deposit and loan rates and product features, delivered with superior customer service.

The majority of our depositors live or work in Monroe County, New York. At June 30, 2019, the latest date for which information is available through the Federal Deposit Insurance Corporation, we held approximately 1.63% of the bank deposits in Monroe County.

Lending Activities

Our principal lending activity is the origination of one- to four-family residential real estate mortgages, home equity lines of credit and to a lesser extent, originations of commercial real estate, multi-family, construction, commercial and industrial, and other consumer loans (consisting of passbook, overdraft protection and unsecured loans). More recently, we have sought to increase our commercial real estate and commercial and industrial lending. At December 31, 2019, one- to four-family residential real estate mortgage loans totaled $212.9 million, or 77.1% of our loan portfolio, home equity lines of credit totaled $17.5 million, or 6.3% of our loan portfolio, multi-family loans totaled $10.9 million, or 3.9%, of our loan portfolio, construction loans totaled $4.7 million, or 1.7%, of our loan portfolio, commercial real estate loans totaled $23.1 million, or 8.3%, of our loan portfolio, commercial and industrial loans totaled $7.1 million, or 2.6%, of our loan portfolio, and all other loans totaled $44,000, or 0.1% of our loan portfolio.

Our strategic plan continues to focus on residential real estate lending in addition to a greater emphasis being placed on increasing our commercial lending. We generally retain in our portfolio adjustable-rate or shorter-term fixed-rate residential real estate mortgage loans. Loans that we sell into the secondary market consist of long-term (a term 15 years or longer), conforming fixed-rate residential real estate mortgage loans and correspondent FHA, VA, and USDA mortgage loans. These loans are sold without recourse. We retain the servicing rights on all conforming fixed-rate residential mortgage loans that we sell to Freddie Mac. However, we also sell conforming fixed-rate residential mortgage loans servicing released to other secondary market investors. Correspondent FHA, VA, and USDA mortgage loans are sold in the secondary market on a servicing-released basis. During the year ended December 31, 2019, we sold $41.8 million in long-term, fixed-rate one- to four family real estate loans in the secondary market. At December 31, 2019, we were servicing $116.5 million of loans sold to others. For the year ended December 31, 2019, we realized a gain of $931,000 on the sale of loans, and we received servicing fees of $298,000.

As a community bank, we are increasing our focus on commercial lending efforts to the small to medium sized business market targeting borrowers with desired loan balances of between $250,000 and $1.0 million. Our loan products include commercial real estate, multi-family, commercial construction and commercial and industrial loans. We are an approved Small Business Administration (“SBA”) lender. As part of the commercial loan strategy, we will seek to use our commercial relationships to grow our commercial transactional deposit accounts.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, by type of loan at the dates indicated, excluding loans held for sale.

	At December 31,
	2019						2018						2017						2016						2015
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)

Real estate loans:
One- to four-family residential (1)	$	212,903			77.09	%	$	221,602			78.21	%	$	206,894			78.38	%	$	188,573			83.04	%	$	177,037			87.47	%
Home equity lines of credit		17,459			6.32			16,766			5.92			17,127			6.49			16,797			7.40			14,523			7.18
Multi-family residential		10,876			3.94			10,241			3.61			10,650			4.03			5,103			2.25			5,146			2.54
Construction (2)		4,679			1.69			4,898			1.73			10,750			4.07			6,134			2.70			1,251			0.62
Commercial		23,081			8.36			22,492			7.94			14,803			5.61			8,440			3.72			3,522			1.74
Commercial and industrial loans		7,133			2.58			7,290			2.57			3,679			1.39			1,947			0.86			853			0.42
Other loans		44			0.02			50			0.02			70			0.03			75			0.03			61			0.03

Total loans receivable		276,175			100.00	%		283,339			100.00	%		263,973			100.00	%		227,069			100.00	%		202,393			100.00	%
Deferred loan origination (fees) costs		(26	)					(37	)					(1	)					113						248
Allowance for loan losses		(1,641	)					(1,561	)					(1,261	)					(990	)					(811	)

Total loans receivable, net	$	274,508					$	281,741					$	262,711					$	226,192					$	201,830

(1)

Includes $2.5 million, $2.7 million, $1.6 million, $1.5 million, and $1.8 million of closed-end home equity loans at December 31, 2019, 2018, 2017, 2016, and 2015.

(2)

Represents amounts disbursed at December 31, 2019, 2018, 2017, 2016, and 2015. The undrawn amounts of the construction loans totaled $4.6 million, $4.4 million, $5.9 million, $5.0 million, and $1.3 million at December 31, 2019, 2018, 2017, 2016, and 2015, respectively.

Loan Portfolio Maturities. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2019. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the year ending December 31, 2020. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.

	One- to Four-Family Residential Real Estate Loans		Home Equity Lines of Credit		Multi- Family Residential Real Estate Loans		Construction Loans		Commercial Real Estate Loans		Commercial & Industrial Loans		Other Loans		Total
	(Dollars in thousands)

Due During the Years Ending December 31,
2020	$	26	$	523	$	-	$	554		199	$	441	$	1	$	1,744
2021		235		49		-		793		-		269		7		1,353
2022		548		118		-		-		-		1,070		4		1,740
2023 to 2024		1,964		15		-		-		196		3,304		11		5,490
2025 to 2029		21,042		332		8,616		-		17,033		2,049		-		49,072
2030 to 2034		21,375		392		842		74		1,052		-		5		23,740
2035 and beyond		167,713		16,030		1,418		3,258		4,601		-		16		193,036

Total	$	212,903	$	17,459	$	10,876	$	4,679	$	23,081	$	7,133	$	44	$	276,175

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2019 that are contractually due after December 31, 2020.

	Due After December 31, 2020
	Fixed		Adjustable		Total
	(Dollars in thousands)

Real estate loans:
One- to four-family residential	$	186,522	$	26,355	$	212,877
Home equity lines of credit		-		16,936		16,936
Multi-family residential		3,030		7,846		10,876
Construction		3,332		793		4,125
Commercial		5,105		17,777		22,882
Commercial and industrial loans		3,789		2,903		6,692
Other loans		43		-		43
Total	$	201,821	$	72,610	$	274,431

One- to Four-Family Residential Real Estate Mortgage Loans. Our primary lending activity is the origination of one- to four-family residential real estate mortgage loans. At December 31, 2019, $212.9 million, or 77.1% of our total loan portfolio, consisted of one- to four-family residential real estate mortgage loans. We offer conforming and non-conforming, fixed-rate and adjustable-rate residential real estate mortgage loans with maturities of up to 30 years and maximum loan amounts generally of up to $1.5 million. Our adjustable-rate mortgage loans provide an initial fixed interest rate for three, five, seven, or ten years and then adjust annually thereafter and amortize over a period of up to 30 years. We originate fixed-rate mortgage loans with terms of less than 15 years, but at interest rates applicable to our 15-year loans.

One- to four-family residential real estate mortgage loans are generally underwritten according to Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed-rate and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Office of Federal Housing Enterprise Oversight, which at December 31, 2019 was $484,350 for single-family homes in our market area. We also originate loans above the lending limit for conforming loans, commonly referred to as “jumbo loans.” At December 31, 2019, we had $22.8 million in jumbo loans. We generally underwrite jumbo loans, which are not uncommon in our market area, in a manner similar to conforming loans. For first mortgage loans with loan-to-value ratios in excess of 80% we require private mortgage insurance. We do not have any loans in our loan portfolio that are considered sub-prime or Alt-A.

We currently offer several adjustable-rate mortgage loans secured by residential properties with interest rates that are fixed for an initial period ranging from one year to ten years. After the initial fixed period, the interest rate on adjustable-rate mortgage loans is generally reset every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board, subject to periodic and lifetime limitations on interest rate changes. All of our traditional adjustable-rate mortgage loans with initial fixed-rate periods of three, five, seven, and ten years have initial and periodic caps of two percentage points on interest rate changes, with a cap of six percentage points for the life of the loan. Many of the borrowers who select these loans have shorter-term credit needs than those who select long-term, fixed-rate mortgage loans. We do not offer “Option ARM” loans, where borrowers can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. At December 31, 2019, we had $22.5 million in adjustable-rate one- to four-family residential real estate mortgage loans. Adjustable-rate mortgage loans generally present different credit risks than fixed-rate mortgage loans primarily because the underlying debt service payments of the borrowers increase as interest rates increase, thereby increasing the potential for default.

We require title insurance on all of our one- to four-family residential real estate mortgage loans, and we also require that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. For fixed-rate mortgage loans with terms of 15 years or less, we will accept an attorney’s letter in lieu of title insurance. A majority of our residential real estate mortgage loans have a mortgage escrow account from which disbursements are made for real estate taxes and flood insurance. We do not conduct environmental testing on residential real estate mortgage loans unless specific concerns for hazards are identified by the appraiser used in connection with the origination of the loan. If we identify an environmental problem on land that will secure a loan, the environmental hazard must be remediated before the closing of the loan.

Home Equity Lines of Credit. We offer home equity lines of credit, which are primarily secured by a second mortgage on single family residences. At December 31, 2019, home equity lines of credit totaled $17.5 million, or 6.3% of total loans receivable. At that date we had an additional $18.3 million of undisbursed home equity lines of credit. We offer an “interest only” period, where the borrower pays interest for an initial period (ten years), after which the loan converts to a fully amortizing loan with a term of 15 years.

The underwriting standards for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. The combined loan-to-value ratio (first and second mortgage liens) for home equity lines of credit is generally limited to 85%, or 90% if Fairport Savings Bank holds the first mortgage. We originate our home equity lines of credit without application fees or borrower-paid closing costs. Our home equity lines of credit are offered with adjustable-rates of interest indexed to the Prime Rate, as reported in The Wall Street Journal.

Multi-Family Residential and Commercial Real Estate Loans. Loans secured by multi-family real estate totaled $10.9 million, or 3.9%, of the total loan portfolio at December 31, 2019. Multi-family residential loans generally are secured by rental properties. All multi-family residential loans are secured by properties located within our lending area. At December 31, 2019, we had 29 multi-family loans with an average principal balance of $375,000, and the largest multi-family real estate loan had a principal balance of $1.5 million. At December 31, 2019, all of our loans secured by multi-family real estate were performing in accordance with their terms. Multi-family real estate loans are offered with fixed or adjustable interest rates. Adjustable-rate multi-family real estate loans are tied to the average yield on U.S. Treasury securities, subject to periodic and lifetime limitations on interest rate changes.

At December 31, 2019, $23.1 million, or 8.4% of our total loan portfolio, consisted of commercial real estate loans. Commercial real estate loans are secured by office, mixed use, retail, and other commercial properties. We generally originate adjustable-rate commercial real estate loans with maximum terms of up to 10 years. Adjustable-rate commercial real estate loans are tied to the five-year Federal Home Loan Bank advance rate plus a margin, subject to periodic and lifetime limitations on interest rate changes. The maximum loan-to-value ratio of commercial real estate loans is 80%. At December 31, 2019, we had 43 commercial real estate loans with an average principal balance of $537,000. At December 31, 2019, our largest loan secured by commercial real estate consisted of a $3.6 million loan secured by non-owner-occupied office buildings. At December 31, 2019, this loan was performing in accordance with its terms.

We consider a number of factors in originating multi-family real estate and commercial real estate loans. We evaluate the qualifications and financial condition of the borrower (including credit history), profitability and expertise, as well as the value and condition of the mortgaged property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the debt service coverage ratio (the ratio of net operating income to debt service) to ensure that it is at least 120% of the monthly debt service and the ratio of the loan amount to the appraised value of the mortgaged property. Multi-family real estate loans and commercial real estate loans are originated in amounts up to 80% of the appraised value of the mortgaged property securing the loan. All multi-family and commercial real estate loans are appraised by outside independent appraisers approved by the Board of Directors. Personal guarantees are generally obtained from commercial real estate borrowers.

Loans secured by multi-family real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate typically depends upon the successful operation of the real estate property securing the loans. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.

Construction Loans. We originate construction loans for the purchase of developed lots and for the construction of single-family residences. Construction loans are offered to individuals for the construction of their personal residences by a qualified builder which will convert to a residential mortgage loan following construction (construction/permanent loans). At December 31, 2019, construction loans totaled $4.7 million, or 1.7% of total loans receivable. At December 31, 2019, the additional unadvanced portion of these construction loans totaled $4.6 million. We also originate commercial construction loans on a limited basis. Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We generally also review and inspect each property before disbursement of funds during the term of the construction loan.

Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the loan.

Commercial and Industrial Loans. At December 31, 2019, we had $7.1 million in commercial and industrial loans, which amounted to 2.6% of total loans. We make commercial and industrial loans primarily in our market area to a variety of sole proprietorships, partnerships, and corporations. Commercial lending products include term loans, revolving and demand lines of credit. Commercial term loans and revolving lines of credit are generally used for longer-term working capital purposes such as purchasing equipment, vehicles, or furniture. Demand lines of credit are generally used for shorter-term working capital purposes. Commercial and industrial loans are made with either adjustable, variable, or fixed rates of interest. Variable rates are based on the prime rate, as published in The Wall Street Journal, plus a margin. Fixed-rate commercial and industrial loans are set at a margin above the comparable Federal Home Loan Bank advance rate.

When making commercial and industrial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, and the value of the collateral. Commercial and industrial loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and equipment, and in addition are supported by unlimited personal guarantees. Depending on the collateral used to secure the loans, commercial and industrial loans are made in amounts of up to 80% of the value of the collateral securing the loan. We generally do not make unsecured commercial and industrial loans.

Commercial and industrial loans generally have greater credit risk than residential real estate loans. Unlike residential real estate loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our underwriting standards. At December 31, 2019, our largest commercial and industrial loan was a $683,000 loan secured by equipment. This loan was performing according to its original terms at December 31, 2019.

Other Loans. We offer a variety of loans secured by property other than real estate. These loans include passbook, overdraft protection and unsecured loans. At December 31, 2019, these other loans totaled $44,000, or 0.1% of the total loan portfolio.

Loan Originations, Sales, and Servicing. Lending activities are conducted by our loan personnel operating at our main and branch office locations and through our mortgage division’s four origination offices. We also obtain referrals from existing or past customers and from local builders, real estate brokers and attorneys. All loans that we originate are underwritten pursuant to our policies and procedures, which incorporate Freddie Mac underwriting guidelines to the extent applicable. We originate both adjustable-rate and fixed-rate loans. Our ability to originate fixed or adjustable-rate loans is dependent upon the relative customer demand for such loans, which is affected by current market interest rates as well as anticipated future market interest rates. Our loan origination and sales activity may be adversely affected by a rising interest rate environment, which typically results in decreased loan demand.

Loans that we sell are sold without recourse. For the year ended December 31, 2019, we realized a gain of $931,000 on the sale of loans, and we received servicing fees of $298,000. As of December 31, 2019, the principal balance of loans serviced for others totaled $116.5 million. Historically, we have retained the servicing rights on all residential real estate mortgage loans that we have sold. However, we have begun to sell some loans servicing released. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities. The value of our servicing rights was $726,000 at December 31, 2019. We have not engaged in whole loan purchases. We have purchased two loan participations secured by office buildings for $4.6 million as of December 31, 2019.

The following table shows our loan originations, sales and repayment activities for the years indicated.

	For the Year Ended December 31,
	2019			2018		2017		2016		2015
	(In thousands)

Total loans at beginning of year	$	283,339		$	263,973	$	227,069	$	202,393	$	189,218
Loan originations:
Real estate loans:
One- to four-family residential		56,048			80,956		91,167		116,331		82,368
Home equity lines of credit		8,506			6,574		6,778		5,562		5,064
Multi-family residential		1,222			400		5,769		318		1,602
Construction		8,795			12,924		20,582		14,202		5,151
Commercial		3,467			6,992		7,560		10,065		3,924
Commercial and industrial loans		3,543			4,659		1,631		2,612		866
Other loans		146			172		210		101		18
Total loans originated		81,727			112,677		133,697		149,191		98,993

Sales and loan principal repayments:
Principal repayments		47,099			33,441		26,690		50,547		30,508
Loan sales		41,792			59,870		70,103		73,968		55,310
Net loan activity		(7,164	)		19,366		36,904		24,676		13,175
Total loans at end of year	$	276,175		$	283,339	$	263,973	$	227,069	$	202,393

Loan Approval Policy and Authority. Fairport Savings Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination policies approved by Fairport Savings Bank’s Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the property that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower.

Residential mortgage loans up to $484,350, home equity lines of credit up to $250,000, lines of credit, personal loans, and unsecured property improvement loans up to $10,000 may be approved by any Loan Underwriter. Residential mortgage loans between $484,351 and $750,000 may be approved by any two Loan Underwriters. Residential mortgage loans between $750,001 and $1.0 million may be approved by any two Senior Loan Committee members. Residential mortgage loans exceeding $1.0 million must be approved by any two Senior Loan Committee members and the Board of Directors. Commercial loans (including commercial real estate, multi-family and commercial and industrial loans) up to $1.0 million may be approved by any two members of the Senior Loan Committee with Board approval required for commercial loans exceeding $1.0 million.

We generally require independent third-party appraisals of real property securing loans. Appraisals are performed by independent licensed appraisers. All appraisers are approved by the Board of Directors annually.

Loans to One Borrower. A New York savings bank generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned equal to 10% of unimpaired capital and surplus if the loan is secured by readily marketable collateral, which generally does not include real estate. Our loans to one borrower limit under this regulation is $4.6 million (excluding the additional amount). At December 31, 2019, we had no loans exceeding this amount. Our policy provides that residential loans to one borrower (or related borrowers) should generally not exceed $1.5 million. At December 31, 2019, we had no loans exceeding this amount.

Non-Performing Assets and Delinquent Loans

System-generated late notices are mailed to borrowers after the late payment “grace period,” which is 15 days in the case of all loans secured by real estate and 10 days in the case of other loans. A second notice will be mailed to borrowers if the loan remains past due after 30 days. In addition, consistent and vigilant attempts are made by our Loan Servicing Department to contact the borrower. After the 45^thday, if we have not successfully contacted the borrower, a letter indicating the serious nature of their loan default is sent. If the loan reaches more than 60 days past due and there is still no repayment plan, a 90 day demand letter is issued by the Bank. This letter provides information on homeownership counseling services the borrower may contact for further assistance in developing a repayment plan. During this period, the Bank continues proactive efforts to contact the borrower. After the end of the 90 day period and without a repayment in place, notification is provided to the borrower that the loan has been referred to our attorney to initiate foreclosure action. A report of all loans 30 days or more past due is provided to the Board of Directors on a monthly basis.

Loans are generally placed on non-accrual status when payment of principal or interest is more than 90 days delinquent, unless the loans are well-secured and in the process of collection. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt or if the loan has been restructured. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent and a satisfactory payment history has been established. Loans not secured by real estate will be charged-off if they become 120 days past due. At December 31, 2019, the Bank had one non-accrual commercial real estate loan for $954,000, one non-accrual residential mortgage loan for $55,000, and one non-accrual commercial and industrial loan for $45,000.

Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. We had no troubled debt restructurings at any of the dates presented below.

	At December 31,
	2019			2018			2017			2016		2015
	(Dollars in thousands)

Non-accrual loans:
Real estate loans:
One- to four-family residential	$	55		$	55		$	153		$	—	$	63
Home equity lines of credit		—			—			—			—		18
Multi-family residential		—			—			—			—		—
Construction		—			—			—			—		—
Commercial		954			—			—			—		—
Commercial and industrial loans		45			45			—			—		—
Other loans		—			—			—			—		1
Total		1,054			100			153			—		82

Accruing loans 90 days or more past due:
Real estate loans:
One- to four-family residential		—			—			—			—		—
Home equity lines of credit		—			—			—			—		—
Multi-family residential		—			—			—			—		—
Construction		—			—			—			—		—
Commercial		—			—			—			—		—
Commercial and industrial loans		—			—			—			—		—
Other loans		—			—			—			—		—
Total loans 90 days or more past due		—			—			—			—		—

Total non-performing loans		1,054			100			153			—		82

Real estate owned		730			—			—			—		—
Other non-performing assets		—			—			—			—		—

Total non-performing assets	$	1,784		$	100		$	153		$	—	$	82

Ratios:
Total non-performing loans to total loans		0.38	%		0.04	%		0.06	%		—%		0.04	%
Total non-performing loans to total assets		0.33	%		0.03	%		0.05	%		—%		0.03	%
Total non-performing assets to total assets		0.55	%		0.03	%		0.05	%		—%		0.03	%

Delinquent Loans. The following table sets forth our loan delinquencies by type, by number and amount at the dates indicated.

	Loans Delinquent For
	60-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	(Dollars in thousands)

At December 31, 2019
Real estate loans:
One- to four-family residential		—	$	—		2	$	55		2	$	55
Home equity lines of credit		1		14		—		—		1		14
Multi-family residential		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial		—		—		1		954		1		954
Commercial and industrial loans		2		21		1		45		3		66
Other loans		1		5		—		—		1		5
Total		4	$	40		4	$	1,054		8	$	1,094

At December 31, 2018
Real estate loans:
One- to four-family residential		2	$	349		1	$	55		3	$	404
Home equity lines of credit		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Commercial and industrial loans		—		—		1		45		1		45
Other loans		—		—		—		—		—		—
Total		2	$	349		2	$	100		4	$	449

At December 31, 2017
Real estate loans:
One- to four-family residential		—	$	—		2	$	153		2	$	153
Home equity lines of credit		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—
Other loans		—		—		—		—		—		—
Total		—	$	—		2	$	153		2	$	153

At December 31, 2016
Real estate loans:
One- to four-family residential		1	$	89		—	$	—		1	$	89
Home equity lines of credit		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Commercial and industrial loans		1		47		—		—		1		47
Other loans		—		—		—		—		—		—
Total		2	$	136		—	$	—		2	$	136

At December 31, 2015
Real estate loans:
One- to four-family residential		—	$	—		1	$	63		1	$	63
Home equity lines of credit		—		—		1		18		1		18
Multi-family residential		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—
Other loans		—		—		1		1		1		1
Total		—	$	—		3	$	82		3	$	82

Foreclosed Real Estate. Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as foreclosed real estate until sold. When property is acquired it is recorded at the estimated fair market value less cost to sell at the date of foreclosure, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions, less the estimated costs to sell the property. Holding costs and declines in estimated fair market value result in charges to expense after acquisition. At December 31, 2019, we had two foreclosed commercial real estate properties with a fair market value totaling $730,000.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.

When we classify assets as either special mention, substandard, doubtful, or loss we allocate a portion of the related general loss allowances to such assets as we deem prudent. The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the consolidated balance sheet date. Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our regulators, the New York State Department of Financial Services and the Federal Deposit Insurance Corporation, which can require that we establish additional loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of our review of our assets, at December 31, 2019, classified assets that are not currently considered impaired consisted of five special mention loans totaling $3.6 million, 19 substandard loans totaling $2.7 million and no assets classified as doubtful or loss. At December 31, 2019, we had one impaired commercial real estate loan for $954,000, one impaired residential mortgage loan for $55,000, and one impaired commercial and industrial loan for $45,000.

Allowance for Loan Losses

We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management considers the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment disclosures.

We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the New York State Department of Financial Services and the Federal Deposit Insurance Corporation periodically review the allowance for loan losses. These regulators may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.

The following table sets forth activity in our allowance for loan losses for the years indicated.

	At or For the Years Ended December 31,
	2019			2018			2017			2016			2015
	(Dollars in thousands)

Balance at beginning of year	$	1,561		$	1,261		$	990		$	811		$	653

Charge-offs:
Real estate loans:
One- to four-family residential		(1	)		—			—			—			—
Home equity lines of credit		—			—			—			—			—
Multi-family residential		—			—			—			—			—
Construction		—			—			—			—			—
Commercial		(214	)		—			—			—			—
Commercial and industrial loans		—			—			—			—			—
Other loans		—			—			—			(1	)		—
Total charge-offs		(215	)		—			—			(1	)		—

Recoveries:
Real estate loans:
One- to four-family residential		—			—			—			—			—
Home equity lines of credit		—			—			—			—			—
Multi-family residential		—			—			—			—			—
Construction		—			—			—			—			—
Commercial		—			—			—			—			—
Commercial and industrial loans		—			—			—			—			—
Other loans		—			—			—			—			—
Total recoveries		—			—			—			—			—

Net charge-offs		—			—			—			(1	)		—
Provision for loan losses		295			300			271			180			158

Balance at end of year	$	1,641		$	1,561		$	1,261		$	990		$	811

Ratios:
Net charge-offs to average loans outstanding		0.08	%		—			—			—			—
Allowance for loan losses to non-performing loans at end of year		155.75	%		1,564.55	%		825.59	%		N/A			994.92	%
Allowance for loan losses to total loans at end of year		0.59	%		0.55	%		0.48	%		0.44	%		0.40	%

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

	At December 31,
	2019								2018								2017
	Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans
	(Dollars in thousands)
Real estate loans:
One- to four-family residential	$	788		48.02	%		77.09	%	$	866		55.48	%		78.21	%	$	816		64.71	%		78.38	%
Home equity lines of credit		104		6.34			6.32			103		6.60			5.92			107		8.49			6.49
Multi-family residential		81		4.93			3.94			77		4.93			3.61			80		6.34			4.03
Construction		23		1.40			1.69			24		1.54			1.73			54		4.28			4.07
Commercial		510		31.08			8.36			284		18.19			7.94			148		11.74			5.61
Commercial and industrial loans		104		6.34			2.58			97		6.21			2.57			47		3.73			1.39
Other loans		1		0.06			0.02			1		0.07			0.02			1		0.08			0.03
Total allocated allowance		1,611		98.17			100.00			1,452		93.02			100.00			1,253		99.37			100.00
Unallocated allowance		30		1.83			—			109		6.98			—			8		0.63			—
Total allowance for loan losses	$	1,641		100.00	%		100.00	%	$	1,561		100.00	%		100.00	%	$	1,261		100.00	%		100.00	%

	At December 31,
	2016								2015
	Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans
	(Dollars in thousands)
Real estate loans:
One- to four-family residential	$	584		58.99	%		83.04	%	$	524		64.61	%		87.47	%
Home equity lines of credit		112		11.31			7.40			101		12.45			7.18
Multi-family residential		38		3.84			2.25			39		4.81			2.54
Construction		31		3.13			2.70			6		0.74			0.62
Commercial		84		8.49			3.72			35		4.32			1.74
Commercial and industrial loans		28		2.83			0.86			11		1.36			0.42
Other loans		1		0.10			0.03			1		0.12			0.03
Total allocated allowance		878		88.69			100.00			717		88.41			100.00
Unallocated allowance		112		11.31			—			94		11.59			—
Total allowance for loan losses	$	990		100.00	%		100.00	%	$	811		100.00	%		100.00	%

Investments

Our Board of Directors is responsible for approving and overseeing our investment policy. The investment policy is reviewed at least annually by management and any changes to the policy are recommended to the Board of Directors and are subject to its approval. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns, the ability to provide collateral for pledging requirements, and consistency with our interest rate risk management strategy. Our asset/liability management committee, which consists of our chief executive officer, chief financial officer and other members of management, oversees our investing activities and strategies. All transactions are formally reviewed by the Board of Directors at least quarterly. Any investment which, subsequent to its purchase, fails to meet the guidelines of the policy is reported to the asset/liability management committee, which decides whether to hold or sell the investment.

Our current investment policy permits us to invest in debt securities issued by the U.S. Government, agencies of the U.S. Government or U.S. Government-sponsored enterprises. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. We also may hold investments in New York State municipal obligations. The investment policy also permits investments in asset-backed securities, pooled trust securities, bankers’ acceptances, money market funds, term federal funds, repurchase agreements and reverse repurchase agreements.

Our current investment policy prohibits hedging through the use of such instruments as financial futures, interest rate options and swaps.

Debt and equity securities investment accounting guidance requires that, at the time of purchase, we designate a security as held to maturity, available for sale, or trading, depending on our ability and intent. Securities available for sale are reported at fair value, while securities held to maturity are reported at amortized cost. We do not have a trading portfolio.

U.S. Government and Agency Obligations. U.S. Government and agency securities are utilized as shorter-term investment vehicles. Investment in U.S. Government and agency securities provide lower yields than loans, however, they provide greater liquidity on a short-term basis.

Mortgage-Backed Securities. We purchase both fixed-rate and adjustable-rate mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. We invest in mortgage-backed securities to achieve interest income and monthly cash flow with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Federal Farm Credit, Fannie Mae or Ginnie Mae.

Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we invest only in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities (generally Ginnie Mae, a U.S. Government agency, and U.S. government sponsored enterprises, such as Fannie Mae, Federal Farm Credit, and Freddie Mac) pool and resell the participation interests in the form of securities to investors such as Fairport Savings Bank, and guarantee the payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities. In addition, mortgage-backed securities may be used to collateralize our specific liabilities and obligations. Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. Our mortgage-backed securities portfolio contains no sub-prime mortgage loans and has no exposure to sub-prime investment activity.

State and Municipal Securities. We purchase state and municipal securities consisting of general obligation bonds backed by the full faith and credit of local municipalities located only in Monroe County, New York, and Ontario County, New York, such as townships and school districts.

The following table sets forth the amortized cost and fair value of our securities portfolio (excluding Federal Home Loan Bank of New York and Atlantic Community Bankers Bank common stock) at the dates indicated.

	At December 31,
	2019				2018				2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Securities available for sale:
U.S. Government and agency obligations	$	14,043	$	14,035	$	12,610	$	12,455	$	10,612	$	10,470
Mortgage-backed securities		4,095		4,091		5,953		5,876		7,909		7,843
Total securities available for sale	$	18,138	$	18,126	$	18,563	$	18,331	$	18,521	$	18,313

Securities held to maturity:
State and municipal securities		4,757		4,885		5,594		5,567		5,938		5,942
Mortgage-backed securities		406		412		458		463		637		646
Total securities held to maturity	$	5,166	$	5,297	$	6,052	$	6,030	$	6,575	$	6,588

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio and the mortgage-backed securities portfolio at December 31, 2019 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. The state and municipal securities have not been adjusted to a tax-equivalent basis.

	One Year or Less					More than One Year through Five Years					More than Five Years through Ten Years						More than Ten Years					Total Securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost			Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in thousands)

Securities available for sale:
U.S. Government and agency obligations	$	—		—	%	$	9,043		1.93	%	$	5,000			2.27	%	$	-		—	%	$	14,043	$	14,035		2.05	%
Mortgage-backed securities		—		—	%		—		—	%		—	%		—	%		4,095		2.04	%		4,095		4,091		2.04	%
Total securities available for sale	$	—		—	%	$	9,043		1.93	%	$	5,000			2.27	%	$	4,095		2.04	%	$	18,138	$	18,126		2.05	%

Securities held to maturity:
State and municipal securities	$	746		1.44	%	$	2,517		1.65	%	$	1,494			2.50	%	$	—		—	%	$	4,757	$	4,885		1.89	%
Mortgage-backed securities		—		—	%		—		—	%		—			—	%		409		4.04	%		409		412		4.04	%
Total securities held to maturity	$	746		1.44	%	$	2,517		1.65	%	$	1,494			2.50	%	$	409		4.04	%	$	5,166	$	5,297		2.06	%

Sources of Funds

General. Deposits traditionally have been our primary source of funds for our lending and investment activities. We also borrow, primarily from the Federal Home Loan Bank of New York, to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds. Our additional sources of funds are scheduled loan payments, loan prepayments, maturing investments, mortgage-backed securities amortizations and prepayments, proceeds of loan sales, and retained earnings.

Deposits. We generate deposits primarily from the areas in which our branch offices are located. We rely on our competitive pricing, convenient locations and customer service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of savings accounts, NOW accounts, money market accounts, certificates of deposit and individual retirement accounts and non-interest-bearing demand deposits. We currently do not accept brokered deposits.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements, interest rates paid by competitors and our deposit growth goals.

At December 31, 2019, our deposits totaled $235.6 million. At December 31, 2019, NOW accounts totaled $31.0 million, savings accounts totaled $25.5 million, money market accounts totaled $33.4 million and non-interest-bearing checking accounts totaled $12.9 million. At December 31, 2019, certificates of deposit, including individual retirement accounts (all of which were certificate of deposit accounts), totaled $132.8 million, of which $96.5 million had remaining maturities of one year or less. Based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.

The following table sets forth the distribution of our average total deposit accounts, by account type, for the years indicated.

	For the Years Ended December 31,
	2019								2018								2017
	Average Balance		Percent			Weighted Average Rate			Average Balance		Percent			Weighted Average Rate			Average Balance		Percent			Weighted Average Rate
	(Dollars in thousands)
Deposit type:
NOW	$	29,185		12.71	%		0.30	%	$	30,018		13.74	%		0.31	%	$	29,659		15.04	%		0.30	%
Savings		25,999		11.32			0.63			27,533		12.61			0.53			26,488		13.43			0.39
Money market		30,771		13.40			1.07			34,593		15.84			1.00			34,330		17.41			0.83
Individual retirement accounts		6,759		2.94			1.71			6,792		3.11			1.25			7,081		3.59			1.05
Certificates of deposit		125,433		54.63			2.21			110,033		50.37			1.75			91,103		46.20			1.38
Non-interest-bearing demand deposits		11,453		5.00			N/A			9,467		4.33			N/A			8,526		4.33			N/A

Total deposits	$	229,600		100.00	%		1.51	%	$	218,436		100.00	%		1.19	%	$	197,187		100.00	%		0.92	%

As of December 31, 2019, the aggregate amount of our outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $74.6 million. The following table sets forth the maturity of those certificates as of December 31, 2019.

	At December 31, 2019
	(In thousands)

Three months or less	$	13,171
Over three months through six months		14,133
Over six months through one year		29,142
Over one year to three years		17,875
Over three years		283

Total	$	74,604

Borrowings. Our long-term borrowings consist primarily of advances from the Federal Home Loan Bank of New York. At December 31, 2019, we had the ability to borrow approximately $163.7 million under our credit facilities with the Federal Home Loan Bank of New York, of which $51.7 million was advanced. Borrowings from the Federal Home Loan Bank of New York are secured by our investment in the common stock of the Federal Home Loan Bank of New York as well as by a blanket pledge of our mortgage portfolio not otherwise pledged.

The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at and for the years shown:

	At or For the Years Ended December 31,
	2019			2018			2017
	(Dollars in thousands)

Balance at end of year	$	51,735		$	71,826		$	64,447
Average balance during year	$	60,458		$	66,294		$	60,457
Maximum outstanding at any month end	$	73,417		$	73,796		$	69,524
Weighted average interest rate at end of year		2.46	%		2.34	%		1.73	%
Weighted average interest rate during year		2.43	%		2.09	%		1.60	%

We also have a repurchase agreement with Raymond James Financial providing an additional $10.0 million in liquidity collateralized by our U.S. Government obligations. There were no advances outstanding under the repurchase agreement at December 31, 2019. In addition, we also have an unsecured line of credit through Atlantic Community Bankers Bank providing an additional $5.0 million in liquidity. There were no draws or outstanding balances from the line of credit at December 31, 2019.

Other Services. Over the past several years we have focused on developing our electronic service offerings to stay relevant with the younger generation of banking consumers. Two of the major services that have demonstrated a high level of growth are mobile banking and online bill pay. While online bill pay has become a standard service that most banks offer, our online bill paying service has additional functionality that allows customers to send person-to-person payments using just an email address or phone number. From the mobile banking application, a customer can pay their bills as well as send person-to-person payments. In early 2016, we implemented online account opening. We intend to continue to expand our internet and mobile banking services as we grow.

Subsidiary Activities

Fairport Wealth Management, the Bank’s wholly owned subsidiary, provides investment advisory services to our customers including brokerage, insurance, and asset management in partnership with Monarch Wealth Management. For the year ended December 31, 2019, we derived $19,000 of fee income from Fairport Wealth Management.

Personnel

As of December 31, 2019, we had 66 full-time employees and eight part-time employees. Our employees are not represented by any collective bargaining group. Management believes that our relationship with our employees is good.

REGULATION AND SUPERVISION

General

Fairport Savings Bank is a stock savings bank organized under the laws of the State of New York. The lending, investment, and other business operations of Fairport Savings Bank are governed by New York law and regulations, as well as applicable federal law and regulations, and Fairport Savings Bank is prohibited from engaging in any operations not authorized by such laws and regulations. Fairport Savings Bank is subject to extensive regulation, supervision and examination by the New York State Department of Financial Services and the Federal Deposit Insurance Corporation. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors, and not for the protection of security holders. Fairport Savings Bank also is a member of and owns stock in the Federal Home Loan Bank of New York, which is one of the 11 regional banks in the Federal Home Loan Bank System.

Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as Fairport Savings Bank or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.

In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.

As a bank holding company, FSB Bancorp is required to comply with the rules and regulations of the Federal Reserve Board. The Company is required to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement authority of the Federal Reserve Board. FSB Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in applicable laws or regulations, whether by the New York State Department of Financial Services, the Federal Deposit Insurance Corporation, the Federal Reserve Board or Congress, could have a material adverse impact on the operations and financial performance of FSB Bancorp and Fairport Savings Bank.

Set forth below is a brief description of material regulatory requirements that are or will be applicable to Fairport Savings Bank and FSB Bancorp. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Fairport Savings Bank and FSB Bancorp.

Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was enacted in 2010. The Dodd-Frank Act has significantly changed the bank regulatory structure and is affecting the lending, investment, trading and operating activities of depository institutions and their holding companies.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with expansive powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as Fairport Savings Bank, will continue to be examined for compliance with these laws by their applicable federal bank regulators. The legislation gave state attorneys general the ability to enforce applicable federal consumer protection laws and weakened federal preemption of state laws as to federal saving banks in certain respects.

The Dodd-Frank Act also broadened the base for Federal Deposit Insurance Corporation assessments for deposit insurance, permanently increased the maximum amount of deposit insurance to $250,000 per depositor. The Dodd-Frank Act also provided for originators of certain securitized loans to retain a percentage of the risk for transferred credits, directed the Federal Reserve Board to regulate pricing of certain debit card interchange fees, repealed restrictions on paying interest on checking accounts and contained a number of reforms related to mortgage origination. The Dodd-Frank Act increased stockholder influence over Boards of Directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments.

The Dodd-Frank Act also required the Consumer Financial Protection Bureau to issue regulations requiring lenders to make a reasonable, good faith determination as to the ability of a prospective borrower to repay a residential mortgage loan. The “Ability to Repay” final rule, effective January 1, 2014, established a “qualified mortgage” safe harbor from liability for loans which have terms and features which are deemed to make the loan less risky.

The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018

On May 24, 2018, The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”) was enacted, which repeals or modifies certain provisions of the Dodd-Frank Act and eases regulations on all but the largest banks. The EGRRCPA’s provisions include, among other things: (i) exempting banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) not requiring appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) exempting banks that originate fewer than 500 open-end and 500 closed-end mortgages from HMDA’s expanded data disclosures; (iv) clarifying that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations; (v) raising eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; and (vi) simplifying capital calculations by requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the general applicable risk-based capital requirements for determining well-capitalized status. In addition, the law required the Federal Reserve Board to raise the asset threshold under its Small Bank Holding Company Policy Statement from $1 billion to $3 billion for bank or savings and loan holding companies that are exempt from consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking activities.

New York Bank Regulation

Fairport Savings Bank derives its lending, investment, branching and other authority primarily from the applicable provisions of New York State Banking Law and the regulations of the New York State Department of Financial Services, as limited by federal laws and regulations. Under these laws and regulations, savings banks, including Fairport Savings Bank, may invest in real estate mortgages, consumer and commercial loans, certain types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies, certain types of corporate equity securities and certain other assets. Under the statutory authority for investing in equity securities, a savings bank may invest up to 7.5% of its assets in corporate stock. Investment in the stock of a single corporation is limited to the lesser of 2% of the outstanding stock of such corporation or 1% of the savings bank’s assets, except as set forth below. Such equity securities must meet certain earnings ratios and other tests of financial performance. A savings bank’s lending powers are not subject to percentage of assets limitations, although there are limits applicable to single borrowers. A savings bank may also, pursuant to the “leeway” power, make investments not otherwise permitted under the New York State Banking Law. This power permits investments in otherwise impermissible investments of up to 1% of assets in any single investment, subject to certain restrictions and to an aggregate limit for all such investments of up to 5% of assets. Additionally, in lieu of investing in such securities in accordance with and reliance upon the specific investment authority set forth in the New York State Banking Law, savings banks are authorized to elect to invest under a “prudent person” standard in a wider range of investment securities as compared to the types of investments permissible under such specific investment authority. However, in the event a savings bank elects to utilize the “prudent person” standard, it will be unable to avail itself of the other provisions of the New York State Banking Law and regulations, which set forth specific investment authority. Fairport Savings Bank has not elected to conduct its investment activities under the “prudent person” standard. A savings bank may also exercise trust powers upon approval of the New York State Department of Financial Services. Fairport Savings Bank does not presently have trust powers.

New York State chartered savings banks may also invest in subsidiaries under their service corporation investment authority. A savings bank may use this power to invest in corporations that engage in various activities authorized for savings banks, plus any additional activities that may be authorized by the New York State Department of Financial Services. Investment by a savings bank in the stock, capital notes and debentures of its service corporations is limited to 3% of the bank’s assets, and such investments, together with the bank’s loans to its service corporations, may not exceed 10% of the savings bank’s assets.

Under the New York State Banking Law, the Superintendent may issue an order to a New York State chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep prescribed books and accounts. Upon a finding by the New York State Department of Financial Services that any director, trustee or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices, such director, trustee or officer may be removed from office after notice and an opportunity to be heard. Fairport Savings Bank does not know of any past or current practice, condition or violation that may lead to any proceeding by the Superintendent or the New York State Department of Financial Services against Fairport Savings Bank or any of its directors or officers.

New York State Community Reinvestment Regulation

Fairport Savings Bank is also subject to provisions of the New York State Banking Law, which imposes continuing and affirmative obligations upon banking institutions organized in New York State to serve the credit needs of its local community (“NYCRA”) which are substantially similar to those imposed by the Community Reinvestment Act. Pursuant to the NYCRA, a bank must file an annual NYCRA report and copies of all federal CRA reports with the New York State Department of Financial Services. The NYCRA requires the New York State Department of Financial Services to make a biennial written assessment of a bank’s compliance with the NYCRA, utilizing a four-tiered rating system and make such assessment available to the public. The NYCRA also requires the Superintendent to consider a bank’s NYCRA rating when reviewing a bank’s application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller machines, and provides that such assessment may serve as a basis for the denial of any such application. Fairport Savings Bank underwent an examination in 2014 and in 2017 received the report for which a satisfactory NYCRA rating was issued from the New York State Department of Financial Services.

Federal Bank Regulation

Capital Requirements. Federal regulations require state banks to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%; a Tier 1 capital to risk-based assets ratio of 6.0%; a total capital to risk-based assets ratio of 8%; and a 4% Tier 1 capital to total assets leverage ratio. These capital requirements were effective January 1, 2015 and are the result of regulations implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

As noted, the risk-based capital standards for state banks require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets ratios of at least 4.5%, 6% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor (from 0.0% to 200.0%) assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the Federal Reserve takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January 1, 2019.

Notwithstanding the foregoing, pursuant to the EGRRCPA, the FDIC finalized a rule that established a community bank leverage ratio (tier 1 capital to average consolidated assets) at 9% for institutions under $10 billion in assets that such institutions may elect to utilize in lieu of the general applicable risk-based capital requirements under Basel III. Such institutions that meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized. The new rule took effect on January 1, 2020.

The Federal Deposit Insurance Corporation Improvement Act required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The Federal Deposit Insurance Corporation, along with the other federal banking agencies, adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The Federal Deposit Insurance Corporation also has authority to establish individual minimum capital requirements in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.

Standards for Safety and Soundness. As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. The agencies have also established standards for safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.

Investment Activities. All Federal Deposit Insurance Corporation insured banks, including savings banks, are generally limited in their equity investment activities to equity investments of the type and in the amount authorized for national banks, notwithstanding state law, subject to certain exceptions. In addition, a state bank may engage in state-authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if it meets all applicable capital requirements and it is determined by the Federal Deposit Insurance Corporation that such activities or investments do not pose a significant risk to the Deposit Insurance Fund.

Interstate Banking and Branching. Federal law permits well capitalized and well managed holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, recent amendments made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

The Federal Deposit Insurance Corporation has adopted regulations to implement the prompt corrective action legislation. The regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0%, or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the Federal Deposit Insurance Corporation to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

Transactions with Affiliates and Regulation W of the Federal Reserve Regulations. Transactions between banks and their affiliates are governed by federal law. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank (although subsidiaries of the bank itself, except financial subsidiaries, are generally not considered affiliates). Generally, Section 23A of the Federal Reserve Act and the Federal Reserve Board’s Regulation W limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such institution’s capital stock and surplus, and with all such transactions with all affiliates to an amount equal to 20.0% of such institution’s capital stock and surplus. Section 23B applies to “covered transactions” as well as to certain other transactions and requires that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from, and issuance of a guarantee to an affiliate, and other similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a bank to an affiliate. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act.

Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to a bank’s insiders, i.e., executive officers, directors and principal stockholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a greater than 10.0% stockholder of a financial institution, and certain affiliated interests of these persons, together with all other outstanding loans to such person and affiliated interests, may not exceed specified limits. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior Board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and surplus. Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers.

Enforcement. The Federal Deposit Insurance Corporation has extensive enforcement authority over insured state savings banks, including Fairport Savings Bank. The enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations, breaches of fiduciary duty and unsafe or unsound practices.

Federal Insurance of Deposit Accounts. Fairport Savings Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. Deposit accounts in Fairport Savings Bank are insured up to a maximum of $250,000 for each separately insured depositor.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation was required to seek to achieve the 1.35% ratio by September 30, 2020. The FDIC indicated that the 1.35% ratio was exceeded in November 2018. Insured institutions of less than $10 billion of assets received credits for the portion of their assessments that contributed to the reserve ratio between 1.15% and 1.35%. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation, which has exercised that discretion by establishing a long range fund ratio of 2%.

The Federal Deposit Insurance Corporation imposes an assessment for deposit insurance on all depository institutions. Assessments for most institutions are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.5%, the assessment range (inclusive of possible adjustments) was reduced for most banks and savings associations to 1.5 basis points to 30 basis points.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Fairport Savings Bank. Future insurance assessment rates cannot be predicted.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule order or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.

Privacy Regulations. Federal regulations generally require that Fairport Savings Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Fairport Savings Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Fairport Savings Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.

Community Reinvestment Act. Under the Community Reinvestment Act, or CRA, as implemented by federal regulations, a state member bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA does require the Federal Deposit Insurance Corporation, in connection with its examination of a state savings bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. Fairport Savings Bank’s latest federal CRA rating was “Satisfactory.”

USA Patriot Act. Fairport Savings Bank is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents, and parties registered under the Commodity Exchange Act.

Other Regulations

Interest and other charges collected or contracted for by Fairport Savings Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:

Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; and

Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such federal and state laws.

The deposit operations of Fairport Savings Bank also are subject to, among others, the:

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Federal Reserve System

The Federal Reserve Board regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $124.2 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0%, and for amounts greater than $124.2 million the reserve requirement is 10.0% (which may be adjusted annually by the Federal Reserve Board to between 8.0% and 14.0%). The first $16.3 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. Fairport Savings Bank is in compliance with these requirements.

Federal Home Loan Bank System

Fairport Savings Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. Fairport Savings Bank was in compliance with this requirement at December 31, 2019. Based on redemption provisions of the Federal Home Loan Bank of New York, the stock has no quoted market value and is carried at cost. Fairport Savings Bank reviews for impairment, based on the ultimate recoverability, the cost basis of the Federal Home Loan Bank of New York stock. As of December 31, 2019, no impairment has been recognized.

Holding Company Regulation

In connection with its second step conversion in 2016, Fairport Savings Bank revoked its Section 10(l) election, changing the status of its holding company from that of a savings and loan holding company to that of a bank holding company. By so doing, the previously applicable requirement that the Bank comply with the “Qualified Thrift Lender Test,” which limited commercial lending, was eliminated. Consequently, FSB Bancorp is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. FSB Bancorp is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval would be required for FSB Bancorp to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.

A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing securities brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property under certain conditions; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings association.

The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including that its depository institution subsidiaries that are “well capitalized” and “well managed,” to opt to become a “financial holding company.” A “financial holding company” may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. FSB Bancorp has elected “financial holding company” status, which became effective following completion of the conversion and reorganization.

FSB Bancorp is not subject to the Federal Reserve Board’s consolidated capital adequacy guidelines for bank holding companies. Legislation was enacted in December 2014 requiring the Federal Reserve Board to generally extend its “Small Bank Holding Company” exemption from consolidated holding company capital requirements to bank and savings and loan holding companies of up to $1 billion in assets. As noted above, the EGRRCPA further increased the exemption from consolidated holding company capital requirements to bank and savings and loan holding companies to $3 billion in assets. Consequently, bank holding companies with less than $3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve determines otherwise in particular cases.

A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions. The Federal Reserve Board has issued guidance which requires consultation with the Federal Reserve Board prior to a redemption or repurchase in certain circumstances.

The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength policy. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of FSB Bancorp to pay dividends or otherwise engage in capital distributions.

FSB Bancorp and Fairport Savings Bank is affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of FSB Bancorp or Fairport Savings Bank.

FSB Bancorp’s status as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

Federal Securities Laws

FSB Bancorp common stock is registered with the Securities and Exchange Commission. FSB Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of common stock issued in FSB Bancorp’s public offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of FSB Bancorp may be resold without registration. Shares purchased by an affiliate of FSB Bancorp will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If FSB Bancorp meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of FSB Bancorp that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of FSB Bancorp, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, FSB Bancorp may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

Emerging Growth Company Status

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” We qualify as an “emerging growth company” and believe that we will continue to qualify as an “emerging growth company” for five years from the completion of the stock offering.

Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we expect to rely on such exemptions so that we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Act, (iii) hold non-binding stockholder votes regarding annual executive compensation or executive compensation payable in connection with a merger or similar corporate transaction, (iv) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (v) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering or until we are no longer an “emerging growth company,” whichever is earlier. However, we will not be subject to the auditor attestation requirement or additional executive compensation disclosure, regardless of the exemptions, so long as we remain a “smaller reporting company” and a “non-accelerated filer” under Securities and Exchange Commission regulations.

We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Change in Control Regulations

Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as FSB Bancorp unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquiror has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with FSB Bancorp, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

In addition, federal regulations provide that no company may acquire control of a bank holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “bank holding company” subject to registration, examination and regulation by the Federal Reserve Board.

TAXATION

FSB Bancorp and Fairport Savings Bank are subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize certain pertinent tax matters and is not a comprehensive description of the tax rules applicable to FSB Bancorp or Fairport Savings Bank.

Federal Taxation

Method of Accounting. For federal income tax purposes, FSB Bancorp and Fairport Savings Bank currently report their income and expenses on the accrual method of accounting and use a tax year ending December 31 for filing their federal income tax returns.

Bad Debt Reserves. Prior to the Small Business Protection Act of 1996 (the “1996 Act”), Fairport Savings Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. As a result of the 1996 Act, Fairport Savings Bank was required to use the specific charge off method in computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). At December 31, 2019, Fairport Savings Bank had no reserves subject to recapture in excess of its base year reserves.

Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if Fairport Savings Bank failed to meet certain thrift asset and definitional tests. Federal legislation has eliminated these thrift-related recapture rules. At December 31, 2018, our total federal pre-1988 base year reserve was approximately $1.5 million. However, under current law, pre-1988 base year reserves remain subject to recapture if Fairport Savings Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a savings bank charter.

Alternative Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences, which we refer to as “alternative minimum taxable income.” The AMT is payable to the extent such alternative minimum taxable income is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain AMT payments may be used as credits against regular tax liabilities in future years. Under the Tax Act, AMT is no longer imposed beginning in 2018.

Net Operating Loss Carryovers. For net operating losses incurred prior to January 1, 2018, a company may carry back those net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. As part of the Act, net operating losses incurred after December 31, 2017 can be carried forward indefinitely and used to offset up to 80% of taxable income. At December 31, 2019, FSB Bancorp had no net operating loss carry forwards for federal income tax purposes.

Corporate Dividends-Received Deduction. FSB Bancorp may exclude from its income 100% of dividends received from Fairport Savings Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is 65% in the case of dividends received from a corporation in which a corporate recipient owns at least 20% of its stock, and corporations that own less than 20% of the stock of a corporation distributing a dividend may deduct only 50% of dividends received or accrued on their behalf.

State Taxation

New York State Taxation. Effective January 1, 2015, banking corporations became subject to taxation under the New York State General Business Corporation Franchise Tax provisions. The New York State tax rate on “entire net income” was reduced from 7.1% to 6.5% effective January 1, 2016, and various modifications were available to community banks (defined as banks with less than $8 billion in total assets) regarding deductions associated with interest income.

Maryland State Taxation. As a Maryland business corporation, FSB Bancorp is required to file an annual report with and pay franchise taxes to the state of Maryland.

ITEM 1A.

RISK FACTORS

As a “smaller reporting company,” FSB Bancorp is not required to provide the information required by this item.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

As of December 31, 2019, the net book value of our office properties was $5.0 million. The following table sets forth information regarding our offices.

Location	Leased or Owner	Year Acquired or Leased	Net Book Value of Real Property

Main Office: Fairport	Owner	1932	$	1,492,000

Other Properties:

Penfield	Leased¹	2002	$	1,223,000

Irondequoit	Leased¹	2007	$	1,084,000

Webster	Leased¹	2009	$	236,000

Perinton	Leased¹	2011	$	898,000

Pittsford	Leased	2010	$	60,000	²

Greece	Leased	2014	$	10,000	²

Watertown	Leased	2010		—

Cheektowaga	Leased	2015		—

¹Ground lease only

²Leasehold improvements

ITEM 3.

LEGAL PROCEEDINGS

On March 13, 2020, Stephen Bushansky, a purported FSB Bancorp stockholder, filed a complaint in the United States District Court for the Northern District of New York, captioned Bushansky v. FSB Bancorp, Inc., Kevin D. Maroney, Dawn Deperrior, Dana C. Gavenda, Stephen J. Meyer, Lowell C. Patric, Alicia H. Pender, James E. Smith and Thomas J. Weldgen (Case No. 5:20-CV-294-DNH/ATB), against FSB Bancorp and each FSB Bancorp director (collectively, the “Individual Bushansky Defendants”). The lawsuit alleges that FSB Bancorp and the Individual Bushansky Defendants have violated the federal securities laws by misrepresenting or omitting certain material information from FSB Bancorp’s definitive proxy statement for the FSB Bancorp special stockholders’ meeting to approve the proposed Merger that is necessary for FSB Bancorp’s stockholders to make an informed decision whether to vote in favor of the proposed Merger. The relief sought by the lawsuit includes both a preliminary and permanent injunction against the completion of the proposed Merger, rescissory damages if the proposed Merger is completed, and costs, including attorneys’ and experts’ fees.

The defendants believe that the lawsuit is without merit and intend to defend against it vigorously. Currently, however, it is not possible to predict the outcome of the litigation or the impact the litigation may have on FSB Bancorp or the proposed Merger, if any. Additional lawsuits alleging similar claims may be filed.

Other than as described above, at December 31, 2019, the Company was not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The approximate number of holders of record of FSB Bancorp’s common stock as of March 5, 2020 was 172. Shares of FSB Bancorp common stock trade on the Nasdaq Capital Market under the symbol “FSBC.” Certain shares of FSB Bancorp are held in “nominee” or “street name” and, accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.

FSB Bancorp has not declared dividends on its common stock. Dividend payments by FSB Bancorp are dependent in part on dividends it receives from Fairport Savings Bank because FSB Bancorp has no source of income other than dividends from Fairport Savings Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by FSB Bancorp and interest payments with respect to FSB Bancorp’s loan to the Employee Stock Ownership Plan. For more information on restrictions on dividend payments, please see “Item 1. Business—Regulation and Supervision—Holding Company Regulation.”

The following table provides certain information with regard to shares repurchased by the Company during the quarter ended December 31, 2019.

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)		(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
October 1 — October 31, 2019		-	$	-		-		24,957
November 1 — November 30, 2019		-	$	-		-		24,957
December 1 — December 31, 2019		-	$	-		-		24,957
Total		-	$	-		-

(1) The Company’s Board of Directors authorized its first stock repurchase program on July 27, 2017 to acquire up to 97,084 shares, or 5.0% of the Company’s then outstanding common stock. Repurchases will be made from time to time depending on market conditions and other factors, and will be conducted through open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. There is no guarantee as to the exact number of shares to be repurchased by the Company.

ITEM 6.

SELECTED FINANCIAL DATA

This item is not applicable to smaller reporting companies.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated by reference to our Annual Report to Stockholders.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company,” FSB Bancorp is not required to provide the information required by this item.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements included in our Annual Report to Stockholders are incorporated herein by reference.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must necessarily reflect the fact that there are resource constraints and that management is required to apply its judgement in evaluating the benefits of possible controls and procedures relative to their costs.

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2019. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

(i)

pertain to the maintenance of records that in reasonable detail accurately and fairly reflects the transactions and disposition of the assets of the Company;

(ii)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and

(iii)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).

Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2019.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

There has been no change in the Company’s internal control over financial reporting during the fourth quarter of the fiscal year ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

The following is a summary of the relevant business experience for each of the Company’s directors and executive officers. All directors have held their present positions for at least five years unless otherwise stated. Each director is also a director of Fairport Savings Bank.

Directors

Dana C. Gavenda retired as Chief Executive Officer of Fairport Savings Bank on December 31, 2017. He was President and Chief Executive Officer for the prior 16 years. He continues to serve FSB Bancorp, Inc. and Fairport Savings Bank as Chairman of the Board of Directors. Mr. Gavenda has held various positions in the banking industry since 1973. Mr. Gavenda’s significant local banking experience provides the Board with perspective on market trends and opportunities. He also assists the Board in assessing trends and developments in the financial institutions industry on a local and national basis. Director of FSB Bancorp, Inc., its predecessor or Fairport Savings Bank since 2002; age 68.

Thomas J. Weldgen is retired. Prior to his retirement in 2019, Mr. Weldgen was the Chief Financial Officer of DiMarco Group, LLC, a real estate and construction company since 2014. From 1992 until 2014, Mr. Weldgen was Chief Financial Officer of CPAC, Inc., a photographic chemicals and equipment company that was liquidated pursuant to the federal bankruptcy laws in 2015. Mr. Weldgen’s background as a chief financial officer provides the Board with valuable insight into the accounting and reporting issues facing FSB Bancorp, Inc. Director of FSB Bancorp, Inc., its predecessor or Fairport Savings Bank since 2015; age 67.

Dawn DePerrior is a consultant with the Burke Group. Most recently, Ms. DePerrior was Vice President of Digital Enablement and Information Technology at Constellation Brands, an international producer and marketer of wine, beer, and spirits from 2014 through 2019. Previously, she was the Senior Director of Information Systems at the University of Rochester Medical Center from 2008 to 2014. Her experience with information technology will provide the Board with valuable insights into cyber-security issues facing Fairport Savings Bank. Director of FSB Bancorp, Inc., its predecessor or Fairport Savings Bank since 2015; age 62.

Kevin D. Maroney has served as our Chief Executive Officer since January 2018 and was named President in October 2017. Mr. Maroney first joined Fairport Savings Bank in 2004 and has served in a number of executive and senior management roles, including as our Chief Financial Officer and Chief Operating Officer, positions he held from 2004 to October 2017. Mr. Maroney has over 40 years of banking experience and has extensive finance and asset/liability experience with his primary objective to successfully execute Fairport Savings Bank’s strategic plan. Director of FSB Bancorp, Inc., its predecessor or Fairport Savings Bank since 2017; age 62.

Stephen Meyer retired in 2015 from M&T Bank, where he held various retail and commercial banking senior management positions in Rochester since 1969. His last 10 years with M&T, he served as an insurance consultant with M&T Securities and Wilmington Trust Company. His experience provides the Board with valuable perspective as to the operations of Fairport Wealth Management, retail banking, and commercial lending. Director of FSB Bancorp, Inc., its predecessor or Fairport Savings Bank since 2015; age 73.

Lowell C. Patric is a co-founder and member of the Board of Karma Culture, Pittsford, New York. Karma Culture was organized to develop, market, and sell a line of natural spring water and vitamin additives mix-to-drink beverage products and to develop and explore uses for its proprietary dispensing cap technology. Prior to Karma Culture, Mr. Patric was founder and Principal of LCP Management Services in Rochester, New York. LCP Management Services was established as a general management consulting firm providing financial advice in regards to strategic initiatives to local and national businesses. Mr. Patric has 26 years of banking experience, including serving in 1993 as President and Chief Operating Officer of RCSB Financial, Inc., a retail consumer financial services holding company including a $4.0 billion banking subsidiary, an insurance company, a full service brokerage subsidiary, a mortgage banking subsidiary, and an automobile finance subsidiary, headquartered in Rochester, New York. Mr. Patric has extensive experience in financial and strategic planning, risk management, investment and balance sheet management, and bank capital management. Director of FSB Bancorp, Inc., its predecessor or Fairport Savings Bank since 2009; age 74.

Alicia H. Pender is the Director of Finance at Sisters of St. Joseph of Rochester, a position she has held since 1991. Ms. Pender has over 40 years of experience in accounting and finance, and is a certified public accountant in the State of New York. Ms. Pender’s background as a certified public accountant provides the Board with valuable insight into the accounting and reporting issues faced by FSB Bancorp, Inc. and in assessing strategic transactions involving FSB Bancorp, Inc. Director of FSB Bancorp, Inc., its predecessor or Fairport Savings Bank since 2008; age 62.

James E. Smith is retired. Prior to his retirement in 2013, Mr. Smith served as Supervisor of the Town of Perinton, New York, an elected office that he held since 1984. Mr. Smith’s previous position as the Supervisor of the Town of Perinton, his knowledge of the local municipalities and contacts with local community leaders and politicians provides the Board with insight into dealing with such municipalities and assists the Board in assessing local government actions which may affect FSB Bancorp, Inc. or its subsidiaries. Mr. Smith holds an MBA degree from Syracuse University. Director of FSB Bancorp, Inc., its predecessor or Fairport Savings Bank since 1991; age 73.

Executive Officers Who are Not Directors

Kathleen M. Dold is our Senior Vice President and Loan Operations Manager. Her areas of responsibility include underwriting, loan delivery and servicing. Ms. Dold has over 30 years’ experience in mortgage lending with an emphasis on underwriting. Prior to joining Fairport Savings Bank in 2000, she held similar managerial positions at local financial institutions including Albion Federal Savings & Loan Association and Sibley Mortgage Corporation. Age 64.

Michael R. Giancursio is our Executive Vice President and Chief Lending Officer. Mr. Giancursio is responsible for managing sales and operations for the commercial lending area of the Bank. He also manages the overall credit risk in this department. Mr. Giancursio is a former National Bank Examiner for the Comptroller of the Currency and has 21 years of experience in commercial lending, cash management, and deposits. Mr. Giancursio has extensive training and experience in sales, credit analysis, and credit administration. Before joining Fairport Savings Bank in 2017, Mr. Giancursio was a Vice President in Sales for M&T Bank and First Niagara Bank. Age 52.

Cheryl M. Gregory is our Senior Vice President of Retail Banking and joined Fairport Savings Bank in 2001. Ms. Gregory’s areas of responsibility include branch administration and marketing. She also oversees our retail banking program and our wealth management division as well as supervising Bank Secrecy and Security. Prior to joining Fairport Savings Bank, she was employed from 1984 to 1992 with Columbia Bank which was acquired by Oswego City Savings Bank in 1992 who then changed their name to Pathfinder Bank. Age 54.

Angela M. Krezmer is our Senior Vice President and Chief Financial Officer. Ms. Krezmer has held various accounting and treasury positions since joining Fairport Savings Bank in 2008. Ms. Krezmer has extensive experience in Securities and Exchange Commission (“SEC”) reporting as well as the treasury management responsibilities of Fairport Savings Bank. Age 34.

Code of Ethics

FSB Bancorp, Inc. has adopted a Code of Ethics that is applicable to the Board of Directors and Fairport Savings Bank’s senior executive officers, including the principal executive officer, principal financial officer, principal accounting officer and all officers performing similar functions. There were no amendments made to or waivers from our Code of Ethics in 2019. The Code of Ethics is posted on our website at www.fairportsavingsbank.com.

Delinquent Section 16(a) Reports

Our executive officers and directors and beneficial owners of greater than 10% of the outstanding shares of common stock are required to file reports with the Securities and Exchange Commission disclosing beneficial ownership and changes in beneficial ownership of our common stock. Securities and Exchange Commission rules require disclosure if an executive officer, director or 10% beneficial owner fails to file these reports on a timely basis. Based on our review of ownership reports and management questionnaires, we believe that none of our executive officers or directors failed to file these reports on a timely basis for 2019.

Audit Committee

The Audit Committee is comprised of Directors Pender (who serves as Chairman), DePerrior and Weldgen. The Board of Directors has determined that Director Alicia Pender qualifies as an “audit committee financial expert” under applicable SEC rules. Each member of the Audit Committee is “independent” in accordance with SEC and Nasdaq standards.

Our Board of Directors has adopted a written charter for the Audit Committee, which is posted on our website at www.fairportsavingsbank.com. As more fully described in the Audit Committee Charter, the Audit Committee is responsible for providing oversight relating to our consolidated financial statements and financial reporting process, systems of internal accounting and financial controls, outsourced internal audit services, annual independent audit and the compliance and ethics programs established by management and the Board.

ITEM 11.

EXECUTIVE COMPENSATION

Directors’ Compensation

The Company pays no fees for service on the Board of Directors or Board committees. However, each of the individuals who currently serves as one of the Company’s directors also serves as a director of Fairport Savings Bank and earns fees in that capacity.

In 2019, each non-employee director received a retainer fee of $675 for each scheduled monthly meeting and $675 for attendance at each scheduled monthly meeting, and received $650 for attendance at meetings of the Audit Committee, Compensation/Benefits/Marketing Committee, and Nominating Committee, $400 for attendance at any special meetings, $250 for attendance at the quarterly ALCO Committee meetings, and $150 for attendance at any Commercial Loan Committee meeting. In addition to these fees in 2019, Director Gavenda received a fee of $7,000 for serving as the Chairman of the Board; Director Patric received a fee of an additional $150 per committee meeting for serving as the Chairman of the Compensation/Benefits/Marketing Committee, Director Pender received a fee of an additional $150 per committee meeting for serving as Chairman of the Audit Committee; and Director Meyer received a fee of an additional $150 per committee meeting for serving as Chairman of the Nominating Committee. Fairport Savings Bank paid cash fees totaling $179,475 to its seven non-employee board members during the year ended December 31, 2019.

As of December 31, 2019, there were no increases to any of the Board fees.

Equity Award Program. Directors are eligible to participate in the Equity Plan. The Equity Plan is discussed under “Stock Benefit Plans – 2017 Equity Incentive Plan.”

Director Compensation Table. The following table sets forth for the year ended December 31, 2019 certain information as to the total remuneration the Company paid to its directors other than Mr. Maroney. No additional compensation was paid to Mr. Maroney for his service as a director.

Name	Fees earned or paid in cash		Total
Dawn DePerrior	$	24,075	$	24,075
Dana C. Gavenda		30,175		30,175
Stephen J. Meyer		24,125		24,125
Lowell C. Patric		25,925		25,925
Alicia H. Pender		25,225		25,225
James E. Smith		24,475		24,475
Thomas J. Weldgen		25,475		25,475

The following table sets forth the number of outstanding options and restricted stock shares held by each director.

Name	Outstanding Options		Restricted Stock Shares
Dawn DePerrior		7,000		2,500
Dana C. Gavenda		48,540		19,410
Stephen J. Meyer		7,000		2,500
Lowell C. Patric		7,000		2,500
Alicia H. Pender		7,000		2,500
James E. Smith		7,000		2,500
Thomas J. Weldgen		7,000		2,500

Summary Compensation Table

The following table shows the compensation of Kevin D. Maroney, the Company’s principal executive officer in 2019, and the two most highly compensated other executive officers who earned total compensation of $100,000 or more for services to the Company or any of its subsidiaries during the year ended December 31, 2019. The Company refers to these individuals as “Named Executive Officers.”

Name and principal position	Year	Salary ($)	Stock Awards ($)⁽¹⁾		Options Awards ($)⁽¹⁾		Non-Equity Incentive Plan Compensation ($)		All Other Compensation ($)⁽²⁾		Total ($)
Kevin D. Maroney President and Chief Executive Officer	2019 2018	226,600 220,000		— —		— —		13,596 9,900		91,354 84,323		331,550 314,223
Michael R. Giancursio Executive Vice President and Chief Lending Officer	2019 2018	169,950 165,000		— —		— —		8,922 6,188		26,152 10,904		205,024 182,092
Angela M. Krezmer Senior Vice President and Chief Financial Officer	2019 2018	120,000 100,000		— 35,040		— 13,100		9,360 5,400		11,101 8,601		140,461 162,141

(1)

The amounts for the year ended December 31, 2018 represent the grant date fair value of the stock and option awards granted to the named executive officers under the 2017 Equity Incentive Plan. The grant date fair value of the stock and option awards have been computed in accordance with the stock-based compensation accounting rules (FASB ASC Topic 718). Assumptions used in the calculations of these amounts are included in note 9 to the Company’s audited financial statements.

(2)

The compensation represented by the amounts for 2019 set forth in the All Other Compensation column for the Named Executive Officers is detailed in the following table. ESOP allocations for the year ended December 31, 2019 were 277 shares for Mr. Maroney, 190 shares for Mr. Giancursio, and 126 shares for Ms. Krezmer. The ESOP value in the table below is based on the Company’s closing stock price as of December 31, 2019 of $17.38 per share.

Other Compensation
	401(k) Plan Contributions		ESOP Contributions		SERP Contributions		Supplemental Disability Insurance Premiums		Country Club and Automobile Allowance		Total All Other Compensation
Kevin D. Maroney	$	18,592	$	4,814	$	45,186	$	1,316	$	21,446	$	91,354
Michael R. Giancursio	$	13,282	$	3,302	$	—	$	1,126	$	8,442	$	26,152
Angela M. Krezmer	$	8,610	$	2,190	$	—	$	301	$	—	$	11,101

Amounts included in the “Stock Awards” and “Option Awards” columns of the summary compensation table for the year ended December 31, 2018 represent grants under the Company’s 2017 Equity Incentive Plan. Notwithstanding that (1) these awards vest ratably over a five-year period following the grant date; and (2) the annual financial statement expense that the Company is required to recognize for these grants will be expensed ratably over the vesting period and will be significantly less than the amounts included in the “Stock Awards” and “Option Awards” columns for the year ended December 31, 2018, the Securities and Exchange Commission rules require that the Company report the full grant date fair value of restricted stock and stock option awards in the year in which the grants are made. In addition, with respect to the stock options, the actual value, if any, realized by any named executive officer from any stock options will depend on the extent to which the market value of the Company common stock exceeds the exercise price of the stock option on the date of exercise. Accordingly, there is no assurance that the value realized by a named executive officer will be at or near the value estimated above in the “Options Awards” column.

Outstanding Equity Awards at Year End. The following table sets forth information with respect to outstanding equity awards as of December 31, 2019 for the named executive officers. All equity awards reflected in this table were granted pursuant to the Company’s 2017 Equity Incentive Plan, described below.

	Option Awards											Stock Awards
Name	Number of securities underlying unexercised options (#) exercisable			Number of securities underlying unexercised options (#) unexercisable		Equity incentive plan awards: number of securities underlying unexercised unearned options (#)		Option Exercise Price ($)		Option Expiration Date		Number of shares or units of stock that have not vested (#)			Market value of shares or units of stock that have not vested ($)⁽⁷⁾
Kevin D. Maroney		19,416	⁽¹⁾		29,124		—	$	16.72		10/02/2027		11,646	⁽⁴⁾	$	202,407
Michael R. Giancursio		2,400	⁽²⁾		3,600		—	$	16.69		10/30/2027		1,500	⁽⁵⁾	$	26,070
Angela M. Krezmer		1,000	⁽³⁾		4,000		—	$	17.52		01/05/2028		1,600	⁽⁶⁾	$	27,808

(1)	Options vest in five equal annual installments commencing on October 2, 2018.
(2)	Options vest in five equal annual installments commencing on October 30, 2018.
(3)	Options vest in five equal annual installments commencing on January 5, 2019.
(4)	Stock awards vest in five equal annual installments commencing on October 2, 2018.
(5)	Stock awards vest in five equal annual installments commencing on October 30, 2018.
(6)	Stock awards vest in five equal annual installments commencing on January 5, 2019.
(7)	Based on the $17.38 per share trading price of the Company common stock on December 31, 2019.

Agreements and Benefit Plans

Employment Agreement with Kevin D. Maroney. Fairport Savings Bank entered into an employment agreement with Mr. Maroney, effective as of January 1, 2018. The employment agreement supersedes and replaces Mr. Maroney’s change in control agreement with Fairport Savings Bank dated March 28, 2012. The employment agreement has an initial term of three years and renews annually such that the remaining term will be three years, unless otherwise terminated. Notwithstanding the foregoing, in the event of a change in control of the Company or Fairport Savings Bank, the term will automatically be extended to expire no less than three years beyond the effective date of the change in control.

The employment agreement provides base salary to Mr. Maroney for his services, which beginning on March 1, 2019, was $225,000. The base salary may be increased, but not decreased. In addition to the base salary, the agreement provides for, among other things, participation in bonus programs and other employee pension benefit and fringe benefit plans applicable to executive employees, a monthly automobile allowance, and other reasonable business expenses incurred.

In the event of Mr. Maroney’s involuntary termination of employment for reasons other than cause, disability or death, or in the event of his resignation for “good reason,” he will receive a severance payment equal to the higher of the amount of base salary that would have been earned by Mr. Maroney had he remained employed with Fairport Savings Bank for the greater of: (1) 12 months; or (2) the remaining term of the agreement (the “Benefit Period”). Such payment will be payable in a lump sum within 30 days following Mr. Maroney’s date of termination. Additionally, Mr. Maroney would be entitled to the continuation, at Fairport Savings Bank’s expense, of life insurance coverage and non-taxable medical and dental insurance coverage upon the earlier of: (1) the completion of the Benefit Period; or (2) the date on which Mr. Maroney becomes a full-time employee of another employer, provided he is entitled to benefits that are substantially similar to the health and welfare benefits provided by Fairport Savings Bank. For purposes of the employment agreement, “good reason” is defined as: (1) a material reduction in Mr. Maroney’s base salary, (2) a material reduction in Mr. Maroney’s authority, duties or responsibilities from the position and attributes associated with serving as President and Chief Executive Officer, (3) a relocation of Mr. Maroney’s principal place of employment by more than 25 miles from its location at the effective date of the employment agreement or (4) a material breach of the employment agreement by Fairport Savings Bank.

In the event of a termination for any reason following a change in control of Fairport Savings Bank or the Company, Mr. Maroney (or, in the event of his death, his beneficiary) would be entitled to a severance payment equal to three times the sum of Mr. Maroney’s highest base salary during the term of the employment agreement, and the highest annual cash bonus paid to, or earned by, Mr. Maroney during the calendar year of the change in control or either of the two calendar years immediately preceding the change in control. Such severance will be paid as a lump sum within 30 days following Mr. Maroney’s date of termination. Moreover, Mr. Maroney would be entitled to the continuation, at Fairport Savings Bank’s expense, of life insurance and non-taxable medical and dental coverage until the earlier of: (1) the date which is three years from Mr. Maroney’s date of termination or (2) the date on which Mr. Maroney becomes a full-time employee of another employer, provided Mr. Maroney is entitled to the benefits that are substantially similar to the health and welfare benefits provided by Fairport Savings Bank.

If Mr. Maroney becomes disabled during the term of the agreement, the agreement shall terminate and Mr. Maroney would have no right to receive any other compensation or benefits under the agreement. In the event Mr. Maroney dies while employed by Fairport Savings Bank, his estate or designated beneficiary will be paid Mr. Maroney’s base salary for one year and his spouse and dependents would continue to receive non-taxable medical and dental coverage comparable to the coverage currently maintained by the bank for Mr. Maroney and his family.

While employed and for a period of 12 months following his date of termination for any reason (except if such termination occurs on or after a change in control), Mr. Maroney will be subject to non-competition and non-solicitation covenants.

Executive Compensation Clawback Agreement with Kevin D. Maroney. On February 23, 2012, Fairport Savings Bank entered into an Executive Compensation Clawback Agreement with Mr. Maroney. Under the agreement, Mr. Maroney acknowledges that he will not be entitled to receive any payments due under the annual Incentive Compensation Program offered by Fairport Savings Bank (the “Incentive Plan”) and/or may be required to repay any payments previously received under the Incentive Plan in the following circumstances: (1) Mr. Maroney’s Incentive Plan payment was conditioned upon achieving certain financial results that were subsequently the subject of a substantial restatement of Fairport Savings Bank’s financial statements and Mr. Maroney engaged in misconduct that caused the need for the substantial restatement, and a lower payment would have been made to Mr. Maroney based upon the restated financial results, or (2) the board of directors of Fairport Savings Bank determines that Mr. Maroney has engaged in fraud, gross negligence or willful misconduct detrimental to Fairport Savings Bank. If Fairport Savings Bank determines that one of the circumstances described above has occurred, Mr. Maroney will be notified and will have ten days to request a reconsideration of Fairport Savings Bank’s determination. If Mr. Maroney fails to request reconsideration and/or Fairport Savings Bank elects not to reconsider its determination, he will be liable for repayment of all Incentive Plan payments paid within the preceding three years or during the period of conduct examined, whichever is longer. Fairport Savings Bank is entitled to offset any such liability against any compensation owed to him by Fairport Savings Bank and he will become ineligible to receive any further Incentive Plan payments. In the event Mr. Maroney is required to repay any amount to Fairport Savings Bank, such repayment will be due within one year from Fairport Savings Bank’s notification of the repayment obligation. In the event such repayment obligation triggers income tax penalties to Fairport Savings Bank or Mr. Maroney, Mr. Maroney will be solely responsible for the payment of such taxes.

Change in Control Agreement with Michael R. Giancursio. On October 30, 2017, Fairport Savings Bank entered into a change in control agreement with Mr. Giancursio. The agreement provides that if Mr. Giancursio either: (1) is terminated by Fairport Savings Bank (or any successor) for any reason other than for cause; or (2) voluntarily resigns for “good reason” within 24 months following a change in control of Fairport Savings Bank or the Company, Mr. Giancursio will be entitled to a payment equal to two times the sum of his highest annual base salary at any time under the agreement and the highest annual cash bonus paid to, or earned by, Mr. Giancursio during the calendar year of the change in control or either of the two calendar years immediately preceding the change in control. Such payment shall be payable within 10 business days following his date of termination, and will be subject to applicable withholding taxes. In the event of death, the benefit will be paid to Mr. Giancursio’s surviving spouse or, if no surviving spouse, to his estate. In addition, Mr. Giancursio would be entitled, at no expense, to the continuation of substantially similar life, health and disability insurance coverage for 18 months following his date of termination.

Notwithstanding the foregoing, the payments required under the agreement will be reduced to the extent necessary to avoid penalties under Section 280G of the Internal Revenue Code.

Change in Control Agreement with Angela M. Krezmer. On January 1, 2018, Fairport Savings Bank entered into a change in control agreement with Ms. Krezmer. The agreement provides that if Ms. Krezmer either: (1) is terminated by Fairport Savings Bank (or any successor) for any reason other than for cause; or (2) voluntarily resigns for “good reason” within 24 months following a change in control of Fairport Savings Bank or the Company, Ms. Krezmer will be entitled to a payment equal to two times the sum of her highest annual base salary at any time under the agreement and the highest annual cash bonus paid to, or earned by, Ms. Krezmer during the calendar year of the change in control or either of the two calendar years immediately preceding the change in control. Such payment shall be payable within 10 business days following her date of termination, and will be subject to applicable withholding taxes. In the event of death, the benefit will be paid to Ms. Krezmer’s surviving spouse or, if no surviving spouse, to her estate. In addition, Ms. Krezmer would be entitled, at no expense, to the continuation of substantially similar life, health and disability insurance coverage for 18 months following her date of termination.

Notwithstanding the foregoing, the payments required under the agreement will be reduced to the extent necessary to avoid penalties under Section 280G of the Internal Revenue Code.

Annual Incentive Plan. On January 1, 2012, the Annual Incentive Plan, a cash-incentive bonus plan, was adopted to align the interests of eligible employees with the overall performance of the Company and Fairport Savings Bank.

Employees selected by the Compensation Committee, which includes the Named Executive Officers, are eligible to participate in the plan. For each plan year (which is the calendar year), each participant will be granted an annual bonus award opportunity, designated as a percentage of base salary, subject to the satisfaction of certain performance objectives specified by the compensation committee for each participant. The specific performance objectives are determined annually by the Compensation Committee, and generally include objective performance targets on financial performance, growth, asset quality and risk management and subjective performance objectives, such as particular qualitative factors for the participant, based on his or her duties for Fairport Savings Bank. Each performance objective will specify level of achievements at “threshold,” “target” and “maximum” levels and will be weighted by priority as a percentage of the total annual bonus award payable to the participant. The annual bonus award earned is payable to each participant in a cash lump sum within 2.5 months following the end of each plan year, to the extent the performance objectives are determined to be satisfied by the Compensation Committee. Payment of an award is also contingent on the participant’s individual performance meeting expectations, as determined by the Compensation Committee.

For 2019, the Compensation Committee established the following range of annual cash incentive opportunities for threshold, target and maximum achievement (as a percentage of base salary):

Executive Officer	Threshold			Target			Maximum
Kevin D. Maroney		15	%		20	%		25	%
Michael R. Giancursio		15	%		20	%		25	%
Angela M. Krezmer		12	%		15	%		18	%

Based on both the satisfaction of company and individual performance goals, Messrs. Maroney and Giancursio and Ms. Krezmer earned a bonus with respect to the 2019 performance period equal to $13,596, $8,922 and $9,360 respectively.

Supplemental Executive Retirement Plans. Effective August 1, 2010, Fairport Savings Bank established a Supplemental Executive Retirement Plan (“SERP”) with Mr. Maroney, which is a non-qualified defined benefit plan. Under the terms of the SERP, upon separation from service after attaining age 65, Fairport Savings Bank will pay Mr. Maroney an annual benefit of $40,000, payable in equal monthly installments for 15 years commencing on the first day of the month after his separation from service. If Mr. Maroney has a separation from service before age 65 or within 24 months after a change in control (as defined in the SERP) or if he experiences a disability (as defined in the SERP) before age 65 or if he dies, then he will be paid a lump sum equal to the accrual balance under the SERP on the first day of the month following his separation from service. However, no SERP benefits are payable if Mr. Maroney’s separation from service is for cause (as defined in the SERP).

If Mr. Maroney is a “specified employee” on the date of his separation from service for any reason (other than due to death or disability), his SERP benefit shall commence or be paid no earlier than the first day of the seventh month following his separation from service.

On December 19, 2019, Fairport Savings Bank adopted an amendment to the SERP with Mr. Maroney. The total amount payable under the SERP in the event of Mr. Maroney’s qualifying termination event following a change in control is $600,000, which is payable in a cash lump sum. All other terms of the SERP remain unchanged.

Fairport Savings Bank also established a Supplemental Executive Retirement Plan, effective May 1, 2006, for Mr. Gavenda. In connection with Mr. Gavenda’s retirement on December 31, 2017, he is entitled to an annual payment under the plan of $60,000, payable for 15 years commencing on July 1, 2018.

401(k) Plan. Fairport Savings Bank maintains the Fairport Savings Bank 401(k) Savings Plan, a tax-qualified defined contribution retirement plan (the “401(k) Plan”), for all employees who have satisfied the 401(k) plan’s eligibility requirements. Employees are eligible to participate in the 401(k) Plan upon attainment of age 19 and completion of one year of service.

A participant may contribute up to 100% of his or her compensation to the 401(k) Plan on a pre-tax basis, subject to the limitations imposed by the Internal Revenue Code. For the 2019 calendar year, the maximum salary deferral contribution that can be made by a participant is $19,000, provided however that a participant over age 50 may contribute an additional $6,000 to the 401(k) Plan. In addition to salary deferral contributions, Fairport Savings Bank will make a matching contribution equal to 100% of the first 6% of the compensation that is deferred by the participant during the plan year. In addition, Fairport Savings Bank may make a discretionary contribution of up to 2% of each eligible employee’s annual base compensation. A participant is always 100% vested in his or her salary deferral contributions. All employer contributions vest at a rate of 20% per year, beginning after the participant’s completion of his or her first year of service, such that the participant will be fully vested upon completion of five years of credited service. Generally, a participant (or participant’s beneficiary) may receive a distribution from his or her vested account at retirement (age 65), early retirement (age 55 and five years of vesting service), death, disability, or termination of employment.

Each participant has an individual account under the 401(k) plan and may direct the investment of his or her account among a variety of investment options available.

Stock Benefit Plans

Employee Stock Ownership Plan and Trust. Fairport Savings Bank adopted the Fairport Savings Bank Employee Stock Ownership Plan (the “ESOP”) in connection with FSB Community Bankshares, Inc.’s 2007 initial stock offering. As part of the offering, the ESOP borrowed funds from FSB Community and used those funds to purchase 69,972 shares of the common stock.

On July 13, 2016 concurrent with the completion of the conversion of FSB Community Bankshares, MHC from the mutual holding company to stock holding company form of the organization, shares of common stock of FSB Community owned by the ESOP were exchanged for shares of the Company’s common stock pursuant to an exchange ratio. The shares of the common stock are the collateral for the loan. Employees who are at least 21 years old with at least one year of employment with Fairport Savings Bank are eligible to participate. The loan has a term of 20 years and is repaid principally from discretionary contributions by Fairport Savings Bank to the ESOP. The loan may be repaid over a shorter period, without penalty for prepayments. The interest rate is an adjustable rate equal to the prime rate, as published in the Wall Street Journal as of January 1 of each calendar year.

The shares purchased with the loan are held in a suspense account and are allocated to participants’ accounts in the employee stock ownership plan as the loan is repaid. Participants will have no interest in the shares in the suspense account and only have an interest in the shares actually allocated to their accounts as the loan is repaid. Allocations are made to each participant’s account in the ratio that his or her compensation bears to the compensation of all plan participants during the plan year. Benefits under the plan become vested at the rate of 20% per year, starting upon completion of two years of credited service, and will be fully vested upon completion of six years of credited service, with credit given to participants for up to three years of credited service with Fairport Savings Bank prior to the adoption of the plan. A participant’s interest in his account under the plan will also fully vest in the event of termination of service due to a participant’s normal retirement, death, disability, or upon a change in control (as defined in the plan). Vested benefits will be payable generally in the form of common stock, or to the extent participants’ accounts contain cash, benefits will be paid in cash. Pursuant to the accounting guidance governing employers’ accounting for employee stock ownership plans, the Company is required to record compensation expense each year in an amount equal to the fair market value of the shares released from the suspense account. For the year ended December 31, 2019, this expense was $66,050.

2017 Equity Incentive Plan. On August 29, 2017, the stockholders of the Company approved the 2017 Equity Incentive Plan (the “Equity Plan”) which provides for the grant of stock-based awards to its Directors and executive officers of the Company and Fairport Savings Bank. The Equity Plan authorizes the issuance or delivery of up to 271,839 shares of the Company common stock pursuant to grants of restricted stock awards, incentive stock options, and non-qualified stock options; provided, however, that the maximum number of shares of stock that may be delivered pursuant to the exercise of stock options is 194,171 (all of which may be granted as incentive stock options) and the maximum number of shares of restricted stock that may be granted is 77,668.

The Equity Plan is administered by the members of the Company’s Compensation Committee of the Board of Directors (the “Compensation Committee”) who are “Disinterested Board Members” as defined in the Equity Plan. The Compensation Committee has the authority and discretion to select the persons who will receive the awards; establish the terms and conditions relating to each award; adopt rules and regulations relating to the Equity Plan; and interpret the Equity Plan. The Equity Plan also permits the Compensation Committee to delegate all or any portion of its responsibilities and powers.

The Company’s executive officers and outside directors are eligible to receive awards under the Equity Plan. Awards may be granted in a combination of restricted stock awards, incentive stock options, and non-qualified stock options. The exercise price of stock options granted under the Equity Plan may not be less than the fair market value on the date the stock option is granted. Stock options are subject to vesting conditions and restrictions as determined by the Compensation Committee. Stock awards under the Equity Plan will be granted only in whole shares of common stock. All restricted stock and stock option grants will be subject to conditions established by the Compensation Committee that are set forth in the award agreement.

There were no stock awards or stock options granted during year ended December 31, 2019.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Set forth below is information as of December 31, 2019 regarding equity compensation plans categorized by those plans that have been approved by the Company's stockholders. There are no plans that have not been approved by the Company's stockholders.

Plan	Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights		Weighted Average Exercise Price		Number of Securities Remaining Available for Issuance Under Plan
Equity compensation plans approved by stockholders		172,080	$	16.82		28,657
Equity compensation plans not approved by stockholders		—		—		—
Total		172,080	$	16.82		28,657

The following table shows as of March 5, 2020, the beneficial ownership of the Company common stock by persons, or groups of persons, known by the Company to beneficially own more than 5% of the Company common stock.

Name and Address of Beneficial Owners	Amount of Shares Owned and Nature of Beneficial Ownership ⁽¹⁾		Percent of Shares of Common Stock Outstanding
Lawrence B. Seidman⁽²⁾ 1000 Lanidex Plaza, 1st Floor Parsippany, New Jersey 07054		116,100		5.98	%

MFP Partners, L.P.⁽³⁾ 909 Third Avenue, 33rd Floor New York, New York 10022		181,713		9.36	%

(1)	In accordance with Rule 13d-3 under the Exchange Act, shares of common stock are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares (i) voting power, which includes the power to vote or to direct the voting of the shares, or (ii) investment power, which includes the power to dispose or to direct the disposition of the shares.
(2)	On a Schedule 13D filed with the SEC on November 28, 2017, Seidman and Associates, L.L.C. reported sole dispositive and voting power with respect to 20,013 shares of the Company common stock; Seidman Investment Partnership, L.P. reported sole dispositive and voting power with respect to 27,013 shares of the Company common stock; Seidman Investment Partnership II, L.P. reported sole dispositive and voting power with respect to 21,046 shares of the Company common stock; Seidman Investment Partnership III, L.P. reported sole dispositive and voting power with respect to 4,584 shares of the Company common stock; LSBK06-08, L.L.C. reported sole dispositive and voting power with respect to 10,808 shares of the Company common stock; Broad Park Investors, L.L.C. reported sole dispositive and voting power with respect to 12,724 shares of the Company common stock; Chewy Gooey Cookies, L.P. reported sole dispositive and voting power with respect to 4,050 shares of the Company common stock; CBPS, LLC reported sole dispositive and voting power with respect to 15,772 shares of the Company common stock; Veteri Place Corporation reported sole dispositive and voting power with respect to 74,729 shares of the Company common stock; JBRC I, LLC reported sole dispositive and voting power with respect to 4,584 shares of the Company common stock; and Lawrence B. Seidman reported sole dispositive and voting power with respect to 116,100 shares of the Company common stock.
(3)	On a Schedule 13G/A filed with the SEC on February 14, 2019, MFP Partners, L.P. reported shared dispositive and voting power with respect to 181,713 shares of the Company common stock; MFP Investors LLC reported shared dispositive and voting power with respect to 181,713 shares of the Company common stock; and Michael F. Price reported shared dispositive and voting power with respect to 181,713 shares of the Company common stock.

Security Ownership of Management

The following table shows as of March 5, 2020, the beneficial ownership of the Company common stock of each director and named executive officer and of all current directors and executive officers of the Company as a group.

Name	Position(s) Held With FSB Bancorp, Inc.	Shares Beneficially Owned⁽¹⁾			Percent of Class
DIRECTORS

Dana C. Gavenda	Chairman of the Board		71,505	⁽²⁾		3.6	%
Thomas J. Weldgen	Director		6,050	⁽³⁾		*
Kevin D. Maroney	President, Chief Executive Officer and Director		54,559	⁽⁴⁾		2.7	%
Stephen J. Meyer	Director		7,300	⁽⁵⁾		*
Alicia H. Pender	Director		7,888	⁽⁶⁾		*
Dawn DePerrior	Director		6,800	⁽⁷⁾		*
Lowell C. Patric	Director		13,844	⁽⁸⁾		*
James E. Smith	Director		8,138	⁽⁹⁾		*

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

Kathleen M. Dold	Senior Vice President, Lending		5,810	⁽¹⁰⁾		*
Michael R. Giancursio	Executive Vice President and Chief Lending Officer		5,090	⁽¹¹⁾		*
Cheryl M. Gregory	Senior Vice President, Retail Banking		5,751	⁽¹²⁾		*
Angela M. Krezmer	Senior Vice President, Chief Financial Officer		4,785	⁽¹³⁾		*
All Directors and Executive Officers as a Group (12 persons)			197,520			9.9	%

*	Less than 1%.

(1)	In accordance with Rule 13d-3 under the Exchange Act, shares of common stock are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares (i) voting power, which includes the power to vote or to direct the voting of the shares, or (ii) investment power, which includes the power to dispose or to direct the disposition of the shares.
(2)	Includes 17,036 shares allocated to Mr. Gavenda’s ESOP account, 11,646 shares of unvested restricted stock, 9,988 shares in his FSB Savings Plan account, 54 shares held by Mr. Gavenda’s wife, and 19,416 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(3)	Includes 1,500 shares of unvested restricted stock, 50 shares held by Mr. Weldgen’s wife, and 2,800 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(4)	Includes 11,646 shares of unvested restricted stock, 7,445 shares allocated to Mr. Maroney’s ESOP account, 8,288 shares in his FSB Savings Plan account, and 19,416 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(5)	Includes 1,500 shares of unvested restricted stock and 2,800 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(6)	Includes 1,500 shares of unvested restricted stock, 1,500 shares held by Ms. Pender’s husband, and 2,800 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(7)	Includes 1,500 shares of unvested restricted stock and 2,800 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(8)	Includes 1,500 shares of unvested restricted stock and 2,800 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(9)	Includes 1,500 shares of unvested restricted stock and 2,800 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(10)	Includes 1,600 shares of unvested restricted stock, 1,810 shares allocated to Ms. Dold’s ESOP account, and 2,000 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(11)	Includes 1,500 shares of unvested restricted stock, 190 shares allocated to Mr. Giancursio’s ESOP account, and 2,400 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(12)	Includes 1,600 shares of unvested restricted stock, 1,251 shares allocated to Ms. Gregory’s ESOP account, 500 shares held by Ms. Gregory’s husband, and 2,000 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.
(13)	Includes 1,600 shares of unvested restricted stock, 785 shares allocated to Ms. Krezmer’s ESOP account, and 2,000 shares that can be acquired pursuant to stock options within 60 days of March 5, 2020.

For purposes of these tables above, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, as amended, under which, in general, a person is deemed to be the beneficial owner of a security if he or she has or shares the power to vote or direct the voting of the security or the power to dispose of or direct the disposition of the security, or if he or she has the right to acquire beneficial ownership of the security within 60 days. All shares of common stock indicated in the above tables are subject to the sole investment and voting power of the identified person, except as otherwise set forth in the footnotes above. All data included in the footnotes above is as of March 5, 2020. The percentages of beneficial ownership in the tables above are calculated in relation to the 1,940,661 shares of the Company common stock issued and outstanding as of March 5, 2020.

Unless otherwise specified, the address of each listed director or executive officer is c/o FSB Bancorp, Inc., 45 South Main Street, Fairport, NY 14450.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Related Party Transactions

The Sarbanes-Oxley Act generally prohibits us from making loans to the Company’s executive officers and directors, but it contains a specific exemption from such prohibition for loans made by Fairport Savings Bank to the Company’s executive officers and directors in compliance with federal banking regulations.

The aggregate amount of the Company’s outstanding loans to its officers and directors and their related entities was approximately $469,000 at December 31, 2019. All of such loans were made in the ordinary course of business, were made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to us, and did not involve more than the normal risk of collectibility or present other unfavorable features. These loans were performing according to their repayment terms at December 31, 2019, and were made in compliance with federal banking regulations.

In accordance with the listing standards of the Nasdaq Stock Market, any transactions that would be required to be reported under this section of the Annual Report on Form 10-K must be approved by the Company’s Audit Committee or another independent body of the board of directors. In addition, any transaction with a director is reviewed by and subject to approval of the members of the board of directors who are not directly involved in the proposed transaction to confirm that the transaction is on terms that are no less favorable as those that would be available to us from an unrelated party through an arms-length transaction.

Director Independence

The Company Board of Directors has determined that each of its directors, with the exception of Messrs. Maroney and Gavenda, is “independent” as defined in the listing standards of the Nasdaq Stock Market. Mr. Maroney is not independent because he is one of the Company’s executive officers. Mr. Gavenda is not independent because he served as an executive officer of the Company and Fairport Savings Bank within the last three years. There were no transactions to be disclosed that were not required to be disclosed under “Related Party Transactions” above.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Set forth below is certain information concerning aggregate fees billed for professional services rendered by Bonadio & Co., LLP during the years ended December 31, 2019 and 2018.

Audit Fees. The aggregate fees billed to us by Bonadio & Co., LLP for professional services rendered for the audit of our annual consolidated financial statements, review of the consolidated financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by Bonadio & Co., LLP in connection with statutory and regulatory filings and engagements were $53,250 and $82,400 for the years ended December 31, 2019 and 2018, respectively. In 2018, there were also $28,622 in additional fees billed to us by Bonadio & Co., LLP for professional services related to the restatement of the audited financial statements in the Annual Report on Form 10-K/A for the year ended December 31, 2017, the unaudited financial statements in the Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2018, and consultation services related to our New York State mortgage recording tax credit audit.

Audit Related Fees. There were no fees billed to us by Bonadio & Co., LLP for assurance and related services rendered by Bonadio & Co., LLP that are reasonably related to the performance of the audit of and review of the consolidated financial statements and that are not already reported in “Audit Fees,” above, during the years ended December 31, 2019 or 2018.

Tax Fees. The aggregate fees billed to us by Bonadio & Co., LLP for tax service fees rendered for the review of quarterly and annual tax provision calculations as well as the preparation and filing of annual income tax returns were $18,500 and $18,750 for the years ended December 31, 2019 and 2018, respectively.

All Other Fees. There were no other fees billed to us by Bonadio & Co., LLP during 2019 or 2018.

The Audit Committee preapproves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for us by Bonadio & Co., LLP, subject to the de minimus exceptions for non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended, which are approved by the Audit Committee prior to the completion of the audit.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)

Financial Statements

The documents filed as a part of this Annual Report on Form 10-K are:

(A)

Report of Independent Registered Public Accounting Firm

(B)

Consolidated Balance Sheets – as of December 31, 2019 and 2018

(C)

Consolidated Statements of Income – years ended December 31, 2019 and 2018

(D)

Consolidated Statements of Comprehensive Income – years ended December 31, 2019 and 2018

(E)

Consolidated Statements of Stockholders’ Equity – years ended December 31, 2019 and 2018

(F)

Consolidated Statements of Cash Flows – years ended December 31, 2019 and 2018

(G)

Notes to Consolidated Financial Statements

(a)(2)

Financial Statement Schedules

All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.

(a)(3)

Exhibits

2.1

Agreement and Plan of Reorganization, dated December 19, 2019, by and between Evans Bancorp, Inc., MMS Merger Sub, Inc. and FSB Bancorp, Inc. (incorporated by reference to Exhibit 2.1 of Evans Bancorp, Inc.’s Current Report on Form 8-K (File No. 001-35021) filed with the SEC on December 20, 2019).

2.2

Amendment No. 1 to the Agreement and Plan of Reorganization, dated March 5, 2020, by and between Evans Bancorp, Inc., MMS Merger Sub, Inc. and FSB Bancorp, Inc.

3.1

Articles of Incorporation of FSB Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 of FSB Bancorp, Inc. (File No. 333-210129), filed with the Securities and Exchange Commission on March 11, 2016).

3.2

Bylaws of FSB Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 of FSB Bancorp, Inc. (File No. 333-210129), filed with the Securities and Exchange Commission on April 28, 2016).

4.1

Form of Common Stock Certificate of FSB Bancorp, Inc. (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-1 of FSB Bancorp, Inc. (File No. 333-210129), filed with the Securities and Exchange Commission on March 11, 2016).

4.2

Description of Common Stock

10.1

Employment Agreement by and between Fairport Savings Bank and Kevin D. Maroney dated October 26, 2017 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of FSB Bancorp, Inc. (File No. 001-37831) filed with the Securities and Exchange Commission on October 31, 2017).

10.2

Supplemental Executive Retirement Plan for Dana C. Gavenda (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 of FSB Bancorp, Inc. (File No. 333-210129), filed with the Securities and Exchange Commission on March 11, 2016).

10.3

Supplemental Executive Retirement Plan Kevin D. Maroney (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 of FSB Bancorp, Inc. (File No. 333-210129), filed with the Securities and Exchange Commission on March 11, 2016).

10.4

Executive Compensation Clawback Agreement with Kevin D. Maroney (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 of FSB Bancorp, Inc. (File No. 333-210129), filed with the Securities and Exchange Commission on March 11, 2016).

10.5

FSB Bancorp, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of FSB Bancorp, Inc. (File No. 333-210129), filed with the Securities and Exchange Commission on March 11, 2016).

10.6

FSB Bancorp, Inc. 2017 Equity Incentive Plan (incorporated by reference to Appendix A of the definitive Proxy Statement (File No. 001-37831) filed with the Securities and Exchange Commission on July 19, 2017).

10.7

Amendment to Fairport Savings Bank Supplemental Executive Retirement Plan, dated September 27, 2017 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of FSB Bancorp, Inc. (File No. 001-37831), filed with the Securities and Exchange Commission on October 3, 2017).

10.8

Amendment to the Supplemental Executive Retirement Agreement between Fairport Savings Bank and Kevin D. Maroney, dated September 27, 2017 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of FSB Bancorp, Inc. (File No. 001-37831), filed with the Securities and Exchange Commission on October 3, 2017).

10.9

Form of Restricted Stock Award Agreements (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 (File No. 333-220742), filed with the Securities and Exchange Commission on September 29, 2017).

10.10

Form of Incentive Stock Option Award Agreement (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-8 (File No. 333-220742), filed with the Securities and Exchange Commission on September 29, 2017).

10.11

Form of Non-Statutory Stock Option Award Agreements (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-8 (File No. 333-220742), filed with the Securities and Exchange Commission on September 29, 2017).

10.12

Change in Control Agreement by and between Fairport Savings Bank and Angela M. Krezmer dated December 20, 2017 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of FSB Bancorp, Inc. (File No. 001-37831) filed with the Securities and Exchange Commission on December 20, 2017).

10.13

Change in Control Agreement by and between Fairport Savings Bank and Michael R. Giancursio dated October 30, 2017 (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K of FSB Bancorp, Inc. (File No. 001-37831) filed with the Securities and Exchange Commission on March 27, 2019).

10.14

Third Amendment to the Supplemental Executive Retirement Agreement by and between Fairport Savings Bank and Kevin D. Maroney, dated December 19, 2019 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of FSB Bancorp, Inc. (File No. 001-37831) filed with the Securities and Exchange Commission on December 20, 2019).

2019 Annual Report to Stockholders

Consent of Bonadio & Co., LLP

31.1

Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements

ITEM 16.

FORM 10-K SUMMARY

The Company has elected not to provide summary information.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FSB BANCORP, INC.


Date: March 30, 2020	By:	/s/ Kevin D. Maroney
		Kevin D. Maroney
		President and Chief Executive Officer
		(Duly Authorized Representative)

/s/ Kevin D. Maroney	President, Chief Executive Officer and Director	March 30, 2020
Kevin D. Maroney	(Principal Executive Officer)

/s/ Angela M. Krezmer	Chief Financial Officer	March 30, 2020
Angela M. Krezmer	(Chief Accounting and Financial Officer)

/s/ Dana C. Gavenda	Chairman of the Board	March 30, 2020
Dana C. Gavenda

/s/ Dawn DePerrior	Director	March 30, 2020
Dawn DePerrior

/s/ Stephen Meyer	Director	March 30, 2020
Stephen Meyer

/s/ Lowell C. Patric	Director	March 30, 2020
Lowell C. Patric

/s/ Alicia H. Pender	Director	March 30, 2020
Alicia H. Pender

/s/ James E. Smith	Director	March 30, 2020
James E. Smith

/s/ Thomas Weldgen	Director	March 30, 2020
Thomas Weldgen

EXHIBIT INDEX

2.1

2.2

Amendment No. 1 to the Agreement and Plan of Reorganization, dated March 5, 2020, by and between Evans Bancorp, Inc., MMS Merger Sub, Inc. and FSB Bancorp, Inc.

3.1

3.2

4.1

4.2

Description of Common Stock

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

10.12

10.13

10.14

2019 Annual Report to Stockholders

Consent of Bonadio & Co., LLP

31.1

Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

Exhibit 2.2

Execution Version

AMENDMENT NO. 1 TO

AGREEMENT AND PLAN OF REORGANIZATION

THIS AMENDMENT NO. 1 (“Amendment”) to the AGREEMENT AND PLAN OF REORGANIZATION (“Agreement”) is made and entered into as of March 5, 2020, by and among Evans Bancorp, Inc. (“Evans”), a New York corporation, MMS Merger Sub, Inc. (“Merger Sub”), a Maryland corporation and a wholly owned subsidiary of Evans, and FSB Bancorp, Inc. (“FSB”), a Maryland corporation.

PREAMBLE

Evans, Merger Sub and FSB entered into the Agreement on December 19, 2019.

Since the execution of the Agreement, the parties have determined that it is in the best interest of all parties to clarify certain technical provisions of the Agreement by making the modifications thereto as set forth herein.

In consideration of their mutual promises and obligations hereunder, and intending to be legally bound hereby, Evans, Merger Sub and FSB agree as follows:

ARTICLE I

AMENDMENTS

Section 1.01 Definitions.

(a) The terms and definitions in Section 10.1 for “Exchange Ratio” and “Exchange Ratio Adjustment” are hereby deleted in their entirety and replaced with the following:

“Exchange Ratio” means 0.4394.

(b) The terms and definitions in Section 10.1 for “Per Share Adjustment” and “Per Share Cash Amount” are hereby deleted in their entirety and replaced with the following:

“Per Share Cash Amount” means $17.80.

ARTICLE II

MISCELLANEOUS

Section 2.01 Continuation. The Agreement is hereby modified to reflect the terms of this Amendment and shall continue in full force and effect. All other provisions of the Agreement not specifically modified herein shall remain in full force and effect.

Section 2.02 Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. This Amendment and any signed agreement or instrument entered into in connection with this Amendment, and any amendments or waivers hereto or thereto, to the extent signed and delivered by means of a facsimile machine or by email delivery of a “.pdf” format data file, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. No party hereto or to any such instrument shall raise the use of a facsimile machine or e-mail delivery of a “.pdf” format data file to deliver a signature to this Amendment or any waiver hereto or any agreement or instrument entered into in connection with this Amendment or the fact that any signature or agreement or instrument was transmitted or communicated through the use of a facsimile machine or e-mail delivery of a “.pdf” format data file as a defense to the formation of a contract and each party hereto forever waives any such defense.

Section 2.03 Governing Law. The parties agree that this Amendment shall be governed by and construed in all respects in accordance with the Laws of the State of New York without regard to any conflict of Laws or choice of Law principles that might otherwise refer construction or interpretation of this Amendment to the substantive Law of another jurisdiction.

Section 2.04 Incorporation. In any publication of the Agreement, the text of the amendments of Sections 10.1 of the Agreement may be substituted for, or supplement, as applicable, the original text of Section 10.1 of, the Agreement and incorporated in the Agreement as though they were originally set forth therein without publishing or reproducing the entirety of this Amendment.

[Signature pages follow]

IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized officers as of the day and year first above written.

EVANS BANCORP, INC.


By:	/s/ David J. Nasca
	Name:	David J. Nasca
	Title:	President and Chief Executive Officer


MMS MERGER SUB, INC.


By:	/s/ David J. Nasca
	Name:	David J. Nasca
	Title:	President

Signature page to Amendment No. 1

Signature page to Amendment No. 1

Exhibit 4.2

DESCRIPTION OF COMMON STOCK

As of December 31, 2019, the common stock of FSB Bancorp, Inc. (the “Company”) is registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The following description of our common stock, certain provisions of our articles of incorporation and bylaws and certain provisions of Maryland law is a summary and is qualified in its entirety by reference to our articles of incorporation, bylaws and the Maryland General Corporation Law, (the “MGCL”). Copies of our articles of incorporation and our bylaws have been filed with the Securities and Exchange Commission (the “SEC”) and are filed as exhibits to the Company’s Annual Report on Form 10-K filed with the SEC of which this Exhibit is a part.

General

The Company is authorized to issue 50,000,000 shares of common stock, par value of $0.01 per share, and 25,000,000 shares of preferred stock, par value $0.01 per share. As of December 31, 2019, we had 1,940,661 shares of common stock outstanding. Our articles of incorporation permit our board of directors, without action by the stockholders, to amend the articles of incorporation to increase or decrease the aggregate number of shares of common stock. Our common stock is listed on the Nasdaq Capital Market under the symbol “FSBC.”

Common Stock

Dividends. The Company may pay dividends in an amount equal to the excess of our capital surplus over payments that would be owed upon dissolution to stockholders whose preferential rights upon dissolution are superior to those receiving the dividend, and in an amount that would not make us insolvent, as and when declared by our board of directors. The payment of dividends by the Company is also subject to limitations that are imposed by law and applicable regulation, including restrictions on payments of dividends that would reduce the Company’s assets below the then-adjusted balance of its liquidation account. The holders of common stock of the Company will be entitled to receive and share equally in dividends as may be declared by our board of directors out of funds legally available therefor. Shares of the Company’s preferred stock in the future may have a priority over the holders of the Company’s common stock with respect to dividends.

Voting Rights. The holders of common stock of the Company currently have exclusive voting rights in the Company. Generally, each holder of common stock is entitled to one vote per share and does not have any right to cumulate votes in the election of directors. Any person who beneficially owns more than 10% of the then-outstanding shares of the Company’s common stock, however, is not entitled or permitted to vote any shares of common stock held in excess of the 10% limit unless approved by the board of directors. Holders of preferred stock may also possess certain voting rights. Certain matters require the approval of 80% of our outstanding common stock.

Liquidation. In the event of liquidation, dissolution or winding up of the Company, the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities (including payments with respect to its liquidation account), all of the assets of the Company available for distribution. If additional preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.

Preemptive Rights. Holders of the common stock of the Company are not be entitled to preemptive rights with respect to any shares that may be issued.

Other. Holders of the common stock of the Company have no conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock.

Certain Anti-Takeover Provisions

Maryland law, as well as the Company’s articles of incorporation and bylaws, contain a number of provisions relating to corporate governance and rights of stockholders that may discourage future takeover attempts. As a result, stockholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of the board of directors or management of the Company more difficult.

Directors. The board of directors is divided into three classes. The members of each class are elected for a term of three years and only one class of directors is elected annually. Thus, it takes at least two annual elections to replace a majority of the board of directors. The bylaws establish qualifications for board members, including restrictions on affiliations with competitors of Fairport Savings Bank and restrictions based upon prior legal or regulatory violations. Further, the bylaws impose notice and information requirements in connection with the nomination by stockholders of candidates for election to the board of directors or the proposal by stockholders of business to be acted upon at an annual meeting of stockholders. Such notice and information requirements are applicable to all stockholder business proposals and nominations, and are in addition to any requirements under the federal securities laws.

Restrictions on Call of Special Meetings. The bylaws provide that special meetings of stockholders can be called by the chairman, vice chairperson, chief executive officer, by a majority of the total authorized directors or upon the written request of stockholders entitled to cast at least a majority of all votes entitled to vote at the meeting.

Prohibition of Cumulative Voting. The articles of incorporation prohibit cumulative voting for the election of directors.

Limitation of Voting Rights. The articles of incorporation provide that in no event will any person who beneficially owns more than 10% of the then-outstanding shares of common stock, be entitled or permitted to vote any of the shares of common stock held in excess of the 10% limit, unless approved by the board of directors. This provision has been included in the articles of incorporation in reliance on Section 2-507(a) of the Maryland General Corporation Law, which entitles stockholders to one vote for each share of stock unless the articles of incorporation provide for a greater or lesser number of votes per share or limit or deny voting rights.

Restrictions on Removing Directors from Office. The articles of incorporation provide that directors may be removed only for cause, and only by the affirmative vote of the holders of at least a majority of the voting power of all of our then-outstanding capital stock entitled to vote in the election of directors voting together as a single class.

Authorized but Unissued Shares of Preferred Stock. The articles of incorporation authorize 25,000,000 shares of serial preferred stock. The Company is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the board of directors is authorized to fix the designations, and relative preferences, limitations, voting rights, if any, including without limitation, offering rights of such shares (which could be multiple or as a separate class). In the event of a proposed merger, tender offer or other attempt to gain control of the Company that the board of directors does not approve, it may be possible for the board of directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede the completion of the transaction. An effect of the possible issuance of preferred stock therefore may be to deter a future attempt to gain control of the Company.

Amendments to Articles of Incorporation and Bylaws. Amendments to the articles of incorporation must be approved by the board of directors and by the affirmative vote of at least two-thirds of the outstanding shares of capital stock, or by the affirmative vote of a majority of the outstanding shares of common stock if at least two-thirds of the members of the whole board of directors approves such amendment; provided, however, approval by at least 80% of the outstanding voting stock is generally required to amend certain provisions.

The articles of incorporation also provide that the bylaws may be amended by the affirmative vote of a majority of the Company’s directors or by the stockholders by the affirmative vote of at least 80% of the total votes eligible to be cast at a duly constituted meeting of stockholders. Any amendment of this super-majority requirement for amendment of the bylaws would also require the approval of 80% of the total votes eligible to be cast.

The provisions requiring the affirmative vote of 80% of the total eligible votes eligible to be cast for certain stockholder actions have been included in the articles of incorporation of the Company in reliance on Section 2-104(b)(4) of the Maryland General Corporation Law.

Business Combinations with Interested Stockholders. Maryland law restricts mergers, consolidations, sales of assets and other business combinations between the Company and an “interested stockholder.”

Evaluation of Offers. The articles of incorporation of the Company provide that its board of directors, when evaluating a transaction that would or may involve a change in control of the Company (whether by purchases of its securities, merger, consolidation, share exchange, dissolution, liquidation, sale of all or substantially all of its assets, proxy solicitation or otherwise), may, in connection with the exercise of its business judgment in determining what is in the best interests of the Company and its stockholders and in making any recommendation to the stockholders, give due consideration to all relevant factors, including, but not limited to, certain enumerated factors.

Exhibit 13

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited consolidated financial statements that appear beginning on page 20 of this Annual Report. You should read the information in this section in conjunction with the business and financial information regarding FSB Bancorp and the consolidated financial statements provided in this Annual Report.

Overview

Our business has traditionally focused on originating one- to four-family residential real estate mortgage loans, home equity lines of credit, and offering retail deposit accounts. In recent years, we have expanded our mortgage origination footprint with a mortgage office in Cheektowaga, 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 growth into higher-yielding assets, primarily commercial loan products and both fixed and adjustable rate one- to four-family mortgage loans in 2019. Increases in the loan portfolio and Fed funds average balances as well as higher average yields on Fed Funds and the overall loan and investment portfolios resulted in higher interest income 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.

At December 31, 2019, the Company had $323.3 million in consolidated assets, a decrease of $5.0 million, or 1.5%, from $328.3 million at December 31, 2018. The credit quality of our loan portfolio remains strong as compared to our peers. At December 31, 2019, the Bank had two non-performing residential mortgage loans for $55,000 and one consumer line of credit for $4,800 as compared to December 31, 2018, the Bank had one non-performing residential mortgage loan for $55,000 and one non-performing commercial and industrial loan for $45,000. At December 31, 2019, the Bank had one impaired commercial real estate loan for $954,000 with a specific reserve of $154,000 and one commercial and industrial loan for $45,000 with a specific reserve of $10,000 as compared to no impaired loans at December 31, 2018. At December 31, 2019 the Bank had one impaired residential mortgage loan for $55,000 with no specific reserve required as compared to $0 at December 31, 2018. At December 31, 2019, the Bank had two foreclosed commercial real estate properties with a fair market value totaling $730,000 as compared to $0 at December 31, 2018.

Our results of operations depend primarily on our net interest income and, to a lesser extent, other income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of savings accounts, NOW accounts, money market accounts, time deposits and borrowings. Other income consists primarily of realized gains on sales of loans and securities, mortgage fee income, fees and service charges from deposit products, fee income from our financial services subsidiary, earnings on bank owned life insurance and miscellaneous other income. Our results of operations also are affected by our provision for loan losses and other expense. Other expense consists primarily of salaries and employee benefits, occupancy, equipment, electronic banking, data processing costs, mortgage fees and taxes, advertising, directors’ fees, FDIC deposit insurance premium expense, audit and tax services, professional services, legal expenses, and other miscellaneous expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, government policies and actions of regulatory authorities. For the year ended December 31, 2019, we had a net loss of $(513,000) compared to net income of $135,000 for the year ended December 31, 2018. The year over year decrease in earnings of $648,000 was attributable to decreases in other income and net interest income partially offset by decreases in other expense, income tax expense, and provision for loan losses.

Critical Accounting Policies

Critical accounting policies are defined as those that involve significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operations depend, involve the most complex subjective decisions or assessments including our policies with respect to our allowance for loan losses, deferred tax assets, and the estimation of fair values for accounting and disclosure purposes.

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the 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 a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

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

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

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

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.

Selected Consolidated Financial and Other Data

	At December 31, 2019		At December 31, 2018
	(In thousands)
Selected Financial Condition Data:
	.
Total assets	$	323,310	$	328,269
Cash and cash equivalents		7,933		6,291
Securities available-for-sale		18,126		18,331
Securities held-to-maturity		5,166		6,052
Loans held for sale		2,194		2,133
Loans, net		274,508		281,741
Premises and equipment, net		2,439		2,731
Deposits		235,560		222,615
Borrowings		51,735		71,826
Stockholders’ equity		31,544		31,513

	For the Year Ended December 31,
	2019			2018
	(In thousands)

Selected Operating Data:

Interest and dividend income	$	13,047		$	12,540
Interest expense		4,937			3,979
Net interest income		8,110			8,561
Provision for loan losses		295			300
Net interest income after provision for loan losses		7,815			8,261
Other income		1,937			2,717
Other expense		10,366			10,811
Income (Loss) before income taxes		(614	)		167
Provision (Benefit) for income taxes		(101	)		32
Net income (loss)	$	(513	)	$	135

	At or For the Year Ended December 31,
	2019			2018

Selected Financial Ratios and Other Data:

Performance Ratios:
Return on average assets		(0.16	)%		0.04	%
Return on average equity		(1.64	)%		0.43	%
Interest rate spread⁽¹⁾		2.39	%		2.63	%
Net interest margin⁽²⁾		2.59	%		2.79	%
Efficiency ratio⁽³⁾		106.29	%		98.48	%
Other income to average total assets		0.60	%		0.85	%
Other expense to average total assets		3.18	%		3.40	%
Average interest-earning assets to average interest-bearing liabilities		113	%		112	%

Asset Quality Ratios:
Non-performing assets as a percent of total assets		0.33	%		0.03	%
Non-performing loans as a percent of total loans		0.38	%		0.03	%
Allowance for loan losses as a percent of non-performing loans		155.04	%		1564.55	%
Allowance for loan losses as a percent of total loans		0.59	%		0.55	%

Capital Ratios⁽⁴⁾:
Total risk-based capital (to risk-weighted assets)		15.32	%		15.70	%
Tier 1 leverage (core) capital (to adjusted tangible assets)		9.01	%		9.07	%
Common Equity Tier 1 capital (to risk-weighted assets)		14.50	%		14.91	%
Tier 1 risk-based capital (to risk-weighted assets)		14.50	%		14.91	%
Average equity to average total assets		9.60	%		9.87	%

Other Data:
Number of full service offices		5			5

⁽¹⁾

Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year.

⁽²⁾

The net interest margin represents net interest income as a percent of average interest-earning assets for the year.

⁽³⁾

The efficiency ratio represents other expense divided by the sum of net interest income after provision for loan loss and other income.

⁽⁴⁾

Bank only capital ratios.

Comparison of Financial Condition at December 31, 2019 and 2018

Total Assets. Total assets decreased $5.0 million, or 1.5%, to $323.3 million at December 31, 2019 from $328.3 million at December 31, 2018, primarily reflecting decreases in net loans receivable, securities held-to-maturity, investment in restricted stock, premises and equipment, and securities available-for-sale, partially offset by increases in right of use asset, cash and cash equivalents, and foreclosed real estate.

Net loans receivable decreased $7.2 million, or 2.6%, to $274.5 million at December 31, 2019 from $281.7 million at December 31, 2018. Residential mortgage loans decreased $8.7 million, or 3.9%, to $212.9 million at December 31, 2019 from $221.6 million at December 31, 2018. The Bank originated $63.6 million of residential mortgage loans for the year ended December 31, 2019 compared to $91.4 million for the year ended December 31, 2018. As a result, the Bank only sold $41.8 million of mortgage loans in the secondary market during the year ended December 31, 2019 compared to $59.9 million during the year ended December 31, 2018 as a balance sheet management strategy to reduce interest-rate risk. The mortgage loans serviced for others decreased by $7.2 million, or 5.8%, to $116.5 million at December 31, 2019 compared to $123.8 million at December 31, 2018 as a result of selling more loans servicing released which yields higher premiums producing higher gain on sale of loans income for the Bank in addition to amortization and prepayments on the existing servicing portfolio. Commercial real estate loans increased $589,000, or 2.6%, to $23.1 million at December 31, 2019 from $22.5 million at December 31, 2018.

Securities held-to-maturity decreased $886,000, or 14.6%, to $5.2 million at December 31, 2019 from $6.1 million at December 31, 2018 due to maturities and calls of $815,000, $48,000 of principal repayments on mortgage-backed securities, and $23,000 in net amortization of premiums and accretion of discounts.

Investment in restricted stock decreased by $880,000, or 24.2%, to $2.8 million at December 31, 2019 from $3.6 million at December 31, 2018 due to decreased borrowings from the Federal Home Loan Bank of New York.

Premises and equipment decreased by $292,000, or 10.7%, to $2.4 million at December 31, 2019 from $2.7 million at December 31, 2018, primarily due to disposals and depreciation of fixed assets partially offset by purchases of new fixed assets.

Securities available-for-sale decreased $205,000, or 1.1%, to $18.1 million at December 31, 2019 from $18.3 million at December 31, 2018 due to maturities and calls of $11.1 million, $1.8 million of principal repayments on mortgage-backed securities, and $52,000 in net amortization of premiums and accretion of discounts, partially offset by purchases of $12.5 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 $220,000 due to the decrease in market interest rates during the latter part of 2019.

Operating lease right of use asset increased by $2.1 million at December 31, 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.

Cash and cash equivalents increased by $1.6 million, or 26.1%, to $7.9 million at December 31, 2019 from $6.3 million at December 31, 2018 due to an increase in deposits.

Foreclosed real estate increased by $730,000 at December 31, 2019 from $0 at December 31, 2018 due to the foreclosure of two commercial real estate properties in 2019.

Deposits and Borrowings. Total deposits increased $12.9 million, or 5.8%, to $235.6 million at December 31, 2019 from $222.6 million at December 31, 2018. The increase in our deposits reflected an $8.9 million increase in certificates of deposit, including individual retirement accounts, primarily due to promotional specials offered in 2019, a $2.6 million increase in interest bearing checking accounts, a $1.9 million increase in non-interest bearing checking accounts, and a $1.5 million increase in money market accounts, partially offset by a $2.0 million decrease in savings accounts. Total borrowings from the Federal Home Loan Bank of New York decreased $20.1 million, or 28.0%, to $51.7 million at December 31, 2019 from $71.8 million at December 31, 2018. Long-term borrowings decreased $7.3 million, or 12.6%, to $50.7 million at December 31, 2019 from $58.1 million at December 31, 2018 due to $19.3 million in principal repayments on our amortizing advances and maturities partially offset by $12.0 million in new advances in 2019. Short-term borrowings decreased by $12.8 million, or 92.7%, to $1.0 million at December 31, 2019 compared to $13.8 million at December 31, 2018. The decrease in FHLB borrowings was due to excess cash as a result of an increase in deposits.

Stockholders’ Equity. Total stockholders’ equity increased $31,000, or 0.1%, to $31.5 million at December 31, 2019. The increase was primarily due to a $304,000 increase in additional paid in capital as a result of stock based compensation, an increase of $66,000 resulting from the release of ESOP shares from the suspense account, and a decrease of $174,000 in accumulated other comprehensive loss due to an increase in the fair market value of our available-for-sale securities in 2019, partially offset by a $(513,000) net loss.

Comparison of Operating Results for the Years Ended December 31, 2019 and 2018

General. Net income decreased $648,000 to a net loss of $(513,000) for the year ended December 31, 2019 from net income of $135,000 for the year ended December 31, 2018. The decrease in net income for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily due to increases in professional services and other professional fees related to transaction costs associated with the definitive merger agreement between the Company and Evans Bancorp, Inc. The year over year decrease in earnings of $648,000 was attributable to a $780,000 decrease in other income and a $451,000 decrease in net interest income, partially offset by a $445,000 decrease in other expense, a $133,000 decrease in income tax expense, and a $5,000 decrease in provision for loan losses.

Interest and Dividend Income. Total interest and dividend income increased $507,000, or 4.0%, to $13.0 million for the year ended December 31, 2019 from $12.5 million for the year ended December 31, 2018. The interest and dividend income increase resulted from a $6.3 million increase year over year in average interest-earning assets, primarily loans, in addition to an eight basis point increase in the average yield on interest-earning assets from 4.08% for 2018 to 4.16% for 2019.

Interest income on loans, including fees, increased $421,000, or 3.6%, to $12.2 million for 2019 from $11.8 million for 2018, reflecting an increase in the average balance of loans to $281.4 million for 2019 from $277.0 million for 2018, in addition to an eight basis point increase in average yield on loans. The increase in the average balance of loans was due to increases in commercial real estate, commercial and industrial, and consumer loans. The average yield on loans increased to 4.35% for 2019 from 4.27% for 2018, as a result of upward repricing for adjustable rate loans in addition to higher interest rates on new fixed-rate residential and commercial mortgage loans.

Interest income on taxable investment securities increased $68,000, or 16.4%, to $483,000 in 2019, from $415,000 in 2018. The average balance of taxable investment securities increased $1.8 million, or 12.8%, to $16.0 million in 2019 from $14.2 million in 2018 in addition to an increase in the average yield of taxable investment securities of nine basis points to 3.01% in 2019 from 2.92% in 2018. The average yield on taxable investment securities increased due to new purchases of modestly higher-yielding investment securities. Interest income on mortgage-backed securities decreased $33,000, or 23.4%, to $108,000 in 2019, from $141,000 in 2018, reflecting a decrease in the average balance of mortgage-backed securities of $2.0 million, or 27.1%, to $5.4 million in 2019 from $7.4 million in 2018, partially offset by an increase in the average yield on mortgage-backed securities of eight basis points to 1.98% in 2019 from 1.90% in 2018. The increase in average yield on mortgage-backed securities was primarily attributable to upward repricing on the pools of mortgage-backed securities held in portfolio. Interest income on federal funds sold increased $54,000, or 103.9%, to $106,000 in 2019, from $52,000 in 2018. The increase in Fed Funds sold was attributable to an increase in the average yield on Fed Funds sold by 29 basis points to 1.80% for 2019 from 1.51% for 2018 due to the Federal Reserve’s increase of the Fed Funds rate in the first half of 2019 in addition to an increase in the average balance of federal funds sold of $2.5 million, or 72.9%, to $5.9 million in 2019 from $3.4 million in 2018. Interest income on tax-exempt securities decreased $3,000, or 2.9%, to $102,000 in 2019 from $105,000 in 2018. The average balance of tax-exempt securities decreased by $443,000, or 7.6%, to $5.4 million in 2019 from $5.9 million in 2018, partially offset by an increase in the average yield of tax-exempt securities of 13 basis points to 2.39% in 2019 from 2.26% in 2018 on a tax equivalent basis as lower yielding state and municipal securities matured and were replaced by modestly higher yielding state and municipal securities.

Total Interest Expense. Total interest expense increased $958,000, or 24.1%, to $4.9 million for the year ended December 31, 2019 from $4.0 million for the year ended December 31, 2018. The increase in total interest expense resulted from a 32 basis point increase in the average cost of interest-bearing liabilities from 1.45% for 2018 to 1.77% for 2019, as a result of higher interest rates paid on deposits, primarily promotional certificates of deposit, savings, and money market accounts along with an increase in interest rates on Federal Home Loan Bank borrowings. In addition, the average balance of interest-bearing liabilities increased $3.3 million, or 1.2%, to $278.6 million for 2019 from $275.3 million for 2018.

Interest expense on deposits increased $878,000, or 33.9%, to $3.5 million for 2019 from $2.6 million for 2018 due primarily to increases in the average cost and balances of our deposits. The weighted average rate of deposits increased to 1.59% for 2019 from 1.24% for 2018 as a result of promotional certificates of deposit, savings, and money market rates to grow branch deposits. In addition, the average balance of our deposits increased $9.2 million, or 4.4%, to $218.1 million for 2019 from $209.0 million for 2018 due to increases in promotional certificates of deposit. The average balance on transaction accounts, traditionally our lower costing deposit accounts, consisting of checking, savings, and money market accounts, decreased by $4.2 million to $97.4 million for 2019 from $101.6 million for 2018, with an increase in the average cost of transaction accounts of three basis points to 0.60% in 2019 from 0.57% in 2018. Additionally, the average balance of certificates of deposit (including individual retirement accounts) traditionally our higher cost deposits, increased by $15.4 million to $132.2 million in 2019 from $116.8 million in 2018 with an increase in the average cost of certificates of deposit accounts of 46 basis points to 2.18% in 2019 from 1.72% in 2018 due to the promotional nature of these accounts and increased competition.

Interest expense on Federal Home Loan Bank borrowings increased $80,000, or 5.8%, to $1.5 million for the year ended December 31, 2019 from $1.4 million for the year ended December 31, 2018. The increase in interest expense on Federal Home Loan Bank borrowings was caused by an increase in the average cost of these funds of 34 basis points from 2.09% in 2018 to 2.43% in 2019 due to rising interest rates, partially offset by a $5.8 million decrease in our average balance of Federal Home Loan Bank borrowings to $60.5 million for 2019 compared to $66.3 million for 2018 as a result of our increased cash position.

Net Interest Income. Net interest income decreased $451,000, or 5.3%, to $8.1 million for the year ended December 31, 2019 from $8.6 million for the year ended December 31, 2018. The decrease in net interest income was primarily due to higher average balances in certificates of deposit year over year along with increases in the average cost of deposits and FHLB borrowings in addition to only modest growth in the loan portfolio when comparing 2019 to 2018. Our net interest margin for the year ended December 31, 2019 decreased 20 basis points to 2.59% from 2.79% for the year ended December 31, 2018. The average cost of interest-bearing liabilities was negatively impacted by an increase in the average balance of deposits in addition to increases in the average cost of deposits and FHLB borrowings as a result of higher repricing of these interest-bearing liabilities. Net average interest-earning assets increased to $35.6 million for 2019 from $32.7 million for 2018.

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 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 $295,000 provision for loan losses for the year ended December 31, 2019 compared to a $300,000 provision for loan losses for the year ended December 31, 2018. The decrease in the provision for loan losses was primarily due to a decrease in loan origination volume in 2019 as compared to 2018, partially offset by an increase in classified loans in 2019. The allowance for loan losses was $1.6 million, or 0.59%, of loans outstanding at December 31, 2019 compared to $1.6 million, or 0.55%, of loans outstanding at December 31, 2018.

Other Income. Other income decreased by $780,000, or 28.7%, to $1.9 million for 2019 from $2.7 million for 2018. The decrease resulted primarily from decreases in realized gains on the sales of loans, mortgage fees, and fee income. A substantial portion of the year over year decrease was in realized gains on the sales of loans which decreased $506,000, or 35.2%, to $931,000 in 2019 from $1.4 million in 2018 due to lower volume of mortgage loans sold in 2019. Mortgage fee income decreased by $131,000, or 17.6%, to $612,000 in 2019 from $743,000 in 2018 due to lower volume of residential mortgage loans originated in 2019 compared to 2018. Fee income from Fairport Wealth Management decreased $112,000, or 85.5%, to $19,000 in 2019 compared to $131,000 in 2018 due to a decrease in non-deposit investment product sales.

Other Expense. Other expense decreased $445,000, or 4.1%, to $10.4 million in 2019 from $10.8 million in 2018. The decrease was primarily the result of decreases in salaries and employee benefits of $360,000, mortgage fees and taxes of $179,000, advertising of $79,000, audits and tax services of $52,000, and FDIC premium expense of $51,000, partially offset by increases in other legal expense of $196,000 and professional services of $81,000. Salaries and employee benefits decreased $360,000, or 5.5%, to $6.1 million in 2019 from $6.5 million in 2018 due to a decrease in commission expense due to lower volume of residential mortgage loan originations in 2019. Mortgage fees and taxes decreased $179,000, or 42.4%, to $243,000 in 2019 from $422,000 in 2018 due to revisions to estimates in 2018 in addition to lower residential mortgage loan origination volume in 2019. Advertising decreased $79,000, or 53.7%, to $68,000 in 2019 from $147,000 in 2018 due to fewer advertising campaigns in 2019. Audit and tax services decreased $52,000, or 24.4%, to $161,000 in 2019 from $213,000 in 2018 as a result of increased expenses related to the Company’s restatement of its 2017 audited consolidated financial statements and its first quarter 2018 unaudited consolidated financial statements in 2018. FDIC premium expense decreased $51,000, or 42.5%, to $69,000 in 2019 from $120,000 in 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 payments for the second and third quarter assessment periods of 2019 payable in the third and fourth quarters of 2019. Legal expense increased $196,000, or 118.1%, to $362,000 in 2019 from $166,000 in 2018 as a result of the legal work related to the definitive merger agreement between the Company and Evans Bancorp, Inc. which was signed on December 19, 2019. Professional services increased $81,000, or 37.9%, to $295,000 in 2019 from $214,000 in 2018 due to transaction costs associated with the completion of the definitive merger agreement between the Company and Evans Bancorp, Inc.

Provision (Benefit) for Income Taxes. Provision for income taxes decreased $133,000, or 415.6%, to a benefit of $(101,000) for 2019 from a provision of $32,000 for 2018. The decrease in income tax expense for the year ended December 31, 2019 as compared to 2018 was due to lower income before income taxes. The effective tax rate was 16.4% in 2019 compared to 19.2% in 2018. The decrease in the effective tax rate was due to lower income before income taxes.

Average balances and yields. The following table sets forth average balance sheets, average yields and costs and certain other information for the years indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are accreted or amortized to interest income or interest expense.

	For the Years Ended December 31,
	2019							2018
	Average Balance		Interest Income/ Expense		Yield/ Cost			Average Balance		Interest Income/ Expense		Yield/ Cost

(Dollars in thousands)
Interest-earning assets:
Loans, including fees	$	281,430	$	12,248		4.35	%	$	277,004	$	11,827		4.27	%
Federal funds sold		5,902		106		1.80			3,413		52		1.51
Securities-taxable		16,019		483		3.01			14,206		415		2.92
Mortgage-backed securities		5,427		108		1.98			7,444		141		1.90
Securities-tax-exempt⁽¹⁾		5,410		129		2.39			5,853		132		2.26
Total interest-earning assets		314,188		13,074		4.16			307,920		12,567		4.08
Noninterest-earning assets		11,417							10,376
Total assets	$	325,605						$	318,296

Interest-bearing liabilities:

NOW accounts	$	29,185	$	88		0.30	%	$	30,018	$	92		0.31	%
Passbook savings		25,999		164		0.63			27,533		147		0.53
Money market savings		30,771		330		1.07			34,593		345		1.00
Individual retirement accounts		6,759		116		1.71			6,792		85		1.25
Certificates of deposit		125,433		2,771		2.21			110,033		1,922		1.75
Borrowings		60,458		1,468		2.43			66,294		1,388		2.09
Total interest-bearing liabilities		278,605		4,937		1.77			275,263		3,979		1.45
Noninterest-bearing liabilities:
Demand deposits		11,453							9,467
Other		4,274							2,298
Total liabilities		294,332							287,028
Stockholders’ equity		31,273							31,268
Total liabilities and stockholders’ equity	$	325,605						$	318,296

Net interest income			$	8,137						$	8,588
Interest rate spread⁽²⁾						2.39	%						2.63	%
Net interest-earning assets⁽³⁾	$	35,583						$	32,657
Net interest margin⁽⁴⁾						2.59	%						2.79	%
Average interest-earning assets to average interest-bearing liabilities						113	%						112	%

_____________________

⁽¹⁾

Tax-exempt interest income is presented on a tax equivalent basis using a 21% federal tax rate for the years ended December 31, 2019 and 2018.

⁽²⁾

Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

⁽³⁾

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

⁽⁴⁾

Net interest margin represents net interest income divided by total interest-earning assets.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

	For the Years Ended December 31, 2019 vs. 2018
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)

Interest-earning assets:
Loans, including fees	$	194		$	227		$	421
Federal funds sold		43			11			54
Securities-taxable		55			13			68
Mortgage-backed securities		(39	)		6			(33	)
Securities-tax-exempt		(12	)		9			(3	)
Total interest-earning assets		241			266			507

Interest-bearing liabilities:
NOW accounts		(2	)		(2	)		(4	)
Passbook savings		(7	)		24			17
Money market savings		(41	)		26			(15	)
Individual retirement accounts		-			31			31
Certificates of deposit		295			554			849
Borrowings		(94	)		174			80
Total interest-bearing liabilities		151			807			958

Net change in net interest income	$	90		$	(541	)	$	(451	)

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, we have an asset/liability management committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

We intend to continue to manage our interest rate risk in order to control the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we intend to use the following strategies to manage our interest rate risk:

(i)

invest in shorter to medium-term repricing and/or maturing securities whenever the market allows;

(ii)

emphasize the marketing of our money market, savings and checking accounts and increasing the duration of our certificates of deposit;

(iii)

sell a portion of our long-term, fixed-rate one- to four-family residential real estate mortgage loans;

(iv)

increase our commercial loan portfolio with shorter term, higher yielding loan products; and

(v)

maintain a strong capital position.

In 2019, we sold $41.8 million of mortgage loan originations including $31.3 million of conventional conforming fixed-rate residential mortgages and $10.5 million of correspondent FHA, VA, and USDA mortgage loans to improve our interest rate risk position in the event of increases in market interest rates. We intend to continue to originate and, subject to market conditions, sell long term (terms of 15 years or greater) fixed-rate one- to four-family residential real estate loans.

Interest Rate Risk Management

Our earnings and the market value of our assets and liabilities are subject to fluctuations caused by changes in the level of interest rates. We manage the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities in an effort to minimize the adverse effects of changes in the interest rate environment. The majority of our assets are long-term fixed-rate mortgage loans that do not reprice as quickly as our deposits, therefore we would experience a significant decrease in our net interest income in the event of an inversion of the yield curve. We have $96.5 million in certificates of deposit accounts (including individual retirement accounts) that are scheduled to mature during 2020. If we retain these deposits it most likely will be at a lower cost to us than their current contractual rates.

Additionally, shortening the average maturity of our interest-earning assets by increasing our investments in shorter term loans, as well as loans with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. By following these strategies, we believe that we are better-positioned to react to changes in market interest rates.

We have an Asset/Liability Management Committee to coordinate all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our cash flows are derived from operating activities, investing activities, and financing activities as reported in our consolidated statements of cash flows included in our consolidated financial statements.

The Company strives to optimize the funding of the consolidated balance sheet, continually balancing the stability and cost factors of our various funding sources. To achieve this goal, the Company maintains a funding strategy that provides effective diversification in the sources and tenor of funding. The objective is a funding mix diversified across a full range of retail as well as secured and unsecured wholesales sources of funds. In general, funding concentrations (including specific retail products) will be avoided to prevent over-reliance on any one source, maintaining an appropriately diverse mix of existing and potential future funding sources. The Company may use this variety of funding sources to manage the funding cost or balance the interest rate risk position.

These sources will include, but not be limited to retail deposit growth, Fed Funds purchased, brokered deposits, wholesale funding, dealer repos, and other short-term alternatives. Management will ensure access to these sources is being actively managed, monitored, and tested. Alternatively, if necessary the Company may liquidate assets or take other measures consistent with our Contingency Funding Plan.

Our primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank of New York, maturities and principal repayments of securities, and loan sales. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our asset/liability management committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 20.0% or greater. For the year ended December 31, 2019, our liquidity ratio averaged 34.4%. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of December 31, 2019.

We regularly adjust our investments in liquid assets based upon our assessment of:

(i)

expected loan demand;

(ii)

expected deposit flows;

(iii)

yields available on interest-earning deposits and securities; and

(iv)

the objectives of our asset/liability management program.

Excess liquid assets are invested generally in interest-earning deposits, short and intermediate-term securities and federal funds sold. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. At December 31, 2019, cash and cash equivalents totaled $7.9 million.

At December 31, 2019, we had $11.4 million in loan commitments outstanding and $4.6 million in additional unadvanced portions of construction loans. In addition to commitments to originate loans, we had $23.5 million in unused lines of credit to borrowers. Certificates of deposit (including individual retirement accounts) comprised solely of certificates of deposits, due within one year of December 31, 2019 totaled $96.5 million, or 72.7% of our certificates of deposit (including individual retirement accounts) and 41.0% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales, other deposit products, including certificates of deposit, and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2020. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of New York, which provides an additional source of funds. Federal Home Loan Bank advances decreased by $20.1 million to $51.7 million at December 31, 2019, compared to $71.8 million at December 31, 2018. At December 31, 2019, we had the ability to borrow approximately $163.7 million from the Federal Home Loan Bank of New York, of which $51.7 million had been advanced.

The Company also has a repurchase agreement with Raymond James providing an additional $10.0 million in liquidity. Funds obtained under the repurchase agreement are secured by the Company’s U.S. Government and agency obligations. There were no advances outstanding under the repurchase agreement at December 31, 2019 and 2018. In addition to the repurchase agreement with Raymond James, the Company also has an unsecured line of credit through Atlantic Community Bankers Bank which would provide an additional $5.0 million in liquidity. There were no draws or outstanding balances from the line of credit at December 31, 2019 and 2018.

Fairport Savings Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2019, Fairport Savings Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines. See Note 13 of the notes to the consolidated financial statements.

Off-Balance Sheet Arrangements

In the ordinary course of business, Fairport Savings Bank is a party to credit-related financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit. We follow the same credit policies in making commitments as we do for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for unused lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by us, is based on our credit evaluation of the customer.

At December 31, 2019 and 2018, we had $11.4 million and $5.6 million, respectively, of commitments to grant loans, $4.6 million and $4.4 million, respectively, of unadvanced portions of construction loans, and $23.5 million and $18.8 million, respectively, of unfunded commitments under lines of credit.

For additional information, see Note 12 of the notes to our consolidated financial statements.

Impact of Inflation and Changing Prices

Our consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

Impact of Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to the consolidated financial statements.

Market for Common Stock

FSB Bancorp, Inc.’s common stock is traded on the Nasdaq Capital Market under the trading symbol “FSBC.”

The following table sets forth the high and low trading prices for our shares of common stock for the years indicated. As of December 31, 2019, there were 1,940,661 shares of our common stock issued and outstanding. On such date our shares were held by approximately 172 holders of record. The Company has never paid cash dividends.

Year Ended December 31, 2019	High		Low

Fourth quarter	$	17.43	$	16.29
Third quarter		18.77		17.01
Second quarter		19.33		16.90
First quarter		19.10		16.52

Year Ended December 31, 2018	High		Low

Fourth quarter	$	17.75	$	15.96
Third quarter		18.50		17.45
Second quarter		17.96		16.85
First quarter		18.00		16.56

STOCKHOLDER INFORMATION

STOCK LISTING

The Company's Common Stock is traded on the Nasdaq Capital Market under the symbol “FSBC.”

ANNUAL REPORT

A copy of the Company's Annual Report for the year ended December 31, 2019 will be furnished without charge to stockholders upon written request to the Secretary, FSB Bancorp, Inc., 45 South Main Street, Fairport, New York 14450.

SPECIAL COUNSEL

Luse Gorman, PC

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

INDEPENDENT AUDITOR

Bonadio & Co., LLP

171 Sully’s Trail

Pittsford, New York 14534

TRANSFER AGENT

Computershare Investor Services

PO Box 30170

College Station, Texas 77842-3170

www.computershare.com/investor

If you have any questions concerning your stockholder account, please call our transfer agent, noted above, at (800) 368-5948. This is the number to call if you require a change of address or need records or information about lost certificates.

FSB Bancorp, Inc.

	REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

	To the Board of Directors and Stockholders of
	FSB Bancorp Inc.:

	Opinion on the Consolidated Financial Statements

	We have audited the accompanying consolidated balance sheets of FSB Bancorp, Inc. (the Company) as of December 31, 2019 and 2018 and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

	Basis for Opinion

	These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

	We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

	Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

171 Sully’s Trail	We have served as the Company’s auditor since 2011.
Pittsford, New York 14534
p (585) 381-1000
f (585) 381-3131
	/s/ Bonadio & Co., LLP
www.bonadio.com	Bonadio & Co., LLP
	Pittsford, New York
	March 30, 2020

ALBANY • BATAVIA • BUFFALO • DALLAS • EAST AURORA • NY METRO AREA • ROCHESTER • RUTLAND • SYRACUSE • UTICA

F-1

FSB Bancorp, Inc.

Consolidated Balance Sheets

December 31, 2019 and 2018

	2019			2018
	(Dollars in Thousands, except share and per share data)
Assets
Cash and due from banks	$	1,689		$	1,581
Interest-earning demand deposits		6,244			4,710
Total Cash and Cash Equivalents		7,933			6,291
Securities available-for-sale, at fair value		18,126			18,331
Securities held-to-maturity, at amortized cost (fair value of 2019 $5,297; 2018 $6,030)		5,166			6,052
Investment in restricted stock, at cost		2,757			3,637
Loans held for sale		2,194			2,133
Loans, net of allowance for loan losses (2019 $1,641; 2018 $1,561)		274,508			281,741
Bank owned life insurance		3,877			3,819
Accrued interest receivable		807			876
Premises and equipment, net		2,439			2,731
Operating lease right-of-use assets		2,123			-
Foreclosed real estate		730			-
Other assets		2,650			2,658

Total Assets	$	323,310		$	328,269

Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest-bearing	$	12,886		$	10,947
Interest-bearing		222,674			211,668
Total Deposits		235,560			222,615
Short-term borrowings		1,000			13,750
Long-term borrowings		50,735			58,076
Official bank checks		519			863
Operating lease liabilities		2,322			-
Other liabilities		1,630			1,452

Total Liabilities		291,766			296,756
Commitments and Contingent Liabilities – see Note 12

Stockholders’ Equity
Preferred stock, par value $0.01; 25,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock; par value $0.01; 50,000,000 shares authorized; 1,940,661 shares issued and outstanding		19			19
Paid-in capital		16,081			15,746
Retained earnings		15,699			16,212
Accumulated other comprehensive loss		(9	)		(183	)
Unearned ESOP shares, at cost		(246	)		(281	)

Total Stockholders’ Equity		31,544			31,513

Total Liabilities and Stockholders’ Equity	$	323,310		$	328,269

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

F-2

FSB Bancorp, Inc.

Consolidated Statements of Income

Years Ended December 31, 2019 and 2018

	2019			2018
	(Dollars in Thousands, Except Per Share Data)
Interest and Dividend Income
Loans, including fees	$	12,248		$	11,827
Securities - taxable		483			415
Securities - tax exempt		102			105
Mortgage-backed securities		108			141
Other		106			52
Total Interest and Dividend Income		13,047			12,540
Interest Expense
Deposits		3,469			2,591
Short-term borrowings		133			215
Long-term borrowings		1,335			1,173

Total Interest Expense		4,937			3,979

Net Interest Income		8,110			8,561
Provision for Loan Losses		295			300
Net Interest Income after Provision for Loan Losses		7,815			8,261
Other Income
Service fees		141			149
Fee income		19			131
Increase in cash surrender value of bank owned life insurance		58			61
Realized gain on sale of loans		931			1,437
Mortgage fee income		612			743
Other		176			196

Total Other Income		1,937			2,717
Other Expense
Salaries and employee benefits		6,137			6,497
Occupancy		1,056			1,088
Data processing costs		467			426
Advertising		68			147
Equipment		543			542
Electronic banking		109			109
Directors’ fees		218			205
Mortgage fees and taxes		243			422
FDIC premium expense		69			120
Audit and tax services		161			213
Professional services		295			214
Legal expense		362			166
Other		638			662

Total Other Expense		10,366			10,811
Income (Loss) before Income Taxes		(614	)		167
Provision (Benefit) for Income Taxes		(101	)		32
Net Income (Loss)	$	(513	)	$	135
Basic and Diluted Earnings (Loss) Per Common Share	$	(0.28	)	$	0.07

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

F-3

FSB Bancorp, Inc.

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2019 and 2018

	2019			2018
	(In Thousands)

Net Income (Loss)	$	(513	)	$	135
Other Comprehensive Income (Loss)
Change in unrealized holding gains (losses) on securities available-for-sale		220			(24	)
Other Comprehensive Income (Loss), Before Tax		220			(24	)
Income Tax Expense (Benefit) Related to Other Comprehensive Income (Loss)		46			(6	)
Other Comprehensive Income (Loss), Net of Tax		174			(18	)
Comprehensive Income (Loss)	$	(339	)	$	117

Tax Effect Allocated to Each Component of Other Comprehensive Income (Loss)

Change in unrealized holding gains (losses) on securities available-for-sale	$	46		$	(6	)
Income tax effect related to other comprehensive income (loss)	$	46		$	(6	)

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

F-4

FSB Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2019 and 2018

	Common Stock		Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unearned ESOP Shares			Total
	(In Thousands)

Balance - January 1, 2018	$	19	$	15,441		$	16,077		$	(165	)	$	(316	)	$	31,056

Net income		-		-			135			-			-			135
Other comprehensive loss, net		-		-			-			(18	)		-			(18	)
ESOP shares committed to be released		-		37			-			-			35			72
Stock based compensation		-		310			-			-			-			310
Effect of stock repurchase plan		-		(42	)		-			-			-			(42	)

Balance - December 31, 2018		19		15,746			16,212			(183	)		(281	)		31,513

Net loss		-		-			(513	)		-			-			(513	)
Other comprehensive income, net		-		-			-			174			-			174
ESOP shares committed to be released		-		31			-			-			35			66
Stock based compensation		-		304			-			-			-			304

Balance - December 31, 2019	$	19	$	16,081		$	15,699		$	(9	)	$	(246	)	$	31,544

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

F-5

FSB Bancorp, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2019 and 2018

	2019			2018
	(In Thousands)
Cash Flows from Operating Activities
Net income (loss)	$	(513	)	$	135
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Net amortization of premiums and accretion of discounts on investments		75			83
Gain on sale of loans		(931	)		(1,437	)
Proceeds from loans sold		42,723			62,069
Loans originated for sale		(41,853	)		(59,995	)
Amortization of net deferred loan origination costs		(11	)		(37	)
Depreciation and amortization		425			445
Provision for loan losses		295			300
Stock based compensation		304			310
Expense related to ESOP		66			72
Deferred income tax benefit		(210	)		(135	)
Earnings on investment in bank owned life insurance		(58	)		(61	)
Decrease (Increase) in accrued interest receivable		69			(52	)
Decrease in other assets		8			42
Increase in other liabilities		541			334

Net Cash Flows From Operating Activities		930			2,073

Cash Flows from Investing Activities
Purchases of securities available-for-sale		(12,500	)		(1,999	)
Proceeds from maturities and calls of securities available-for-sale		11,065			-
Proceeds from principal paydowns on securities available-for-sale		1,808			1,901
Purchases of securities held-to-maturity		-			(517	)
Proceeds from maturities and calls of securities held-to-maturity		815			835
Proceeds from principal paydowns on securities held-to-maturity		48			178
Net decrease (increase) in loans		6,219			(19,293	)
Purchase of restricted stock		(414	)		(1,477	)
Redemption of restricted stock		1,294			1,110
Purchase of premises and equipment		(133	)		(112	)

Net Cash Flows From Investing Activities		8,202			(19,374	)

Cash Flows from Financing Activities
Net increase in deposits		12,945			5,924
Proceeds from borrowings		22,146			67,300
Repayments on borrowings		(42,237	)		(59,921	)
Effect of stock repurchase plan		-			(42	)
Net decrease in official bank checks		(344	)		(66	)

Net Cash Flows From Financing Activities		(7,490	)		13,195

Change in Cash and Cash Equivalents		1,642			(4,106	)

Cash and Cash Equivalents - Beginning		6,291			10,397

Cash and Cash Equivalents - Ending	$	7,933		$	6,291

Supplementary Cash Flows Information
Interest paid	$	4,994		$	3,905
Taxes paid	$	-		$	38
Supplemental Noncash Disclosures
Transfers from loans to real estate owned	$	730		$	-

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

F-6

FSB Bancorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 1 - Nature of Operations and Summary of Significant Accounting Policies

Organization and Nature of Operations

On March 2, 2016, the Boards of Directors of the FSB Community Bankshares, Inc. (“FSB Community”), FSB Community Bankshares, MHC (the “MHC”), and Fairport Savings Bank (the “Bank”) unanimously adopted a Plan of Conversion of the MHC pursuant to which the MHC undertook a “second-step” conversion and now no longer exists. The Bank reorganized from a two-tier mutual holding company structure to a fully public stock holding company structure effective July 13, 2016, and, as a result, is now the wholly-owned subsidiary of FSB Bancorp, Inc. (the “Company”).

FSB Bancorp, Inc., the new stock holding company for the Bank, sold 1,034,649 shares of common stock at $10.00 per share, for gross offering proceeds of $10.3 million in its stock offering. Additionally, after accounting for conversion-related expenses of $1.4 million, which offset gross proceeds, the Company received $8.9 million in net proceeds.

Concurrent with the completion of the conversion and reorganization, shares of common stock of FSB Community owned by public stockholders were exchanged for shares of the Company’s common stock so that the former public stockholders of FSB Community owned approximately the same percentage of the Company’s common stock as they owned of FSB Community’s common stock immediately prior to the conversion. Stockholders of FSB Community received 1.0884 shares of the Company’s common stock for each share of FSB Community’s stock they owned immediately prior to completion of the transaction. Cash in lieu of fractional shares was paid based on the offering price of $10.00 per share. As a result of the offering and the exchange of shares, the Company had 1,941,688 shares outstanding as of December 31, 2016.

In accordance with Board of Governors of the Federal Reserve System regulations, at the time of the reorganization, the Company substantially restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The Bank has established a parallel liquidation account to support the Company’s liquidation account in the event the Company does not have sufficient assets to fund its obligations under its liquidation account. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts. In the event of a complete liquidation of the Bank or the Company, each account holder will be entitled to receive a distribution in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The Company provides a variety of financial services to individuals and corporate customers through its wholly-owned subsidiary, Fairport Savings Bank. The Bank’s operations are conducted in five branches located in Monroe County, New York. The Company and the Bank are subject to the regulations of certain regulatory authorities and undergo periodic examinations by those regulatory authorities.

The Company’s principal business consists of originating one-to-four-family residential real estate mortgages, home equity loans and lines of credit and to a lesser extent, originations of commercial real estate, multi-family, construction, commercial and industrial, and other consumer loans. The Company has three mortgage origination offices located in Pittsford, New York; Watertown, New York; and Buffalo, New York.

The Bank also provides non-deposit investment services to its customers through its wholly-owned subsidiary, Fairport Wealth Management. Prior to January 15, 2016, Fairport Wealth Management was known as Oakleaf Services Corporation. The results of operations of Fairport Wealth Management are not material to the consolidated financial statements.

F-7

FSB Bancorp, Inc.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company, the Bank and Fairport Wealth Management. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, deferred tax assets, and the estimation of fair values for accounting and disclosure purposes.

The Company is subject to the regulations of various governmental agencies. The Company also undergoes periodic examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loss allowances, and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations.

Significant Group Concentrations of Credit Risk

Most of the Company’s activities are with customers located within Monroe, Livingston, Ontario, Orleans, Wayne, Jefferson, Niagara, and Erie Counties, New York. Note 2 discusses the types of securities that the Company invests in. The concentration of credit by type of loan is set forth in Note 3. Although the Bank has a diversified loan portfolio, its debtors’ ability to honor their contracts is primarily dependent upon the real estate and general economic conditions in those areas.

Cash and Cash Equivalents

For purposes of the consolidated statement of cash flows, cash and cash equivalents include cash, balances due from banks and interest-earning demand deposits (with an original maturity of three months or less).

Securities

The Company classifies debt investing securities as either available-for-sale or held-to-maturity. The Company does not hold any securities considered to be trading. Available-for-sale securities are reported at fair value, with net unrealized gains and losses reflected as a separate component of stockholders’ equity, net of the applicable income tax effect. Held-to-maturity securities are those that the Company has the ability and intent to hold until maturity and are reported at amortized cost.

Gains or losses on investment security transactions are based on the amortized cost of the specific securities sold. Premiums and discounts on securities are amortized and accreted into income using the interest method over the period to maturity.

When the fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis, an assessment is made at the balance sheet date as to whether other-than-temporary impairment (“OTTI”) is present.

The Company considers numerous factors when determining whether potential OTTI exists and the period over which the debt security is expected to recover. The principal factors considered are (1) the length of time and the extent to which the fair value has been less than amortized cost basis, (2) the financial condition of the issuer (and guarantor, if any) and adverse conditions specifically related to the security industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of a security by a rating agency, and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

F-8

FSB Bancorp, Inc.

For debt securities, OTTI is considered to have occurred if (1) the Company intends to sell the security, (2) it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or (3) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis or carrying value.

For debt securities, credit-related OTTI is recognized in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss). Credit-related OTTI is measured as the difference between the present value of an impaired security’s expected cash flows and its amortized cost basis or carrying value. Noncredit-related OTTI is measured as the difference between the fair value of the security and its amortized cost, or carrying value, less any credit-related losses recognized. For securities classified as held-to-maturity, the amount of OTTI recognized in other comprehensive income (loss) is accreted to the credit-adjusted expected cash flow amounts of the securities over future periods.

Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the accompanying consolidated financial statements.

Restricted Stock

Restricted equity securities are held as a long-term investment and value is determined based on the ultimate recoverability of the par value. Impairment of these investments is evaluated quarterly and is a matter of judgment that reflects management’s view of the issuer’s long-term performance, which includes factors such as the following: its operating performance; the severity and duration of declines in the fair value of its net assets related to its capital stock amount; its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance; and its liquidity and funding position. After evaluating these considerations, the Company concluded that the par value of these investments will be recovered and, as such, has not recognized any impairment on its holdings of restricted equity securities during the current year.

The Company holds restricted stock from Federal Home Loan Bank and Atlantic Community Bankers Bank.

No impairment charges were recorded related to the restricted stock during 2019 or 2018.

Loans Held for Sale

Mortgage loans held for sale in the secondary market are carried at the lower of amortized cost or fair value. Separate determinations of fair value for residential and commercial loans are made on an aggregate basis. Fair value is determined based solely on the effect of changes in secondary market interest rates and yield requirements from the commitment date to the date of the consolidated financial statements. Realized gains and losses on sales are computed using the specific identification method.

Loan Servicing Rights

The Company retains the servicing on a portion of conventional fixed-rate mortgage loans sold and receives a fee based on the principal balance outstanding.

Loans serviced for others totaled $116,531,000 and $123,755,000 at December 31, 2019 and 2018, respectively.

The Company also sells correspondent FHA, VA, and USDA mortgage loans, servicing released.

Loan servicing rights are recorded at fair value when loans are sold with servicing rights retained. The fair value of the mortgage servicing rights (“MSRs”) is determined using a method which utilizes servicing income, discount rates, and prepayment speeds relative to the Bank’s portfolio for MSRs and are amortized over the life of the loan. MSRs amounted to $726,000 and $812,000 at December 31, 2019 and 2018, respectively, and are included in other assets on the consolidated balance sheets. In 2019, $30,000 was capitalized and $116,000 was amortized. In 2018, $5,000 was capitalized with $85,000 amortized.

F-9

FSB Bancorp, Inc.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and net deferred origination fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method over the estimated life of the loan.

The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed.

Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

Allowance for Loan Losses

The allowance for loan losses (the “Allowance”) is established as losses are estimated to have occurred in the loan portfolio. The allowance for loan losses is recorded through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the loan is uncollectable. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are deemed impaired and classified as either special mention, substandard, doubtful, or loss. For such loans that are also classified as impaired, an allowance is generally established when the collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for the following qualitative factors: effects of changes in lending policies; national and/or local economic trends and conditions; trends in volume and terms of loans; experience, ability, and depth of management; levels and trends of delinquencies, non-accruals and classified loans; quality of institutions loan review system; collateral value for collateral dependent loans; concentrations of credit; and competition, legal and regulatory requirements on level of estimated credit losses. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

F-10

FSB Bancorp, Inc.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures unless subject to a troubled debt restructuring.

In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Bank Owned Life Insurance

The Company holds life insurance policies on a key executive. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Premises and Equipment

Premises and equipment are stated at cost. Depreciation and amortization are computed on the straight-line basis over the shorter of the estimated useful lives or lease terms (in the case of leasehold improvements) of the related assets. Estimated useful lives are generally 20 to 30 years for premises and 3 to 10 years for furniture and equipment.

Foreclosed Real Estate

Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated selling costs at the date of foreclosure. Any write-downs based on the asset’s fair value at date of acquisition are charged to the allowance for loan losses. After foreclosure, property held for sale is carried at the lower of the new basis or fair value less any costs to sell. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management or third party valuation experts, and any subsequent write-downs are recorded as a charge to earnings, if necessary, to reduce the carrying value of the property to the lower of its cost or fair value less cost to sell. The Company had two foreclosed commercial real estate loans at December 31, 2019 and no foreclosed loans at December 31, 2018. At December 31, 2019 and 2018 the Company had one residential mortgage loan for $55,000 in the process of foreclosure.

Income Taxes

Income taxes are provided for the tax effects of certain transactions reported in the consolidated financial statements. Income taxes consist of taxes currently due plus deferred taxes related primarily to temporary differences between the financial reporting and income tax basis of the allowance for loan losses, premises and equipment, certain state tax credits, and deferred loan origination costs. The deferred tax assets and liabilities represent the future tax return consequences of the temporary differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Advertising Costs

The Company follows the policy of charging the costs of advertising to expense as incurred.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated balance sheets when they are funded.

F-11

FSB Bancorp, Inc.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Comprehensive Income (Loss)

Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income (loss).

Accumulated other comprehensive income (loss) represents the sum of these items, with the exception of net income, as of the consolidated balance sheet date and is represented in the table below.

	As of December 31,
	2019			2018

Accumulated Other Comprehensive Loss By Component:
Unrealized losses on securities available-for-sale	$	(12	)	$	(232	)
Tax effect		3			49
Net unrealized losses on securities available-for-sale		(9	)		(183	)

Accumulated other comprehensive loss	$	(9	)	$	(183	)

F-12

FSB Bancorp, Inc.

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 following table sets forth the calculation of basic and diluted earnings per share.

	Year Ended
	December 31,
(In thousands, except per share data)	2019			2018
Basic and Diluted Earnings (Loss) Per Common Share
Net income (loss) available to common stockholders	$	(513	)	$	135
Weighted average basic common shares outstanding		1,859			1,851
Weighted average diluted common shares outstanding		1,859			1,853
Earnings (loss) per common share – basic and diluted	$	(0.28	)	$	0.07

Share Repurchases

The Company announced on July 27, 2017 that the Board of Directors had adopted its first stock repurchase program. Under the repurchase program, the Company may repurchase up to 97,084 shares of its common stock, or approximately 5% of its then outstanding shares. The Company did not repurchase any shares in 2019. In 2018, the Company repurchased 2,592 shares at an average price of $16.38 per share. As of December 31, 2019, the Company had repurchased 72,127 shares at an average price of $15.31 per share.

Stock-Based Compensation

On September 27, 2017, the Board of Directors of the Company approved restricted stock and stock option grants to senior management and the directors of the Company, pursuant to the terms of the 2017 Equity Incentive Plan (the “Plan”). The Plan was approved previously by the Company’s stockholders on August 29, 2017. There were no stock options or shares of restricted stock granted to senior management or directors in 2019. An aggregate of 20,000 stock options and 8,400 shares of restricted stock were granted to senior management during the year ended December 31, 2018. 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.

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 was 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 was largely unchanged from that applied under the previous guidance. In addition, the guidance required an entity to separate the lease components from the nonlease components in a contract. The ASU required disclosures about the amount, timing, and judgments related to a reporting entity's accounting for leases and related cash flows. The standard was required to be applied to all leases in existence as of the date of adoption using a modified retrospective transition approach. This guidance was 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.

F-13

FSB Bancorp, Inc.

The new guidance required 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 required 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.

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.

Effective in November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which defers certain effective dates of the standards on credit losses (ASU No. 2016-13), hedging (ASU NO. 2017-12), and leases (ASU No. 2016-02). ASU No. 2016-13 is now required to be adopted by the Company effective January 1, 2023.

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 shortened the amortization period for certain callable debt securities held at a premium. Specifically, the amendments required the premium to be amortized to the earliest call date. The amendments did 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 were 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.

F-14

FSB Bancorp, Inc.

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.

Subsequent Events

Proposed Merger with Evans Bancorp, Inc.

COVID-19

The outbreak of Coronavirus Disease 2019 (“COVID-19”) could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their obligations to the Company. The World Health Organization has declared Covid-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.

The spread of the outbreak will likely cause disruptions in the U.S. economy and is highly likely to disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread business continuity issues for the Company.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.

F-15

FSB Bancorp, Inc.

Note 2 - Securities

The amortized cost and estimated fair value of securities with gross unrealized gains and losses at December 31, 2019 and 2018 are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2019:	(In Thousands)
Available-for-Sale:
U.S. Government and agency obligations	$	14,043	$	6	$	(14	)	$	14,035
Mortgage-backed securities - residential		4,095		14		(18	)		4,091

	$	18,138	$	20	$	(32	)	$	18,126
Held-to-Maturity:
Mortgage-backed securities - residential	$	409	$	3	$	-		$	412
State and municipal securities		4,757		128		-			4,885

	$	5,166	$	131	$	-		$	5,297

December 31, 2018:
Available-for-Sale:
U.S. Government and agency obligations	$	12,610	$	7	$	(162	)	$	12,455
Mortgage-backed securities - residential		5,953		24		(101	)		5,876
	$	18,563	$	31	$	(263	)	$	18,331
Held-to-Maturity:
Mortgage-backed securities - residential	$	458	$	6	$	(1	)	$	463
State and municipal securities		5,594		29		(56	)		5,567

	$	6,052	$	35	$	(57	)	$	6,030

Mortgage-backed securities consist of securities that are issued by Fannie Mae (“FNMA”), Freddie Mac (“FHLMC”), Ginnie Mae (“GNMA”), and are collateralized by residential mortgages. U.S. Government and agency obligations include notes and bonds with both fixed and variable rates. State and municipal securities consist of government obligations and revenue bonds.

F-16

FSB Bancorp, Inc.

The amortized cost and estimated fair value by contractual maturity of debt securities at December 31, 2019 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In Thousands)
Due in one year or less	$	-	$	-	$	746	$	748
Due after one year through five years		9,043		9,041		2,517		2,554
Due after five years through ten years		5,000		4,994		1,494		1,583
Mortgage-backed securities - residential		4,095		4,091		409		412
	$	18,138	$	18,126	$	5,166	$	5,297

There were no realized gains on sales of securities in 2019 or 2018.

No securities were pledged to secure public deposits or for any other purpose required or permitted by law at December 31, 2019 and 2018.

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.

F-17

FSB Bancorp, Inc.

The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, at December 31, 2019 and 2018:

	Less than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(In Thousands)
2019:
Available-for-Sale
U.S. Government and agency obligations	$	2,993	$	10	$	2,536	$	4	$	5,529	$	14
Mortgage-backed securities – residential⁽¹⁾		131		-		3,065		18		3,196		18
	$	3,124	$	10	$	5,601	$	22	$	8,725	$	32
2019:
Held-to-Maturity
Mortgage-backed securities – residential	$	-	$	-	$	-	$	-	$	-	$	-
State and municipal Securities		-		-		-		-		-		-
	$	-	$	-	$	-	$	-	$	-	$	-

2018:
Available-for-Sale
U.S. Government and agency obligations	$	-	$	-	$	9,445	$	162	$	9,445	$	162
Mortgage-backed securities – residential⁽¹⁾		203		-		3,749		101		3,952		101
	$	203	$	-	$	13,194	$	263	$	13,397	$	263
2018:
Held-to-Maturity
Mortgage-backed securities – residential	$	-	$	-	$	165	$	1	$	165	$	1
State and municipal Securities		1,039		4		3,021		52		4,060		56
	$	1,039	$	4	$	3,186	$	53	$	4,225	$	57

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

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. In 2019 and 2018, the Company did not record an other-than-temporary impairment charge.

At December 31, 2019, one residential mortgage-backed security and two U.S. Government and agency obligations were in a continuous unrealized loss position for less than twelve months. At December 31, 2019, five residential mortgage-backed securities and two U.S. Government and agency obligations were in a continuous unrealized loss position for more than twelve months. The debt securities and residential mortgage-backed securities were issued by U.S. Government sponsored agencies.

All are paying in accordance with their terms with no deferrals of interest or defaults. Because the decline in fair value is attributable to changes in interest rates, not credit quality, and because management does not intend to sell and will not be required to sell these securities prior to recovery or maturity, no declines are deemed to be other-than-temporary.

F-18

FSB Bancorp, Inc.

Note 3 – Loans and The Allowance for Loan Losses

Net loans at December 31, 2019 and 2018 consist of the following:

	2019			2018
	(In Thousands)
Real estate loans:
Secured by one- to four-family residences	$	212,903		$	221,602
Secured by multi-family residences		10,876			10,241
Construction		4,679			4,898
Commercial real estate		23,081			22,492
Home equity lines of credit		17,459			16,766
Commercial & industrial		7,133			7,290
Other loans		44			50

Total Loans		276,175			283,339

Net deferred loan origination fees		(26	)		(37	)
Allowance for loan losses		(1,641	)		(1,561	)

Net Loans	$	274,508		$	281,741

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 & industrial
		Other loans

The Company’s primary lending activity is the origination of one- to four-family residential real estate mortgage loans. At December 31, 2019, $212.9 million, or 77.1%, of the total loan portfolio consisted of one- to four-family residential real estate mortgage loans compared to $221.6 million, or 78.2%, of the total loan portfolio at December 31, 2018.

F-19

FSB Bancorp, Inc.

The Company offers home equity lines of credit, which are primarily secured by a second mortgage on one- to four-family residences. At December 31, 2019, home equity lines of credit totaled $17.5 million, or 6.3%, of total loans receivable compared to $16.8 million, or 5.9%, of total loans receivable at December 31, 2018.

The underwriting standards for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. The combined loan-to-value ratio (first and second mortgage liens) for home equity lines of credit is generally limited to 90%. The Company originates home equity lines of credit without application fees or borrower-paid closing costs. Home equity lines of credit are offered with adjustable-rates of interest indexed to the prime rate, as reported in The Wall Street Journal.

Multi-family residential loans generally are secured by rental properties. Multi-family real estate loans are offered with fixed and adjustable interest rates. Loans secured by multi-family real estate totaled $10.9 million, or 3.9%, of the total loan portfolio at December 31, 2019 compared to $10.2 million, or 3.6%, of the total loan portfolio at December 31, 2018. Multi-family real estate loans are originated for terms of up to 20 years. Adjustable-rate multi-family real estate loans are tied to the average yield on U.S. Treasury securities, subject to periodic and lifetime limitations on interest rate changes.

The Company originates construction loans for the purchase of developed lots and for the construction of single-family residences. At December 31, 2019, construction loans totaled $4.7 million, or 1.7%, of total loans receivable compared to $4.9 million, or 1.7%, at December 31, 2018. At December 31, 2019, the additional unadvanced portion of these construction loans totaled $4.6 million compared to $4.4 million at December 31, 2018. Construction loans are offered to individuals for the construction of their personal residences by a qualified builder (construction/permanent loans).

Before making a commitment to fund a construction loan, the Company requires an appraisal of the property by an independent licensed appraiser. The Company generally also reviews and inspects each property before disbursement of funds during the term of the construction loan.

Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the loan.

Commercial real estate loans are secured by office buildings, mixed-use properties, places of worship and other commercial properties. Loans secured by commercial real estate totaled $23.1 million, or 8.3%, of the Company’s total loan portfolio at December 31, 2019 compared to $22.5 million, or 7.9%, of our total loan portfolio at December 31, 2018.

The Company generally originates adjustable-rate commercial real estate loans with maximum terms of up to 15 years. The maximum loan-to-value ratio of commercial real estate loans is 80%.

F-20

FSB Bancorp, Inc.

The commercial and industrial product set includes loans to individuals or businesses on an installment basis secured by vehicles, equipment or other durable goods for which the loans were made, loans for and secured by machinery and/or equipment for which a legitimate resale market exists, lines of credit to businesses and individuals, and unsecured loans to businesses and individuals on a short-term basis. At December 31, 2019, these loans totaled $7.1 million, or 2.6%, of the total loan portfolio compared to $7.3 million, or 2.6%, at December 31, 2018.

These loans carry a higher risk than commercial real estate loans by the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable. To reduce the risk, management also attempts to secure secondary collateral, such as real estate, and obtain personal guarantees of the borrowers. To further reduce risk and enhance liquidity, these loans generally carry variable rates of interest, repricing in five-year periods, and have a maturity of ten years or less.

The Company is an approved SBA lender. SBA acts as a loan guarantor and these loans are generally for commercial business purposes versus real estate. The Company follows the Small Business Administration lending guidelines regarding eligibility, underwriting etc. as stated in SBA’s most current version of SOP 50 10 SBA’s Lender and Development Company Loan Program.

The Company offers a variety of other loans secured by property other than real estate. At December 31, 2019, these other loans totaled $44,000, or 0.1%, of the total loan portfolio compared to other loans totaling $50,000, or 0.1%, of the total loan portfolio at December 31, 2018. These loans include automobile, passbook, overdraft protection and unsecured loans. Due to the relative immateriality of other loans, the Company’s risk associated with these loans is not considered significant.

F-21

FSB Bancorp, Inc.

The following table sets forth the allowance for loan losses allocated by loan class and the activity in the allowance for loan losses for the years ending December 31, 2019 and 2018. The allowance for loan losses allocated to each class is not necessarily indicative of future losses in any particular class and does not restrict the use of the allowance to absorb losses in other classes.

	Secured by			Secured by
At December 31, 2019	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		(1	)		-		-			(214	)		-		-		-			(215	)
Recoveries		-			-		-			-			-		-		-			-
Provisions (Credits)		(77	)		4		(1	)		440			1		7		(79	)		295
Ending balance	$	788		$	81	$	23		$	510		$	104	$	104	$	31		$	1,641
Ending balance: related to loans individually evaluated for impairment		-			-		-		$	154			-	$	10		-		$	164
Ending balance: related to loans collectively evaluated for impairment	$	788		$	81	$	23		$	356		$	104	$	94	$	31		$	1,477
Loans receivables:
Ending balance	$	212,903		$	10,876	$	4,679		$	23,081		$	17,459	$	7,133	$	44		$	276,175
Ending balance: related to loans individually evaluated for impairment	$	55			-		-		$	954			-	$	45		-		$	1,054
Ending balance: related to loans collectively evaluated for impairment	$	212,848		$	10,876	$	4,679		$	22,127		$	17,459	$	7,088	$	44		$	275,121

	Secured by		Secured by
At December 31, 2018	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)		50		(3	)		(30	)		136		(4	)		50		101		300
Ending balance	$	866	$	77		$	24		$	284	$	103		$	97	$	110	$	1,561
Ending balance: related to loans individually evaluated for impairment		-		-			-			-		-			-		-		-
Ending balance: related to loans collectively evaluated for impairment	$	866	$	77		$	24		$	284	$	103		$	97	$	110	$	1,561
Loans receivables:
Ending balance	$	221,602	$	10,241		$	4,898		$	22,492	$	16,766		$	7,290	$	50	$	283,339
Ending balance: related to loans individually evaluated for impairment		-		-			-			-		-			-		-		-
Ending balance: related to loans individually evaluated for impairment	$	221,602	$	10,241		$	4,898		$	22,492	$	16,766		$	7,290	$	50	$	283,339

F-22

FSB Bancorp, Inc.

The Company’s policies, consistent with regulatory guidelines, provide for the classification of loans that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose the Company to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

When the Company classifies assets as pass a portion of the related general loss allowances is allocated to such assets as deemed prudent. The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the consolidated balance sheet date. The Company’s determination as to the classification of its assets and the amount of its loss allowances are subject to review by its principal state regulator, the New York State Department of Financial Services, which can require that the Company establish additional loss allowances. The Company regularly reviews its asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The following table summarizes impaired loans information by portfolio class as of and for the years ended December 31, 2019 and 2018:

	As of December 31, 2019
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized on Cash Basis
Without an allowance recorded:
Secured by one-to-four residences	$	55	$	55	$	-	$	55	$	-
With an allowance recorded:
Commercial real estate	$	954	$	954	$	151	$	961	$	33
Commercial & industrial loans	$	45	$	45	$	10	$	45	$	-
Total loans	$	1,054	$	1,054	$	161	$	1,061	$	33

As of December 31, 2018

(In thousands)

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized
on Cash
Basis

Without an allowance recorded:

Secured by one-to-four residences

With an allowance recorded:

Commercial real estate

Commercial & industrial loans

Total loans

F-23

FSB Bancorp, Inc.

The commercial real estate loan that was considered impaired at December 31, 2019 was sold subsequent to year-end with no additional losses incurred by the Company.

The following table presents the risk category of loans by class at December 31, 2019 and 2018:

	Pass		Special Mention		Substandard		Doubtful		Total
2019	(In Thousands)
One- to four-family residential	$	210,194	$	183	$	2,526	$	-	$	212,903
Multi-family residential		10,876		-		-		-		10,876
Construction		4,679		-		-		-		4,679
Commercial real estate		18,772		3,355		954		-		23,081
Home equity lines of credit		17,280		14		165		-		17,459
Commercial & industrial		7,050		10		73		-		7,133
Other loans		39		-		5		-		44
Total	$	268,890	$	3,562	$	3,723	$	-	$	276,175

2018
One- to four-family residential	$	218,222	$	494	$	2,886	$	-	$	221,602
Multi-family residential		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
Commercial & industrial		7,245		-		45		-		7,290
Other loans		50		-		-		-		50
Total	$	278,534	$	1,425	$	3,380	$	-	$	283,339

F-24

FSB Bancorp, Inc.

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

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Loans Receivable
	(In thousands)
2019
Real estate loans:
One- to four-family residential	$	82	$	-	$	55	$	137	$	212,766	$	212,903
Multi-family residential		-		-		-		-		10,876		10,876
Construction		-		-		-		-		4,679		4,679
Commercial		-		-		954		954		22,127		23,081
Home equity lines of credit		-		14		-		14		17,445		17,459
Commercial & industrial		16		21		45		82		7,051		7,133
Other loans		-		-		5		5		39		44
Total	$	98	$	35	$	1,059	$	1,192	$	274,983	$	276,175

2018
Real estate loans:
One- to four-family residential	$	227	$	349	$	55	$	631	$	220,971	$	221,602
Multi-family residential		-		-		-		-		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
Commercial & industrial		-		-		45		45		7,245		7,290
Other loans		-		-		-		-		50		50
Total	$	622	$	349	$	100	$	1,071	$	282,268	$	283,339

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

	December 31,		December 31,
(In thousands)	2019		2018
Residential mortgage loans:
Secured by one-to-four family residences	$	55	$	55
		55		55
Commercial loans:
Real estate		954		-
Commercial and industrial loans		45		45
		999		45
Total nonaccrual loans	$	1,054	$	100

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

Interest on non-accrual loans that would have been earned if loans were accruing interest was immaterial for 2019 and 2018.

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.

F-25

FSB Bancorp, Inc.

Foreclosed real estate at December 31, 2019 is summarized as follows (in thousands):

Beginning balance	$	-
Commercial real estate loans transferred to real estate owned		944
Direct write-downs		(214	)

End of year	$	730

Activity in the valuation allowance was as follows for the year ended December 31, 2019 (in thousands):

Beginning balance	$	25
Provisions charged to expense		189
Direct write-downs		(214	)

End of year	$	-

Expenses incurred during the year ended December 31, 2019 related to foreclosed assets include (in thousands):

Operating expenses

At December 31, 2019, the balance of foreclosed real estate includes $0 of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. The recorded investment of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process is $55,000 at December 31, 2019 and 2018. The Company had no foreclosed real estate at December 31, 2018. Expenses related to foreclosed assets subsequent to December 31, 2019 totaled $28,000.

Note 4 - Premises and Equipment

Premises and equipment at December 31, 2019 and 2018 are summarized as follows:

	2019			2018
	(In Thousands)
Premises	$	5,003		$	5,003
Furniture and equipment		3,452			3,357

		8,455			8,360
Accumulated depreciation and amortization		(6,016	)		(5,629	)

	$	2,439		$	2,731

Depreciation and amortization expense was $425,000 and $445,000 for the years ended December 31, 2019 and 2018, respectively.

At December 31, 2019, the Company was obligated under non-cancelable operating leases for existing branches in Penfield, Irondequoit, Webster, and Perinton, New York and for four mortgage-origination offices in Watertown, Pittsford, Greece, and Buffalo, New York. Rent expense under leases totaled $456,000 during 2019 and $457,000 during 2018.

F-26

FSB Bancorp, Inc.

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. The Company has elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

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 management believes it is reasonably certain that the renewal options will be exercised.

The components of the lease expense are as follows:

	For the year
	ended December 31,
(In thousands)	2019
Operating lease cost	$	387
Short-term lease cost		69
Total	$	456

Supplemental cash flow information related to leases was as follows:

	For the year
	ended December 31,
(In thousands)	2019
Cash paid for amount included in the measurement of operating lease liabilities:
Operating cash flows from operating leases	$	387

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

(In thousands, except lease term and discount rate)	December 31, 2019
Operating Leases
Operating lease right-of-use assets	$	2,123
Operating lease liabilities	$	2,322

Weighted Average Remaining Lease Term
Operating Leases		8.6 years

Weighted Average Discount Rate
Operating Leases		3.52	%

Maturities of operating lease liabilities were as follows:

Year Ending December 31,
(In thousands)
2020	$	318
2021		312
2022		252
2023		194
2024		206
Thereafter		1,040
Total minimum lease payments	$	2,322

F-27

FSB Bancorp, Inc.

Note 5 - Deposits

The components of deposits at December 31, 2019 and 2018 consist of the following:

	2019		2018
	(In Thousands)
Non-interest bearing	$	12,886	$	10,947
NOW accounts		30,950		28,376
Regular savings, tax escrow and demand clubs		25,500		27,478
Money market		33,392		31,880
Individual retirement accounts		6,774		6,477
Certificates of deposit		126,058		117,457

	$	235,560	$	222,615

As of December 31, 2019, individual retirement accounts and certificates of deposit have scheduled maturities as follows (in thousands):

2020	$	96,523
2021		32,296
2022		1,903
2023		905
2024		1,205

	$	132,832

The aggregate amount of time deposits, each with a minimum denomination of $250,000 was $20,430,000 and $18,032,000 at December 31, 2019 and 2018, respectively. Listing service deposits totaled $8,506,000 and $11,225,000 at December 31, 2019 and 2018, respectively. Under the Dodd-Frank Act, deposit insurance per account owner is $250,000.

Interest expense on deposits for the years ended December 31, 2019 and 2018 is as follows:

	2019		2018
	(In Thousands)
NOW accounts	$	88	$	92
Regular savings and demand clubs		164		147
Money market		330		345
Individual retirement accounts		116		85
Certificates of deposit		2,771		1,922

	$	3,469	$	2,591

F-28

FSB Bancorp, Inc.

Note 6 - Borrowings

Borrowings consist of advances from the Federal Home Loan Bank of New York (FHLB).

The following table sets forth the contractual maturities of borrowings with the FHLB as of December 31:

Advance Date	Maturity Date	Current Rate			2019		2018
					(In Thousands)
09/05/12	09/05/19		1.13	%	$	-	$	246
12/19/12	12/19/19		1.20	%		-		321
01/04/13	01/04/19		1.52	%		-		1,000
01/22/13	01/22/19		1.44	%		-		1,000
02/20/13	02/20/20		1.28	%		37		185
02/20/13	02/21/23		1.77	%		345		447
01/21/14	01/22/19		1.45	%		-		34
03/20/14	03/20/19		1.50	%		-		103
07/21/14	07/21/21		1.94	%		250		397
07/21/14	07/22/19		2.08	%		-		500
08/21/14	08/21/19		2.12	%		-		1,000
10/02/14	10/04/21		2.00	%		576		867
10/15/14	10/15/21		1.69	%		286		431
11/28/14	11/29/21		1.90	%		599		890
12/31/14	12/31/19		1.63	%		-		224
01/14/15	01/14/20		1.73	%		1,500		1,500
01/21/15	01/21/20		1.79	%		500		500
01/21/15	01/21/21		1.97	%		500		500
04/13/15	04/13/20		1.74	%		1,000		1,000
05/20/15	05/20/20		1.52	%		103		308
05/20/15	05/20/22		1.91	%		372		517
06/25/15	06/25/20		1.65	%		121		326
10/29/15	10/29/20		1.51	%		378		784
10/29/15	10/29/20		1.90	%		1,000		1,000
01/27/16	01/27/21		1.92	%		1,000		1,000
01/27/16	01/27/23		1.87	%		469		611
02/12/16	02/13/23		1.66	%		479		621
02/12/16	02/13/23		2.04	%		500		500
10/28/16	10/28/20		1.57	%		1,000		1,000
11/04/16	11/04/21		1.72	%		2,000		2,000
11/17/16	11/17/21		2.13	%		1,000		1,000
11/17/16	11/17/21		1.78	%		411		611
11/17/16	11/17/23		2.07	%		589		729
11/28/16	11/29/19		1.78	%		-		1,500
12/21/16	12/23/19		1.91	%		-		1,000
01/04/17	01/04/19		1.62	%		-		1,500
01/19/17	01/21/20		1.91	%		1,000		1,000
03/24/17	03/24/22		2.00	%		719		1,017
03/24/17	03/25/24		2.28	%		956		1,164
07/24/17	07/24/20		1.88	%		1,000		1,000
07/24/17	07/26/21		2.03	%		1,000		1,000
07/24/17	07/25/22		1.94	%		545		743
08/31/17	08/31/21		1.96	%		1,000		1,000

F-29

FSB Bancorp, Inc.

Advance Date	Maturity Date	Current Rate			2019		2018
					(In Thousands)
09/11/17	09/11/20		1.80	%		1,000		1,000
09/11/17	09/12/22		2.07	%		1,500		1,500
09/27/17	09/27/22		2.28	%		1,000		1,000
01/18/18	01/18/19		2.17	%		-		1,500
01/24/18	01/24/20		2.42	%		1,500		1,500
02/09/18	02/09/22		2.78	%		2,500		2,500
03/21/18	03/21/23		3.13	%		1,500		1,500
04/04/18	04/04/23		3.00	%		2,000		2,000
05/22/18	05/23/22		3.22	%		1,500		1,500
05/29/18	05/31/22		2.97	%		2,000		2,000
05/29/18	05/30/23		3.01	%		1,500		1,500
06/28/18	06/28/23		3.13	%		1,000		1,000
06/28/18	06/28/24		3.25	%		2,000		2,000
07/23/18	07/23/24		3.34	%		1,000		1,000
08/20/18	08/20/20		2.93	%		2,000		2,000
08/31/18	02/28/19		2.56	%		-		1,500
09/25/18	03/25/19		2.66	%		-		2,000
09/27/18	09/27/21		3.24	%		1,500		1,500
10/18/18	04/18/19		2.76	%		-		1,500
10/30/18	04/30/19		2.78	%		-		1,500
11/23/18	05/23/19		2.82	%		-		1,500
12/03/18	01/03/19		2.61	%		-		3,750
12/20/18	06/20/19		2.81	%		-		2,000
01/29/19	01/30/23		2.94	%		3,000		-
01/29/19	01/29/24		2.97	%		3,000		-
09/30/19	03/30/20		2.10	%		1,000		-

					$	51,735	$	71,826

Borrowings are secured by residential mortgages with a carrying amount of $194,868,000 at December 31, 2019 and the Company’s investment in FHLB stock. As of December 31, 2019, $111,948,000 was available for borrowings. At December 31, 2018, borrowings were secured by residential mortgages with a carrying amount of $201,922,000, and $94,106,000 was available for new borrowings.

The following table sets forth the contractual maturities of all FHLB borrowings at December 31, 2019 (dollars in thousands):

	Contractual Maturity		Weighted Average Rate
2020	$	13,140		2.04	%
2021		10,121		2.11
2022		10,137		2.60
2023		11,381		2.78
2024		6,956		3.01
	$	51,735		2.46	%

The Company also has a repurchase agreement with Raymond James providing an additional $10.0 million in liquidity collateralized by the Company’s U.S. Government and agency obligations. There were no advances outstanding under the repurchase agreement at December 31, 2019 and 2018. Securities are not pledged until the borrowing is initiated. In addition to the repurchase agreement with Raymond James, the Company also has an unsecured line of credit through Atlantic Community Bankers Bank which would provide an additional $5.0 million in liquidity. There were no draws or outstanding balances from the line of credit at December 31, 2019 and 2018.

F-30

FSB Bancorp, Inc.

Note 7 - Income Taxes

The provision for (benefit from) income taxes for 2019 and 2018 consists of the following:

	2019			2018
	(In Thousands)
Current
Federal	$	106		$	163
State		3			4
Deferred		(210	)		(135	)
	$	(101	)	$	32

The Company’s effective tax rate was 16% and 19% in 2019 and 2018, respectively. The effective tax rate primarily reflects the impact of non-tax interest and dividends from tax exempt securities.

Items that give rise to differences between income tax expense included in the consolidated statements of income and taxes computed by applying the statutory federal tax at a rate of 21% included the following (dollars in thousands):

	2019						2018
	Amount			% of Pre-tax Income			Amount			% of Pre-tax Income
Federal Tax at a Statutory rate	$	(129	)		21	%	$	35			21	%
State taxes, net of Federal provision		422			(69	)		14			9
Change in valuation allowance		(419	)		68			(11	)		(7	)
Nontaxable interest and dividend income		(18	)		3			(19	)		(11	)
Other items		43			(7	)		13			7
Income tax provision	$	(101	)		16	%	$	32			19	%

F-31

FSB Bancorp, Inc.

Deferred income tax assets and liabilities resulting from temporary differences are summarized as follows and are included in other assets at December 31, 2019 and at December 31, 2018 in the accompanying consolidated balance sheets:

	2019			2018
	(In Thousands)
Deferred tax assets:
Deferred loan origination fees	$	75		$	94
Allowance for loan losses - Federal		485			408
State tax credits		180			825
Supplemental Executive Retirement Plan		221			216
Unrealized loss on securities available for sale		3			49
Net operating loss		639			477
Stock compensation		42			32
Depreciation		128			-
Other		84			43

		1,857			2,144
Valuation allowance		(994	)		(1,413	)
Total deferred tax assets, net of valuation allowance		863			731

Deferred tax liabilities:
Depreciation		-			(9	)
Mortgage servicing rights		(190	)		(213	)

Total deferred tax liabilities		(190	)		(222	)

Net deferred tax asset	$	673		$	509

The Company has recorded a valuation allowance for mortgage recording tax credits incurred before 2015 as well as state tax deductions since anticipated levels of future state taxable income makes it more likely than not that all of these tax benefits will not be used. Beginning in 2015, the New York State Special Additional Mortgage Recording Tax Credit became a refundable credit, with the exception of residential mortgage loans originated in Erie County. To the extent that the credit exceeds the Company’s New York State tax liability, any remaining credit will be refunded to the Company.

As a thrift institution, the Bank is subject to special provisions in the income tax laws regarding its allowable income tax bad debt deduction and related tax basis bad debt reserves. Deferred income tax liabilities are to be recognized with respect to any base-year reserves which are to become taxable (or "recaptured") in the foreseeable future.

Under current income tax laws, the base-year reserves would be subject to recapture if the Company pays a cash dividend in excess of earnings and profits or liquidates. The Bank does not expect to take any actions in the foreseeable future that would require the recapture of any Federal reserves. As a result, a deferred tax liability has not been recognized with respect to the Federal base-year reserve of $1,518,000 at December 31, 2019 and 2018, because

the Bank does not expect that this amount will become taxable in the foreseeable future. The unrecognized deferred tax liability with respect to the Federal base-year reserve was $319,000 at December 31, 2019 and 2018. It is more likely than not that this liability will never be incurred because, as noted above, the Bank does not expect to take any action in the future that would result in this liability being incurred.

The Company's Federal and New York State tax returns, constituting the returns of the major taxing jurisdictions, are subject to examination by the taxing authorities for 2016, 2017, and 2018 as prescribed by applicable statute. No waivers have been executed that would extend the period subject to examination beyond the period prescribed by statute.

F-32

FSB Bancorp, Inc.

Note 8 – Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive loss (“AOCI”), net of tax, for the periods indicated are summarized in the table below, in thousands.

	For the year ended December 31, 2019
(In thousands)	Unrealized Losses on Available- for-Sale Securities			Total
Beginning balance	$	(183	)	$	(183	)
Other comprehensive income		174			174
Ending balance	$	(9	)	$	(9	)

	For the year ended December 31, 2018
(In thousands)	Unrealized Losses on Available- for-Sale Securities			Total
Beginning balance	$	(165	)	$	(165	)
Other comprehensive loss		(18	)		(18	)
Ending balance	$	(183	)	$	(183	)

Note 9 - Employee Benefit Plans

The Bank has a 401(k) plan for all eligible employees. Employees are eligible for participation in the 401(k) Plan after one year of service and attaining age 19. The 401(k) Plan allows employees to contribute 1% to 100% of their annual salary subject to statutory limitations. Matching contributions made by the Bank are 100% of the first 6% of compensation that an employee contributes to the 401(k) Plan. In addition, the Bank may make a discretionary contribution as a percentage of each eligible employee’s annual base compensation including the value of ESOP shares allocated. Matching contributions to the 401(k) Plan amounted to $217,000 and $218,000 for the years ended December 31, 2019 and 2018, respectively. Discretionary contributions to the 401(k) Plan were $55,000 and $28,000 for the years ended December 31, 2019 and 2018, respectively.

The Bank sponsors an Employee Stock Ownership Plan (ESOP) for eligible employees who have attained age 21 and completed one year of employment. The cost of shares not committed to be released is presented in the accompanying consolidated balance sheets as a reduction of stockholders’ equity. Allocations to individual accounts are based on participant compensation. As shares are committed to be released to participants, the Company reports compensation expense equal to the current market price of the shares and the shares become outstanding for earnings per share computations. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in-capital. Any dividends on allocated shares reduce retained earnings. Any dividends on unallocated ESOP shares reduce debt and accrued interest. In connection with establishing the ESOP in 2007, the ESOP borrowed $700,000 from FSB Community to purchase 69,972 common shares of FSB Community’s stock. The loan is being repaid in twenty equal annual installments through 2026. The loan bears interest at the Prime Rate.

Shares are released to participants on a straight-line basis as the loan is repaid and totaled 3,808 shares for each of the years ended December 31, 2019 and December 31, 2018. Total expense for the ESOP was $66,000 and $72,000 for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019, the Company had 26,655 unearned ESOP shares having an aggregate market value of $463,264.

F-33

FSB Bancorp, Inc.

The Bank has a supplemental executive retirement plan (SERP) for two participants, one current executive and one retired executive. All benefits provided under the SERP are unfunded and, as these executives retire, the Company will make payments to participants. The Company has recorded $845,000 and $826,000 at December 31, 2019 and 2018 respectively, for the SERP in other liabilities. In 2019 and 2018, the expense under the SERP totaled $79,000 and $59,000, respectively.

On September 27, 2017, the Board of Directors of the Company approved the grant of restricted stock awards to its Directors and executive officers under the 2017 Equity Incentive Plan that was approved at the special meeting of stockholders on August 29, 2017 when 77,668 shares were authorized for award. There were no restricted stock awards granted in 2019. On January 5, 2018 and July 2, 2018, a total of 8,400 restricted stock awards were granted to five executive officers of the Company with the fair value of the stock at $17.52 and $17.75, respectively. The awards vest ratably over five years (20% per year for each year of the participant’s service with the Company). Vesting will automatically accelerate in the event of a participant’s death, disability, or involuntary termination following a change in control.

A summary of the Company’s stock award activity for the years ended December 31, 2019 and 2018 is as follows:

	2019				2018
	Stock Awards		Weighted Average Price Per Share		Stock Awards		Weighted Average Price Per Share
Outstanding at beginning of year		71,100	$	16.82		62,700	$	16.72
Grants		-		-		8,400		17.57
Outstanding at year end		71,100	$	16.82		71,100	$	16.82

Vested shares at year end		29,408	$	16.78		15,644	$	16.72
Unvested shares at year end		41,692	$	16.85		55,456	$	16.85
Total outstanding shares at year end		71,100				71,100

The Bank also has a stock-based compensation plan which allows the Company to issue up to 194,168 stock options. There were no stock options granted in 2019. On January 5, 2018 and July 2, 2018, the Board of Directors granted a combined total of 20,000 options to buy stock under the plan at exercise prices of $17.52 and $17.75, the fair value of the stock as of January 5^th and July 2^nd, respectively. These options have a 10-year term and are vested over a five-year period. Vesting will automatically accelerate in the event of a participant’s death, disability, or involuntary termination following a change in control.

A summary of the Company’s stock option activity and related information for its option plans for the years ended December 31, 2019 and 2018 is as follows:

	2019						2018
	Options		Exercise Price Range		Weighted Average Exercise Price Per Share		Options		Exercise Price Range		Weighted Average Exercise Price Per Share
Outstanding at beginning of year		172,080		$16.69-$17.75	$	16.82		152,080		$16.69-$16.72	$	16.72
Grants		-		-		-		20,000		$17.52-$17.75		17.58
Exercised		-		-		-		-		-		-
Outstanding at year end		172,080		$16.69-$17.75	$	16.82		172,080		$16.69-$17.75	$	16.82

Exercisable at year end		64,832		$16.69-$17.75	$	16.77		30,416		$16.69-$16.72	$	16.72

F-34

FSB Bancorp, Inc.

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards. The following weighted average assumptions were used to value options granted during the years ended December 31, 2019 and 2018:

	2019		2018

Risk-free interest rate		-		2.41	%
Volatility factor		-		10.47	%
Dividends		-		0.00	%
Weighted average expected life (years)		-		5.00
Forfeiture rate		-		0.00	%

The Company calculates expected volatility for stock options by taking an average of historical volatility over the past five years and a computation of implied volatility. The computation of expected term was determined based on the contractual terms of the stock-based awards and vesting schedules. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of grant. Forfeiture rates are calculated by dividing unvested shares forfeited by beginning shares outstanding.

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 $304,000 and $310,000 for the years ended December 31, 2019 and 2018, respectively and is expected to record approximately $304,000 in 2020 and 2021, $238,000 in 2022, and $5,000 in 2023.

The grant date fair value of all options granted during 2018 under the methods and assumptions described above was $55,000.

The Company’s unrecognized compensation cost, net of estimated forfeitures, related to the non-vested share-based compensation arrangements granted under the plan is expected to be recognized over a weighted average period of approximately 2.80 years.

The aggregate intrinsic value of options outstanding and exercisable at December 31, 2019 and 2018 were approximately $40,000 and $9,000, respectively.

A summary of changes in the Company’s unvested options for the year is as follows:

Unvested Options	Options		Weighted Average Grant Date Fair Value

Unvested at January 1, 2019		141,664	$	2.31
Granted		-		-
Vested		34,416		2.30

Unvested at December 31, 2019		107,248	$	2.31

F-35

FSB Bancorp, Inc.

Note 10: Other Income

The Company has included the following table regarding the Company’s other income for 2019 and 2018. All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income. The following table presents the Company’s sources of Non-Interest Income for the twelve months ended December 31, 2019 and 2018. Items outside the scope of ASC 606 are noted as such.

	For the year ended		For the year ended
	December 31, 2019		December 31, 2018
(In thousands)
Service fees
Deposit related fees	$	65	$	66
Insufficient funds fee		76		83
Total service fees		141		149
Fee income
Securities commission income		8		43
Insurance commission income		11		88
Total insurance and securities commission income		19		131
Card income
Debit card interchange fee income		135		146
ATM fees		30		31
Total card income		165		177
Mortgage fee income and realized gain on sales of loans*
Residential mortgage loan origination fees		229		324
Commercial loan fees		85		88
Loan servicing income		298		331
Realized gain on sales of residential mortgage loans		931		1,390
Realized gain on sale of SBA loan		-		47
Total mortgage fee income and realized gain on sales of loans		1,543		2,180
Bank owned life insurance		58		61
Other miscellaneous income		11		19
Total non-interest income	$	1,937	$	2,717

*Outside scope of ASC 606

The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09 on January 1, 2018. 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.

Note 11 - Related Party Transactions

Certain employees, executive officers and directors are engaged in transactions with the Bank in the ordinary course of business. It is the Bank’s policy that all related party transactions are conducted at “arms length” and all loans and commitments included in such transactions are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Bank and do not involve more than the normal risk of collectibility or present other unfavorable terms.

As of December 31, 2019 and 2018, loans outstanding with related parties were $469,000 and $485,000, respectively. During 2019, there were new loans of $415,000, sales of $360,000 and repayments totaled $71,000.

F-36

FSB Bancorp, Inc.

Note 12 - Commitments

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments summarized as follows at December 31, 2019 and 2018:

	2019		2018
	(In Thousands)
Commitments to extend credit:
Commitments to grant loans	$	11,351	$	5,578
Unadvanced portion of construction loans		4,601		4,439
Unfunded commitments under lines of credit		23,539		18,774

	$	39,491	$	28,791

Commitments to grant loans at fixed-rates at December 31, 2019 totaled $5.9 million and had interest rates that ranged from 3.125% to 4.875% as compared to commitments to grant loans at fixed-rates at December 31, 2018 which totaled $3.1 million and had interest rates that ranged from 4.50% to 6.00%.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank had one commercial letter of credit for $16,000 at December 31, 2019 and three commercial letters of credit for $64,000 at December 31, 2018.

The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Bank upon extension of credit, varies and is based on management’s credit evaluation of the counterparty.

In the ordinary course of business, the Bank sells residential mortgage loans to third parties and in certain limited situations, such as in the event of an early payment default, the Bank retains credit risk exposure on those residential mortgage loans and may be required to repurchase them or to indemnify guarantors for certain losses. The Bank may also be required to repurchase residential mortgage loans when representations and warranties made by the Bank in connection with those sales are breached. When a residential mortgage loan sold to an investor fails to perform according to its contractual terms, the investor will typically review the loan file to search for errors that may have been made in the process of originating the loan. If errors were discovered and it is determined that such errors constitute a breach of a representation or warranty made to the investor in connection with the Bank’s sale of the residential mortgage loan, the Bank will be required to either repurchase the loan or indemnify the investor for losses sustained. The bank has not been required to repurchase any residential mortgage loans or indemnify any investors for any such errors.

Note 13 - Regulatory Matters

The Bank is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

F-37

FSB Bancorp, Inc.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 capital (as defined), and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 to adjusted total assets (as defined). Management believes that, as of December 31, 2019 and 2018, the Bank met all capital adequacy requirements to which it was subject. As of December 31, 2019, the most recent notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s status as well capitalized.

The Bank’s actual capital amounts and ratios are presented in the table below.

Minimum

To Be "Well-

Minimum

Capitalized"

Well-Capitalized

For Capital

Under Prompt

With Buffer, Fully

Actual

Adequacy Purposes

Corrective Provisions

Phased in for 2019

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2019

Total Core Capital (to Risk-Weighted Assets)

30,780

15.32

³$16,075

³8.0

³$20,093

³10.0

³$21,098

³10.5

Tier 1 Capital (to Risk-Weighted Assets)

29,139

14.50

³12,056

³6.0

³16,075

³8.0

³17,079

³8.5

Tier 1 Common Equity (to Risk-Weighted Assets)

29,139

14.50

³9,042

³4.5

³13,061

³6.5

³14,065

³7.0

Tier 1 Capital (to Assets)

29,139

9.01

³12,938

³4.0

³16,172

³5.0

³16,172

³5.0

As of December 31, 2018:

Total Core Capital (to Risk-Weighted Assets)

30,896

15.70

³$14,927

³8.0

³$18,658

³10.0

³$20,665

³10.5

Tier 1 Capital (to Risk-Weighted Assets)

29,335

14.91

³11,808

³6.0

³14,927

³8.0

³16,729

³8.5

Tier 1 Common Equity (to Risk-Weighted Assets)

29,335

14.91

³8,856

³4.5

³12,128

³6.5

³13,777

³7.0

Tier 1 Capital (to Assets)

29,335

9.07

³12,938

³4.0

³15,216

³5.0

³16,173

³5.0

The FRB has issued a policy guidance regarding the payment of dividends by bank holding companies. In general, the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. FRB guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of FSB Bancorp to pay dividends or otherwise engage in capital distributions.

Note 14 - Fair Value Measurement and Fair Values of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s assets and liabilities; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all assets and liabilities, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of assets and liabilities subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

F-38

FSB Bancorp, Inc.

Accounting guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used are as follows at December 31:

(In Thousands)
2019	Total		Level 1		Level 2		Level 3
U.S. Government and agency obligations	$	14,035	$	-	$	14,035	$	-
Mortgage-backed securities - residential		4,091		-		4,091		-
Total Available-for-Sale Securities	$	18,126	$	-	$	18,126	$	-

2018	Total		Level 1		Level 2		Level 3
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	$	-

There were no securities transferred out of level 2 securities available-for-sale during the twelve months ended December 31, 2019 or 2018.

F-39

FSB Bancorp, Inc.

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

	December 31, 2019
(In thousands)	Level 1		Level 2		Level 3		Total Fair Value
Impaired loans	$	-	$	803	$	90	$	893
Loans held for sale	$	-	$	2,194	$	-	$	2,194
Foreclosed real estate	$	-	$	-	$	730	$	730
Total loans	$	-	$	2,997	$	820	$	3,817

	December 31, 2018
(In thousands)	Level 1		Level 2		Level 3		Total Fair Value
Impaired loans	$	-	$	-	$	-	$	-
Loans held for sale	$	-	$	2,133	$	-	$	2,133
Foreclosed real estate	$	-	$	-	$	-	$	-
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 December 31, 2019	Valuation Techniques	Unobservable Input	Range (Weighted Avg.)
Impaired loans	Appraisal of collateral	Appraisal Adjustments	50%
	(Sales Approach)	Costs to Sell	10.0% - 50.7% (41.7%)
Foreclosed real estate	Appraisal of collateral	Appraisal Adjustments	25.0%-29.2% (26.6%)
	(Market Approach)	Costs to Sell	6.7%-7.3% (6.9%)

There have been no transfers of assets into or out of any fair value measurement level during the year ended December 31, 2019.

Required disclosures include fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of certain of the Company’s assets and liabilities at December 31, 2019 and 2018.

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.

F-40

FSB Bancorp, Inc.

Investment in Restricted Stock

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

Loans and Loans Held for Sale

The fair values of loans held in portfolio are estimated using discounted cash flow analyses. 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.

Mortgage loans held for sale in the secondary market are carried at the lower of cost or fair value, resulting in a Level 2 classification. Separate determinations of fair value for residential and commercial loans are made on an aggregate basis. Fair value is determined based solely on the effect of changes in secondary market interest rates and yield requirements from the commitment date to the date of the consolidated financial statements.

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. The one impaired loan, which was disposed of subsequent to year-end, was valued using prices at which the loan was sold, resulting in a Level 2 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 December 31, 2019 and 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.

F-41

FSB Bancorp, Inc.

Foreclosed Real Estate

For each of the foreclosed real estate properties owned by the Bank during 2019, fair value was determined as either the highest price offered to the Bank for the property by a willing market participant or the appraisal value of the collateral less a discount factor. If there were changes to the conditions surrounding the property or management did not believe that a relied-upon offer was valid subsequent to the establishment of fair value, a new fair value was determined to be equal to or supported by the highest price from a current valid offer to the Bank. Fair value was discounted for estimated costs to sell as the Bank believed that each property would be sold with additional related costs.

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2019 and 2018 are as follows:

		2019				2018
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
		(In Thousands)
Financial assets:
Cash and due from banks	1	$	1,689	$	1,689	$	1,581	$	1,581
Interest bearing demand deposits	1		6,244		6,244		4,710		4,710
Securities available for sale	2		18,126		18,126		18,331		18,331
Securities held to maturity	2		5,166		5,297		6,052		6,030
Investment in restricted stock	2		2,757		2,757		3,637		3,637
Loans held for sale	2		2,194		2,194		2,133		2,133
Loans, net	3		274,508		279,114		281,741		280,173
Foreclosed real estate	3		730		730		-		-
Accrued interest receivable	1		807		807		876		876

Financial liabilities:
Demand deposits, savings, NOW and MMDA	1		102,728		102,728		98,681		98,681
Time deposits	2		132,832		132,972		123,934		124,182
Borrowings	2		51,735		52,348		71,826		71,086
Accrued interest payable	1		111		111		168		168

F-42

FSB Bancorp, Inc.

Note 15 - FSB Bancorp, Inc. (Parent Company Only) Financial Information

Balance Sheets

	December 31
	2019		2018
	(In Thousands)
Assets
Cash and cash equivalents	$	1,474	$	1,570
Investment in banking subsidiary		29,796		29,661
ESOP loan receivable		297		331
Total Assets	$	31,567	$	31,562

Liabilities and Stockholders’ Equity

Total Liabilities	$	23	$	49

Stockholders’ Equity		31,544		31,513

Total Liabilities and Stockholders’ Equity	$	31,567	$	31,562

Statements of Income

	Year Ended December 31
	2019			2018
	(In Thousands)
Interest Income	$	39		$	36
Other Expense		(447	)		(500	)
Equity in undistributed (loss) earnings of banking subsidiary		(105	)		599

Net (Loss) Income	$	(513	)	$	135

F-43

FSB Bancorp, Inc.

Statements of Cash Flows

	Year Ended December 31
	2019			2018
	(In Thousands)
Cash flows from operating activities
Net (loss) income	$	(513	)	$	135
Adjustments to reconcile net (loss) income to net cash flows from operating activities
Equity in undistributed loss (earnings) of banking subsidiary		105			(599	)
Stock based compensation		304			310
Net (decrease) increase in other liabilities		(26	)		15
Net cash flows from operating activities		(130	)		(139	)

Cash flows from investing activities
Payments received on ESOP loan		34			34
Net cash flows from investing activities		34			34

Cash flows from financing activities
Purchase of common stock		-			(42	)
Net cash flows from financing activities		-			(42	)

Net decrease in cash and cash equivalents		(96	)		(147	)
Cash and cash equivalents - beginning		1,570			1,717

Cash and cash equivalents - ending	$	1,474		$	1,570

F-44

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in this Annual Report on Form 10-K of FSB Bancorp, Inc. for the year ended December 31, 2019 of our report dated March 30, 2020 included in its Registration Statements on Form S-8 (No. 333-220742) and (No. 333-214302) relating to the consolidated financial statements for the two years ended December 31, 2019.

Bonadio & Co., LLP

Pittsford, New York

March 30, 2020

Exhibit 31.1

CERTIFICATION

I, Kevin D. Maroney, certify that:

I have reviewed this annual report on Form 10-K of FSB Bancorp, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles; and

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2020		/s/ Kevin D. Maroney
		Kevin D. Maroney
		President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Angela M. Krezmer, certify that:

I have reviewed this annual report on Form 10-K of FSB Bancorp, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2020		/s/ Angela M. Krezmer
		Angela M. Krezmer
		Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Kevin D. Maroney, President and Chief Executive Officer, and Angela M. Krezmer, Chief Financial Officer of FSB Bancorp, Inc. (the “Company”) each certify in their capacity as an officer of the Company that they have reviewed this Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2019 and that to the best of their knowledge:

(1)

the report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2)

the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002.

Date: March 30, 2020		/s/ Kevin D. Maroney
		Kevin D. Maroney
		President and Chief Executive Officer

Date: March 30, 2020		/s/ Angela M. Krezmer
		Angela M. Krezmer
		Chief Financial Officer