FSB Bancorp 10-K 2019 FY Annual report

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.

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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.

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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.

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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

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	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.

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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.

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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.

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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.

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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.

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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.

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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	%

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⁽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.

11

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:

12

(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.

13

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.

14

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.

15

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.

16

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

17

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.

18

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.

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 theBoard of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and theNew 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.

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 inThe 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.

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

The Company originates construction loans for the purchase of developed lots and for the construction of single-family residences. At December 31, 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.

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

The commercial and industrial product set includes loans to individuals or businesses on an installment basis secured by vehicles, equipment or other durable goods for which the loans were made, loans for and secured by machinery and/or equipment for which a legitimate resale market exists, lines of credit to businesses and individuals, and unsecured loans to businesses and individuals on a short-term basis. At December 31, 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 $ 27

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.

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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.

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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

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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

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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

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