10-Q 1 tm1919480d1_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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

For the transition period from _______ to _______

FSB BANCORP, INC.

(Exact Name of Company as Specified in its Charter)

Maryland

(State of Other Jurisdiction
of Incorporation)

001-37831

(Commission File No.)

81-2509654

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

45 South Main Street, Fairport, NY 14450

(Address of Principal Executive Office) (Zip Code)

(585) 381-4040

(Issuer's Telephone Number including area code)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

FSBC

The Nasdaq Stock Market LLC

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

YES x NO ¨

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

YES x NO ¨

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

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

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

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

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

FSB BANCORP, INC.

INDEX

		PAGE NO.
PART I - FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Income (Loss)	4-5
	Consolidated Statements of Comprehensive Income (Loss)	6-7
	Consolidated Statements of Stockholders’ Equity	8-9
	Consolidated Statements of Cash Flows	10
	Notes to Consolidated Financial Statements	11-33

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34-49

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50

Item 4.	Controls and Procedures	50

PART II - OTHER INFORMATION		50-51

Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other information	51
Item 6.	Exhibits	51

SIGNATURES		52

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

FSB Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

	September 30,			December 31,
(In thousands, except share and per share data)	2019			2018
ASSETS:
Cash and due from banks	$	1,485		$	1,581
Interest earning demand deposits		3,731			4,710
Total cash and cash equivalents		5,216			6,291
Available-for-sale securities, at fair value		18,000			18,331
Held-to-maturity securities, at amortized cost (fair value of $6,137 and $6,030, respectively)		6,011			6,052
Investment in restricted stock, at cost		2,961			3,637
Loans held for sale		3,690			2,133
Loans		278,447			283,302
Less: Allowance for loan losses		(1,736	)		(1,561	)
Loans receivable, net		276,711			281,741
Bank owned life insurance		3,864			3,819
Accrued interest receivable		912			876
Premises and equipment, net		2,506			2,731
Operating lease right-of-use assets		2,199			-
Other assets		2,740			2,658
Total assets	$	324,810		$	328,269

LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest bearing	$	11,401		$	10,947
Interest bearing		221,482			211,668
Total deposits		232,883			222,615
Short-term borrowings		2,000			13,750
Long-term borrowings		54,262			58,076
Official bank checks		268			863
Operating lease liabilities		2,401			-
Other liabilities		1,079			1,452
Total liabilities		292,893			296,756
Stockholders' equity:
Preferred stock – par value $0.01; 25,000,000 authorized shares; no shares issued and outstanding		-			-
Common stock, par value $0.01; 50,000,000 authorized shares; 1,940,661 shares issued and outstanding		19			19
Paid-in capital		15,998			15,746
Retained earnings		16,175			16,212
Accumulated other comprehensive loss		(20	)		(183	)
Unearned ESOP shares, at cost		(255	)		(281	)
Total stockholders’ equity		31,917			31,513
Total liabilities and stockholders' equity	$	324,810		$	328,269

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

- 3 -

FSB Bancorp, Inc.

Consolidated Statements of Income (Loss)

(Unaudited)

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

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

- 4 -

FSB Bancorp, Inc.

Consolidated Statements of Income (Loss)

(Unaudited)

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

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

- 5 -

FSB Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	For the three months ended
(In thousands)	September 30, 2019		September 30, 2018
Net Income (Loss)	$	2	$	(50	)

Other Comprehensive Income (Loss)

Unrealized holding gains (losses) on available-for-sale securities
Unrealized holding gains (losses) arising during the period		26		(25	)
Net unrealized gain (loss) on available-for-sale securities		26		(25	)

Other comprehensive income (loss), before tax		26		(25	)
Tax expense (benefit)		5		(5	)
Other comprehensive income (loss), net of tax		21		(20	)
Comprehensive income (loss)	$	23	$	(70	)


Tax Expense (Benefit) Allocated to Each Component of Other Comprehensive Income (Loss)
Unrealized holding gains (losses) arising during the period	$	5	$	(5	)
Income tax expense (benefit) related to other comprehensive income (loss)	$	5	$	(5	)

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

- 6 -

FSB Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	For the nine months ended
(In thousands)	September 30, 2019			September 30, 2018
Net Income (Loss)	$	(37	)	$	92

Other Comprehensive Income (Loss)

Unrealized holding gains (losses) on available-for-sale securities
Unrealized holding gains (losses) arising during the period		206			(148	)
Net unrealized gain (loss) on available-for-sale securities		206			(148	)

Other comprehensive income (loss), before tax		206			(148	)
Tax expense (benefit)		43			(31	)
Other comprehensive income (loss), net of tax		163			(117	)
Comprehensive income (loss)	$	126		$	(25	)


Tax Expense (Benefit) Allocated to Each Component of Other Comprehensive Income (Loss)
Unrealized holding gains (losses) arising during the period	$	43		$	(31	)
Income tax expense (benefit) related to other comprehensive income (loss)	$	43		$	(31	)

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

- 7 -

FSB Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

								Accumulated Other
	Common		Paid-in		Retained			Comprehensive			Unearned
(In thousands, except share and per share data)	Stock		Capital		Earnings			Loss			ESOP			Total
Three Months Ended September 30, 2019
Balance, July 1, 2019	$	19	$	15,914	$	16,173		$	(41	)	$	(264	)	$	31,801

Net income		-		-		2			-			-			2

Other comprehensive income, net of tax		-		-		-			21			-			21

ESOP shares committed to be released		-		8		-			-			9			17

Stock-based compensation		-		76		-			-			-			76

Balance, September 30, 2019	$	19	$	15,998	$	16,175		$	(20	)	$	(255	)	$	31,917

Three Months Ended September 30, 2018
Balance, July 1, 2018	$	19	$	15,615	$	16,219		$	(262	)	$	(298	)	$	31,293

Net loss		-		-		(50	)		-			-			(50	)

Other comprehensive loss, net of tax		-		-		-			(20	)		-			(20	)

ESOP shares committed to be released		-		8		-			-			8			16

Stock-based compensation		-		79		-			-			-			79

Balance, September 30, 2018	$	19	$	15,702	$	16,169		$	(282	)	$	(290	)	$	31,318

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

- 8 -

FSB Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

								Accumulated Other
	Common		Paid-in		Retained			Comprehensive			Unearned
(In thousands, except share and per share data)	Stock		Capital		Earnings			Loss			ESOP			Total
Nine Months Ended September 30, 2019
Balance, January 1, 2019	$	19	$	15,746	$	16,212		$	(183	)	$	(281	)	$	31,513

Net loss		-		-		(37	)		-			-			(37	)

Other comprehensive income, net of tax		-		-		-			163			-			163

ESOP shares committed to be released		-		24		-			-			26			50

Stock-based compensation		-		228		-			-			-			228

Balance, September 30, 2019	$	19	$	15,998	$	16,175		$	(20	)	$	(255	)	$	31,917

Nine Months Ended September 30, 2018
Balance, January 1, 2018	$	19	$	15,441	$	16,077		$	(165	)	$	(316	)	$	31,056

Net income		-		-		92			-			-			92

Other comprehensive loss, net of tax		-		-		-			(117	)		-			(117	)

ESOP shares committed to be released		-		30		-			-			26			56

Stock-based compensation		-		231		-			-			-			231

Balance, September 30, 2018	$	19	$	15,702	$	16,169		$	(282	)	$	(290	)	$	31,318

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

- 9 -

FSB Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

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

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

- 10 -

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Basis of Presentation

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

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

Note 2: New Accounting Pronouncements

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

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

- 11 -

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

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

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

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

- 12 -

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

Note 3: Earnings per Common Share

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed in a similar manner to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to reflect the assumed exercise and conversion of dilutive stock options and unvested restricted stock. In periods of loss, basic earnings per common share and diluted earnings per share are the same due to the fact that the inclusion of any of the dilutive shares will result in an anti-dilutive impact, driven by the loss. Net income available to common stockholders is net income of the Company. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released. The Company did not grant any restricted stock awards or stock options during the nine months ended September 30, 2019. An aggregate of 20,000 stock options and 8,400 shares of restricted stock were granted to senior management during the nine months ended September 30, 2018. The grants to senior management vest over a five year period in equal annual installments, with the first installment vesting on the first anniversary date of the grant and succeeding installments on each anniversary thereafter, through 2023. Vesting will automatically accelerate in the event of a participant’s death, disability, or involuntary termination following a change in control.

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

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

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

- 13 -

Note 4: Investment Securities

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

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

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

- 14 -

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

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

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

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

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

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

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

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

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

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

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

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

- 16 -

Note 5: Loans

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

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

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

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

Loan Origination / Risk Management

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

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

- 17 -

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

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

Other Loans	Commercial and industrial
	Other loans

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

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

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

- 18 -

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

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

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Nonaccrual and Past Due Loans

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

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

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

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

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

- 20 -

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

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

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

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

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

As of December 31, 2018

(In thousands)

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

With an allowance recorded:

Commercial real estate

Commercial & industrial loans

Total loans

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

- 21 -

Note 6: Allowance for Loan Losses and Foreclosed Real Estate

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

	For the three months ended September 30, 2019
	Secured by		Secured by
	one-to-four		multi-family							Home equity
	family residences		residences		Construction		Commercial			lines of credit			Commercial			Other/
(In thousands)	real estate loans		real estate loans		real estate loans		real estate loans			real estate loans			& industrial			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	805	$	74	$	20	$	482		$	105		$	125		$	50	$	1,661
Charge-offs		-		-		-		-			-			-			-		-
Recoveries		-		-		-		-			-			-			-		-
Provisions (Credits)		20		8		9		(2	)		(3	)		(1	)		44		75
Ending balance	$	825	$	82	$	29	$	480		$	102		$	124		$	94	$	1,736
Ending balance: related to loans individually evaluated for impairment		-		-		-		180			-			30			-		210
Ending balance: related to loans collectively evaluated for impairment	$	825	$	82	$	29	$	300		$	102		$	94		$	94	$	1,526
Loans receivables:
Ending balance	$	215,400	$	10,973	$	5,706	$	21,961		$	17,101		$	7,296		$	47	$	278,484
Ending balance: related to loans individually evaluated for impairment		-		-		-		944			-			45			-		989
Ending balance: related to loans collectively evaluated for impairment	$	215,400	$	10,973	$	5,706	$	21,017		$	17,101		$	7,251		$	47	$	277,495

- 22 -

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

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

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		For the nine months ended September 30, 2018
		Secured by		Secured by
		one-to-four		multi-family								Home equity
		family residences		residences			Construction			Commercial		lines of credit			Commercial		Other/
(In thousands)		real estate loans		real estate loans			real estate loans			real estate loans		real estate loans			& industrial		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	816	$	80		$	54		$	148	$	107		$	47	$	9	$	1,261
Charge-offs		-		-			-			-		-			-		-		-
Recoveries		-		-			-			-		-			-		-		-
Provisions (Credits)		72		(2	)		(23	)		116		(3	)		26		39		225
Ending balance	$	888	$	78		$	31		$	264	$	104		$	73	$	48	$	1,486
Ending balance: related to loans individually evaluated for impairment		-		-			-			-		-			-		-		-
Ending balance: related to loans collectively evaluated for impairment	$	888	$	78		$	31		$	264	$	104		$	73	$	48	$	1,486
Loans receivables:
Ending balance	$	219,841	$	10,337		$	6,277		$	21,650	$	17,012		$	5,399	$	56	$	280,572
Ending balance: related to loans individually evaluated for impairment		-		-			-			-		-			-		-		-
Ending balance: related to loans individually evaluated for impairment	$	219,841	$	10,337		$	6,277		$	21,650	$	17,012		$	5,399	$	56	$	280,572

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

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

Note 7: Fair Value Measurements

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

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

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

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

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

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

- 24 -

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

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

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

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

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

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

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

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

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

Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

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

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

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

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

Cash, Due from Banks, and Interest Earning Demand Deposits

The carrying amounts of these assets approximate their fair values.

Investment Securities

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

Investment in Restricted Stock

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

Loans

The fair values of loans, held in portfolio are estimated using discounted cash flow analyses. The discount rate considers a market participant’s cost of funds, liquidity premiums, capital charges, servicing charges, and expectations of future rate movements (for variable rate loans), resulting in a Level 3 classification. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal, and adjusted for potential defaulted loans.

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

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Impaired Loans

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

Accrued Interest Receivable and Payable

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

Deposits

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

Borrowings

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

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

			September 30, 2019				December 31, 2018
	Fair Value		Carrying		Estimated		Carrying		Estimated
(In thousands)	Hierarchy		Amounts		Fair Values		Amounts		Fair Values
Financial assets:
Cash and due from banks		1	$	1,485	$	1,485	$	1,581	$	1,581
Interest earning demand deposits		1		3,731		3,731		4,710		4,710
Securities - available-for-sale		2		18,000		18,000		18,331		18,331
Securities - held-to-maturity		2		6,011		6,137		6,052		6,030
Investment in restricted stock		2		2,961		2,961		3,637		3,637
Loans held for sale		2		3,690		3,690		2,133		2,133
Loans, net		3		276,711		287,796		281,741		280,173
Accrued interest receivable		1		912		912		876		876

Financial liabilities:
Demand deposits, savings, NOW and MMDA		1		96,799		96,799		98,681		98,681
Time deposits		2		136,084		136,367		123,934		124,182
Borrowings		2		56,262		57,084		71,826		71,086
Accrued interest payable		1		119		119		168		168

- 27 -

Note 8: Accumulated Other Comprehensive Loss

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

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

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

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

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

- 28 -

Note 9: Other Income

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

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

*Outside scope of ASC 606

- 29 -

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

*Outside scope of ASC 606

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

	·	Service fees – Revenue from fees on deposit accounts is earned through the presentation of an individual item for processing for insufficient funds fees or customer initiated activities or passage of time for deposit related fees.

	·	Fee income – Fee income is earned through commissions on insurance and securities sales and earned at a point in time.

	·	Card income – Card income consists of interchange fees from consumer debit card networks and other card related services. Interchange rates are set by the card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.

	·	Mortgage fee income and realized gain on sales of loans – Revenue from mortgage fee income and realized gain on sales of loans is earned through the origination of residential and commercial mortgage loans and the sales of one-to-four family residential mortgage loans and government guaranteed portions of SBA loans and is recognized as transactions occur.

- 30 -

Note 10: Stock-Based Compensation

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

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

Exercisable at quarter end		34,416	$	16.82

	For the nine months ended September 30, 2018
	Options		Weighted Average Exercise Price Per Share
Outstanding at beginning of year		152,080	$	16.72
Grants		20,000		17.58
Exercised		-		-
Outstanding at quarter end		172,080	$	16.82

Exercisable at quarter end		-	$	-

The grants to senior management and directors vest over a five year period in equal annual installments, with the first installment vesting on the first anniversary date of the grant and succeeding installments on each anniversary thereafter, through 2023. Vesting will automatically accelerate in the event of a participant’s death, disability, or involuntary termination following a change in control.

The compensation expense of the awards is based on the fair value of the instruments on the date of grant. The Company recorded compensation expense in the amount of $76,000 for the three months ended September 30, 2019 and $228,000 for the nine months ended September 30, 2019. The Company recorded compensation expense in the amount of $79,000 for the three months ended September 30, 2018 and $231,000 for the nine months ended September 30, 2018.

- 31 -

Note 11: Leases

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

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

The components of the lease expense are as follows:

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

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

Supplemental cash flow information related to leases was as follows:

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

- 32 -

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

	For the nine months
	ended September 30,
(In thousands, except lease term and discount rate)	2019
Operating Leases
Operating lease right-of-use assets	$	2,199
Operating lease liabilities	$	2,401

Weighted Average Remaining Lease Term
Operating Leases		8.8 years

Weighted Average Discount Rate
Operating Leases		3.52	%

Maturities of operating lease liabilities were as follows:

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

- 33 -

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

Statement Regarding Forward-Looking Statements

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

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

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

Overview

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

Our business has traditionally focused on originating one- to four-family residential real estate mortgage loans, home equity lines of credit, and offering retail deposit accounts. In recent years, we have expanded our mortgage origination footprint and opened new mortgage offices in Cheektowaga and Lewiston, New York. Our primary market area now consists of Monroe County and the surrounding western New York counties of Erie, Livingston, Ontario, Orleans, Jefferson, Niagara, and Wayne. Management has made the decision to deploy available funds from deposit and borrowings growth into higher-yielding assets, primarily residential and commercial loan products in 2019. More recently, we shifted attention to expand our commercial loan department in an effort to improve our interest rate risk exposure with shorter duration commercial loan products, as well as higher yielding assets.

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

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Critical Accounting Policies

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

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

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

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

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

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

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

- 35 -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

General. Net income decreased $129,000 to a loss of $(37,000) for the nine months ended September 30, 2019 from $92,000 for the nine months ended September 30, 2018. The year-over-year nine month decrease was attributable to decreases in other income of $747,000 and net interest income of $265,000, partially offset by decreases in other expense of $806,000, provision for loan losses of $50,000, and provision for income taxes of $27,000.

Interest and Dividend Income. Total interest and dividend income increased $615,000, or 6.7%, to $9.9 million for the nine months ended September 30, 2019 from $9.2 million for the nine months ended September 30, 2018. The increase resulted from a $9.6 million year-over-year nine month increase in average interest-earning assets, primarily residential mortgage and commercial real estate loans, and a 14 basis point increase in the average yield earned on interest-earning assets from 4.05% for the nine months ended September 30, 2018 to 4.19% for the nine months ended September 30, 2019 due to rising interest rates.

Interest income on loans increased $516,000, or 5.9%, to $9.3 million for the nine months ended September 30, 2019 from $8.7 million for the nine months ended September 30, 2018, reflecting a $7.6 million increase in the average balance of loans to $282.2 million for the nine months ended September 30, 2019 from $274.6 million for the nine months ended September 30, 2018, in addition to a 13 basis point increase in the average yield earned on loans for the nine months ended September 30, 2019 as compared to the same period in 2018. The increase in the average balance of loans was due to our focus on increasing our residential mortgage and commercial loan portfolios during the nine months ended September 30, 2019 as compared to the same period in 2018. The average yield on loans increased to 4.37% for the nine months ended September 30, 2019 from 4.24% for the nine months ended September 30, 2018, reflecting increases in market interest rates on new loan products, primarily residential mortgages, commercial mortgages, and home equity lines of credit, in addition to upward repricing for adjustable rate loans.

Interest income on taxable investment securities increased $70,000, or 23.7%, to $366,000 for the nine months ended September 30, 2019 from $296,000 for the nine months ended September 30, 2018. The average balance of taxable investment securities increased $2.0 million, or 14.6%, to $15.8 million for the nine months ended September 30, 2019 from $13.8 million for the nine months ended September 30, 2018. The average yield on taxable investment securities increased 23 basis points to 3.08% during the nine months ended September 30, 2019 as compared to 2.85% for the nine months ended September 30, 2018 due to new purchases of moderately higher-yielding investment securities. Interest income on mortgage-backed securities decreased $21,000, or 20.4%, to $82,000 for the nine months ended September 30, 2019, from $103,000 for the nine months ended September 30, 2018. The average balance of mortgage-backed securities decreased $2.1 million, or 26.7%, to $5.7 million for the nine months ended September 30, 2019 from $7.7 million for the nine months ended September 30, 2018. The average yield on mortgage-backed securities increased 17 basis points to 1.94% for the nine months ended September 30, 2019 from 1.77% for the nine months ended September 30, 2018 primarily due to slower prepayment speeds on the pools of mortgage-backed securities held in portfolio during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. A portion of the cash flow from these investment and mortgage-backed securities was redeployed to fund loan growth. Interest income on tax-exempt state and municipal securities increased $1,000, or 1.3%, to $79,000 for the nine months ended September 30, 2019 from $78,000 for the nine months ended September 30, 2018. The average tax equivalent yield on state and municipal securities increased 16 basis points to 2.39% for the nine months ended September 30, 2019 from 2.23% for the nine months ended September 30, 2018, as lower yielding state and municipal securities matured and were replaced by modestly higher yielding state and municipal securities. The average balance of state and municipal securities decreased by $349,000, or 5.9%, from $5.9 million for the nine months ended September 30, 2018 to $5.6 million for the nine months ended September 30, 2019. Interest income on Fed Funds sold increased $49,000, or 140.0%, to $84,000 for the nine months ended September 30, 2019 from $35,000 for the nine months ended September 30, 2018. The increase in Fed Funds sold was attributable to an increase in the average yield on Fed Funds sold of 56 basis points to 1.99% during the nine months ended September 30, 2019 as compared to 1.43% for the nine months ended September 30, 2018 due to the Federal Reserve’s increase of the Fed funds rate in addition to an increase in the average balance of Fed Funds sold of $2.4 million, or 72.8%, to $5.6 million for the nine months ended September 30, 2019 from $3.3 million for the nine months ended September 30, 2018.

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Interest Expense. Total interest expense increased $880,000, or 31.2%, to $3.7 million for the nine months ended September 30, 2019 from $2.8 million for the nine months ended September 30, 2018. Total interest expense reflected an increase in interest expense on deposits of $713,000 and an increase in interest expense on borrowings of $167,000 when comparing the nine months ended September 30, 2019 and 2018. The total interest expense reflected an increase in the average cost of interest-bearing liabilities of 39 basis points from 1.38% for the nine months ended September 30, 2018 to 1.77% for the nine months ended September 30, 2019, in addition to an increase of $6.6 million in average interest-bearing liabilities.

Interest expense on deposits increased $713,000, or 38.4%, to $2.6 million for the nine months ended September 30, 2019 from $1.9 million for the nine months ended September 30, 2018. The average cost of deposits increased to 1.58% for the nine months ended September 30, 2019 from 1.18% for the nine months ended September 30, 2018, primarily reflecting increases in the average cost of our higher rate promotional certificates of deposit, savings, and money market accounts offered during the first nine months of 2019. The average balance of deposits increased $8.3 million, or 4.0%, from $208.9 million for the nine months ended September 30, 2018 to $217.2 million for the nine months ended September 30, 2019 also primarily due to higher rate promotional certificates of deposit offered in the first nine months of 2019. The average cost of certificates of deposit (including individual retirement accounts) increased to 2.16% for the nine months ended September 30, 2019 from 1.64% for the nine months ended September 30, 2018, in addition to an increase in the average balance of these accounts by $15.7 million to $131.3 million for the nine months ended September 30, 2019 from $115.7 million for the nine months ended September 30, 2018. The average cost of transaction accounts, our core non-time deposit accounts, increased four basis points to 0.60% for the nine months ended September 30, 2019 from 0.56% for the nine months ended September 30, 2018 primarily due to promotional savings and money market accounts, partially offset by a decrease in the average balance of transaction accounts by $5.4 million to $97.0 million for the nine months ended September 30, 2019 from $102.4 million for the nine months ended September 30, 2018.

Interest expense on borrowings increased $167,000, or 17.3%, from $968,000 for the nine months ended September 30, 2018 to $1.1 million for the nine months ended September 30, 2019, due to an increase in the average cost of these funds from 2.01% for the nine months ended September 30, 2018 to 2.42% for the nine months ended September 30, 2019 as a result of an increase in market interest rates, partially offset by a $1.7 million decrease in our average balance of borrowings with the Federal Home Loan Bank from $64.2 million for the nine months ended September 30, 2018 to $62.5 million for the nine months ended September 30, 2019.

Net Interest Income. Net interest income decreased $265,000, or 4.1%, to $6.2 million for the nine months ended September 30, 2019 as compared to $6.4 million for the nine months ended September 30, 2018. Net interest income decreased primarily due to an increase in the average balance and average cost of our interest-bearing liabilities, primarily certificates of deposit and FHLB borrowings, partially offset by a higher average balance and average yield on our interest-earning assets when comparing the nine months ended September 30, 2019 to the same period in 2018. Our net interest rate spread decreased 25 basis points to 2.42% for the nine months ended September 30, 2019 from 2.67% for the nine months ended September 30, 2018. There was a 39 basis point increase in the average cost of our interest-bearing liabilities from 1.38% for the nine months ended September 30, 2018 to 1.77% for the nine months ended September 30, 2019, partially offset by a 14 basis point increase in the average yield on our interest-earning assets to 4.19% for the nine months ended September 30, 2019 from 4.05% for the nine months ended September 30, 2018. Our net interest margin decreased 20 basis points to 2.62% during the nine months ended September 30, 2019 from 2.82% during the nine months ended September 30, 2018.

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Based on our evaluation of the above factors, we recorded a $175,000 provision for loan losses for the nine months ended September 30, 2019 as compared to a $225,000 provision for loan losses for the nine months ended September 30, 2018. The decrease in the provision for loan losses for the nine months ended September 30, 2019 was the result of a decrease in the general provision due to lower residential and commercial loan volume when comparing the nine months ended September 30, 2019 and September 30, 2018. The provision for loan losses decreased in the nine months ended September 30, 2019 due to lower origination volume as compared to the same period in 2018 even though the average balance of loans increased modestly. The allowance for loan losses was $1.7 million, or 0.62% of net loans outstanding at September 30, 2019 compared to $1.5 million, or 0.53% of net loans outstanding, at September 30, 2018. The allowance for loan losses was $1.6 million, or 0.55% of net loans outstanding at December 31, 2018.

Other Income. Other income decreased by $747,000, or 35.6%, to $1.4 million for the nine months ended September 30, 2019 compared to $2.1 million for the nine months ended September 30, 2018. The decrease in other income was primarily attributable to decreases in realized gains on sales of loans of $478,000, mortgage fee income of $145,000, and fee income of $95,000. Realized gains on sales of loans decreased $478,000, or 43.5%, to $620,000 for the nine months ended September 30, 2019 from $1.1 million for the nine months ended September 30, 2018. The decrease in realized gains on sales of loans was primarily due to lower volume of residential mortgage loans sold during the first nine months of 2019 compared to the first nine months of 2018. Mortgage fee income decreased by $145,000, or 24.7%, to $443,000 for the nine months ended September 30, 2019 compared to $588,000 for the nine months ended September 30, 2018 due to lower volume of residential mortgage loans originated during the first nine months of 2019 compared to the first nine months of 2018. Fee income from Fairport Wealth Management decreased by $95,000, or 87.2%, to $14,000 for the nine months ended September 30, 2019 from $109,000 for the nine months ended September 30, 2018 due to a decrease in non-deposit investment product sales in the first nine months of 2019 compared to the first nine months of 2018.

Other Expense. Other expense decreased $806,000, or 9.9%, to $7.4 million for the nine months ended September 30, 2019 from $8.2 million for the nine months ended September 30, 2018. The decrease in other expense was primarily due to decreases in salaries and employee benefits of $344,000, mortgage fees and taxes of $169,000, other miscellaneous expenses of $112,000, audits and taxes of $55,000, and advertising of $53,000. Salaries and employee benefits decreased $344,000, or 7.0%, to $4.6 million for the nine months ended September 30, 2019 from $4.9 million for the nine months ended September 30, 2018 due to a decrease in commission expense due to lower volume of residential mortgage loan originations during the first nine months of 2019 compared to the first nine months of 2018. Mortgage fees and taxes decreased $169,000, or 49.1%, to $175,000 for the nine months ended September 30, 2019 from $344,000 for the nine months ended September 30, 2018 due to a $159,000 change in accounting estimate in 2018. Other miscellaneous expense decreased $112,000, or 18.1%, to $506,000 for the nine months ended September 30, 2019 from $618,000 for the nine months ended September 30, 2018 due to a $71,000 decrease in legal fees in the first nine months of 2019 compared to the first nine months of 2018. Audits and tax services decreased $55,000, or 33.3%, to $110,000 for the nine months ended September 30, 2019 from $165,000 for the nine months ended September 30, 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. Advertising decreased $53,000, or 45.7%, to $63,000 for the nine months ended September 30, 2019 from $116,000 for the nine months ended September 30, 2018 due to the timing of advertising campaigns when comparing the first nine months of 2019 to the first nine months of 2018.

Income Taxes. Income tax expense decreased $27,000 to a benefit of $(3,000) for the nine months ended September 30, 2019 from $24,000 for the nine months ended September 30, 2018. The decrease in income tax expense for the nine months ended September 30, 2019 as compared to the same period in 2018 was due to lower income before income taxes. The effective tax rate was 7.5% for the nine months ended September 30, 2019 compared to 20.7% for the nine months ended September 30, 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 tables set forth average balance sheets, average yields and costs and certain other information for the periods 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 three months ended September 30,
	2019									2018
							Average									Average
	Average						Yield /			Average						Yield /
(Dollars in thousands)	Balance			Interest			Cost⁽⁵⁾			Balance			Interest			Cost⁽⁵⁾
Interest-earning assets:
Loans	$	281,628		$	3,079			4.37	%	$	281,491		$	3,023			4.30	%
Federal funds sold		6,812			34			2.00			3,476			14			1.59
Taxable investment securities		16,179			118			2.92			14,196			105			2.96
Mortgage-backed securities		5,163			26			1.98			7,144			28			1.59
State and municipal securities⁽¹⁾		5,581			33			2.39			5,877			33			2.28
Total interest-earning assets	$	315,363		$	3,290			4.17	%	$	312,184		$	3,203			4.10	%
Noninterest-earning assets:
Other assets	$	11,858								$	10,159
Total assets	$	327,221								$	322,343
Interest-bearing liabilities:
NOW accounts	$	29,874		$	23			0.31	%	$	30,456		$	23			0.30	%
Passbook savings		26,605			51			0.77			29,850			51			0.68
Money market savings		31,575			84			1.07			33,576			98			1.17
Individual retirement accounts		6,900			31			1.82			6,684			21			1.27
Certificates of deposit		127,202			735			2.31			110,489			496			1.80
Federal Home Loan Bank advances		56,508			344			2.44			67,042			371			2.22
Total interest-bearing liabilities	$	278,664		$	1,268			1.82	%	$	278,097		$	1,060			1.53	%
Noninterest-bearing liabilities:
Demand deposits	$	12,272								$	10,413
Other liabilities		4,408									2,545
Total liabilities	$	295,344								$	291,055
Stockholders' equity	$	31,876								$	31,288
Total liabilities & stockholders' equity	$	327,220								$	322,343
Net interest income				$	2,022								$	2,143
Interest rate spread⁽²⁾								2.35	%								2.57	%
Net interest-earning assets⁽³⁾	$	36,699								$	34,087
Net interest margin⁽⁴⁾					2.56	%								2.74	%
Ratio of average interest-earning assets to average interest-bearing liabilities		113.17	%								112.26	%

(1)

Tax-exempt interest income is presented on a tax equivalent basis using a 21% federal tax rate for the quarters ended September 30, 2019 and 2018. The unadjusted average yield on tax-exempt securities was 1.89% and 1.80% for the three months ended September 30, 2019 and 2018, respectively. The unadjusted interest income on tax-exempt securities was $27,000 for the quarter ended September 30, 2019 and $26,000 for the quarter ended September 30, 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.

(5)

Annualized

- 43 -

	For the nine months ended September 30,
	2019									2018
							Average									Average
	Average						Yield /			Average						Yield /
(Dollars in thousands)	Balance			Interest			Cost⁽⁵⁾			Balance			Interest			Cost⁽⁵⁾
Interest-earning assets:
Loans	$	282,188		$	9,252			4.37	%	$	274,580		$	8,736			4.24	%
Federal funds sold		5,623			84			1.99			3,254			35			1.43
Taxable investment securities		15,834			366			3.08			13,813			296			2.85
Mortgage-backed securities		5,670			82			1.94			7,731			103			1.77
State and municipal securities⁽¹⁾		5,587			100			2.39			5,936			99			2.23
Total interest-earning assets	$	314,902		$	9,884			4.19	%	$	305,314		$	9,269			4.05	%
Noninterest-earning assets:
Other assets	$	11,357								$	10,540
Total assets	$	326,259								$	315,854
Interest-bearing liabilities:
NOW accounts	$	29,243		$	66			0.30	%	$	30,350		$	70			0.31	%
Passbook savings		26,298			125			0.63			27,780			111			0.53
Money market savings		30,308			246			1.08			35,121			248			0.94
Individual retirement accounts		6,727			84			1.67			6,858			63			1.22
Certificates of deposit		124,612			2,047			2.19			108,803			1,363			1.67
Federal Home Loan Bank advances		62,527			1,135			2.42			64,200			968			2.01
Total interest-bearing liabilities	$	279,715		$	3,703			1.77	%	$	273,112		$	2,823			1.38	%
Noninterest-bearing liabilities:
Demand deposits	$	11,155								$	9,105
Other liabilities		3,710									2,290
Total liabilities	$	294,580								$	284,507
Stockholders' equity	$	31,679								$	31,347
Total liabilities & stockholders' equity	$	326,259								$	315,854
Net interest income				$	6,181								$	6,446
Interest rate spread⁽²⁾								2.42	%								2.67	%
Net interest-earning assets⁽³⁾	$	35,187								$	32,202
Net interest margin⁽⁴⁾					2.62	%								2.82	%
Ratio of average interest-earning assets to average interest-bearing liabilities		112.58	%								111.79	%

(1)

Tax-exempt interest income is presented on a tax equivalent basis using a 21% federal tax rate for the nine months ended September 30, 2019 and 2018. The unadjusted average yield on tax-exempt securities was 1.89% and 1.76% for the nine months ended September 30, 2019 and 2018, respectively. The unadjusted interest income on tax-exempt securities was $79,000 and $78,000 for the nine months ended September 30, 2019 and 2018, respectively.

(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.

(5)

Annualized

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Rate/Volume Analysis

The following tables present the effects of changing rates and volumes on our net interest income for the periods 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 these tables, 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.

	Three months ended September 30,
	2019 vs. 2018
	Increase/(Decrease) Due to
							Total
							Increase
(In thousands)	Volume			Rate			(Decrease)
Interest and dividend income:
Loans	$	2		$	54		$	56
Federal funds sold		16			4			20
Taxable investment securities		14			(1	)		13
Mortgage-backed securities		(17	)		15			(2	)
Total interest and dividend income		15			72			87
Interest expense:
Money market savings		(6	)		(8	)		(14	)
Individual retirement accounts		1			9			10
Certificates of deposit		83			156			239
Federal home loan bank advances		(73	)		46			(27	)
Total interest expense		5			203			208
Net change in net interest income	$	10		$	(131	)	$	(121	)

	Nine months ended September 30,
	2019 vs. 2018
	Increase/(Decrease) Due to
							Total
							Increase
(In thousands)	Volume			Rate			(Decrease)
Interest and dividend income:
Loans	$	245		$	271		$	516
Federal funds sold		32			17			49
Taxable investment securities		45			25			70
Mortgage-backed securities		(33	)		12			(21	)
State and municipal securities		(5	)		6			1
Total interest and dividend income		284			331			615
Interest expense:
NOW accounts		(2	)		(2	)		(4	)
Passbook savings		(6	)		20			14
Money market savings		23			(25	)		(2	)
Individual retirement accounts		(1	)		22			21
Certificates of deposit		218			466			684
Federal home loan bank advances		(24	)		191			167
Total interest expense		208			672			880
Net change in net interest income	$	76		$	(341	)	$	(265	)

- 45 -

Loan and Asset Quality and Allowance for Loan Losses

The following table represents information concerning the aggregate amount of nonperforming assets at the indicated dates:

	September 30,			December 31,			September 30,
(Dollars In thousands)	2019			2018			2018
Nonaccrual loans:
Residential mortgage loans	$	55		$	55		$	55
Commercial real estate loans		944			-			-
Commercial and industrial loans		45			45			45
Total nonaccrual loans		1,044			100			100
Total nonperforming loans		1,044			100			100
Total nonperforming assets	$	1,044		$	100		$	100

Nonperforming loans to total loans		0.37	%		0.04	%		0.05	%
Nonperforming assets to total assets		0.32	%		0.03	%		0.03	%

Nonperforming assets include nonaccrual loans, non-accruing TDRs, and foreclosed real estate. The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more. At September 30, 2019 there were no loans that were past due 90 days or more and still accruing interest. Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. At the dates indicated above, the Company had no TDRs outstanding.

As indicated in the table above, nonperforming assets at September 30, 2019 were $1.0 million, an increase of $944,000, from $100,000 at December 31, 2018. At September 30, 2019, the Bank had two non-performing residential mortgage loans for $55,000, two non-performing commercial real estate loans for $944,000, and one non-performing commercial and industrial loan for $45,000 and at December 31, 2018, the Company had one non-performing residential mortgage loan for $55,000 and one non-performing commercial and industrial loan for $45,000. At September 30, 2018, the Company had one non-performing residential mortgage loan for $55,000 and one non-performing commercial and industrial loan for $45,000. At the dates indicated above, the Company had no foreclosed real estate.

The allowance for loan losses represents management’s estimate of the probable losses inherent in the loan portfolio as of the date of the consolidated balance sheet. The allowance for loan losses was $1.7 million at September 30, 2019 and $1.6 million at December 31, 2018. The Company reported an increase in the ratio of the allowance for loan losses to gross loans to 0.62% at September 30, 2019 as compared to 0.55% at December 31, 2018. Management performs a quarterly evaluation of the allowance for loan losses based on quantitative and qualitative factors and has determined that the current level of the allowance for loan losses is adequate to absorb the losses in the loan portfolio as of September 30, 2019.

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.

- 46 -

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.

At September 30, 2019, the Company had two commercial real estate loans for $944,000 and one commercial and industrial loan for $45,000 which were deemed to be impaired and at December 31, 2018, the Company did not have loans which were deemed to be impaired.

Management has identified potential credit problems which may result in the borrowers not being able to comply with the current loan repayment terms and which may result in it being included in future impaired loan reporting. Management has identified potential problem loans totaling $4.1 million as of September 30, 2019 as compared to $4.8 million at December 31, 2018. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired. Total potential problem loans decreased between these two dates, as the Company reported a decrease of $1.2 million in loans rated special mention, partially offset by an increase of $528,000 in loans rated substandard. The decrease in loans classified as special mention was due to two commercial mortgage loans paying as agreed and one residential mortgage loan payoff, partially offset by the delinquency of one residential mortgage loan and two commercial and industrial loans newly classified as special mention during the nine months ended September 30, 2019. The increase in loans rated substandard was due to the delinquency of five additional mortgage loans and one commercial mortgage loan, partially offset by seven mortgage loans paying as agreed and the impairment of one commercial mortgage loan and one commercial and industrial loan during the nine months ended September 30, 2019. Based on current information available at September 30, 2019, these loans were re-evaluated for their range of potential losses and reclassified accordingly.

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.

Our primary sources of funds consist of deposit inflows, loan repayments, borrowings from the Federal Home Loan Bank of New York, maturities and principal repayments of securities, and loan and securities 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 quarter ended September 30, 2019, our liquidity ratio averaged 32.4%. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 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 September 30, 2019, cash and cash equivalents totaled $5.2 million.

- 47 -

At September 30, 2019, we had $19.7 million in loan commitments outstanding. In addition to commitments to originate loans, we had $22.8 million in unused lines of credit outstanding to borrowers. Certificates of deposit (including individual retirement accounts comprised solely of certificates of deposit), due within one year of September 30, 2019 totaled $94.1 million, or 69.2% of our certificates of deposit (including individual retirement accounts) and 40.4% 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, and Federal Home Loan Bank borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the existing certificates of deposit due on or before September 30, 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 borrowings decreased by $15.6 million, to $56.3 million at September 30, 2019, from $71.8 million at December 31, 2018. At September 30, 2019, we had the ability to borrow approximately $166.8 million from the Federal Home Loan Bank of New York, of which $56.3 million had been advanced.

We also have 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 September 30, 2019 and December 31, 2018. In addition to the repurchase agreement with Raymond James, we also have 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 September 30, 2019 and December 31, 2018.

Capital

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 September 30, 2019, Fairport Savings Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. At September 30, 2019, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have developed a “Community Bank Leverage Ratio” (the ratio of a bank’s Tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies set the new Community Bank Leverage Ratio at 9%. A financial institution can elect to be subject to this new definition. The new rule takes effect on January 1, 2020.

- 48 -

Fairport Savings Bank’s capital amounts and ratios as of the indicated dates are presented in the following table.

Minimum

To Be “Well-

Minimum

Capitalized”

For Capital

Under Prompt

Well-Capitalized

Actual

Adequacy Purposes

Corrective Provisions

With Buffer

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2019

Total Core Capital (to Risk-Weighted Assets)

31,427

16.53

³$15,211

³8.0

³$19,014

³10.0

³$19,964

³10.5

Tier 1 Capital (to Risk-Weighted Assets)

29,691

15.62

³11,408

³6.0

³15,211

³8.0

³16,162

³8.5

Tier 1 Common Equity (to Risk-Weighted Assets)

29,691

15.62

³8,556

³4.5

³12,359

³6.5

³13,310

³7.0

Tier 1 Capital (to Assets)

29,691

9.13

³13,011

³4.0

³16,263

³5.0

³16,263

³5.0

As of December 31, 2018:

Total Core Capital (to Risk-Weighted Assets)

30,896

15.70

³$15,745

³8.0

³$19,681

³10.0

³$20,665

³10.5

Tier 1 Capital (to Risk-Weighted Assets)

29,335

14.91

³11,808

³6.0

³15,745

³8.0

³16,729

³8.5

Tier 1 Common Equity (to Risk-Weighted Assets)

29,335

14.91

³8,856

³4.5

³12,793

³6.5

³13,777

³7.0

Tier 1 Capital (to Assets)

29,335

9.07

³12,938

³4.0

³16,173

³5.0

³16,173

³5.0

Off-Balance Sheet Arrangements

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity 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 September 30, 2019 and December 31, 2018, we had $14.5 million and $5.6 million, respectively, of commitments to grant loans, $5.2 million and $4.4 million, respectively, of unadvanced portions of construction loans, and $22.8 million and $18.8 million, respectively, of unfunded commitments under lines of credit. We had one commercial letter of credit for $16,000 at September 30, 2019 and three commercial letters of credit for $64,000 at December 31, 2018.

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.

- 49 -

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information relating to this item.

Item 4 – Controls and Procedures

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As of September 30, 2019, the Company’s management, including the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15 and 15d-15(e) under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must necessarily reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

As of September 30, 2019, the Company is not currently a named party in a legal proceeding, the outcome of which would have a material effect on the financial condition or results of operations of the Company.

Item 1A – Risk Factors

A smaller reporting company is not required to provide the information relating to this item.

- 50 -

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides certain information with regard to shares repurchased by the Company in the third quarter of 2019.

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

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

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Mine Safety Disclosures

Not applicable

Item 5 – Other Information

None

Item 6 – Exhibits

Exhibit No.		Description

31.1		Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
31.2		Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
32		Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer
101		The following materials from FSB Bancorp, Inc. Form 10-Q for the quarter ended September 30, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, and (iv) related notes

- 51 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FSB BANCORP, INC.
	(registrant)

November 13, 2019	/s/ Kevin D. Maroney
	Kevin D. Maroney
	President & Chief Executive Officer

November 13, 2019	/s/ Angela M. Krezmer
	Angela M. Krezmer
	Chief Financial Officer

- 52 -