FSB Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - FSB Bancorp, Inc.	t1700303_ex32.htm
EX-31.2 - EXHIBIT 31.2 - FSB Bancorp, Inc.	t1700303_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - FSB Bancorp, Inc.	t1700303_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

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	001-37831	81-2509654
(State of Other Jurisdiction of Incorporation)	(Commission File No.)	(I.R.S. Employer Identification No.)

45 South Main Street, Fairport, NY 14450

(Address of Principal Executive Office) (Zip Code)

(585) 377-8970

(Issuer's Telephone Number including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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	¨ (Do not check if a smaller reporting company)
		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. ¨

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 May 11, 2017, there were 1,941,688 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	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II - OTHER INFORMATION		34

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other information	34
Item 6.	Exhibits	34

SIGNATURES		35

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PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

FSB Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

	March 31,			December 31,
(In thousands, except share and per share data)	2017			2016
ASSETS:
Cash and due from banks	$	1,547		$	1,634
Interest earning demand deposits		5,635			5,773
Total cash and cash equivalents		7,182			7,407
Available-for-sale securities, at fair value		18,363			17,747
Held-to-maturity securities, at amortized cost (fair value of $7,328 and $7,384, respectively)		7,329			7,420
Investment in restricted stock, at cost		3,369			2,886
Loans held for sale		3,934			2,059
Loans		236,829			227,182
Less: Allowance for loan losses		(1,042	)		(990	)
Loans receivable, net		235,787			226,192
Bank owned life insurance		3,711			3,696
Accrued interest receivable		705			652
Premises and equipment, net		3,226			3,175
Other assets		2,679			2,487
Total assets	$	286,285		$	273,721

LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest bearing	$	8,188		$	8,423
Interest bearing		178,496			174,511
Total deposits		186,684			182,934
Short-term borrowings		13,500			6,000
Long-term borrowings		52,261			50,813
Official bank checks		593			318
Other liabilities		1,354			1,797
Total liabilities		254,392			241,862
Stockholders' equity:
Preferred stock – par value $0.01; 25,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock, par value $0.01; 50,000,000 authorized shares; 1,941,688 shares issued and outstanding		19			19
Paid-in capital		16,356			16,352
Retained earnings		15,934			15,923
Accumulated other comprehensive loss		(75	)		(85	)
Unearned ESOP shares, at cost		(341	)		(350	)
Total stockholders’ equity		31,893			31,859
Total liabilities and stockholders' equity	$	286,285		$	273,721

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

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FSB Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

	For the three			For the three
	months ended			months ended
(In thousands, except per share data)	March 31, 2017			March 31, 2016
Interest and dividend income:
Loans, including fees	$	2,354		$	2,084
Securities:
Taxable		69			98
Tax-exempt		29			23
Mortgage-backed securities		30			58
Other		4			4
Total interest and dividend income		2,486			2,267
Interest expense:
Interest on deposits		371			362
Interest on short-term borrowings		17			-
Interest on long-term borrowings		203			184
Total interest expense		591			546
Net interest income		1,895			1,721
Provision for loan losses		52			45
Net interest income after provision for loan losses		1,843			1,676
Other income:
Service fees		40			33
Fee income		35			66
Increase in cash surrender value of bank owned life insurance		15			17
Realized gain on sale of loans		326			348
Mortgage fee income		172			170
Other		48			37
Total other income		636			671
Other expense:
Salaries and employee benefits		1,524			1,356
Occupancy		269			254
Data processing costs		81			50
Advertising		43			30
Equipment		143			152
Electronic banking		7			26
Directors’ fees		72			66
Mortgage fees and taxes		24			91
FDIC premium expense		26			42
Audits and tax services		52			34
Other		255			177
Total other expenses		2,496			2,278
Income (Loss) before income taxes		(17	)		69
(Benefit) for income taxes		(28	)		(8	)
Net income	$	11		$	77
Earnings per common share – basic	$	0.01		$	0.04

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

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Consolidated Statements of Comprehensive Income

(Unaudited)

	For the three months ended
(In thousands)	March 31, 2017		March 31, 2016

Net Income	$	11	$	77

Other Comprehensive Income

Unrealized holding gains on available-for-sale securities
Unrealized holding gains arising during the period		15		96
Net unrealized gain on available for sale securities		15		96

Accretion of net unrealized loss on securities transferred to held-to-maturity⁽¹⁾		-		113

Other comprehensive income, before tax		15		209
Tax effect		5		33
Other comprehensive income, net of tax		10		176
Comprehensive income	$	21	$	253

Tax Effect Allocated to Each Component of Other Comprehensive Income
Unrealized holding gains (losses) arising during the period	$	5	$	(33	)
Accretion of net unrealized loss on securities transferred to held-to-maturity		-		66
Income tax effect related to other comprehensive income	$	5	$	33

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

⁽¹⁾

The accretion of the unrealized holding losses in accumulated other comprehensive income at the date of transfer partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the date of transfer, and is an adjustment of yield.

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FSB Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

							Accumulated Other
	Common		Paid in		Retained		Comprehensive			Treasury			Unearned
(In thousands, except share and per share data)	Stock		Capital		Earnings		Income (Loss)			Stock			ESOP			Total

Balance, January 1, 2017	$	19	$	16,352	$	15,923	$	(85	)	$	-		$	(350	)	$	31,859

Net income		-		-		11		-			-			-			11

Other comprehensive income, net of tax		-		-		-		10			-			-			10

ESOP shares committed to be released		-		4		-		-			-			9			13

Balance, March 31, 2017	$	19	$	16,356	$	15,934	$	(75	)	$	-		$	(341	)	$	31,893

Balance, January 1, 2016	$	179	$	7,239	$	14,985	$	(212	)	$	(46	)	$	(385	)	$	21,760

Net income		-		-		77		-			-			-			77

Other comprehensive income, net of tax		-		-		-		176			-			-			176

ESOP shares committed to be released		-		1		-		-			-			9			10

Balance, March 31, 2016	$	179	$	7,240	$	15,062	$	(36	)	$	(46	)	$	(376	)	$	22,023

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

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FSB Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	For the Three Months Ended March 31,
(In thousands)	2017			2016
OPERATING ACTIVITIES
Net income	$	11		$	77
Adjustments to reconcile net income to net cash flows from operating activities:
Net amortization of premiums and accretion of discounts on investments		35			140
Gain on sale of loans		(326	)		(348	)
Proceeds from loans sold		11,567			11,764
Loans originated for sale		(13,116	)		(11,443	)
Amortization of net deferred loan origination costs		276			133
Depreciation and amortization		120			113
Provision for loan losses		52			45
Expense related to ESOP		13			10
Deferred income tax benefit		(38	)		(68	)
Earnings on investment in bank owned life insurance		(15	)		(17	)
Decrease (Increase) in accrued interest receivable		(53	)		12
Decrease (Increase) in other assets		(192	)		41
Increase (Decrease) in other liabilities		(410	)		71
Net cash flows from operating activities		(2,076	)		530
INVESTING ACTIVITIES
Purchases of securities available-for-sale		(1,500	)		(3,910	)
Proceeds from maturities and calls of securities available-for-sale		-			3,833
Proceeds from principal paydowns on securities available-for-sale		873			831
Proceeds from maturities and calls of securities held-to-maturity		-			3,391
Proceeds from principal paydowns on securities held-to-maturity		82			31
Net increase in loans		(9,923	)		(4,056	)
Purchase of restricted stock, net		(483	)		(27	)
Purchase of premises and equipment		(171	)		(334	)
Net cash flows from investing activities		(11,122	)		(241	)
FINANCING ACTIVITIES
Net increase in deposits		3,750			2,028
Proceeds from long-term borrowings		5,501			3,500
Repayments on long-term borrowings		(4,053	)		(2,895	)
Proceeds from short-term borrowings, net		7,500			-
Net increase (decrease) in official bank checks		275			(957	)
Net cash flows from financing activities		12,973			1,676
Change in cash and cash equivalents		(225	)		1,965
Cash and cash equivalents at beginning of period		7,407			6,147
Cash and cash equivalents at end of period	$	7,182		$	8,112
CASH PAID DURING THE PERIOD FOR:
Interest	$	584		$	546
Income taxes	$	-		$	17

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

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Notes to Consolidated Financial Statements (Unaudited)

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements of FSB Bancorp, Inc., (“FSB Bancorp”), FSB Community Bankshares, Inc. (“FSB Community”), 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, 2017 or for any future period. References to the Company prior to July 13, 2016 include FSB Community and not FSB Bancorp, whereas after July 13, 2016 references to the Company include FSB Bancorp and not FSB Community.

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 financial statements; accordingly, as this information changes, the 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 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.

FSB Bancorp is a Maryland Corporation headquartered in Fairport, New York. On July 13, 2016, FSB Bancorp, completed the conversion and reorganization pursuant to which FSB Community Bankshares, MHC converted to the stock holding company form of organization. FSB Bancorp, the new stock holding company for Fairport Savings Bank, sold 1,034,649 shares of common stock, par value $0.01 per share, at $10.00 per share, for gross offering proceeds of $10.3 million in its stock offering. Additionally, after accounting for conversion related expenses of $1.4 million, which offset gross proceeds, the Company received $8.9 million in net proceeds.

Concurrent with the completion of the conversion and reorganization, shares of common stock of FSB Community owned by public stockholders were exchanged for shares of FSB Bancorp’s common stock so that the former public stockholders of FSB Community owned approximately the same percentage of FSB Bancorp’s common stock as they owned of FSB Community’s common stock immediately prior to the conversion, subject to adjustment as disclosed in the prospectus. Stockholders of FSB Community received 1.0884 shares of FSB Bancorp’s common stock for each share of FSB Community’s stock they owned immediately prior to completion of the transaction. Cash in lieu of fractional shares was paid based on the offering price of $10.00 per share. All share and per share information in this report for periods prior to the conversion have been revised to reflect the 1.0884:1 conversion ratio on shares outstanding, including shares held by FSB Community Bankshares, MHC that were not publicly traded.

Note 2: New Accounting Pronouncements

ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amended guidance shortens the amortization period for the premium paid on some classes of callable debt to the earliest call date instead of the bond’s maturity. The amendment more closely aligns the interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. Public companies will have to begin applying the revisions to FASB ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, and the related amendments in their first fiscal years that start after December 15, 2018. The changes will have to be used for the quarterly reports for those years. The FASB issued the amendment in response to the concerns that were brought to it about the requirements in ASC 310-20 that sometimes forced bondholders to record a loss once a bond was called by its issuer. The amended guidance largely affects municipal bonds but also could affect the accounting treatment of some callable corporate debt. The Company’s management is currently in the process of evaluating the impact that this standard will have on the consolidated financial statements.

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Note 3: Earnings per Common Share

Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Net income available to common stockholders is net income to FSB Bancorp, Inc. The Company has not granted any restricted stock awards or stock options and, during the periods ended March 31, 2017 and 2016, had no potentially dilutive common stock equivalents. Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released.

The following tables set forth the calculation of basic earnings per share. Historical share and per share data have been adjusted by the exchange ratio of 1.0884 used in the conversion and offering.

	Three months ended
	March 31,
(In thousands, except per share data)	2017		2016
Basic Earnings Per Common Share
Net income available to common stockholders	$	11	$	77
Weighted average common shares outstanding		1,908		1,896
Basic earnings per common share	$	0.01	$	0.04

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Note 4: Investment Securities

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

	March 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Available-for-Sale Portfolio
U.S. Government and agency obligations	$	9,606	$	1	$	(99	)	$	9,508
Mortgage-backed securities – residential		8,870		33		(48	)		8,855
Total available-for-sale	$	18,476	$	34	$	(147	)	$	18,363
Held-to-Maturity Portfolio
Mortgage-backed securities – residential	$	663	$	8	$	-		$	671
State and municipal securities		6,666		32		(41	)		6,657
Total held-to-maturity	$	7,329	$	40	$	(41	)	$	7,328

	December 31, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Available-for-Sale Portfolio
U.S. Government and agency obligations	$	8,106	$	3	$	(110	)	$	7,999
Mortgage-backed securities – residential		9,769		42		(63	)		9,748
Total available-for-sale	$	17,875	$	45	$	(173	)	$	17,747
Held-to-Maturity Portfolio
Mortgage-backed securities – residential	$	745	$	13	$	-		$	758
State and municipal securities		6,675		25		(74	)		6,626
Total held-to-maturity	$	7,420	$	38	$	(74	)	$	7,384

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The amortized cost and estimated fair value of debt investments at March 31, 2017 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	$	-	$	-	$	754	$	754
Due after one year through five years		7,606		7,531		3,638		3,649
Due after five years through ten years		1,000		1,000		2,274		2,254
Due after ten years		1,000		977		-		-
Sub-total	$	9,606	$	9,508	$	6,666	$	6,657
Mortgage-backed securities – residential		8,870		8,855		663		671
Totals	$	18,476	$	18,363	$	7,329	$	7,328

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:

	March 31, 2017
	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		7	$	99	$	8,007		-	$	-	$	-		7	$	99	$	8,007
Mortgage-backed securities - residential		3		34		4,029		2		14		929		5		48		4,958
Totals		10	$	133	$	12,036		2	$	14	$	929		12	$	147	$	12,965
Held-to-Maturity
Mortgage-backed securities – residential⁽¹⁾		1	$	-	$	177		-	$	-	$	-		1	$	-	$	177
State and municipal securities⁽¹⁾		12		41		3,297		1		-		45		13		41		3,342
Totals		13	$	41	$	3,474		1	$	-	$	45		14	$	41	$	3,519

	December 31, 2016
	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		6	$	110	$	6,996		-	$	-	$	-		6	$	110	$	6,996
Mortgage-backed securities - residential		3		49		4,441		2		14		987		5		63		5,428
Totals		9	$	159	$	11,437		2	$	14	$	987		11	$	173	$	12,424
Held-to-Maturity
Mortgage-backed securities – residential⁽¹⁾		1	$	-	$	178		-	$	-	$	-		1	$	-	$	178
State and municipal securities⁽¹⁾		14		74		4,275		1		-		45		15		74		4,320
Totals		15	$	74	$	4,453		1	$	-	$	45		16	$	74	$	4,498

⁽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 statement of condition 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 26 securities in an unrealized loss position at March 31, 2017, of which three have been in loss positions for a period greater than twelve months and 23 have been in loss positions for a period less than twelve months. This compares to 27 securities in an unrealized loss position at December 31, 2016, of which three had been in loss positions for a period greater than twelve months and 24 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 three securities in loss positions for a period greater than twelve months at March 31, 2017, two were mortgage-backed securities issued by GNMA and guaranteed by the United States Government. The remaining security that has been in a loss position for a period greater than twelve months was issued by a state subdivision. The unrealized losses reflected are primarily attributable to changes in interest rates since the securities were acquired.

Among the 23 securities in an unrealized loss position at March 31, 2017 for less than twelve months, 11 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: FNMA, FHLMC, FHLB and FFCB. The remaining 12 securities were issued by a state or political subdivision. The unrealized losses reflected are 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 March 31, 2017 represents OTTI.

There were no gross realized gains on sales of securities for the three months ended March 31, 2017 and March 31, 2016.

As of March 31, 2017 and December 31, 2016, 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.

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Note 5: Loans

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

	March 31,			December 31,
(In thousands)	2017			2016
Real estate loans:
Secured by one-to-four family residences	$	194,520		$	188,573
Secured by multi-family residences		5,989			5,103
Construction		6,169			6,134
Commercial real estate		10,700			8,440
Home equity lines of credit		17,140			16,797
Total real estate loans		234,518			225,047
Commercial and industrial loans		2,174			1,947
Other loans		67			75
Total loans		236,759			227,069
Net deferred loan origination costs		70			113
Less allowance for loan losses		(1,042	)		(990	)
Loans receivable, net	$	235,787		$	226,192

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 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 March 31, 2017 and December 31, 2016, residential mortgage loans with a carrying value of $176.6 million and $165.5 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and term borrowings. The Company retains the servicing on most fixed-rate mortgage loans sold and receives a fee based on the principal balance outstanding. Loans serviced for others totaled $121.5 million and $118.6 million at March 31, 2017 and December 31, 2016, 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 $820,000 and $804,000 at March 31, 2017 and December 31, 2016, 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 3 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 16, 2017 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.

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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 March 31, 2017
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Real estate loans:
Secured by one-to-four family residences	$	192,771	$	-	$	1,749	$	-	$	194,520
Secured by multi-family residences		5,989		-		-		-		5,989
Construction		6,169		-		-		-		6,169
Commercial real estate		10,700		-		-		-		10,700
Home equity lines of credit		16,842		-		298		-		17,140
Total real estate loans		232,471		-		2,047		-		234,518
Commercial & industrial loans		2,174		-		-		-		2,174
Other loans		67		-		-		-		67
Total loans	$	234,712	$	-	$	2,047	$	-	$	236,759

	As of December 31, 2016
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Real estate loans:
Secured by one-to-four family residences	$	187,079	$	-	$	1,494	$	-	$	188,573
Secured by multi-family residences		5,103		-		-		-		5,103
Construction		6,134		-		-		-		6,134
Commercial real estate		8,440		-		-		-		8,440
Home equity lines of credit		16,498		-		299		-		16,797
Total real estate loans		223,254		-		1,793		-		225,047
Commercial & industrial loans		1,900		-		47		-		1,947
Other loans		75		-		-		-		75
Total loans	$	225,229	$	-	$	1,840	$	-	$	227,069

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 March 31, 2017 and December 31, 2016, are detailed in the following tables:

	As of March 31, 2017
	30-59 Days		60-89 Days
	Past Due		Past Due		90 Days		Total				Total Loans
(In thousands)	And Accruing		And Accruing		and Over		Past Due		Current		Receivable
Real estate loans:
Secured by one-to-four family residences	$	233	$	-	$	37	$	270	$	194,250	$	194,520
Secured by multi-family residences		-		-		-		-		5,989		5,989
Construction		-		-		-		-		6,169		6,169
Commercial		-		-		-		-		10,700		10,700
Home equity lines of credit		-		-		-		-		17,140		17,140
Total real estate loans		233		-		37		270		234,248		234,518
Commercial & industrial loans		-		-		-		-		2,174		2,174
Other loans		-		-		-		-		67		67
Total loans	$	233	$	-	$	37	$	270	$	236,489	$	236,759

	As of December 31, 2016
	30-59 Days		60-89 Days
	Past Due		Past Due		90 Days		Total				Total Loans
(In thousands)	And Accruing		And Accruing		and Over		Past Due		Current		Receivable
Real estate loans:
Secured by one-to-four family residences	$	89	$	-	$	-	$	89	$	188,484	$	188,573
Secured by multi-family residences		-		-		-		-		5,103		5,103
Construction		-		-		-		-		6,134		6,134
Commercial		-		-		-		-		8,440		8,440
Home equity lines of credit		-		-		-		-		16,797		16,797
Total real estate loans		89		-		-		89		224,958		225,047
Commercial & industrial loans		47		-		-		47		1,900		1,947
Other loans		-		-		-		-		75		75
Total loans	$	136	$	-	$	-	$	136	$	226,933	$	227,069

At March 31, 2017, the Company had one nonaccrual residential mortgage loan for $37,000. At December 31, 2016, the Company had no nonaccrual loans.

There were no loans that were past due 90 days or more and still accruing interest at March 31, 2017 or December 31, 2016. At March 31, 2017 and December 31, 2016, there were no loans considered to be impaired and no troubled debt restructurings.

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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 March 31, 2017
	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	$	584	$	38	$	31	$	84	$	112	$	28	$	113		$	990
Charge-offs		-		-		-		-		-		-		-			-
Recoveries		-		-		-		-		-		-		-			-
Provisions		77		7		-		23		2		-		(57	)		52
Ending balance	$	661	$	45	$	31	$	107	$	114	$	28	$	56		$	1,042

	For the three months ended March 31, 2016
	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	$	524	$	39	$	6	$	35	$	101	$	11	$	95		$	811
Charge-offs		-		-		-		-		-		-		(1	)		(1	)
Recoveries		-		-		-		-		-		-		-			-
Provisions		15		2		2		11		3		-		12			45
Ending balance	$	539	$	41	$	8	$	46	$	104	$	11	$	106		$	855

The Company had no foreclosed real estate at March 31, 2017 or December 31, 2016.

At March 31, 2017 and December 31, 2016, the Company did not have any residential real estate loans 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.

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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.

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:

	March 31, 2017
(In thousands)	Level 1		Level 2		Level 3		Total Fair Value
Available-for-sale portfolio
U.S. Government and agency obligations	$	-	$	9,508	$	-	$	9,508
Mortgage-backed securities – residential		-		8,855		-		8,855
Total available-for-sale securities	$	-	$	18,363	$	-	$	18,363

	December 31, 2016
(In thousands)		Level 1		Level 2		Level 3		Total Fair Value
Available-for-sale portfolio
U.S. Government and agency obligations	$	-	$	7,999	$	-	$	7,999
Mortgage-backed securities – residential		-		9,748		-		9,748
Total available-for-sale securities	$	-	$	17,747	$	-	$	17,747

There have been no transfers of assets into or out of any fair value measurement level during the quarter ended March 31, 2017.

Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, 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.

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.

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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 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.

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 Bearing 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, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the 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. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

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

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.

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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:

		March 31, 2017				December 31, 2016
	Fair Value	Carrying		Estimated		Carrying		Estimated
(In thousands)	Hierarchy	Amounts		Fair Values		Amounts		Fair Values
Financial assets:
Cash and due from banks	1	$	1,547	$	1,547	$	1,634	$	1,634
Interest earning demand deposits	1		5,635		5,635		5,773		5,773
Securities - available-for-sale	2		18,363		18,363		17,747		17,747
Securities - held-to-maturity	2		7,329		7,328		7,420		7,384
Investment in restricted stock	2		3,369		3,369		2,886		2,886
Loans held for sale	2		3,934		3,934		2,059		2,059
Loans, net	3		235,787		238,627		226,192		225,569
Accrued interest receivable	1		705		705		652		652

Financial liabilities:
Demand Deposits, Savings, NOW and MMDA	1		96,522		96,522		94,926		94,926
Time Deposits	2		90,162		90,458		88,008		88,043
Borrowings	2		65,761		64,410		56,813		57,008
Accrued interest payable	1		78		78		71		71

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Note 8: Accumulated Other Comprehensive Income (Loss)

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

	For the three months ended March 31, 2017
(In thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Unrealized Loss on Securities Transferred to Held-to-Maturity		Total
Beginning balance	$	(85	)	$	-	$	(85	)
Other comprehensive income before reclassifications		10			-		10
Ending balance	$	(75	)	$	-	$	(75	)

	For the three months March 31, 2016
(In thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Securities reclassified from AFS to HTM			Total
Beginning balance	$	(4	)	$	(208	)	$	(212	)
Other comprehensive income before reclassifications		63			113			176
Ending balance	$	59		$	(95	)	$	(36	)

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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 anticipated stricter consumer protection laws and regulations; and

Other risks described herein and in the other reports and statements we file with 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 March 31, 2017 and at December 31, 2016 and the results of operations for the three month periods ended March 31, 2017 and 2016. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other period.

Our business has traditionally focused on originating one- to four-family residential real estate mortgage loans and home equity lines of credit, and offering retail deposit accounts. Our primary market area consists of Monroe County and the surrounding western New York counties of Erie, Livingston, Ontario, Orleans, Jefferson and Wayne. We continue to expand our commercial lending activities in an effort to improve our interest rate risk exposure through the origination of shorter duration commercial loan products. We intend to generally sell all of the fixed-rate residential real estate loans with terms of 15 years or greater that we originate in order to manage interest rate risk. We continue to evaluate growth opportunities of the investment portfolio, while mainly focusing on higher yielding assets, primarily shorter duration or adjustable rate one- to four-family mortgage loans, commercial real estate loans, and commercial and industrial loans in 2017.

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, audit 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 Securities and Exchange Commission on March 16, 2017. These policies, along with the disclosures presented in the other 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.

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 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.

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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 March 31, 2017 and at December 31, 2016

Total Assets. Total assets increased $12.6 million, or 4.6%, to $286.3 million at March 31, 2017 from $273.7 million at December 31, 2016, primarily due to increases in net loans receivable and securities available-for-sale, partially offset by decreases in cash and cash equivalents and securities held-to-maturity.

Cash and cash equivalents, primarily interest-earning deposits at the Federal Reserve Bank and the Federal Home Loan Bank, decreased by $225,000, or 3.0%, to $7.2 million at March 31, 2017 from $7.4 million at December 31, 2016.

Net loans receivable increased $9.6 million, or 4.2%, to $235.8 million at March 31, 2017 from $226.2 million at December 31, 2016. The Bank continues to focus on loan production as we continue to grow our one-to four-family residential mortgage and commercial loan portfolios at a measured pace while still maintaining our strong credit quality and strict underwriting standards. One-to four-family residential mortgage loans increased $5.9 million, or 3.2%, to $194.5 million at March 31, 2017 from $188.6 million at December 31, 2016. The Bank originated $21.1 million of residential mortgage loans and sold $11.2 million of such loans in the secondary market as a balance sheet management strategy during the first three months of 2017 to reduce interest rate risk. The Bank sold these loans at a gain of $326,000 which was recorded in other income. At March 31, 2017, the Bank was servicing $121.5 million in residential mortgage loans sold to third parties and will realize servicing income on these loans as long as they remain outstanding. At March 31, 2017, the Bank had $3.9 million in loans held for sale, comprised of one- to four-family residential fixed rate conventional, FHA, and VA mortgage loans originated and closed by the Bank in the first quarter of 2017 that have been committed for sale in the secondary market, and will be delivered and sold in the second quarter of 2017. Mortgage servicing rights increased $16,000, or 1.9%, to $820,000 at March 31, 2017 compared to $804,000 at December 31, 2016, and are included in other assets on the consolidated balance sheets. Multi-family residential loans increased $886,000, or 17.4%, to $6.0 million at March 31, 2017 from $5.1 million at December 31, 2016. Home equity lines of credit increased $343,000, or 2.0% to $17.1 million at March 31, 2017 from $16.8 million at December 31, 2016. Commercial real estate loans increased $2.3 million, or 26.8%, to $10.7 million at March 31, 2017 from $8.4 million at December 31, 2016. Commercial and industrial loans increased $227,000, or 11.7%, to $2.2 million at March 31, 2017 from $1.9 million at December 31, 2016. We anticipate continued growth in both commercial real estate and commercial and industrial loan production in 2017.

Securities available-for-sale increased by $616,000, or 3.5%, to $18.4 million at March 31, 2017 from $17.7 million at December 31, 2016. The increase was primarily due to purchases of $1.5 million in new securities of U.S. Government and agency obligations and an increase in the fair market value of available-for-sale securities of $15,000, partially offset by principal repayments of $873,000, and amortization of $26,000 during the first three months of 2017.

Securities held-to-maturity decreased $91,000, or 1.2%, to $7.3 million at March 31, 2017 from $7.4 million at December 31, 2016 due to principal repayments of $82,000 and amortization of $9,000 during the first three months of 2017.

Deposits and Borrowings. Total deposits increased $3.8 million, or 2.1%, to $186.7 million at March 31, 2017 from $182.9 million at December 31, 2016 primarily due to increases in money market accounts and certificates of deposit, partially offset by a decrease in NOW accounts. Total borrowings from the Federal Home Loan Bank of New York increased $8.9 million, or 15.7%, to $65.8 million at March 31, 2017 from $56.8 million at December 31, 2016 to fund our loan growth. Long-term borrowings increased $1.4 million, or 2.9% to $52.3 million at March 31, 2017 from $50.8 million at December 31, 2016 due to $5.5 million in new advances partially offset by principal repayments on our amortizing advances and maturities of $4.1 million. The Company increased its short-term borrowings by $7.5 million, or 125.0%, to $13.5 million at March 31, 2017 compared to $6.0 million at December 31, 2016.

- 23 -

Stockholders’ Equity. Stockholders’ equity increased $34,000, or 0.1%, to $31.9 million at March 31, 2017. The increase resulted from the $11,000 in net income, a decrease of $10,000 in accumulated other comprehensive loss and an increase of $13,000 resulting from the release of ESOP shares from the suspense account.

Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016

General. Net income decreased $66,000, or 85.7%, to $11,000 for the quarter ended March 31, 2017 from $77,000 for the quarter ended March 31, 2016. The quarter over quarter decrease was attributable to an increase in other expense of $218,000, a $7,000 increase in provision for loan losses, and a decrease in other income of $35,000, partially offset by increases in net interest income of $174,000, and benefit for income taxes of $20,000.

Interest and Dividend Income. Total interest and dividend income increased $219,000, or 9.7%, to $2.5 million for the quarter ended March 31, 2017 from $2.3 million for the quarter ended March 31, 2016. The increase resulted from a $19.5 million increase quarter over quarter in average interest-earning assets, primarily residential mortgage and commercial real estate loans, resulting in a seven basis point increase in the average yield earned on interest-earning assets from 3.71% for the three months ended March 31, 2016 to 3.78% for the three months ended March 31, 2017.

Interest income on loans increased $270,000, or 13.0%, to $2.4 million for the quarter ended March 31, 2017 from $2.1 million for the quarter ended March 31, 2016, reflecting a $27.5 million increase in the average balance of loans to $233.9 million for the three months ended March 31, 2017 from $206.4 million for the three months ended March 31, 2016, partially offset by a one basis point decrease in the average yield earned on loans for the three months ended March 31, 2017 as compared to the same period in 2016. The increase in the average balance of loans was due to our focus on increasing our portfolios of one- to four-family residential mortgages, commercial real estate, and to a lesser extent, home equity lines of credit and commercial and industrial loans during the three months ended March 31, 2017 as compared to the same period in 2016. The average yield on loans decreased to 4.03% for the three months ended March 31, 2017 from 4.04% for the three months ended March 31, 2016, reflecting decreases in market interest rates on loan products, primarily residential mortgages.

Interest income on taxable investment securities decreased $29,000 to $69,000 for the three months ended March 31, 2017 from $98,000 for the three months ended March 31, 2016. The average balance of taxable investment securities decreased $2.9 million, or 20.9%, to $11.1 million for the three months ended March 31, 2017 from $14.1 million for the three months ended March 31, 2016. The average yield on taxable investment securities decreased 31 basis points to 2.47% during the quarter ended March 31, 2017 as compared to 2.78% for the quarter ended March 31, 2016 due to new purchases of shorter-term lower yielding investment securities replacing calls of higher yielding investment securities. Interest income on mortgage-backed securities decreased $28,000 to $30,000 for the three months ended March 31, 2017, from $58,000 for the three months ended March 31, 2016, reflecting a decrease in the average yield on mortgage-backed securities of 34 basis points to 1.20% for the three months ended March 31, 2017 from 1.54% for the three months ended March 31, 2016 and a decrease in the average balance of mortgage-backed securities of $5.1 million, or 33.7%, to $10.0 million for the three months ended March 31, 2017 from $15.1 million for the three months ended March 31, 2016. The decrease in average yield on mortgage-backed securities was primarily attributable to faster prepayment speeds on the pools of mortgage-backed securities held in the three months ended March 31, 2017 compared to the three months ended March 31, 2016. 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 $6,000 to $29,000 for the three months ended March 31, 2017, from $23,000 for the three months ended March 31, 2016. The average balance of state and municipal securities increased by $2.0 million, or 43.5%, from $4.7 million for the three months ended March 31, 2016 to $6.7 million for the three months ended March, 31, 2017, partially offset as the average tax equivalent yield decreased by 34 basis points to 2.64% for the three months ended March 31, 2017 from 2.98% for the three months ended March 31, 2016, as higher yielding state and municipal securities matured and were replaced by modestly lower yielding state and municipal securities.

Total Interest Expense. Total interest expense increased $45,000, or 8.2%, to $591,000 for the quarter ended March 31, 2017 from $546,000 for the quarter ended March 31, 2016. Total interest expense reflected an increase in interest expense on deposits of $9,000 and an increase in interest expense on borrowings of $36,000 when comparing the quarters ended March 31, 2017 and 2016. The total interest expense reflected an increase in the average cost of interest-bearing liabilities of four basis points from 0.97% for the three months ended March 31, 2016 to 1.01% for the three months ended March 31, 2017, in addition to an increase of $9.3 million in average interest-bearing liabilities.

- 24 -

Interest expense on deposits increased $9,000, or 2.5%, to $371,000 for the three months March 31, 2017 from $362,000 for the three months ended March 31, 2016. The average cost of deposits increased to 0.85% for the three months ended March 31, 2017 from 0.82% for the three months ended March 31, 2016, primarily reflecting higher average balances on a promotional money market account offering during the first quarter of 2017. The average balance of deposits decreased $3.1 million, or 1.8%, from $177.5 million for the three months ended March 31, 2016 to $174.3 million for the three months ended March 31, 2017. The average cost of certificates of deposit (including individual retirement accounts) remained unchanged at 1.22% during the three months ended March 31, 2017 and 2016. The average balance of certificates of deposit (including individual retirement accounts) decreased by $12.2 million to $88.9 million for the three months ended March 31, 2017 from $101.1 million for the three months ended March 31, 2016. The average balance of transaction accounts, traditionally our lower cost non-time deposit accounts, increased by $10.0 million to $93.3 million for the three months ended March 31, 2017 from $83.3 million for the three months ended March 31, 2016, along with an increase in the average cost of transaction accounts of 18 basis points to 0.43% for the three months ended March 31, 2017 from 0.25% for the three months ended March 31, 2016 primarily due to promotional money market accounts.

At March 31, 2017, we had $49.1 million of certificates of deposit, including individual retirement accounts, scheduled to mature throughout the remainder of 2017. Based on current market interest rates, we expect that the cost of these deposits upon renewal will be at a similar cost to us as their current contractual rates.

Interest expense on borrowings increased $36,000 from $184,000 for the quarter ended March 31, 2016 to $220,000 for the quarter ended March 31, 2017, due to a $12.4 million increase in our average balance of borrowings with the Federal Home Loan Bank from $46.6 million for the three months ended March 31, 2016 compared to $59.0 million for the three months ended March 31, 2017 in order to fund loan growth, partially offset by a decrease in the average cost of these funds from 1.58% for the three months ended March 31, 2016 to 1.49% for the three months ended March 31, 2017. The decrease in the average cost of borrowings was primarily due to management’s decision to increase short-term borrowings.

Net Interest Income. Net interest income increased $174,000, or 10.1%, to $1.9 million for the quarter ended March 31, 2017 as compared to $1.7 million for the quarter ended March 31, 2016. Net interest income increased primarily due to an increase of $10.2 million in net interest-earning assets to $31.5 million for the quarter ended March 31, 2017 from $21.3 million for the same period in 2016. Our net interest rate spread increased three basis points to 2.77% for the quarter ended March 31, 2017 compared to 2.74% for the quarter ended March 31, 2016. There was an increase in the average yield on our interest-earning assets of seven basis points from 3.71% for the three months ended March 31, 2016 to 3.78% for the three months ended March 31, 2017, partially offset by a four basis point increase in the average cost of interest-bearing liabilities to 1.01% for the three months ended March 31, 2017 from 0.97% for the three months ended March 31, 2016. Our net interest margin increased seven basis points from 2.82% during the three months ended March 31, 2016 to 2.89% during the three months ended March 31, 2017.

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 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 $52,000 provision for loan losses for the quarter ended March 31, 2017, compared to a $45,000 provision for loan losses recorded for the quarter ended March 31, 2016. The increase in the three months ended March 31, 2017 was the result of additional general provisions deemed necessary to support an increased balance of loans receivable, primarily one- to four-family residential real estate and commercial real estate, and to a lesser extent, multi-family residential real estate, home equity lines of credit, and commercial and industrial loans, as well as a potentially weaker economy. The allowance for loan losses was $1.0 million, or 0.44% of net loans outstanding at March 31, 2017 compared to $855,000, or 0.41% of net loans outstanding, at March 31, 2016.

- 25 -

Other Income. Other income decreased by $35,000, or 5.2%, to $636,000 for the three months ended March 31, 2017 compared to $671,000 for the three months ended March 31, 2016. The decrease in other income was primarily due to decreases in fee income and realized gains on sales of loans, partially offset by an increase in miscellaneous other income. Fee income from Fairport Wealth Management, the non-deposit investment subsidiary of Fairport Savings Bank, decreased by $31,000, or 47.0%, to $35,000 for the three months ended March 31, 2017 compared to $66,000 for the three months ended March 31, 2016 due to a modest decrease in non-deposit investment product sales. Realized gains on sales of loans decreased $22,000, or 6.3%, to $326,000 for the three months ended March 31, 2017 from $348,000 for the three months ended March 31, 2016. The decrease in realized gains on sales of loans was primarily attributable to a modest decrease in volume of loans sold in addition to slightly lower premiums on loans sold. Miscellaneous other income increased by $11,000, or 29.7%, to $48,000 for the three months ended March 31, 2017 compared to $37,000 for the three months ended March 31, 2016 due to a dividend received from First Monetary Mutual Limited, a Bermuda based captive insurance company owned by its community bank members in the first quarter of 2017.

Other Expense. Other expense increased $218,000, or 9.6%, to $2.5 million for the three months ended March 31, 2017 from $2.3 million for the three months ended March 31, 2016. The increase in other expense was primarily attributable to increases in salaries and employee benefits of $168,000, miscellaneous other expense of $78,000, and data processing costs of $31,000, partially offset by a decrease in mortgage fees and taxes of $67,000. Salaries and employee benefits increased $168,000, or 12.4%, to $1.5 million for the three months ended March 31, 2017 from $1.4 million for the three months ended March 31, 2016 primarily due to annual merit increases for existing staff, the increased salary and commission costs associated with additional processing and mortgage origination staff as a result of mortgage loan growth. Miscellaneous other expense increased $78,000, or 44.1%, to $255,000 for the three months ended March 31, 2017 from $177,000 for the three months ended March 31, 2016 due to additional costs related to legal expense and professional services associated with becoming an SEC reporting company in the second half of 2016. Data processing costs increased $31,000, or 62.0%, to $81,000 for the three months ended March 31, 2017 from $50,000 for the three months ended March 31, 2016 primarily due to the additional expense associated with the conversion of our core processing system from in-house hosting to data center hosting in the third quarter of 2016. Mortgage fees and taxes decreased $67,000, or 73.6%, to $24,000 for the three months ended March 31, 2017 compared to $91,000 for the three months ended March 31, 2016 due to a recent change in New York State tax law which allowed for a refundable tax credit for mortgage recording tax expensed. Under New York law, a bank that paid special additional mortgage recording tax (“SAMRT”) on residential mortgages in any tax year beginning on or after January 1, 2015, may elect to treat the unused portion of the SAMRT credit on those mortgages as an overpayment of tax to be carried or refunded. Previously, any unused credits were only eligible to be carried forward to future years.

Benefit for Income Taxes. The benefit for income taxes was $28,000 for the quarter ended March 31, 2017, an increase of $20,000 compared to a benefit for income taxes of $8,000 for the quarter ended March 31, 2016. The income tax benefit increased in the three months ended March 31, 2017 as compared to the same period in 2016 due to less income before income taxes, the impact of interest and dividends from tax-exempt securities as well as a partial reversal of a component of the deferred tax asset valuation allowance.

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Average balances and yields. The following table sets forth average balance sheets, average yields and costs and certain other information for the 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 March 31,
	2017									2016
							Average									Average
	Average						Yield /			Average						Yield /
(Dollars in thousands)	Balance			Interest			Cost⁽⁵⁾			Balance			Interest			Cost⁽⁵⁾
Interest-earning assets:
Loans	$	233,901		$	2,354			4.03	%	$	206,400		$	2,084			4.04	%
Federal funds sold		3,120			4			0.62			5,112			4			0.33
Taxable investment securities		11,146			69			2.47			14,084			98			2.78
Mortgage-backed securities		10,039			30			1.20			15,137			58			1.54
State and municipal securities⁽¹⁾		6,672			44			2.64			4,650			35			2.98
Total interest-earning assets	$	264,878		$	2,501			3.78	%	$	245,383		$	2,279			3.71	%
Noninterest-earning assets:
Other assets	$	10,764								$	9,563
Total assets	$	275,642								$	254,946
Interest-bearing liabilities:
NOW accounts	$	28,256		$	20			0.28	%	$	26,810		$	13			0.19	%
Passbook savings		25,834			19			0.29			26,489			24			0.36
Money market savings		31,338			61			0.78			23,096			16			0.28
Individual retirement accounts		7,036			16			0.91			7,932			19			0.94
Certificates of deposit		81,877			255			1.25			93,160			290			1.25
Federal Home Loan Bank advances		59,046			220			1.49			46,610			184			1.58
Total interest-bearing liabilities	$	233,387		$	591			1.01	%	$	224,097		$	546			0.97	%
Noninterest-bearing liabilities:
Demand deposits	$	7,871								$	6,931
Other liabilities		2,506									2,010
Total liabilities	$	243,764								$	233,038
Stockholders' equity	$	31,878								$	21,908
Total liabilities & stockholders' equity	$	275,642								$	254,946
Net interest income				$	1,910								$	1,733
Interest rate spread⁽²⁾								2.77	%								2.74	%
Net interest-earning assets⁽³⁾	$	31,491								$	21,286
Net interest margin⁽⁴⁾					2.89	%								2.82	%
Ratio of average interest-earning assets to average interest-bearing liabilities		113.49	%								109.50	%

(1)

Tax-exempt interest income is presented on a tax equivalent basis using a 34% federal tax rate. The unadjusted average yield on tax-exempt securities was 1.74% and 1.97% for the quarters ended March 31, 2017 and 2016, respectively. The unadjusted interest income on tax-exempt securities was $29,000 and $23,000 for the quarters ended March 31, 2017 and 2016, 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 table presents 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 this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

	Three months ended March 31,
	2017 vs. 2016
	Increase/(Decrease) Due to
							Total
							Increase
(In thousands)	Volume			Rate			(Decrease)
Interest and dividend income:
Loans	$	275		$	(5	)	$	270
Taxable investment securities		(19	)		(10	)		(29	)
Mortgage-backed securities		(17	)		(11	)		(28	)
State and municipal securities⁽¹⁾		12			(3	)		9
Total interest and dividend income		251			(29	)		222
Interest expense:
NOW accounts		1			6			7
Passbook savings		(1	)		(4	)		(5	)
Money market savings		7			38			45
Individual retirement accounts		(2	)		(1	)		(3	)
Certificates of deposit		(35	)		-			(35	)
Federal home loan bank advances		46			(10	)		36
Total interest expense		16			29			45
Net change in net interest income	$	235		$	(58	)	$	177

(1)

Tax-exempt interest income is presented on a tax equivalent basis using a 34% federal tax rate.

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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:

	March 31,			December 31,			March 31,
(Dollars In thousands)	2017			2016			2016
Nonaccrual loans:
Residential mortgage loans	$	37		$	-		$	118
Home equity lines of credit		-			-			18
Other loans		-			-			-
Total nonaccrual loans		37			-			136
Total nonperforming loans		37			-			136
Total nonperforming assets	$	37		$	-		$	136

Nonperforming loans to total loans		0.02	%		0.00	%		0.06	%
Nonperforming assets to total assets		0.01	%		0.00	%		0.05	%

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. There are no loans that are 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 March 31, 2017 were $37,000, an increase of $37,000 from the $0 balance reported at December 31, 2016. At March 31, 2017, the Company had one non-performing residential mortgage for $37,000 and at December 31, 2016, the Company had no non-performing loans. At March 31, 2016, the Company had one non-performing residential mortgage loan for $89,000, one non-performing home equity line of credit for $18,000, and one non-performing home equity loan for $29,000. 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 balance sheet. The allowance for loan losses was $1.0 million and $990,000 at March 31, 2017 and December 31, 2016, respectively. The Company reported no change in the ratio of the allowance for loan losses to gross loans of 0.44% at March 31, 2017 and December 31, 2016. 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 March 31, 2017.

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.

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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 March 31, 2017 and December 31, 2016, 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 $2.0 million as of March 31, 2017 as compared to $1.8 million at December 31, 2016. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired. Total potential problem loans increased between these two dates, as the Company reported an increase of $207,000 in loans rated substandard. The increase in loans classified as substandard was due to two residential mortgage loans which were newly categorized as such during the three months ended March 31, 2017. These loans were not criticized as of December 31, 2016. Based on current information available at March 31, 2017, 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 March 31, 2017, our liquidity ratio averaged 27.6%. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of March 31, 2017.

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 March 31, 2017, cash and cash equivalents totaled $7.2 million.

At March 31, 2017, we had $20.0 million in loan commitments outstanding. In addition to commitments to originate loans, we had $17.0 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 March 31, 2017 totaled $66.6 million, or 73.9% of our certificates of deposit (including individual retirement accounts) and 35.7% 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 March 31, 2018. 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.

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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 increased by $8.9 million, to $65.8 million at March 31, 2017, from $56.8 million at December 31, 2016. At March 31, 2017, we had the ability to borrow approximately $153.6 million from the Federal Home Loan Bank of New York, of which $65.8 million had been advanced.

We also have a repurchase agreement with Raymond James Financial providing an additional $10.0 million in liquidity. Funds obtained under the repurchase agreement are secured by our U.S Government and agency obligations. There were no advances outstanding under the repurchase agreement at March 31, 2017 or December 31, 2016.

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 March 31, 2017, 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. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. For 2017, the capital conservation buffer requirement is 125% of risk-weighted assets.

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"

Well-Capitalized

For Capital

Under Prompt

With Buffer, Fully

Actual

Adequacy Purposes

Corrective Provisions

Phased in for 2019

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of March 31, 2017

Total Core Capital (to Risk-Weighted Assets)

29,330

17.63

³$13,310

³8.0

³$16,637

³10.0

³$17,469

³10.5

Tier 1 Capital (to Risk-Weighted Assets)

28,288

17.00

³9,982

³6.0

³13,310

³8.0

³14,141

³8.5

Tier 1 Common Equity (to Risk-Weighted Assets)

28,288

17.00

³7,487

³4.5

³10,814

³6.5

³11,646

³7.0

Tier 1 Capital (to Assets)

28,288

10.39

³10,893

³4.0

³13,616

³5.0

³13,616

³5.0

As of December 31, 2016:

Total Core Capital (to Risk-Weighted Assets)

29,264

18.45

³$12,689

³8.0

³$15,861

³10.0

³$16,654

³10.5

Tier 1 Capital (to Risk-Weighted Assets)

28,274

17.83

³9,516

³6.0

³12,689

³8.0

³13,482

³8.5

Tier 1 Common Equity (to Risk-Weighted Assets)

28,274

17.83

³7,137

³4.5

³10,309

³6.5

³11,102

³7.0

Tier 1 Capital (to Assets)

28,274

10.70

³10,572

³4.0

³13,214

³5.0

³13,214

³5.0

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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 March 31, 2017 and December 31, 2016, we had $15.1 million and $15.2 million, respectively, of commitments to grant loans, $4.9 million and $5.0 million, respectively, of unadvanced portion of construction loans, and $17.0 million and $17.6 million, respectively, of unfunded commitments under lines of credit. We had two commercial letters of credit for $110,000 at March 31, 2017 and two commercial letters of credit for $110,000 at December 31, 2016.

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.

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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

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. 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.

There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

As of March 31, 2017, 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.

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

None

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 March 31, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Financial Condition, (iii) Consolidated Statements of Cash Flows, and (iv) related notes

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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)

May 12, 2017	/s/ Dana C. Gavenda
	Dana C. Gavenda
	President and Chief Executive Officer

May 12, 2017	/s/ Kevin D. Maroney
	Kevin D. Maroney
	Chief Financial Officer and Chief Operating Officer

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FSB Bancorp, Inc. - FORM 10-Q - May 12, 2017

Attached files

FSB Bancorp, Inc. Reports