Note 5: Loans

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

	September 30,			December 31,
(In thousands)	2016			2015
Real estate loans:
Secured by one-to-four family residences	$	179,322		$	177,037
Secured by multi-family residences		5,156			5,146
Construction		5,454			1,251
Commercial real estate		6,492			3,522
Home equity lines of credit		15,854			14,523
Total real estate loans		212,278			201,479
Commercial and industrial loans		1,931			853
Other loans		82			61
Total loans		214,291			202,393
Net deferred loan origination costs		186			248
Less allowance for loan losses		(945	)		(811	)
Loans receivable, net	$	213,532		$	201,830

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 September 30, 2016 and December 31, 2015, residential mortgage loans with a carrying value of $166.0 million and $168.2 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 $108.4 million and $85.9 million at September 30, 2016 and December 31, 2015, 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 $731,000 and $561,000 at September 30, 2016 and December 31, 2015, 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 Registration Statement on Form S-1 declared effective by the Securities and Exchange Commission on May 13, 2016 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.

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

Portfolio Segment	Class

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

Other Loans	Commercial and industrial
	Other loans

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

	As of September 30, 2016
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Real estate loans:
Secured by one-to-four family residences	$	177,919	$	-	$	1,403	$	-	$	179,322
Secured by multi-family residences		5,156		-		-		-		5,156
Construction		5,454		-		-		-		5,454
Commercial real estate		6,492		-		-		-		6,492
Home equity lines of credit		15,552		-		302		-		15,854
Total real estate loans		210,573		-		1,705		-		212,278
Commercial & industrial loans		1,931		-		-		-		1,931
Other loans		82		-		-		-		82
Total loans	$	212,586	$	-	$	1,705	$	-	$	214,291

	As of December 31, 2015
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Real estate loans:
Secured by one-to-four family residences	$	175,885	$	-	$	1,152	$	-	$	177,037
Secured by multi-family residences		5,146		-		-		-		5,146
Construction		1,251		-		-		-		1,251
Commercial real estate		3,522		-		-		-		3,522
Home equity lines of credit		14,223		-		300		-		14,523
Total real estate loans		200,027		-		1,452		-		201,479
Commercial & industrial loans		853		-		-		-		853
Other loans		60		-		-		1		61
Total loans	$	200,940	$	-	$	1,452	$	1	$	202,393

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.

Nonaccrual and Past Due Loans

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

Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date. An age analysis of past due loans, segregated by portfolio segment and class of loans, as of September 30, 2016 and December 31, 2015, are detailed in the following tables:

	As of September 30, 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	$	-	$	-	$	-	$	-	$	179,322	$	179,322
Secured by multi-family residences		-		-		-		-		5,156		5,156
Construction		-		-		-		-		5,454		5,454
Commercial		-		-		-		-		6,492		6,492
Home equity lines of credit		12		-		18		30		15,824		15,854
Total real estate loans		12		-		18		30		212,248		212,278
Commercial & industrial loans		-		-		-		-		1,931		1,931
Other loans		-		-		-		-		82		82
Total loans	$	12	$	-	$	18	$	30	$	214,261	$	214,291

	As of December 31, 2015
	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	$	118	$	-	$	63	$	181	$	176,856	$	177,037
Secured by multi-family residences		-		-		-		-		5,146		5,146
Construction		-		-		-		-		1,251		1,251
Commercial		-		-		-		-		3,522		3,522
Home equity lines of credit		-		-		18		18		14,505		14,523
Total real estate loans		118		-		81		199		201,280		201,479
Commercial & industrial loans		-		-		-		-		853		853
Other loans		9		-		1		10		51		61
Total loans	$	127	$	-	$	82	$	209	$	202,184	$	202,393

At September 30, 2016, the Company had one nonaccrual home equity line of credit for $18,000. At December 31, 2015, the Company had one nonaccrual residential mortgage loan for $63,000, one nonaccrual home equity line of credit for $18,000, and one nonaccrual checking line of credit for $1,000.

There were no loans that were past due 90 days or more and still accruing interest at September 30, 2016 or December 31, 2015. At September 30, 2016 and December 31, 2015, there were no loans considered to be impaired and no troubled debt restructurings.