Melrose Bancorp, Inc. - FORM 10-Q

Melrose Bancorp, Inc. - FORM 10-Q - May 11, 2016

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EX-31.1 - EX-31.1 - Melrose Bancorp, Inc.	d190855dex311.htm
EX-32 - EX-32 - Melrose Bancorp, Inc.	d190855dex32.htm
EX-31.2 - EX-31.2 - Melrose Bancorp, Inc.	d190855dex312.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2016

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No. 001-36702

Melrose Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Maryland		47-0967316
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

638 Main Street, Melrose, Massachusetts		02176
(Address of Principal Executive Offices)		Zip Code

(781) 665-2500

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

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 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 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

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, 2016, 2,697,979 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

Melrose Bancorp, Inc.

Form 10-Q


		Page
	Part I. Financial Information

Item 1.	Condensed Consolidated Financial Statements

	Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015		1

	Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015 (unaudited)		2

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015 (unaudited)		3

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2016 and 2015 (unaudited)		4

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (unaudited)		5

	Notes to Condensed Consolidated Financial Statements (unaudited)		6

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		25

Item 4.	Controls and Procedures		25

	Part II. Other Information

Item 1.	Legal Proceedings		26

Item 1A.	Risk Factors		26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26

Item 3.	Defaults upon Senior Securities		26

Item 4.	Mine Safety Disclosures		26

Item 5.	Other Information		26

Item 6.	Exhibits		26

	Signature Page		27

Part I. – Financial Information

Item 1.

Condensed Financial Statements

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)


	March 31, 2016			December 31, 2015
	(unaudited)
ASSETS
Cash and due from banks	$	14,147		$	11,934
Money market funds		3,576			1,605
Federal funds sold		3,044			3,315

Cash and cash equivalents		20,767			16,854
Investments in available-for-sale securities (at fair value)		43,785			45,143
Federal Home Loan Bank stock, at cost		437			437
Loans, net of allowance for loan losses of $639 at March 31, 2016 and $580 at December 31, 2015		168,219			160,303
Premises and equipment, net		1,214			1,226
Co-operative Central Bank deposit		881			881
Bank-owned life insurance		5,264			5,230
Accrued interest receivable		486			440
Other assets		258			195

Total assets	$	241,311		$	230,709

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	15,622		$	13,400
Interest-bearing		180,411			171,127

Total deposits		196,033			184,527
Deferred tax liability, net		198			78
Other liabilities		354			559

Total liabilities		196,585			185,164

Stockholders’ equity:
Common stock, par value $0.01 per share, authorized 15,000,000 shares; issued and outstanding 2,701,979 shares at March 31, 2016 and 2,787,579 shares at December 31, 2015		27			28
Additional paid-in-capital		24,716			25,994
Retained earnings		20,683			20,490
Unearned compensation - ESOP		(2,094	)		(2,113	)
Accumulated other comprehensive income		1,394			1,146

Total stockholders’ equity		44,726			45,545

Total liabilities and stockholders’ equity	$	241,311		$	230,709

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data)

(Unaudited)


	Three Months Ended March 31,
	2016		2015
Interest and dividend income:
Interest and fees on loans	$	1,453	$	1,163
Interest and dividends on securities:
Taxable		231		201
Tax-exempt		15		5
Other interest		13		8

Total interest and dividend income		1,712		1,377

Interest expense:
Interest on deposits		361		299

Total interest expense		361		299

Net interest and dividend income		1,351		1,078
Provision for loan losses		59		—

Net interest and dividend income after provision for loan losses		1,292		1,078

Noninterest income:
Fees and service charges		19		20
Gain on sales of securities, net		—		1
Income on bank-owned life insurance		21		20
Other income		5		2

Total noninterest income		45		43

Noninterest expense:
Salaries and employee benefits		682		587
Occupancy expense		72		77
Equipment expense		9		12
Data processing expense		82		77
Advertising expense		40		28
Printing and supplies		7		6
FDIC assessment		26		29
Audits and examinations		48		42
Other professional services		50		27
Other expense		40		28

Total noninterest expense		1,056		913

Income before income tax expense		281		208
Income tax expense		88		59

Net income	$	193	$	149

Earnings per share:
Basic	$	0.08	$	0.06

Diluted	$	0.08	$	0.06

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)


	Three Months Ended March 31,
	2016			2015
Net income	$	193		$	149
Other comprehensive income, net of tax:
Net unrealized holding gain on available-for-sale securities		368			230
Reclassification adjustment for net realized gain in net income		—			(1	)

Other comprehensive income before income tax effect		368			229
Income tax expense		(120	)		(85	)

Other comprehensive income, net of tax		248			144

Comprehensive income	$	441		$	293

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2016 and 2015

(In Thousands, Except Share Data)

(Unaudited)


	Common Stock						Additional Paid-in-			Retained		Unearned Compensation			Accumulated Other Comprehensive
	Shares			Amount			Capital			Earnings		- ESOP			Income		Total
Balance, December 31, 2014		2,829,579		$	28		$	26,575		$	19,832	$	(2,188	)	$	1,216	$	45,463
Net income		—			—			—			149		—			—		149
Other comprehensive income, net of tax		—			—			—			—		—			144		144
Common stock held by ESOP committed to be released (7,546 shares annually)		—			—			6			—		19			—		25

Balance, March 31, 2015		2,829,579		$	28		$	26,581		$	19,981	$	(2,169	)	$	1,360	$	45,781

Balance, December 31, 2015		2,787,579		$	28		$	25,994		$	20,490	$	(2,113	)	$	1,146	$	45,545
Net income		—			—			—			193		—			—		193
Other comprehensive income, net of tax		—			—			—			—		—			248		248
Buyback of common stock		(85,600	)		(1	)		(1,284	)		—		—			—		(1,285	)
Common stock held by ESOP committed to be released (7,546 shares annually)		—			—			6			—		19			—		25

Balance, March 31, 2016		2,701,979		$	27		$	24,716		$	20,683	$	(2,094	)	$	1,394	$	44,726

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	Three Months Ended March 31,
	2016			2015
	(unaudited)
Cash flows from operating activities:
Net income	$	193		$	149
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization of securities, net of accretion		9			6
Gain on sales of available-for-sale securities, net		—			(1	)
Provision for loan losses		59			—
Change in net deferred loan costs/fees		17			1
Depreciation and amortization		21			24
Increase in accrued interest receivable		(46	)		(21	)
(Increase) decrease in other assets		(100	)		43
Decrease in accrued expenses and other liabilities		(205	)		(64	)
Decrease in income taxes receivable		37			24
Deferred tax benefit		—			(1	)
Income on bank-owned life insurance		(21	)		(20	)
ESOP expense		25			25

Net cash (used in) provided by operating activities		(11	)		165

Cash flows from investing activities:
Purchases of available-for-sale securities		(1,089	)		(3,994	)
Proceeds from sale of available-for-sale securities		—			1,034
Proceeds from maturities and calls of available-for-sale securities		2,806			202
Loan originations and principal collections, net		(6,009	)		(917	)
Recoveries on loans previously charged off		—			1
Loans purchased		(1,983	)		—
Capital expenditures		(9	)		(10	)
Premiums paid on bank-owned life insurance		(13	)		(14	)

Net cash used in investing activities		(6,297	)		(3,698	)

Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		1,937			240
Net increase (decrease) in time deposits		9,569			(605	)
Repurchase of Melrose Bancorp, Inc. Common Stock		(1,285	)		—

Net cash provided by (used in) financing activities		10,221			(365	)

Net increase (decrease) in cash and cash equivalents		3,913			(3,898	)
Cash and cash equivalents at beginning of period		16,854			29,491

Cash and cash equivalents at end of period	$	20,767		$	25,593

Supplemental disclosures:
Interest paid	$	361		$	299
Income taxes paid		51			36

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

Melrose Bancorp, Inc. and Subsidiary

Form 10-Q

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 1 - NATURE OF OPERATIONS

Melrose Bancorp, Inc. (the “Company”), was incorporated in February 2014 under the laws of State of Maryland. The Company’s activity consists of owning and supervising its subsidiary, Melrose Cooperative Bank (the “Bank”). The Bank provides financial services to individuals, families and businesses through our full-service banking office. Our primary business activity consists of taking deposits from the general public in our market area and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans, home equity loans and lines of credit, commercial loans, and to a much lesser extent consumer loans. The Bank is a Massachusetts-chartered cooperative bank headquartered in Melrose, Massachusetts. The Bank is subject to the regulations of, and periodic examination by, the Massachusetts Division of Banks (“DOB”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are insured by the FDIC.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and Rule 10-01 of Regulation S-X. Information included herein as of March 31, 2016 and for the interim periods ended March 31, 2016 and 2015 is unaudited; however, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and were of a normal recurring nature. These statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Form 10-K for the year ended December 31, 2015. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016.

The significant accounting policies are summarized below to assist the reader in better understanding the consolidated financial statements and other data contained herein.

BASIS OF PRESENTATION:

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary the Bank, and the Bank’s wholly-owned subsidiary, MCBSC, Inc., which is used to hold investment securities. All significant intercompany accounts and transactions have been eliminated in the consolidation.

USE OF ESTIMATES:

In preparing consolidated financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of securities and deferred income taxes.

CASH AND CASH EQUIVALENTS:

As of March 31, 2016 (unaudited), the Company has total cash and cash equivalents in the following banks:


Eastern Bank		$6,170,000 which represents approximately 13.8% of total stockholders’ equity
State Street Bank		$2,992,000, which represents approximately 6.7% of total stockholders’ equity

As of December 31, 2015, the Company has total cash and cash equivalents in the following banks:


Eastern Bank		$6,414,000, which represents approximately 14.0% of total stockholders’ equity
State Street Bank		$2,993,000, which represents approximately 6.6% of total stockholders’ equity

EARNINGS PER SHARE (EPS):

Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding adjusted to exclude the weighted average number of unallocated shares held by the ESOP. Diluted EPS, if presented, reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings of the entity. For the purposes of computing diluted EPS, the treasury stock method is used.

The calculation of basic and diluted EPS is presented below. There were no common stock equivalents in the three month period ending March 31, 2016 and 2015. (unaudited)


	Three Months Ended March 31, 2016			Three Months Ended March 31, 2015
	(In Thousands, except share data)
Net income	$	193		$	149

Basic Common Shares:
Weighted average common shares outstanding		2,738,368			2,829,579
Weighted average unallocated ESOP shares		(211,274	)		(218,820	)

Basic and diluted weighted average shares outstanding		2,527,094			2,610,759

Basic earnings per share	$	0.08		$	0.06

Diluted earnings per share ⁽¹⁾	$	0.08		$	0.06

(1)	As of and during the three months ended March 31, 2016 and 2015, there were no potentially dilutive securities or contracts to issue common stock.

FAIR VALUES OF FINANCIAL INSTRUMENTS:

Accounting Standards Codification (ASC) 825, “Financial Instruments,” requires that the Company disclose the estimated fair value for its financial instruments. Fair value methods and assumptions used by the Company in estimating its fair value disclosures are as follows:

Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate fair value.

Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans held-for-sale: Fair values of loans held-for-sale are based on commitments on hand from investors or prevailing market prices.

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Accrued interest receivable: The carrying amount of accrued interest receivable approximates fair value.

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificate accounts are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on certificate accounts.

Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portion of loans, fair value also considers the difference between current levels of interest rates and the committed rates.

RECENT ACCOUNTING PRONOUNCEMENTS:

As an “emerging growth company,” as defined in Title 1 of Jumpstart Our Business Startups (JOBS) Act, the Company has elected to use the extended transition period to delay adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, the consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of March 31, 2016, there is no significant difference in the comparability of the financial statements as a result of this extended transition period.

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-05, “Intangibles – Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Under the extended transition period for an emerging growth company, this ASU is effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 31, 2016. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07: “Fair Value Measurement (Topic 820) – Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent).” The objective of this update is to address the diversity in practice related to how certain investments measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. Under the extended transition period for an emerging growth company, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and makes targeted improvements to GAAP as follows:

Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, the entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same manner.

2.	Simplify the impairment assessment of equity investments without determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.

3.	Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.

4.	Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

6.	Require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.

7.	Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

Under the extended transition period for an emerging growth company, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of item 5 above is permitted as of the fiscal years beginning after December 31, 2019, or interim periods for which financial statements have not been issued. Early adoption of all other amendments in this ASU is not permitted. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU was issued to increase transparency and comparability among organizations by requiring reporting entities to recognize all leases, including operating, as lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Under the extended transition period for an emerging growth company, the amendments in this ASU are effective for fiscal years beginning after December 31, 2019, and interim periods within fiscal years being after December 15, 2020. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company is currently evaluating the provisions of ASU No. 2016-09 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

NOTE 3 - INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost basis of securities and their approximate fair values are as follows:


	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In Thousands)
March 31, 2016: (unaudited)
U.S. Government and federal agency obligations	$	7,203	$	11	$	48	$	7,166
Debt securities issued by states of the United States and political subdivisions of the states		2,404		39		6		2,437
Corporate bonds and notes		13,539		85		19		13,605
Preferred stock		3,000		93		—		3,093
Mortgage-backed securities		2,070		—		57		2,013
Marketable equity securities		13,272		2,208		9		15,471

	$	41,488	$	2,436	$	139	$	43,785

December 31, 2015:
U.S. Government and federal agency obligations	$	8,851	$	7	$	88	$	8,770
Debt securities issued by states of the United States and political subdivisions of the states		2,408		8		18		2,398
Corporate bonds and notes		13,540		12		44		13,508
Preferred stock		3,000		31		2		3,029
Mortgage-backed securities		2,232		—		66		2,166
Marketable equity securities		13,183		2,125		36		15,272

	$	43,214	$	2,183	$	254	$	45,143

The scheduled maturities of debt securities were as follows as of March 31, 2016 (unaudited):


	Fair Value
	(In Thousands)
Due within one year	$	3,758
Due after one year through five years		14,884
Due after five years through ten years		1,743
Due after ten years		3,165
Mortgage-backed securities		2,013
Asset-backed securities		1,727

	$	27,290

Not included in the maturity table above is preferred stock with no stated maturity of $1,024,000 at March 31, 2016 (unaudited).

There were no securities of issuers whose aggregate carrying amount exceeded 10% of stockholders’ equity as of March 31, 2016 (unaudited) and December 31, 2015.

During the three months ended March 31, 2016 (unaudited) there were no sales of available-for-sale securities. During the three months ended March 31, 2015 (unaudited) proceeds from the sales of available-for-sale securities were $1,034,000 and gains on these sales amounted to $1,000. The tax expense on the realized gains during the three months ended March 31, 2015 (unaudited) was not significant.

The Company had no pledged securities as of March 31, 2016 (unaudited) and December 31, 2015.

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other-than-temporarily impaired, are as follows:


	Less than 12 months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In Thousands)
March 31, 2016 (unaudited)
U.S. government and federal agency obligations	$	2,716	$	22	$	1,366	$	26	$	4,082	$	48
Debt securities issued by states of the United States and political subdivisions of the states		—		—		253		6		253		6
Corporate bonds and notes		2,000		19		—		—		2,000		19
Mortgage-backed securities		427		5		1,586		52		2,013		57
Marketable equity securities		1,834		9		—		—		1,834		9

Total temporarily impaired securities	$	6,977	$	55	$	3,205	$	84	$	10,182	$	139

December 31, 2015
U.S. government and federal agency obligations	$	5,366	$	59	$	1,403	$	29	$	6,769	$	88
Debt securities issued by states of the United States and political subdivisions of the states		1,176		9		505		9		1,681		18
Corporate bonds and notes		9,012		38		993		6		10,005		44
Preferred stock		998		2		—		—		998		2
Mortgage-backed securities		1,608		40		558		26		2,166		66
Marketable equity securities		5,160		36		—		—		5,160		36

Total temporarily impaired securities	$	23,320	$	184	$	3,459	$	70	$	26,779	$	254

The Company conducts periodic reviews of investment securities with unrealized losses to evaluate whether the impairment is other-than-temporary. The Company’s review for impairment generally includes a determination of the cause, severity and duration of the impairment; and an analysis of both positive and negative evidence available. The Company also determines if it has the ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery to cost basis.

During the three months ended March 31, 2016 and 2015, the Company had no write downs of securities. A summary of the Company’s reviews of investment securities deemed to be temporarily impaired is as follows:

March 31, 2016 (unaudited)

Unrealized losses on U.S. Government and federal agency obligations amounted to $48,000 and consisted of seven securities. Unrealized losses on corporate bonds and notes amounted to $19,000 and consisted of five securities. The unrealized losses on all but two of these debt securities were individually less than 2.0% of amortized cost basis, with one U.S. government and federal agency obligation at 2.9% and one corporate bond at 2.6% of amortized cost basis. The unrealized losses were primarily due to changes in interest rates. Unrealized losses on municipal bonds amounted to $6,000 and consisted of one security. The unrealized loss on this debt security was 2.5% of amortized cost basis, and the unrealized loss was primarily due to changes in interest rates. Unrealized losses on mortgage-backed securities amounted to $57,000 and consisted of four securities. The unrealized losses on two of these debt securities were each individually less than 2.0% of amortized cost basis, with the other two mortgage backed securities at 5.0% and 3.8% of amortized cost basis. The unrealized losses were primarily due to changes in interest rates. In regard to corporate debt, the Company also considers the issuer’s current financial condition and its ability to make future scheduled interest and principal payments on a timely basis in assessing other-than-temporary impairment.

Unrealized losses on marketable equity securities amounted to $9,000 and consisted of two mutual funds, the unrealized losses on these two equity securities were each individually less than 1.0%. The cause of the impairment in these mutual funds is due to changes in interest rates. The Company considered several factors in reviewing these mutual fund investments, including underlying investment performance, composition and rating of the securities in the mutual fund, and management of the mutual funds’ issuer.

NOTE 4 - LOANS

Loans consisted of the following at:


	March 31, 2016			December 31, 2015
	(In Thousands)
	(unaudited)
Real estate loans:
One-to four-family residential	$	135,555		$	132,237
Home equity loans and lines of credit		10,872			10,862
Commercial		15,919			13,251
Construction		6,295			4,303
Consumer loans		125			121

Total loans		168,766			160,774

Allowance for loan losses		(639	)		(580	)
Deferred loan costs, net		92			109

Net loans	$	168,219		$	160,303

The following tables set forth information on the allowance for loan losses at and for the three months ended March 31, 2016 and 2015, and at December 31, 2015:


	Real Estate:
	One-to four- family Residential		Home Equity Loans and Lines of Credit		Commercial		Construction		Consumer Loans			Unallocated			Total
					(In Thousands)
Three Months Ended March 31, 2016 (unaudited)
Allowance for loan losses:
Beginning balance	$	331	$	49	$	150	$	40	$	1		$	9		$	580
Charge offs		—		—		—		—		—			—			—
Recoveries		—		—		—		—		—			—			—
Provision (benefit)		8		—		61		—		(1	)		(9	)		59

Ending balance	$	339	$	49	$	211	$	40	$	—		$	—		$	639

At March 31, 2016 (unaudited)
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—		$	—		$	—
Ending balance:
Collectively evaluated for impairment		339		49		211		40		—			—			639

Total allowance for loan losses ending balance	$	339	$	49	$	211	$	40	$	—		$	—		$	639

Loans:
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—		$	—		$	—
Ending balance:
Collectively evaluated for impairment		135,555		10,872		15,919		6,295		125			—			168,766

Total loans ending balance	$	135,555	$	10,872	$	15,919	$	6,295	$	125		$	—		$	168,766


	Real Estate:
	One- to four-		Home Equity Loans						Consumer
	family Residential		and Lines of Credit		Commercial		Construction		Loans			Unallocated			Total
	(In Thousands)
Three Months Ended March 31, 2015 (unaudited)
Allowance for loan losses:
Beginning balance	$	414	$	58	$	25	$	21	$	1		$	1		$	520
Charge offs		—		—		—		—		—			—			—
Recoveries		—		—		—		—		1			—			1
Provision (benefit)		—		—		—		—		—			—			—

Ending balance	$	414	$	58	$	25	$	21	$	2		$	1		$	521

March 31, 2015 (unaudited)
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—		$	—		$	—
Ending balance:
Collectively evaluated for impairment		414		58		25		21		2			1			521

Total allowance for loan losses ending balance	$	414	$	58	$	25	$	21	$	2		$	1		$	521

Loans:
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—		$	—		$	—
Ending balance:
Collectively evaluated for impairment		118,998		10,802		2,472		2,854		141			—			135,267

Total loans ending balance	$	118,998	$	10,802	$	2,472	$	2,854	$	141		$	—		$	135,267


	Real Estate:
	One-to four- family Residential		Home Equity Loans and Lines of Credit		Commercial		Construction		Consumer Loans		Unallocated		Total
					(In Thousands)
December 31, 2015
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance:
Collectively evaluated for impairment		331		49		150		40		1		9		580

Total allowance for loan losses ending balance	$	331	$	49	$	150	$	40	$	1	$	9	$	580

Loans:
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance:
Collectively evaluated for impairment		132,237		10,862		13,251		4,303		121		—		160,774

Total loans ending balance	$	132,237	$	10,862	$	13,251	$	4,303	$	121	$	—	$	160,774

The following tables set forth information regarding nonaccrual loans and past-due loans:


	30 - 59 Days		60 - 89 Days		90 Days or More Past Due		Total Past Due		Total Current		Total		90 Days or More Past Due and Accruing		Non- Accrual
	(In Thousands)
At March 31, 2016 (unaudited)
Real estate loans:
One-to four-family residential	$	1,087	$	16	$	—	$	1,103	$	134,452	$	135,555	$	—	$	—
Home equity loans and lines of credit		—		—		—		—		10,872		10,872		—		—
Commercial		—		—		—		—		15,919		15,919		—		—
Construction		—		—		—		—		6,295		6,295		—		—
Consumer loans		—		—		—		—		125		125		—		—

Total	$	1,087	$	16	$	—	$	1,103	$	167,663	$	168,766	$	—	$	—

At December 31, 2015
Real estate loans:
One-to four-family residential	$	600	$	—	$	68	$	668	$	131,569	$	132,237	$	—	$	68
Home equity loans and lines of credit		—		—		197		197		10,665		10,862		—		197
Commercial		—		—		—		—		13,251		13,251		—		—
Construction		—		—		—		—		4,303		4,303		—		—
Consumer loans		—		—		—		—		121		121		—		—

Total	$	600	$	—	$	265	$	865	$	159,909	$	160,774	$	—	$	265

As of and during the three months ended March 31, 2016 and 2015 (unaudited) there were no loans that met the definition of an impaired loan in ASC 310-10-35.

During the three months ended March 31, 2016 and 2015 (unaudited) there were no loans modified that met the definition of a troubled debt restructured loan in ASC 310-10-50.

As of March 31, 2016 (unaudited) there are no consumer mortgage loans in the process of foreclosure.

Credit Quality Information

In early 2016, the Company implemented a new ten point internal loan rating system for commercial real estate, construction and commercial loans. Residential and retail loans are also included within this system as noted below. The new risk rating system will assist the Company in better understanding the risk inherent in each loan. The new loan ratings are as follows:

Loans rated 1: Secured by cash collateral or highly liquid diversified marketable securities.

Loans rated 2 – 3: Strongest quality loans in the portfolio not secured by cash. Defined by consistent, solid profits, strong cash flow and are well secured. Very little vulnerability to changing economic conditions and compare favorably to their industry.

Loans rated 4 – 5: These loans are pass rated. Borrower will show average to strong cash flow, strong to adequate collateral coverage, and will have a generally sound balance sheet. Inclusive in the 5 rating are all open and closed – end residential and retail loans which are paying as agreed.

Loans rated 6: Possess above average risk but still considered pass. Generally this rating is reserved for projects currently under construction or borrowers with modest cash flow, although still meeting all loan covenants.

Loans rated 6W: Contain all the risks of a 6 rated credit but have an inherent weakness that requires close monitoring. This rating also generally includes open and closed-end residential and retail loans which are greater than 30 days past due but display no other inherent weakness.

Loans rated 7: Potential weaknesses which warrant management’s close attention. If weaknesses are uncorrected, repayment prospects may be weakened. This is typically a transitional rating.

Loans rated 8: Considered substandard. There is a likelihood of loss if the deficiencies are not corrected. Generally, open and closed – end retail loans, as well as automotive and other consumer loans, past 90 cumulative days from the contractual due date should be classified as an 8.

Loans rated 9: Borrower has a pronounced weakness and all current information indicates collection or liquidation of all debts in full is improbable and highly questionable.

Loans rated 10: Uncollectable and a loss will be taken. Open and closed – end loans secured by residential real estate that are beyond 180 days past due will be assessed for value and any outstanding loan balance in excess of said value, less cost to sell, will be classified as a 10.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate and construction loans.

As of March 31, 2016 (unaudited), one- to four- family residential real estate loans with balances totaling $296,000 had a risk rating of “substandard” and all other loans outstanding had a risk rating of “pass.”

As of December 31, 2015, one- to four- family residential real estate loans with balances totaling $366,000 and home equity lines of credit totaling $197,000 had a risk rating of “substandard” and all other loans outstanding had a risk rating of “pass.”

NOTE 5 - PREMISES AND EQUIPMENT

The following is a summary of premises and equipment:


	March 31, 2016			December 31, 2015
	(In Thousands)
	(unaudited)
Land	$	393		$	393
Building and improvements		1,817			1,817
Furniture and equipment		521			514
Data processing equipment		256			254

		2,987			2,978
Accumulated depreciation		(1,773	)		(1,752	)

	$	1,214		$	1,226

NOTE 6 - DEPOSITS

The aggregate amount of time deposit amounts in denominations that meet or exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 as of March 31, 2016 (unaudited) and December 31, 2015 amounted to $19,973,000 and $16,876,000, respectively.

For time deposits as of March 31, 2016 (unaudited) the scheduled maturities for each of the following years ended March 31 are as follows:


	(In Thousands)
2017	$	64,076
2018		25,170
2019		5,927
2020		1,156
2021		576

	$	96,905

Deposits from related parties held by the Bank as of March 31, 2016 (unaudited) and December 31, 2015 amounted to $5,899,000 and $4,030,000, respectively.

NOTE 7 - BORROWED FUNDS

The Company is permitted to borrow from the Federal Reserve Bank of Boston under certain conditions. Any such borrowings would be required to be fully secured by pledges of collateral satisfactory to the Federal Reserve Bank of Boston. In addition, the Company has the ability to borrow from the Federal Home Loan Bank of Boston and the Co-operative Central Bank.

NOTE 8 - FINANCIAL INSTRUMENTS

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to originate loans are agreements to lend to a customer provided 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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income-producing properties.

Notional amounts of financial instrument liabilities with off-balance sheet credit risk are as follows:


	March 31,		December 31,
	2016		2015
	(In Thousands)
	(unaudited)
Commitments to originate loans	$	1,315	$	5,214
Unused lines of credit		11,589		11,986
Due to borrowers on unadvanced construction loans		1,872		1,796

	$	14,776	$	18,996

NOTE 9 - FAIR VALUE MEASUREMENTS

ASC 820-10, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value under generally accepted accounting principles. This guidance also allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.

In accordance with ASC 820-10, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for March 31, 2016 (unaudited) and December 31, 2015. The Company did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2016 (unaudited) and the year ended December 31, 2015.

The Company’s investments in preferred stock and marketable equity securities are generally classified within level 1 of the fair value hierarchy because they are valued using quoted market prices.

The Company’s investment in debt securities available-for-sale is generally classified within level 2 of the fair value hierarchy. For these securities, we obtain fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

The following summarizes assets measured at fair value on a recurring basis:


	Fair Value Measurements at Reporting Date Using:
	Total		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
	(In Thousands)
March 31, 2016 (unaudited):
U.S. Government and federal agency obligations	$	7,166	$	—	$	7,166	$	—
Debt securities issued by states of the United States and political subdivisions of the states		2,437		—		2,437		—
Corporate bonds and notes		13,605		—		13,605		—
Preferred stock		3,093		3,093		—		—
Mortgage-backed securities		2,013		—		2,013		—
Marketable equity securities		15,471		15,471		—		—

Totals	$	43,785	$	18,564	$	25,221	$	—

December 31, 2015:
U.S. Government and federal agency obligations	$	8,770	$	—	$	8,770	$	—
Debt securities issued by states of the United States and political subdivisions of the states		2,398		—		2,398		—
Corporate bonds and notes		13,508		—		13,508		—
Preferred stock		3,029		3,029		—		—
Mortgage-backed securities		2,166		—		2,166		—
Marketable equity securities		15,272		15,272		—		—

Totals	$	45,143	$	18,301	$	26,842	$	—

Under certain circumstances the Company makes adjustments to fair value for its assets and liabilities although they are not measured at fair value on a recurring basis. At March 31, 2016 (unaudited) and December 31, 2015, there were no assets or liabilities carried on the consolidated balance sheets for which a nonrecurring change in fair value has been recorded.

The estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, are as follows:


	March 31, 2016 (unaudited)
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	20,767	$	20,767	$	—	$	—	$	20,767
Available-for-sale securities		43,785		18,564		25,221		—		43,785
Federal Home Loan Bank stock		437		437		—		—		437
Loans, net		168,219		—		—		169,285		169,285
Co-operative Central Bank deposit		881		881		—		—		881
Accrued interest receivable		486		486		—		—		486

Financial liabilities:
Deposits		196,033		—		196,563		—		196,563


	December 31, 2015
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	16,854	$	16,854	$	—	$	—	$	16,854
Available-for-sale securities		45,143		18,301		26,842		—		45,143
Federal Home Loan Bank stock		437		437		—		—		437
Loans, net		160,303		—		—		161,206		161,206
Co-operative Central Bank deposit		881		881		—		—		881
Accrued interest receivable		440		440		—		—		440

Financial liabilities:
Deposits		184,527		—		185,170		—		185,170

The carrying amounts of financial instruments shown in the above tables are included in the consolidated balance sheets under the indicated captions. Accounting policies related to financial instruments are described in Note 2.

NOTE 10 - OTHER COMPREHENSIVE INCOME

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

The components of other comprehensive income, included in stockholders’ equity, are as follows:


	For the three months ended March 31,
	2016			2015
	(In Thousands)
	(unaudited)
Net unrealized holding gains on available-for-sale securities	$	368		$	230
Reclassification adjustment for net realized gain in net income ⁽¹⁾		—			(1	)

Other comprehensive income before income tax effect		368			229
Income tax expense		(120	)		(85	)

Other comprehensive income, net of tax	$	248		$	144

(1)

Reclassification adjustments include net realized securities gains. Realized gains have been reclassified out of accumulated other comprehensive income and affect certain captions in the consolidated statements of income as follows: pre-tax amount is reflected as a gain on sale of securities, net, the tax effect, which was not significant, is included in income tax expense, and the after-tax amount is included in net income.

Accumulated other comprehensive income as of March 31, 2016 (unaudited) and December 31, 2015 consists of net unrealized holding gains on available-for-sale securities, net of taxes.

NOTE 11 - REGULATORY MATTERS

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

Effective January 1, 2015, (with a phase-in period of two to four years for certain components), the Bank became subject to new capital regulations adopted by the Board of Governors of the Federal Reserve System (“FRB”) and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new common equity Tier 1 (“CET1”) capital ratio of 4.5%, increase the minimum Tier 1 capital to risk-weighted assets ratio to 6.0% from 4.0%, require a minimum total capital to risk-weighted assets ratio of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% (new) and a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk based capital ratio of 10.0% (unchanged) and a Tier 1 leverage ratio of 5.0% (unchanged). In addition, the regulations establish a capital conservation buffer above the required capital ratios that began phasing in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses.

The new regulation implemented changes to what constitutes regulatory capital. Certain instruments will no longer constitute qualifying capital, subject to phase-out periods. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 will be deducted from capital.

The new regulations also changed the risk weights of certain assets, including an increase in the risk weight of certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or on non-accrual status to 150% from 100%, a credit conversion factor for the unused portion of the commitments with maturities of less than one year that are not cancellable to 20% from 0%, an increase in the risk weight for mortgage servicing rights and deferred tax assets that are not deducted from capital to 250% from 100%, and an increase in the risk weight for equity exposures to 600% from 100%.

Management believes, as of March 31, 2016, that the Bank meets all capital adequacy requirements to which it is subject.

As of March 31, 2016, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There were no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios (unaudited) are presented in the following table.


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars In Thousands)
As of March 31, 2016:
Total Capital (to Risk Weighted Assets)	$	33,885		24.14	%	$	11,229		8.0	%	$	14,037		10.0	%
Tier 1 Capital (to Risk Weighted Assets)		32,256		22.98			8,422		6.0			11,229		8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		32,256		22.98			6,317		4.5			9,124		6.5
Tier 1 Capital (to Average Assets)		32,256		13.95			9,252		4.0			11,565		5.0

NOTE 12 – COMMON STOCK REPURCHASES

From time to time, our board of directors authorizes stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. Our board of directors authorized a stock repurchase program, allowing us to repurchase up to 283,000 shares of our common stock from time to time at various prices in the open market or through private transactions. The actual amount and timing of future share repurchases, if any, will depend on market conditions, applicable SEC rules and various other factors.

In 2015, 42,000 shares of common stock were repurchased at an average cost of $14.60.

During the three months ended March 31, 2016, a total of 85,600 shares of common stock were repurchased at an average cost of $15.05.

In April 2016, a total of 4,000 shares of common stock were repurchased at an average cost of $15.05.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of the financial condition at March 31, 2016 and the results of operations for the three months ended March 31, 2016 and 2015 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

•

statements of our goals, intentions and expectations;

•

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

•

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

•

estimates of our risks and future costs and benefits.

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

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

•

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

•

our success in growing our commercial real estate loan portfolio;

•

increased competition among depository and other financial institutions;

•

inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial instruments or increase our funding costs;

•

changes in laws or government regulations or policies that adversely affect financial institutions, including changes in regulatory fees and capital requirements;

•

our ability to manage operations in the current economic conditions;

•

our ability to capitalize on growth opportunities;

•

changes in consumer spending, borrowing and savings habits;

•

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

•

changes in our organization, compensation and benefit plans;

•

changes in the level of government support for housing finance;

•

significant increases in delinquencies and our loan losses; and

•

changes in our financial condition or results of operations that reduce capital.

Comparison of Financial Condition at March 31, 2016 (unaudited) and December 31, 2015

Total assets increased $10.6 million, or 4.6%, to $241.3 million at March 31, 2016 from $230.7 million at December 31, 2015. The increase was primarily the result of an increase in cash and cash equivalents and net loans, partially offset by a decrease in available-for-sale securities.

Cash and cash equivalents increased $3.9 million, or 23.2%, to $20.8 million at March 31, 2016 from $16.9 million at December 31, 2015. This increase was due primarily from proceeds from maturities and calls of available-for-sale securities.

Securities available-for-sale decreased $1.3 million, or 3.0%, to $43.8 million at March 31, 2016 from $45.1 million at December 31, 2015. The decrease in securities available-for-sale during 2016 was a result of maturities and calls of available-for-sale securities.

Net loans increased $7.9 million, or 4.9%, to $168.2 million at March 31, 2016 from $160.3 million at December 31, 2015. The increase in net loans was due primarily to an increase of $4.6 million, or 30.3%, in commercial real estate and commercial construction loans, and an increase of $3.3 million, or 2.5%, in one-to four-family residential loans during the three months ended March 31, 2016.

At March 31, 2016 our investment in bank-owned life insurance was $5.3 million, an increase of $34,000, or 0.6%, from $5.2 million at December 31, 2015. We invest in bank-owned life insurance to provide us with a funding offset for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is non-taxable.

Other assets increased $63,000, or 32.3%, to $258,000 at March 31, 2016 from $195,000 at December 31, 2015. The increase was due to an increase in prepaid expenses.

Total deposits increased $11.5 million, or 6.2%, to $196.0 million at March 31, 2016 from $184.5 million at December 31, 2015. The increase in deposits was due primarily to an increase of $9.6 million, or 11.0%, in time deposits, and an increase of $1.4 million, or 4.1%, in money market accounts, and an increase of $2.2 million, or 16.6%, in demand deposits. The increases in time deposits, money markets, and demand deposits were offset by a decrease of $2.0 million, or 11.8%, in NOW accounts.

We had no borrowings outstanding at March 31, 2016 or December 31, 2015. At March 31, 2016, we had the ability to borrow approximately $99.2 million from the Federal Home Loan Bank of Boston, subject to certain collateral requirements. Additionally at March 31, 2016, we had the ability to borrow up to $5.0 million on a Federal Funds line of credit with the Co-operative Central Bank.

Total stockholders’ equity decreased $819,000, or 1.8%, to $44.7 million at March 31, 2016 from $45.5 million at December 31, 2015. The decrease was primarily due to repurchases of Company common stock totaling $1.3 million, partially offset by net income of $193,000 and other comprehensive income of $248,000.

Comparison of Operating Results for the Three Months Ended March 31, 2016 and 2015

General. Net income increased $44,000, or 29.5%, to $193,000 for the three months ended March 31, 2016 from $149,000 for the three months ended March 31, 2015. Net income increased primarily due to an increase in interest income, partially offset by an increase in interest expense and noninterest expense.

Interest and Dividend Income. Interest and dividend income increased $335,000, or 24.3%, to $1.7 million for the three months ended March 31, 2016 from $1.4 million for the three months ended March 31, 2015 due to an increase in interest and fees on loans, which increased $290,000, or 24.9%, to $1.5 million for the three months ended March 31, 2016 from $1.2 million for the three months ended March 31, 2015. The increase in interest and fees on loans was primarily the result of an increase in new loan originations.

Interest and dividends on securities increased $40,000, or 19.4%, to $246,000 for the three months ended March 31, 2016 from $206,000 for the three months ended March 31, 2015 resulting primarily from an increase of $2.1 million in the average balance of securities quarter to quarter.

Other interest income increased $5,000, or 62.5%, for the three months ended March 31, 2016 primarily due to a $7.8 million increase in the average balance of other interest-earning assets.

Interest Expense. Interest expense increased $62,000, or 20.7%, to $361,000 for the three months ended March 31, 2016 from $299,000 for the three months ended March 31, 2015. The increase was primarily due to an increase of $23.8 million, or 15.6%, in the average balance of interest-bearing deposits.

Net Interest and Dividend Income. Net interest and dividend income increased $273,000, or 25.3%, to $1.4 million for the three months ended March 31, 2016 from $1.1 million for the three months ended March 31, 2015 primarily due to an increase in net interest rate spread of 26 basis points to 2.18% for 2016 from 1.92% for 2015. This was offset in part by a decrease in net interest-earning assets of $170,000, or 0.3%, to $51.9 million for the three months ended March 31, 2016 from $52.1 million for the three months ended March 31, 2015.

Provision for Loan Losses. We recorded a provision for loan losses of $59,000 for the three months ended March 31, 2016, an increase of $59,000 from the provision of $0 for the three months ended March 31, 2015.

There were no charge-offs for the quarters ended March 31, 2016 and March 31, 2015. The allowance for loan losses was $639,000 or 0.38% of total loans, at March 31, 2016, an increase of $118,000, or 22.6%, compared to $521,000, or 0.32% of total loans, at March 31, 2015. Total nonperforming loans were $0 at March 31, 2016 compared to $707,000 at March 31, 2015.

Noninterest Income. Noninterest income increased $2,000, or 4.7%, to $45,000 for the three months ended March 31, 2016 from $43,000 for the three months ended March 31, 2015 due to an increase of $1,000 in income on bank-owned life insurance and $3,000 in other income, partially offset by decreased fees and service charges.

There were no loans originated for sale and sold during the three months ended March 31, 2016 and March 31, 2015. Fees and service charges decreased $1,000, or 5.0%, to $19,000 for the three months ended March 31, 2016 from $20,000 for the three months ended March 31, 2015.

Noninterest Expense. Noninterest expense increased $143,000, or 15.7%, to $1.1 million for the three months ended March 31, 2016 from $913,000 for the three months ended March 31, 2015. Noninterest expense increased primarily due to an increase to salaries and employee benefits as well as expenses for advertising and professional services.

Salaries and employee benefits increased $95,000, or 16.2%, to $682,000 for the three months ended March 31, 2016 from $587,000 for the three months ended March 31, 2015 as a result of hiring additional loan staff as well as normal salary increases and increases in payroll taxes. Data processing expenses increased $5,000, or 6.5%, to $82,000 for the three months ended March 31, 2016, from $77,000 for the three months ended March 31, 2015. Advertising expense increased $12,000, or 42.9%, to $40,000 for the three month period ended March 31, 2016 from $28,000 for the same period in 2015. The expense for professional services increased $23,000, or 85.2%, to $50,000 for the three month period ended March 31, 2016 from $27,000 for the same period in 2015.

Income Tax Expense. Income tax increased $29,000, or 49.2%, to $88,000 for the three months ended March 31, 2016 from $59,000 for the three months ended March 31, 2015. The effective tax rate for the three months ended March 31, 2016 and March 31, 2015 was 31.3% and 28.4%, respectively.

Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the three months ended March 31, 2016 and 2015 (unaudited). All average balances are daily average balances based upon amortized costs. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Yields/rates for the three months ended March 31, 2016 and 2015 are annualized.


	Three Months Ended March 31,								Three Months Ended March 31,
	2016								2015
	Average Outstanding Balance			Interest		Yield/Rate			Average Outstanding Balance			Interest		Yield/Rate
	(Dollars In Thousands)
Interest-earning assets:
Loans	$	162,457		$	1,453		3.57	%	$	133,866		$	1,163		3.47	%
Securities ⁽¹⁾		44,838			246		2.19	%		42,692			206		1.96	%
Other interest-earning assets		20,738			13		0.25	%		27,812			8		0.11	%

Total interest-earning assets		228,033			1,712		3.00	%		204,370			1,377		2.70	%

Non-interest earning assets		7,680								7,261

Total assets	$	235,713							$	211,631

Interest-bearing liabilities:
Deposits:
Savings accounts	$	32,911		$	18		0.22	%	$	31,444		$	15		0.19	%
Certificates of deposit		92,601			307		1.33	%		70,814			246		1.39	%
Money market accounts		35,207			32		0.36	%		37,012			35		0.38	%
NOW accounts		15,411			4		0.10	%		13,027			3		0.09	%

Total interest-bearing deposits		176,130			361		0.82	%		152,297			299		0.78	%
Borrowings		—			—					—			—

Total interest-bearing liabilities		176,130			361		0.82	%		152,297			299		0.78	%
Demand deposit accounts		14,067								12,942
Other noninterest-bearing liabilities		515								817

Total liabilites		190,712								166,056
Stockholders’ equity		45,001								45,575

Total liabilities and stockholders’ equity	$	235,713							$	211,631

Net interest income				$	1,351							$	1,078

Net interest rate spread ⁽²⁾							2.18	%							1.92	%
Net interest-earning assets ⁽³⁾	$	51,903							$	52,073

Net interest margin ⁽⁴⁾							2.37	%							2.11	%
Average of interest-earning assets to interest-bearing liabilities		129.47	%							134.19	%

(1)	No tax equivalent adjustment was applied to tax exempt income for the three months ended March 31, 2016 and 2015 as the amount is not significant.

(2)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3)	Net interest - earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4)	Net interest margin represents net interest income as a percentage of average interest-earning assets.

Rate/Volume Analysis. The following table presents the effects of changing interest rates and volumes on our net interest income for the time period indicated. The rate column shows the effects attributable to changes in rate (change in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (change 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, 2016 vs. 2015
	(In Thousands)
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
Interest-earning assets:
Loans (1)	$	256		$	34		$	290
Securities (2)		12			28			40
Other interest-earning assets (3)		(1	)		6			5

Total interest-earning assets		267			68			335

Interest-bearing liabilities
Deposits:
Savings accounts		1			2			3
Certificates of deposit		71			(10	)		61
Money market accounts		(1	)		(2	)		(3	)
NOW accounts		1			—			1

Total interest-bearing deposits		72			(10	)		62
Borrowings		—			—			—

Total interest-bearing liabilities		72			(10	)		62

Change in net interest income	$	195		$	78		$	273

(1)	Includes non-accrual loans and interest received on such loans, and loans held-for-sale.

(2)	Includes short-term investments.

(3)	Includes Federal Home Loan Bank of Boston Stock, deposits with Cooperative Central Bank, and available-for-sale securities.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable, as the Registrant is a smaller reporting company.

Item 4.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2016, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

We are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Bank’s or the Company’s financial condition or results of operations.

Item 1A.

Risk Factors

Not applicable, as the Registrant is a smaller reporting company.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Sales of Unregistered Securities. Not applicable.

(b)

Use of Proceeds. Not applicable

(c)

The Company’s repurchases of its common stock during the first quarter of 2016 were as follows:


Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2016 to January 31, 2016		13,600	$	15.05		—		227,400
February 1, 2016 through February 29, 2016		72,000		15.05		—		155,400
March 1, 2016 through March 31, 2016		—		—		—		155,400

Total		85,600	$	15.05		—

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits


31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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.


						MELROSE BANCORP, INC.

Date: May 11, 2016						/s/ Jeffrey D. Jones
						Jeffrey D. Jones
						President and Chief Executive Officer

Date: May 11, 2016						/s/ Diane Indorato
						Diane Indorato
						Senior Vice President and Chief Financial Officer

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company