Melrose Bancorp, Inc. - FORM 10-K

Melrose Bancorp, Inc. - FORM 10-K - March 21, 2017

Attached files

Attached files

Melrose Bancorp, Inc. Reports

file	filename
EX-32 - EX-32 - Melrose Bancorp, Inc.	d333128dex32.htm
EX-31.2 - EX-31.2 - Melrose Bancorp, Inc.	d333128dex312.htm
EX-31.1 - EX-31.1 - Melrose Bancorp, Inc.	d333128dex311.htm
EX-23 - EX-23 - Melrose Bancorp, Inc.	d333128dex23.htm
EX-21 - EX-21 - Melrose Bancorp, Inc.	d333128dex21.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal ended December 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 number: 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)

Registrant’s telephone number, including area code: (781) 665-2500

Securities registered pursuant to Section 12(b) of the Act: None

Common Stock, par value $0.01 per share

The NASDAQ Capital Market

(Title of each class to be registered)

(Name of each exchange on which

each class is to be registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒

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 ☒ NO ☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, 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 ☒ NO ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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 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 Act). YES ☐ NO ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2016 ($15.52), was approximately $31.9 million.

As of March 21, 2017, there were 2,602,079 issued and outstanding shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of Part III of this 10-K are referenced to the 2016 proxy statement.

TABLE OF CONTENTS


ITEM 1.	BUSINESS	1

ITEM 1A.	RISK FACTORS	32

ITEM 1B.	UNRESOLVED STAFF COMMENTS	32

ITEM 2.	PROPERTIES	32

ITEM 3.	LEGAL PROCEEDINGS	32

ITEM 4.	MINE SAFETY DISCLOSURES	32

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	33

ITEM 6.	SELECTED FINANCIAL DATA	34

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	34

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	44

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	44

ITEM 9A	CONTROLS AND PROCEDURES	44

ITEM 9B.	OTHER INFORMATION	45

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	45

ITEM 11.	EXECUTIVE COMPENSATION	45

ITEM 12.	SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	45

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	45

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	45

ITEM 15	FORM 10-K SUMMARY	45

ITEM 16.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	46

PART I

This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” 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 asset quality of our loan and investment portfolios; and

•

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations 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. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.

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.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

ITEM 1.

Business

General

Melrose Bancorp, Inc.

Melrose Bancorp, Inc. (“Melrose Bancorp” or the “Company”) was incorporated in the State of Maryland in February 2014 for the purpose of becoming the bank holding company for Melrose Cooperative Bank (the “Bank”), upon consummation of the Bank’s mutual to stock conversion. The conversion was consummated in October 2014 at which time Melrose Bancorp became the registered bank holding company of the Bank. In connection with the conversion, the Company sold 2,723,409 shares of common stock, at an offering price of $10 per share, and issued an additional 106,170 shares of its common stock to the Melrose Cooperative Bank Foundation, resulting in an aggregate issuance of 2,829,579 shares of common stock. The net proceeds from the stock offering, net of offering costs of $1,716,000, amounted to $25,518,000. The Company’s stock began trading on October 22, 2014 on the NASDAQ Capital Market under the symbol “MELR”. To date, other than holding all of the Bank’s issued and outstanding stock and making a loan to the Bank’s employee stock ownership plan, the Company is not engaged in any material business.

At December 31, 2016, Melrose Bancorp had consolidated assets of $268.6 million, liabilities of $225.3 million and stockholders’ equity of $43.3 million.

Melrose Bancorp uses the support staff and offices of Melrose Cooperative Bank and pays Melrose Cooperative Bank for these services. If we expand or change our business in the future, we may hire our own employees although we do not expect that this will happen in the near future.

Melrose Bancorp is a registered bank holding company and is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System. Melrose Bancorp’s executive and administrative office is located at 638 Main Street, Melrose, Massachusetts 02176, and our telephone number at this address is (781) 665-2500. Our website address is www.melrosecoop.com. Information on this website should not be considered a part of this annual report.

Melrose Cooperative Bank

Melrose Cooperative Bank is a Massachusetts-chartered cooperative bank headquartered in Melrose, Massachusetts. Melrose Cooperative Bank was incorporated in 1890 and has operated continuously in or around the surrounding area of Melrose, Massachusetts since that time.

We provide financial services to individuals, families and businesses through our full-service banking office in Melrose, Massachusetts. 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 and home equity loans and lines of credit. To a much lesser extent, we also originate commercial real estate, construction and consumer loans. We offer a variety of deposit accounts to consumers and small businesses, including certificate of deposit accounts, savings accounts, money market accounts and demand and NOW accounts. We also offer online and mobile banking services. At December 31, 2016, the Bank had total assets of $263.9 million, total deposits of $216.6 million and total equity of $34.4 million.

Generally, we retain in our portfolio all adjustable-rate loans that we originate, as well as fixed-rate one- to four-family residential real estate loans with terms of less than 15 years. Consistent with prudent interest rate risk strategy and based upon the market and interest rate environment, we will consider holding in our portfolio longer term fixed-rate one- to four-family residential mortgage loans. Historically, as part of our interest rate risk strategy, we have sold our fixed-rate one- to four-family residential real estate loans with terms of 15 years or greater outside of our community reinvestment act (CRA) area on a servicing-released basis. During the years ended December 31, 2016 and 2015, we did not originate any loans for sale and sold no fixed-rate one- to four-family residential mortgage loans, including refinances. Consistent with our current interest rate risk strategy the bank started purchasing loans at the end of 2015. During the year ended December 31, 2016, the Bank purchased $31.4 million fixed-rate and adjustable-rate, one- to four-family residential real estate loans with terms of 15 and 30 years.

Reflecting our focus on our community, in connection with our mutual to stock conversion and stock offering which we consummated in October 2014, we established a charitable foundation called Melrose Cooperative Bank Foundation and funded it with $300,000 in cash and 106,170 shares of our common stock with an initial value of $1,061,700. The purpose of this foundation is to make contributions to support various charitable organizations operating in our community now and in the future.

Our website address is www.melrosecoop.com. Information on this website should not be considered a part of this annual report.

Market Area

We conduct our operations from our full-service banking office in Melrose, Massachusetts which is located in the greater Boston metropolitan area of Middlesex County. Melrose is a suburb located approximately seven miles north of Boston. We consider our primary deposit area to be Melrose and the surrounding towns and our primary lending market area to be Northeastern Massachusetts. While we occasionally make loans secured by properties located outside of our primary lending market, these loans are generally to borrowers with whom we have an existing relationship and who have a presence within our primary lending market.

The Boston metropolitan area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several significant mutual fund investment companies. Eastern Massachusetts also has many high technology companies employing personnel with specialized skills. These factors affect the demand for residential homes, multifamily apartments, office buildings, shopping centers, industrial warehouses and other commercial properties.

Based on the 2015 United States census, the Boston metropolitan area is the 10^th largest metropolitan area in the United States. Located adjacent to major transportation corridors, the Boston metropolitan area provides a highly diversified economic base, with major employment sectors ranging from services, manufacturing and wholesale/retail trade, to finance, technology and medical care. According to the United States Department of Labor, in November 2016, the Boston-Cambridge-Quincy, Massachusetts/New Hampshire Metropolitan Statistical Area had an unemployment rate of 2.5% compared to the national unemployment rate of 4.5% for December 2016.

Based on United States census from 2010 to 2015, the population of Middlesex County increased marginally from 1.50 million persons to 1.56 million persons. In 2015 the median household income for Middlesex County was $85,118 compared to median household income for Massachusetts of $68,563 and $55,775 for the United States.

Competition

We face significant competition within our market both in making loans and attracting deposits. Our market area has a high concentration of financial institutions, including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms, consumer finance companies and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies.

We are a small community savings institution and as of June 30, 2016 (the latest date for which information is available), our market share was 0.39% of total Federal Deposit Insurance Corporation (FDIC)-insured deposits in Middlesex County, Massachusetts making us the 38th largest out of 56 financial institutions in Middlesex County.

Lending Activities

Our principal lending activity is originating one- to four-family residential real estate loans and home equity loans and lines of credit. To a much lesser extent, we also originate commercial real estate loans, construction loans and consumer loans. In recent years, we have modestly increased our commercial real estate loans. Subject to market conditions and our asset-liability analysis, we expect to continue to increase our focus on commercial real estate loans in an effort to diversify our overall loan portfolio and increase the overall yield earned on our loans.

During 2016, due to the highly competitive market conditions and the bank’s strategic plan to increase the residential loan portfolio, we started purchasing fixed and adjustable rate one- to four-family residential real estate loans with terms of 15 and 30 years from two well-established mortgage companies. Prior to purchase the Bank underwrites the loans to ensure credit quality consistent with the Bank’s lending policy, and reviews all closing documentation. Loans are purchased up to the Bank’s legal lending limit, for properties located in Massachusetts and generally within our primary lending market. During the year ended December 31, 2016, the Bank purchased 46 one- to four-family residential real estate loans for $31.4 million, including the premiums paid of $372,000.

Consistent with the current market conditions and the strategic plan the bank did not originate for sale or sell any loans during the year ended December 31, 2016. Historically, we originated for sale and sold the majority of the fixed-rate, one- to-four-family residential real estate loans that we originate with terms of greater than 15 years outside of our CRA area, on a servicing-released, limited or no resource basis, while retaining shorter-term, fixed-rate and all adjustable-rate one- to four-family residential real estate loans in order to manage the duration and time to repricing of our loan portfolio.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio at the dates indicated.


	December 31,
	2016						2015						2014						2013						2012
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One-to four-family residential	$	168,111			78.7	%	$	132,237			82.3	%	$	118,144			87.9	%	$	118,328			89.4	%	$	112,914			89.5	%
Home equity loans and lines of credit		10,720			5.0			10,862			6.8			10,811			8.1			10,037			7.6			9,906			7.9
Commercial		23,011			10.7			13,251			8.2			2,462			1.8			2,052			1.5			1,918			1.6
Construction⁽¹⁾		11,738			5.5			4,303			2.6			2,787			2.1			1,871			1.4			1,189			0.9
Consumer loans		71			0.1			121			0.1			146			0.1			121			0.1			192			0.1

Total loans		213,651			100.0	%		160,774			100.0	%		134,350			100.0	%		132,409			100.0	%		126,119			100.0	%

Other Items:
Allowance for loan losses		(890	)					(580	)					(520	)					(510	)					(474	)
Deferred loan costs, net		32						109						80						96						104
Unamortized premiums		372						—						—						—						—

Net loans	$	213,165					$	160,303					$	133,910					$	131,995					$	125,749

(1)	Net of undisbursed proceeds on loans-in-process.

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2016. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Maturities are based on the final contractual payment date and do not reflect the effect of prepayments and scheduled principal amortization.


	One- to Four- Family Residential Loans					Home Equity Loans and Lines of Credit					Commercial Real Estate Loans					Construction Loans					Consumer Loans					Total
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During the Years Ending December 31,
2017	$	105		5.90	%	$	—		—	%	$	620		4.75	%	$	3,232		4.17	%	$	12		14.83	%	$	3,969		4.34	%
2018		151		4.55			55		3.50			—		—			3,174		4.25			4		4.99			3,384		4.25
2019		352		3.26			83		3.50			—		—			—		—			11		4.99			446		3.35
2020 to 2021		1,406		3.36			426		3.50			56		4.13			—		—			—		—			1,888		3.41
2022 to 2026		13,614		3.21			2,338		3.99			15,757		4.16			3,871		3.93			44		5.62			35,624		3.77
2027 to 2031		28,274		3.07			1,935		3.95			24		5.00			—		—			—		—			30,233		3.13
2032 and beyond		124,209		3.37			5,883		3.03			6,554		4.26			1,461		3.97			—		—			138,107		3.41

Total	$	168,111		3.31	%	$	10,720		3.43	%	$	23,011		4.21	%	$	11,738		4.09	%	$	71		7.02	%	$	213,651		3.46	%

The following table sets forth our fixed- and adjustable-rate loans at December 31, 2016 that are due after December 31, 2017.


	Due After December 31, 2017
	Fixed Rate		Adjustable		Total
	(In thousands)
Real estate loans:
One-to four-family residential	$	75,868	$	92,138	$	168,006
Home equity loans and lines of credit		2,327		8,393		10,720
Commercial		4,618		17,773		22,391
Construction		2,898		5,608		8,506
Consumer loans		15		44		59

Total	$	85,726	$	123,956	$	209,682

One- to Four-Family Residential Real Estate Lending. The focus of our lending is the origination of long-term loans secured by mortgages on owner-occupied one- to four-family residences. At December 31, 2016, $168.1 million, or 78.7%, of our total loan portfolio consisted of one- to four-family residential real estate loans. At that date, our average outstanding one- to four-family residential real estate loan balance was $247,000 and our largest outstanding residential loan had a principal balance of $2.2 million. At December 31, 2016, our 10 largest one- to four-family residential loans totaled $11.9 million. The majority of the one- to four-family residential real estate loans that we originate are secured by properties located in our primary lending area of Melrose and the surrounding towns. See “ – Originations, Sales and Purchases of Loans.”

Our one- to four-family residential real estate loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate one- to four- family residential real estate loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency (“FHFA”). We also originate loans above the FHFA limit, which are referred to as “jumbo loans.” We generally underwrite jumbo loans in a manner similar to conforming loans. During the years ended December 31, 2016 and 2015, we originated $9.2 million and $10.5 million of jumbo loans, respectively.

We originate both fixed-rate and adjustable-rate one- to four-family residential real estate loans. Our fixed-rate and adjustable-rate one- to four-family residential real estate loans are originated with terms of up to 30 years. Prior to January 2014, we offered a 40-year adjustable rate loan product. At December 31, 2016, $92.1 million, or 54.9%, of our one- to four-family residential real estate loans were adjustable-rate loans.

We originate our adjustable-rate one- to four-family residential real estate loans with initial interest rate adjustment periods of three, five, seven and 10 years, based on changes in a designated market index. These loans are limited to a 200 basis point initial increase in their interest rate, a 200 basis point increase in their interest rate annually after the initial adjustment, and a maximum upward adjustment of 600 basis points over the life of the loan. We determine whether a borrower qualifies for an adjustable-rate mortgage loan based on secondary market guidelines.

We originate one- to four-family residential mortgage loans with loan-to-value ratios of up to 80% without private mortgage insurance. We originate loans with loan-to-value ratios of up to 97% with private mortgage insurance and where the borrower’s monthly debt service does not exceed 43% of the borrower’s monthly cash-flow.

Certain of our one- to four-family residential real estate loans are for the purchase of residential condominiums. Consistent with our risk analysis, we will not finance more than 15% of the units in any condominium project. In addition and consistent with Fannie Mae and Freddie Mac guidelines, generally, we will not make a loan for the purchase of a condominium in a new condominium project unless at least 60% of the total units in the project are sold or under a sales agreement prior to the loan closing.

Historically, we sold the majority of the fixed-rate one- to four-family residential real estate loans that we originate with terms of greater than 15 years outside of our CRA area. We base the amount of fixed-rate loans that we sell on our liquidity needs, asset/liability mix, loan volume, portfolio size and other factors. The majority of loans that we sold, are sold to the Massachusetts Housing Finance Agency and Northeast Home Loan with servicing released. Consistent with the current strategy, the Bank began purchasing one- to four- family residential loans from two well-established mortgage companies in our local market in the last quarter of 2015. During 2016, the Bank purchased $31.4 million in fixed and adjustable rate one- to four-family residential mortgage loans.

We generally do not offer “interest only” mortgage loans on one- to four-family residential real estate loans nor do we offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his loan, resulting in an increased principal balance during the life of the loan. Additionally, we do not offer “subprime loans” (loans that are made with low down-payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation).

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically reprice, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. During the year ended December 31, 2016, we originated 66 one-to-four family residential real estate loans totaling $34.6 million with adjustable rates of interest.

We evaluate both the borrower’s ability to make principal, interest and escrow payments and the value of the property that will secure the loan. Our one- to four-family residential real estate loans do not currently include prepayment penalties, are non-assumable and do not produce negative amortization. Our one- to four-family residential mortgage loans customarily include “due-on-sale” clauses giving us the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage. All borrowers are required to obtain title insurance for the benefit of Melrose Cooperative Bank. We also require homeowner’s insurance and fire and casualty insurance and, where circumstances warrant, flood insurance on properties securing real estate loans.

We offer on a limited basis one- to four-family residential real estate loans secured by non-owner occupied properties. Generally, we require personal guarantees from the borrowers on these properties, and we will not make loans in excess of 80% loan to value on non-owner-occupied properties.

Home Equity Loans and Lines of Credit. In addition to one- to four-family residential real estate loans, we offer home equity loans and lines of credit that are secured by the borrower’s primary or secondary residence. At December 31, 2016, we had $10.7 million, or 5.0%, of our total loan portfolio, in home equity loans and lines of credit. Home equity lines of credit totaled $10.1 million at December 31, 2016. At that date we also had $11.8 million of unused commitments related to home equity lines of credit.

Home equity loans and lines of credit are generally underwritten using the same criteria that we use to underwrite one- to four-family residential real estate loans. Home equity loans and lines of credit may be underwritten with a loan-to-value ratio of up to 80% when combined with the principal balance of the existing first mortgage loan. Our home equity loans are primarily originated with fixed rates of interest with terms of up to 20 years. Our home equity lines of credit are originated with adjustable-rates based on the prime rate of interest plus an applicable margin with a floor rate and require interest paid monthly.

Home equity loans and lines of credit are generally secured by junior mortgages and have greater risk than one- to four-family residential real estate loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure, after repayment of the senior mortgages, if applicable. When customers default on their loans, we attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity loans and lines of credit, decreases in real estate values could adversely affect our ability to fully recover the loan balance in the event of a default.

Commercial Real Estate Lending. Consistent with our strategy to enhance the yield and reduce the term to maturity of our loan portfolio, we offer commercial real estate loans. We hired an experienced commercial lender during the first quarter of 2015, seeking to increase our originations of commercial real estate loans. At December 31, 2016, we had $22.7 million in commercial real estate loans, representing 10.6% of our total loan portfolio. In addition to commercial real estate loans, we offer commercial lines of credit that are secured by the real estate investment properties. At December 31, 2016, we had $316,000, or 0.2% of our total loan portfolio, in commercial lines of credit. At that date we also had $1.7 million of unused commitments related to commercial lines of credit. The majority of the commercial real estate loans that we originate are secured by properties located in our primary lending area of Melrose and the surrounding towns. See “ – Originations, Sales and Purchases of Loans.”

Generally, our commercial real estate loans have terms and amortization periods of up to 30 years. Generally these loans have adjustable rates of interest tied to the U.S. Treasury index.

The majority of our commercial real estate loans are secured by multifamily residential real estate, office buildings or mixed-use properties located in Middlesex County and Suffolk County, Massachusetts.

We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service, generally at least 1.25 to 1). All commercial real estate loans are appraised by outside independent appraisers who are approved by the board of directors on an annual basis. Personal guarantees are generally obtained from the principals of commercial and multifamily real estate loans.

Commercial real estate loans entail greater credit risks compared to owner-occupied one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties.

Our regulatory limit on loans-to-one borrower was $5.0 million at December 31, 2016. We generally target commercial real estate loans with balances of up to the lesser of $4.0 million or our legal lending limit. At December 31, 2016, our average outstanding commercial real estate loan balance was $649,000 and our largest outstanding commercial real estate loan had a principal balance of $2.4 million. At December 31, 2016, our 10 largest loans totaled $14.1 million, all of which are commercial real estate loans.

Construction Loans. We also originate construction loans for one- to four-family residential real estate properties and commercial properties. At December 31, 2016, $11.7 million, or 5.5%, of our total loan portfolio, consisted of construction loans secured by one- to four-family residential real estate or commercial real estate.

Our construction loans are primarily secured by properties located within our primary market area. We generally do not originate speculative construction loans to contractors and builders to finance the construction and rehabilitation of residential or commercial properties.

Construction loans for one- to four-family residential real estate properties are generally originated with adjustable rates and a maximum loan to value ratio of 80%. Construction loans for commercial real estate are originated with a maximum loan to value ratio of 75%. At December 31, 2016, our largest construction loan had a principal balance of $2.4 million and was secured by commercial real estate in our market area. This loan was performing in accordance with its repayment terms at December 31, 2016.

Construction loans are “interest-only” loans during the construction period which typically does not exceed 12 months and may convert to permanent, amortizing financing following the completion of construction. Depending on the complexity of the construction project, the term of an “interest-only” construction loan may be extended up to an additional 12 months. At December 31, 2016, the additional unadvanced portions of these construction loans totaled $3.9 million.

We make construction loans for commercial properties, including commercial “mixed-use” buildings. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction, but are generally limited to 75% loan-to-completed-appraised-value ratio. Repayment of construction loans on residential properties is normally expected from the property’s eventual rental income, income from the borrower’s operating entity, the personal resources of the guarantor, or the sale of the subject property. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. We typically provide the permanent mortgage financing on our construction loans on income-producing properties and owner-occupied properties.

Generally, before making a commitment to fund a construction loan, we require an appraisal of the property by a state-certified or state-licensed appraiser. We review and inspect properties before disbursement of funds during the term of the construction loan.

Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. In the event we make a land acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

Consumer Lending. To a much lesser extent, we offer a variety of consumer loans to individuals who reside or work in our market area, including new and used automobile loans, unsecured overdraft lines of credit and loans secured by passbook accounts. At December 31, 2016, our consumer loan portfolio totaled $71,000 or 0.1%, of our total loan portfolio.

Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

Consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are primarily dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Originations, Sales and Purchases of Loans

Our loan originations are generated by our loan personnel operating at our banking office. All loans we originate are underwritten pursuant to our policies and procedures. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of real estate loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our real estate loan originations can vary from period to period.

In the low interest rate environment that has existed in recent years, we generally originated for sale and sold the majority of the fixed-rate, one- to four-family residential real estate loans that we originate with terms of greater than 15 years outside of our CRA area, on a servicing-released, limited or no recourse basis, while retaining shorter-term fixed-rate and all adjustable-rate one- to four-family residential real estate loans in order to manage the duration and time to repricing of our loan portfolio. We consider our balance sheet as well as market conditions on an ongoing basis in making decisions as to whether to hold loans we originate for investment or to sell such loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. For the year ended December 31, 2016, we did not sell any one- to four-family residential real estate loans, and based on our current strategy we opted to hold for investment all long term fixed-rate loans we originated in 2016.

From time to time, we may purchase loan participations secured by properties within and outside of our primary lending market area in which we are not the lead lender. In these circumstances, we follow our customary loan underwriting and approval policies. During the year ended December 31, 2016, the Bank purchased two participation loans totaling $3.1 million. At December 31, 2016, we had a total of five participation loans purchased, and our outstanding balance amounted to $4.2 million. We may participate out portions of a loan that exceed our loans-to-one borrower legal lending limit and for risk diversification.

At December 31, 2016, we had one commercial real estate loan participation in which we were the lead bank, with an outstanding balance of $2.9 million, of which we own $1.9 million and sold the remaining $1.0 million. In line with the Bank’s current strategy we also started purchasing whole one- to four- family residential loans during the fourth quarter of 2015. During 2016, the Bank purchased $31.4 million in one- to four-family residential real estate loans.

The following table shows our loan originations and principal repayment activities during the years indicated. During 2016 and 2015, the bank did not originate for sale or sell any loans. During 2014, 2013, 2012 we originated for sale and sold $1.8 million, $5.2 million, and $4.3 million, respectively, of loans held-for-sale. These loans are not included in the table.


	Years Ended December 31,
	2016			2015			2014			2013			2012
	(In thousands)
Total loans at beginning of period	$	160,774		$	134,350		$	132,409		$	126,119		$	114,979

Loans originated:
Real estate loans:
One-to four-family residential		30,877			30,809			19,847			23,616			33,084
Home equity loans and lines of credit		1,598			1,853			662			392			681
Commercial		11,811			9,625			—			—			—
Commercial lines of credit		—			50			—			—			—
Construction		6,752			3,015			2,040			1,308			1,390
Consumer loans		19			37			122			17			108

Total loans originated		51,057			45,389			22,671			25,333			35,263

Other:
Loans purchased:
One-to four-family residential		31,400			2,835			—			—			—
Commercial		3,100			—			—			—			—
Principal repayments		(39,859	)		(29,863	)		(30,195	)		(26,932	)		(31,369	)
Advances on construction and home equity lines of credit		7,179			8,063			9,465			7,889			7,246

Net loan activity		52,877			26,424			1,941			6,290			11,140

Total loans at end of period	$	213,651		$	160,774		$	134,350		$	132,409		$	126,119

Loan Approval Procedures and Authority

The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by statute, to 15% of our capital, in accordance with the FDIC regulations, undivided profits and, after the completion of the conversion, capital stock. Loans secured by a first mortgage on residential property occupied by the borrower are excluded from this limit. At December 31, 2016, our regulatory limit on loans-to-one borrower was $5.0 million. However, we maintain an internal loans-to-one borrower limit that is below the regulatory limit. At December 31, 2016, our internal limit was $4.0 million. At December 31, 2016, our largest lending relationship consisted of three loans totaling $3.5 million secured by commercial real estate in our market area. This loan relationship was performing in accordance with its original repayment terms at December 31, 2016. Our second largest relationship at this date was four loans totaling $3.5 million secured by commercial real estate in our market area that was performing in accordance with its terms.

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed or certified appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.

The board of directors has overall responsibility for our lending policy, and the board reviews this policy at least annually. The loan committee (the “Security Committee”) of the board of directors is comprised of between three and five members of the board, and additionally, our Vice President of Lending is a non-voting member of the Security Committee. All loans require ratification of the board of directors at a regularly scheduled meeting.

Our President and our Vice President – Lending each have individual approval authority of up to the Federal Housing Finance Authority (“FHFA”) conforming guidelines for one- to four-family residential real estate loans. One- to four-family residential real estate loans above the current FHFA limit, up to $1.0 million, require the approval of at least two authorized employees or Security Committee members. All loans or relationships that are greater than $1.0 million require the approval of the full board of directors. All commercial real estate loans regardless of amount require the approval of the Security Committee. Additionally, our policies and loan approval limits which are established by the board of directors provide various lending approval authority for other designated individual employees or employees acting together.

Generally, we require title insurance on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. We also require flood insurance if the improved property is determined to be in a flood zone area.

Delinquencies and Non-Performing Assets

Delinquency Procedures. When a borrower fails to make required payments on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to current status. We generally send a written notice of non-payment to the borrower 15, 30, 60 and 90 days after a loan is first past due. We will additionally try to contact the borrower by telephone after the 30th day after the due date.

Generally, when a loan becomes 90 days past due, the loan is turned over to our attorneys to ensure that further collection activities are conducted in accordance with applicable laws and regulations. All loans past due 90 days are put on non-accrual and reported to the board of directors monthly. If our attorneys do not receive a response from the borrower, or if the terms of any payment plan established are not followed, then foreclosure proceedings will be implemented. Management submits a delinquent loan report detailing loans 30 days or more past due to the board of directors on a monthly basis.

When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on an appraisal typically obtained before the foreclosure process is completed. Subsequent decreases in the value of the property are charged to operations. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies by type and amount at the periods indicated.


	Loans Delinquent For
	30-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	(Dollars in thousands)
At December 31, 2016
Real estate loans:
One-to four-family residential		3	$	527		—	$	—		3	$	527
Home equity loans and lines of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—

Total		3	$	527		—	$	—		3	$	527

At December 31, 2015
Real estate loans:
One-to four-family residential		3	$	600		1	$	68		4	$	668
Home equity loans and lines of credit		—		—		1		197		1		197
Commercial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—

Total		3	$	600		2	$	265		5	$	865

At December 31, 2014
Real estate loans:
One-to four-family residential		6	$	939		1	$	113		7	$	1,052
Home equity loans and lines of credit		1		198		1		4		2		202
Commercial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Consumer loans		1		1		—		—		1		1

Total		8	$	1,138		2	$	117		10	$	1,255

At December 31, 2013
Real estate loans:
One-to four-family residential		12	$	1,384		1	$	102		13	$	1,486
Home equity loans and lines of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—

Total		12	$	1,384		1	$	102		13	$	1,486

At December 31, 2012
Real estate loans:
One-to four-family residential		6	$	1,086		1	$	50		7	$	1,136
Home equity loans and lines of credit		1		75		—		—		1		75
Commercial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—

Total		7	$	1,161		1	$	50		8	$	1,211

At December 31, 2011
Real estate loans:
One-to four-family residential		8	$	1,020		—	$	—		8	$	1,020
Home equity loans and lines of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Consumer loans		2		3		—		—		2		3

Total		10	$	1,023		—	$	—		10	$	1,023

Nonperforming Assets. The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.


	At December 31,
	2016			2015			2014			2013			2012
	(Dollars in thousands)
Nonaccrual loans:
Real estate loans:
One- to four-family residential	$	9		$	68		$	421		$	336		$	383
Home equity loans and lines of credit		—			197			202			—			—
Commercial		—			—			—			—			—
Construction		—			—			—			—			—
Consumer loans		—			—			—			—			—

Total non-accrual loans		9			265			623			336			383

Loans delinquent 90 days or greater and still accruing:
Real estate loans:
One- to four-family residential		—			—			—			—			—
Home equity loans and lines of credit		—			—			—			—			—
Commercial		—			—			—			—			—
Construction		—			—			—			—			—
Consumer loans		—			—			—			—			—

Total loans delinquent 90 days or greater and still accruing		—			—			—			—			—

Total non-performing loans		9			265			623			336			383

Other real estate owned and foreclosed assets:
Real estate loans:
One- to four-family residential		—			—			—			—			205
Home equity loans and lines of credit		—			—			—			—			—
Commercial		—			—			—			—			—
Construction		—			—			—			—			—
Consumer loans		—			—			—			—			—

Total real estate owned and foreclosed assets		—			—			—			—			205

Total non-performing assets		9			265			623			336			588

Performing troubled debt restructurings		—			—			—			—			—

Total non-performing assets and performing troubled debt restructurings	$	9		$	265		$	623		$	336		$	588

Ratios:
Non-performing loans as a percentage of total loans		0.00	%		0.16	%		0.46	%		0.25	%		0.30	%
Non-performing assets as a percentage of total assets		0.00	%		0.11	%		0.29	%		0.17	%		0.32	%

For the year ended December 31, 2016, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $80, and there was no interest income recognized on such loans for the year ended December 31, 2016.

Non-Performing Loans. At December 31, 2016, we had one loan secured by one- to four-family residential real estate totaling $9,000 that was on non-accrual status.

We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans generally is applied against principal or interest and is recognized on a cash basis. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Troubled Debt Restructurings. Loans are classified as troubled debt restructured when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The modification of the terms of such loans would generally be one of the following: a reduction of the stated interest rate of the loan for some period of time, an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, or an extension of time to make payments with the delinquent payments added to the principal of the loan. We had no troubled debt restructurings at or during the years ended December 31, 2016 and 2015.

Classified Assets. Federal regulations provide that each insured savings institution classify its assets on a regular basis. In addition, in connection with examination of insured institutions, federal and Massachusetts banking regulators have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve or charge-off is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory agencies, which may require the establishment of additional general or specific loss allowances.

In accordance with our loan policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or delinquency status, or if the loan possesses weaknesses although currently performing. If a loan deteriorates in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.” Management reviews the status of each loan on our delinquency report on a monthly basis.

The following table sets forth our amounts of classified assets and assets designated as special mention at the dates indicated.


	At December 31,
	2016		2015		2014		2013		2012
	(In thousands)
Classified Assets:
Substandard ⁽¹⁾	$	287	$	563	$	596	$	324	$	—
Doubtful		—		—		—		—		—
Loss		—		—		—		—		—

Total classified assets	$	287	$	563	$	596	$	324	$	—

Special Mention	$	—	$	—	$	—	$	—	$	—

(1)

As of December 31, 2016 the one non-accrual loan totaling $9,000 was not classified because management expects full payment of principal and interest. As of December 31, 2015 and 2014 all non-accrual loans were classified. As of December 31, 2013, one non-accrual loan totaling $12,000 was not classified because management expected full payment of principal and interest.

Other Loans of Concern. There were no other loans at December 31, 2016 that are not already disclosed where there is information about possible credit problems of borrowers that caused management to have serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.

Allowance for Loan Losses. We maintain the allowance through provisions for loan losses that we charge to income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. Recoveries on loans charged-off are restored to the allowance for loan losses. The allowance for loan losses is maintained at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio both probable and reasonable to estimate at each reporting date. The level of allowance for loan losses is based on management’s periodic review of the collectability of the loans principally in light of our historical experience, augmented by the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current and anticipated economic conditions in the primary lending area. We evaluate our allowance for loan losses quarterly. We did not make any changes to our policies or methodology pertaining to the general component of our allowance for loan losses during 2016. We will continue to monitor all items involved in the allowance calculation closely.

We recorded provisions for loan losses of $310,000 and $60,000 for the years ended December 31, 2016 and 2015, respectively. The allowance for loan losses was $890,000, or 0.4% of total loans, at December 31, 2016, compared to $580,000, or 0.4% of total loans, at December 31, 2015. At these dates, the level of our allowance reflects management’s view of the risks inherent in the loan portfolio.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and management may determine that increases in the allowance are necessary if the quality of any portion of our loan portfolio deteriorates as a result. Furthermore, as an integral part of its examination process, the Massachusetts Division of Banks and the FDIC periodically review our allowance for loan losses. The Massachusetts Division of Banks and/or the FDIC may require that we increase our allowance based on its judgments of information available to it at the time of its examination. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

Consistent with our business strategy, we have increased our originations of commercial real estate loans. These types of loans generally bear higher risk than our one- to four-family residential real estate loans. Accordingly, we would expect to increase our allowance for loans losses in the future as the balance of these types of loans increase in our portfolio.

Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.


	At or For the Years Ended
	December 31,
	2016			2015			2014			2013			2012
	(Dollars in thousands)
Balance at beginning of period	$	580		$	520		$	510		$	474		$	439

Charge offs:
Real estate loans:
One-to four-family residential		—			—			—			—			—
Home equity loans and lines of credit		—			—			—			(1	)		—
Commercial		—			—			—			—			—
Construction		—			—			—			—			—
Consumer loans		—			—			—			(1	)		(1	)

Total charge-offs		—			—			—			(2	)		(1	)

Recoveries:
Real estate loans:
One-to four-family residential		—			—			—			—			—
Home equity loans and lines of credit		—			—			—			—			—
Commercial		—			—			—			—			—
Construction		—			—			—			—			—
Consumer loans		—			—			—			1			—

Total recoveries		—			—			—			1			—

Net (charge-offs) recoveries		—			—			—			(1	)		(1	)

Provision for loan losses		310			60			10			37			36

Balance at end of period	$	890		$	580		$	520		$	510		$	474

Ratios:
Net (charge-offs) recoveries as a percentage of average loans outstanding		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Allowance for loan losses as a percentage of non-performing loans at period end		9,888.89	%		218.87	%		83.47	%		151.79	%		123.76	%
Allowance for loan losses as a percentage of total loans receivable at period end ⁽¹⁾		0.42	%		0.36	%		0.39	%		0.39	%		0.38	%

(1)	Total loans does not include net deferred loan costs.

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.


	At December 31,
	2016					2015					2014					2013					2012
	Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Allocated allowance:
Real estate loans:
One- to four-family residential	$	418		78.7	%	$	331		82.3	%	$	414		87.9	%	$	414		89.4	%	$	392		89.5	%
Home equity loans and lines of credit		49		5.0			49		6.8			58		8.1			55		7.6			53		7.9
Commercial		276		10.7			150		8.2			25		1.8			20		1.5			19		1.5
Construction		117		5.5			40		2.6			21		2.1			14		1.4			9		0.9
Consumer loans		1		0.1			1		0.1			1		0.1			1		0.1			1		0.2

Total allocated allowance		861		100.0	%		571		100.0	%		519		100.0	%		504		100.0	%		474		100.0	%

Unallocated allowance		29					9					1					6					—

Total	$	890				$	580				$	520				$	510				$	474

Investment Activities

General. Our investment policy is established by the board of directors. The objectives of the policy are to: (i) provide and maintain liquidity within the guidelines of the Massachusetts banking laws and regulations for loan demand and deposit fluctuations, and to allow us to alter our liquidity position to meet both day-to-day and long-term changes in assets and liabilities; (ii) manage interest rate risk in accordance with our interest rate risk policy; (iii) provide collateral for pledging requirements; (iv) maximize return on our investments; and (v) maintain a balance of high quality diversified investments to minimize risk.

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises and municipal governments, deposits at the Federal Home Loan Bank of Boston, certificates of deposit of federally insured institutions, investment grade corporate bonds and investment grade marketable equity securities. We also are required to maintain an investment in Federal Home Loan Bank of Boston stock. While we have the authority under applicable law to invest in derivative securities, we have not invested in derivative securities.

At December 31, 2016, our investment portfolio consisted primarily of corporate debt securities, U.S. government and federal agency obligations, preferred stock, mortgage-backed securities, municipal obligations and marketable equity securities.

Our investment policy is reviewed annually by our board of directors and all policy changes recommended by management must be approved by the board. Authority to make investments under the approved guidelines are delegated to appropriate officers. While general investment strategies are developed and authorized by the board, the execution of specific actions with respect to securities held by Melrose Bancorp, Inc. and its subsidiary, rests with the President and Chief Executive Officer within the scope of the established investment policy.

We utilize an independent financial institution to provide us with portfolio accounting services, including a monthly portfolio performance analysis of our securities portfolio. These reports are reviewed by management in making investment decisions. The Asset/Liability Committee, comprised of senior management and one outside board member, reviews a summary of these reports on a quarterly basis.

At the time of purchase, we designate a security as held-to-maturity, available-for-sale, or trading, depending on our ability and intent. Securities available-for-sale or trading are reported at fair value, while securities held to maturity are reported at amortized cost. All of our securities are currently classified as available-for-sale. Some of our securities are callable by the issuer or contain other features of financial engineering. Although these securities may have a yield somewhat higher than the yield of similar securities without such features, these securities are subject to the risk that they may be redeemed by the issuer prior to maturing in the event general interest rates decline. At December 31, 2016, we had $8.0 million of securities which were subject to redemption by the issuer prior to their stated maturity.

We review equity and debt securities with significant declines in fair value on a periodic basis to determine whether they should be considered temporarily or other than temporarily impaired. In making these determinations, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) our intent not to sell the security and whether it is more likely than not that we will be required to sell the debt security before its anticipated recovery. For any debt security with a fair value less than its amortized cost basis, the Company will determine whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, the Bank will recognize a full impairment charge to earnings. If a decline in the fair value of a debt security is determined to be other than temporary, the amount of impairment is split into two components as follows: (1) other than temporary impairment related to credit loss, which must be recognized in the income statement and (2) other than temporary impairment related to other factors, which is recognized in other comprehensive (loss) income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

During 2016, there were no securities declared other-than-temporarily impaired. During 2015, there were five securities that were declared other-than-temporarily impaired, and a total loss of $461,000 was realized.

At December 31, 2016, our corporate bond portfolio consisted of investment grade securities with maturities generally shorter than five years. Our investment policy provides that we may invest up to 15% of our tier-one risk-based capital in corporate bonds from individual issuers which, at the time of purchase, are within the three highest investment-grade ratings from Standard & Poor’s or Moody’s. The maturity of these bonds may not exceed 10 years, and there is no aggregate limit for this security type. Corporate bonds from individual issuers with investment-grade ratings, at the time of purchase, below the top three ratings are limited to the lesser of 1% of our total assets or 15% of our tier-one risk-based capital and must have a maturity of less than one year. Aggregate holdings of this security type cannot exceed 5% of our total assets. Bonds that subsequently experience a decline in credit rating below investment grade are monitored at least quarterly.

In 2016, the Bank changed its investment strategy in regard to marketable equity securities based on the January 2016, Financial Accounting Standards Board (FASB) Accounting Standard Update (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 to include a requirement that equity investments (expect those accounted for under the equity method of accounting or those that result in consolidation of investee) be measured at fair value with change in fair value recognized in net income effective for fiscal years beginning after December 15, 2018. In January 2016, at the time the ASU was issued, the Bank had two equity investments with Vanguard, with a fair-value of $4.9 million, and unrealized holding gains of $2.1 million. At this time, based on the current gain position, the Bank decided to sell off all shares of the Vanguard equity investments evenly over a three year period, prior to the effective date of ASU 2016-01. During the year ended December 31, 2016, 23,690 shares of Vanguard stock were sold, proceeds from the sale were $1.9 million, and realized gains on the sale were $940,000.

Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is non-taxable. Applicable regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. At December 31, 2016, we had $5.9 million in bank-owned life insurance.

Securities Portfolio. The following table sets forth the composition of our investment securities portfolio at the dates indicated. At the dates presented, all investment securities were classified as available-for-sale.


	At December 31,
	2016				2015				2014
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Securities available-for-sale:
Debt securities:
U.S. Government and federal agency obligations	$	5,819	$	5,688	$	8,851	$	8,770	$	4,007	$	3,990
Debt securities issued by states of the United States and political subdivisions of the states		2,695		2,656		2,408		2,398		544		540
Corporate bonds and notes		12,537		12,493		13,540		13,508		15,238		15,241
Preferred stock		3,000		2,938		3,000		3,029		3,000		2,904
Mortgage-backed securities		1,498		1,432		2,232		2,166		2,138		2,115

Total debt securities		25,549		25,207		30,031		29,871		24,927		24,790

Marketable equity securities:
Mutual funds:
GNMA funds		—		—		4,145		4,123		4,293		4,094
Corporate bonds		—		—		3,103		3,103		3,187		3,077
Global funds		—		—		—		—		932		854
Short-term bonds		3,517		3,520		3,453		3,457		3,463		3,429
Stock market index funds		1,555		3,104		2,482		4,589		2,905		5,531

Total marketable equity securities		5,072		6,624		13,183		15,272		14,780		16,985

Total securities available-for-sale	$	30,621	$	31,831	$	43,214	$	45,143	$	39,707	$	41,775

Securities Portfolio Maturities and Yields. The composition and maturities of the debt securities portfolio, excluding our marketable equity securities and preferred stock without maturities, at December 31, 2016 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect scheduled amortization or the impact of prepayments or redemptions that may occur.


	One Year or Less					More than One Year through Five Years					More than Five Years through Ten Years					More than Ten Years					Total Debt Securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Securities available-for-sale:
Debt securities:
U.S. Government and federal agency obligations	$	500		0.75	%	$	2,500		1.25	%	$	—		—	%	$	1,256		2.33	%	$	4,256		2.16	%
Debt securities issued by states of the United States and political subdivisions of the states		—		—			269		4.00			1,471		3.31			955		2.79			2,695		3.19
Corporate bonds and notes		2,669		2.51			9,373		1.74			495		1.38			—		—			12,537		1.89
Preferred stock with maturities		—		—			1,000		3.50			—		—			1,000		4.88			2,000		4.19
Mortgage-backed securities		—		—			—		—			379		7.25			1,119		3.32			1,498		4.31
Asset-backed securities		—		—			—		—			328		3.64			1,235		4.19			1,563		3.70

Total ⁽¹⁾	$	3,169		2.23	%	$	13,142		1.83	%	$	2,673		3.55	%	$	5,565		3.36	%	$	24,549		2.42	%

(1)	Not included in the above table is a preferred stock classified as a debt security that has no stated maturity, an amortized cost of $1.0 million, a fair value of $931,000 and a yield of 5.20%.

Sources of Funds

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We have not historically used borrowings, but during 2016 the bank borrowed $10 million from the FHLB. The borrowings consisted of two fixed rate advances of $5.0 million at interest rates of 1.42% and 1.48%. In addition, we receive funds from scheduled loan payments, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including noninterest-bearing demand accounts, money market accounts, savings accounts, NOW accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. Historically we have not utilized, and currently do not hold, any brokered deposits. At December 31, 2016, our core deposits, which are deposits other than certificates of deposit, were $101.2 million, representing 47.1% of total deposits.

Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers’ demands. Our ability to gather deposits is impacted by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products. We believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates.

The following tables set forth the distribution of total deposit accounts, by account type, for the periods indicated.


									For the Years Ended December 31,
	2016								2015								2014
	Average Balance		Percent			Weighted Average Rate			Average Balance		Percent			Weighted Average Rate			Average Balance		Percent			Weighted Average Rate
	(Dollars in thousands)
Deposit Type:
Demand deposits	$	16,280		7.9	%		—	%	$	13,604		7.9	%		—	%	$	14,197		8.1	%		—	%
Savings accounts		32,750		16.0			0.21			31,574		18.4			0.20			31,991		18.3			0.20
Certificates of deposit		106,624		51.9			1.31			77,231		45.1			1.38			74,545		42.7			1.39
Money market accounts		35,731		17.4			0.37			35,072		20.5			0.37			41,250		23.7			0.37
NOW		13,960		6.8			0.10			13,960		8.1			0.10			12,528		7.2			0.09

Total	$	205,345		100.0	%		0.86	%	$	171,441		100.0	%		0.81	%	$	174,511		100.0	%		0.79	%

The following table sets forth our certificates of deposit classified by interest rate as of the dates indicated.


	At December 31,
	2016		2015		2014
	(In thousands)
Interest Rate:
Less than 1.00%	$	12,719	$	18,421	$	25,493
1.00% to 1.99%		97,831		66,077		36,906
2.00% to 2.99%		3,026		2,838		8,847
3.00% and greater		30		—		—

Total	$	113,606	$	87,336	$	71,246

The following table sets forth the amount and maturities of our certificates of deposit at December 31, 2016.


	At December 31, 2016
	Period to Maturity
	Less than or equal to One Year		More than One to Two Years		More than Two to Three Years		More than Three Years		Total		Percent of Total
	(In thousands)
Interest Rate:
Less than 1.00%	$	12,509	$	210	$	—	$	—	$	12,719		11.2	%
1.00% to 1.99%		49,790		43,339		1,825		2,877		97,831		86.1
2.00% to 2.99%		1,194		1,832		—				3,026		2.7
3.00% and greater		30		—		—		—		30		0.0

Total	$	63,523	$	45,381	$	1,825	$	2,877	$	113,606		100.0	%

As of December 31, 2016, the aggregate amount of our outstanding certificates of deposit in amounts greater than or equal to $100,000 was $69.9 million. The following table sets forth the maturity of these certificates as of December 31, 2016.


	At December 31, 2016		At December 31, 2015		At December 31, 2014
	(In thousands)		(In thousands)		(In thousands)
Three months or less	$	7,253	$	3,371		2,178
Over three months through six months		13,307		2,671		14,385
Over six months through one year		19,328		23,988		2,939
Over one year to three years		29,185		17,739		2881.14077
Over three years		810		648		20204.80763

Total	$	69,883	$	48,417		32,099

Borrowing Capacity. As a member of the Federal Home Loan Bank of Boston, Melrose Cooperative Bank is eligible to obtain advances upon the security of the Federal Home Loan Bank stock owned and certain residential mortgage loans, provided certain standards related to credit-worthiness have been met. Federal Home Loan Bank advances are available pursuant to several credit programs, each of which has its own interest rate and range of maturities. The remaining maximum borrowing capacity with the FHLB at December 31, 2016 was approximately $102.5 million subject to the purchase of additional FHLB stock. The company had borrowings of $10.0 million at December 31, 2016 and no borrowings at December 31, 2015. Additionally, at December 31, 2016, we had the ability to borrow up to $5.0 million on a Fed Funds line of credit with the Co-Operative Central Bank.

Subsidiary and Other Activities

Melrose Bancorp, Inc. has one subsidiary, Melrose Cooperative Bank.

Melrose Cooperative Bank has one subsidiary, MCBSC, Inc., a Massachusetts corporation, which is engaged in the buying, selling and holding of investment securities. The income earned on MCBSC, Inc.’s securities is subject to a significantly lower rate of state tax than that assessed on income earned on securities maintained at Melrose Cooperative Bank. At December 31, 2016, MCBSC, Inc. had total assets of $21.9 million, almost all of which were in securities.

Expense and Tax Allocation

Melrose Cooperative Bank has entered into an agreement with Melrose Bancorp to provide it with certain administrative support services for compensation not less than the fair market value of the services provided. In addition, Melrose Cooperative Bank and Melrose Bancorp have entered into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.

Personnel

As of December 31, 2016, we had 27 full-time equivalent employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.

Availability of Annual Report on Form 10-K

This Annual Report on Form 10-K is available by written request to: Melrose Bancorp, Inc. 638 Main Street, Melrose, Massachusetts 02176, Attention: Corporate Secretary.

REGULATION AND SUPERVISION

General

Melrose Cooperative Bank is a Massachusetts stock co-operative bank and is the wholly owned subsidiary of Melrose Bancorp, Inc., a Maryland corporation, which is a registered bank holding company. Melrose Cooperative Bank’s deposits are insured up to applicable limits by the FDIC, and by the Share Insurance Fund of the Co-Operative Central Bank of Massachusetts for amounts in excess of the FDIC insurance limits. Melrose Cooperative Bank is subject to extensive regulation by the Massachusetts Commissioner of Banks, as its chartering agency, and by the FDIC, its primary federal regulator and deposit insurer. Melrose Cooperative Bank is required to file reports with, and is periodically examined by, the FDIC and the Massachusetts Commissioner of Banks concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. Melrose Cooperative Bank must comply with consumer protection regulations issued by the Consumer Financial Protection Bureau. Melrose Cooperative Bank also is a member of and owns stock in the Federal Home Loan Bank of Boston, which is one of the twelve regional banks in the Federal Home Loan Bank System.

As a bank holding company, Melrose Bancorp is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board. Melrose Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of stockholders and creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets and establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Massachusetts legislature, the Massachusetts Commissioner of Banks, the FDIC, or the Federal Reserve Board or Congress, could have a material adverse impact on the financial condition and results of operations of Melrose Bancorp, Inc. and Melrose Cooperative Bank. As is further described below, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has significantly changed the bank regulatory structure and may affect the lending, investment and general operating activities of depository institutions and their holding companies.

Set forth below are certain material regulatory requirements that are applicable to Melrose Cooperative Bank and Melrose Bancorp. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Melrose Cooperative Bank and Melrose Bancorp. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on Melrose Bancorp, Melrose Cooperative Bank and their operations.

Massachusetts Banking Laws and Supervision

General. As a Massachusetts-chartered co-operative bank, Melrose Cooperative Bank is subject to supervision, regulation and examination by the Massachusetts Commissioner of Banks and to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings and payment of dividends. In addition, Melrose Cooperative Bank is subject to Massachusetts consumer protection and civil rights laws and regulations. The approval of the Massachusetts Commissioner of Banks or the Massachusetts Board of Bank Incorporation is required for a Massachusetts-chartered bank to establish or close branches, merge with other financial institutions, issue stock and undertake certain other activities. Any Massachusetts bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks may be sanctioned. The Massachusetts Commissioner of Banks may suspend or remove directors or officers of a bank who have violated the law, conducted a bank’s business in a manner that is unsafe, unsound or contrary to the depositors’ interests, or been negligent in the performance of their duties. In addition, the Massachusetts Commissioner of Banks has the authority to appoint a receiver or conservator if it is determined that the bank is conducting its business in an unsafe or unauthorized manner, and under certain other circumstances.

Massachusetts regulations generally allow Massachusetts banks to, with appropriate regulatory approvals, engage in activities permissible for federally chartered banks or banks chartered by another state. The Massachusetts Commissioner of Banks also has adopted procedures reducing regulatory burdens and expense and expediting branching by well-capitalized and well-managed banks.

The Commonwealth of Massachusetts recently adopted a law modernizing the Massachusetts banking law, which affords Massachusetts chartered banks with greater flexibility compared to federally chartered and out-of-state banks. Where indicated in the below discussion, the new provisions of Massachusetts banking law took effect on April 7, 2015.

Lending Activities. A Massachusetts-chartered co-operative bank may make a wide variety of mortgage loans including fixed-rate loans, adjustable-rate loans, variable-rate loans, participation loans, graduated payment loans, construction and development loans, condominium and co-operative loans, second mortgage loans and other types of loans that may be made in accordance with applicable regulations. Commercial loans may be made to corporations and other commercial enterprises with or without security. Consumer and personal loans may also be made with or without security.

Insurance Sales. Massachusetts banks may engage in insurance sales activities if the Massachusetts Commissioner of Banks has approved a plan of operation for insurance activities and the bank obtains a license from the Massachusetts Division of Insurance. A bank may be licensed directly or indirectly through an affiliate or a subsidiary corporation established for this purpose. Melrose Cooperative Bank does not sell or refer insurance products, and has not sought approval for insurance sales activities.

Dividends. A Massachusetts co-operative bank may declare cash dividends from net profits not more frequently than quarterly. Non-cash dividends may be declared at any time. No dividends may be declared, credited or paid if the bank’s capital stock is impaired. A Massachusetts co-operative bank with outstanding preferred stock may not, without the prior approval of the Commissioner of Banks, declare dividends to the common stock without also declaring dividends to the preferred stock. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. Net profits for this purpose means the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal and state taxes. Dividends from Melrose Bancorp may depend, in part, upon receipt of dividends from Melrose Cooperative Bank. The payment of dividends from Melrose Cooperative Bank would be restricted by federal law if the payment of such dividends resulted in Melrose Cooperative Bank failing to meet regulatory capital requirements.

Parity Regulation. A Massachusetts bank may, in accordance with Massachusetts law and regulations issued by the Massachusetts Commissioner of Banks, exercise any power and engage in any activity that has been authorized for national banks, federal thrifts or state banks in a state other than Massachusetts, provided that the activity is permissible under applicable federal and not specifically prohibited by Massachusetts law. Such powers and activities must be subject to the same limitations and restrictions imposed on the national bank, federal thrift or out-of-state bank that exercised the power or activity. Beginning in April 2015, a Massachusetts bank must provide the Commissioner of Banks advance written notice prior to engaging in certain activities permissible for national banks, federal thrifts, or out-of-state banks.

Loans to One Borrower Limitations. In accordance with FDIC regulation the total obligations to one borrower may not exceed 15% of the total of the bank’s capital.

Loans to a Bank’s Insiders. Massachusetts banking laws currently prohibit any executive officer or director of a bank from borrowing or guaranteeing extensions of credit by such bank except for any of the following loans or extensions of credit with the approval of a majority of the board of directors: (i) loans or extension of credit, secured or unsecured, to an officer of the bank in an amount not exceeding $100,000; (ii) loans or extensions of credit intended or secured for educational purposes to an officer of the bank in an amount not exceeding $200,000; (iii) loans or extensions of credit secured by a mortgage on residential real estate to be occupied in whole or in part by the officer to whom the loan or extension of credit is made, in an amount not exceeding $750,000; and (iv) loans or extensions of credit to a director of the bank who is not also an officer of the bank in an amount permissible under the bank’s loan to one borrower limit. No such loan or extension of credit may be granted with an interest rate or other terms that are preferential in comparison to loans granted to persons not affiliated with the bank.

Beginning in April 2015, Massachusetts law provides that a Massachusetts bank must comply with Regulation O of the Federal Reserve Board. See “ – Federal Banking Regulation – Transactions with Related Parties.”

Investment Activities. In general, Massachusetts-chartered co-operative banks may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4% of the bank’s deposits. Federal law imposes additional restrictions on Melrose Cooperative Bank’s investment activities. See “– Federal Banking Regulation – Business Activities”.

Regulatory Enforcement Authority. Any Massachusetts co-operative bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks may be subject to sanctions for non-compliance, including revocation of its charter. The Massachusetts Commissioner of Banks may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the bank’s business in an unsafe or unsound manner or contrary to the depositors interests or been negligent in the performance of their duties. Upon finding that a bank has engaged in an unfair or deceptive act or practice, the Massachusetts Commissioner of Banks may issue an order to cease and desist and impose a fine on the bank concerned. The Massachusetts Commissioner of Banks also has authority to take possession of a bank and appoint a liquidating agent under certain conditions such as an unsafe and unsound condition to transact business, the conduct of business in an unsafe or unauthorized manner of impaired capital. In addition, Massachusetts consumer protection and civil rights statutes applicable to Melrose Cooperative Bank permit private individual and class action law suits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.

Co-Operative Central Bank and Share Insurance Fund. All Massachusetts-chartered co-operative banks are required to be members of the Co-Operative Central Bank, which maintains the Share Insurance Fund that insures co-operative bank deposits in excess of federal deposit insurance coverage. The Co-Operative Central Bank is authorized to charge co-operative banks an annual assessment fee on deposit balances in excess of amounts insured by the FDIC.

Protection of Personal Information. Massachusetts has adopted regulatory requirements intended to protect personal information. The requirements are similar to existing federal laws such as the Gramm-Leach-Bliley Act that require organizations to establish written information security programs to prevent identity theft. The Massachusetts regulation also contains technology system requirements, especially for the encryption of personal information sent over wireless or public networks or stored on portable devices.

Massachusetts has other statutes or regulations that are similar to certain of the federal provisions discussed below.

Federal Banking Regulation

Business Activities. Under federal law, all state-chartered FDIC-insured banks, including co-operative banks, have been limited in their activities as principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits exceptions to these limitations. For example, certain state-chartered co-operative banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange and in the shares of an investment company registered under the Investment Company Act of 1940. The maximum permissible investment is the lesser of 100.0% of Tier 1 capital or the maximum amount permitted by Massachusetts law. Such grandfathered authority may be terminated under certain circumstances including a change in charter or a determination by the FDIC that such investments pose a safety and soundness risk.

The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specified that a state bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary,” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.

Capital Requirements. 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 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 regulations require a common equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and 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 prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5%, a Tier 1 risk based capital ratio of 8.0%, a total risk based capital ratio of 10%, and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that phases 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. 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. At December 31, 2016, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer.

The regulations 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 Bank has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on the Bank’s regulatory capital ratios.

The regulations, effective January 1, 2015, 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 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%.

At December 31, 2016, Melrose Cooperative Bank’s capital exceeded all regulatory requirements.

Community Reinvestment Act and Fair Lending Laws. All institutions have a responsibility under the Community Reinvestment Act (the “CRA”) and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a state non-member bank, the FDIC is required to assess the institution’s record of compliance with the CRA. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA does require the FDIC, in connection with its examination of a non-member bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. An institution’s failure to comply with the provisions of the CRA could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The CRA requires all institutions insured by the FDIC to publicly disclose their rating. Melrose Cooperative Bank received a “Satisfactory” CRA rating in its most recent federal examination.

Massachusetts has its own statutory counterpart to the CRA that is applicable to Melrose Cooperative Bank. The Massachusetts version is generally similar to the CRA but utilizes a five-tiered descriptive rating system. Massachusetts law requires the Massachusetts Commissioner of Banks to consider, but not be limited to, a bank’s record of performance under Massachusetts law in considering any application by the bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. Melrose Cooperative Bank’s most recent rating under Massachusetts law was “Satisfactory.”

In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice.

Transactions with Related Parties. An institution’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with an insured depository institution such as Melrose Cooperative Bank. Melrose Bancorp will be an affiliate of Melrose Cooperative Bank because of its control of Melrose Cooperative Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. Transactions with affiliates also must be consistent with safe and sound banking practices, generally not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.

Melrose Cooperative Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:

•

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

•

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Melrose Cooperative Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by Melrose Cooperative Bank’s loan committee or board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.

Enforcement. The FDIC has extensive enforcement responsibility over state non-member banks and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an institution. Formal enforcement action by the FDIC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” The FDIC may also appoint itself as conservator or receiver for an insured state non-member bank under specified circumstances, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; (4) insufficient capital; or (5) the incurrence of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance. The FDIC also has the authority to terminate deposit insurance.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Interstate Banking and Branching. Federal law permits well-capitalized and well-managed bank holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, recent amendments made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.

Prompt Corrective Action Regulations. The FDIC is required by law to take supervisory actions against undercapitalized institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital.

Under FDIC prompt corrective action regulations Melrose Cooperative Bank must have a Tier 1 leverage ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 8.0%, a CET1 risk-based capital ratio of at least 6.5%, and a total risk-based capital ratio of at least 10.0% in order to be classified as “well-capitalized.” An institution that has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio less than 6.0%, a CET1 risk-based capital ratio of less than 4.5%, or a Tier 1 leverage ratio of less than 4.0%, is considered to be undercapitalized. An institution that has total risk-based capital less than 6.0%, a CET1 risk-based capital ratio of less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a Tier 1 leverage ratio that is less than 3.0% is considered to be “significantly undercapitalized.” An institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.”

Generally, a receiver or conservator must be appointed for an institution that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the FDIC within 45 days of the date that an institution is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company of an institution that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5% of the institution’s assets at the time it was deemed to be undercapitalized by the FDIC or the amount necessary to restore the institution to adequately capitalized status. This guarantee remains in place until the FDIC notifies the institution that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions that are undercapitalized become subject to certain mandatory measures such as restrictions on capital distributions and asset growth. The FDIC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At December 31, 2016, Melrose Cooperative Bank met the criteria for being considered “well capitalized.”

Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as Melrose Cooperative Bank. Deposit accounts in Melrose Cooperative Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund.

Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates. Assessments are based on an institution’s average consolidated total assets minus average tangible equity instead of total deposits. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2016, the annualized FICO assessment was equal to 56 basis points of total assets less tangible capital.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long range fund of 2.0%.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Melrose Cooperative Bank. Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

Prohibitions Against Tying Arrangements. State non-member banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Reserve System. Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $89.0 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $89.0 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $13.3 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. Melrose Cooperative Bank is in compliance with these requirements.

Federal Home Loan Bank System. Melrose Cooperative Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Boston, Melrose Cooperative Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2016, Melrose Cooperative Bank was in compliance with this requirement.

Other Regulations

Interest and other charges collected or contracted for by Melrose Cooperative Bank are subject to state usury laws and federal laws concerning interest rates. Melrose Cooperative Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

•

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

•

Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

•

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

•

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

•

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

•

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

•

Truth in Savings Act;

•

the Biggert-Watters Flood Insurance Reform Act of 2012; and

•

rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

In addition, the Consumer Financial Protection Bureau issues regulations and standards under these federal consumer protection laws that affect our consumer businesses. These include regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and mortgage loan servicing and originator compensation standards. Melrose Cooperative Bank is evaluating recent regulations and proposals, and devotes significant compliance, legal and operational resources to compliance with consumer protection regulations and standards.

The operations of Melrose Cooperative Bank also are subject to the:

•

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

•

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

•

Check Clearing for the 21^st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

•

The USA PATRIOT Act, which requires depository institution to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

•

The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

General. Melrose Bancorp is a bank holding company within the meaning of the Bank Holding Company Act of 1956. As such, Melrose Bancorp is registered with the Federal Reserve Board and is subject to regulations, examinations, supervision and reporting requirements applicable to bank holding companies. In addition, the Federal Reserve Board has enforcement authority over Melrose Bancorp and its non-bank subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary institution.

Permissible Activities. Melrose Bancorp is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. Melrose Bancorp is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval also is required for Melrose Bancorp to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after such acquisition, it would directly or indirectly own or control more than 5% of any class of voting shares of the bank or bank holding company. In evaluating applications by holding companies to acquire depository institutions, the Federal Reserve Board must consider, among other things, the financial and managerial resources and future prospects of the company and institutions involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. In addition to the approval of the Federal Reserve Board, prior approval may also be necessary from other agencies having supervisory jurisdiction over the bank to be acquired before any bank acquisition can be completed.

A bank holding company is generally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose direct and indirect activities are limited to those permitted for bank holding companies. A bank holding company that meets certain criteria, such as being well-capitalized and well-managed within the meaning of applicable regulations, may elect to become a “financial holding company.” Such an election allows a bank holding company to engage in a broader array of financial activities, including insurance and investment banking.

Source of Strength. The Dodd-Frank Act codified the “source of strength” doctrine. The Federal Reserve Board has issued regulations requiring that all bank holding companies serve as a source of managerial and financial strength to their subsidiary banks by providing capital, liquidity and other support in times of financial stress.

Dividends. The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a bank holding company to pay dividends may be restricted if a subsidiary institution becomes undercapitalized. The policy statement also states that a bank holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the bank holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Melrose Bancorp, Inc. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a bank holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.

Massachusetts Holding Company Regulation. Under the Massachusetts banking laws, a company owning or controlling two or more banking institutions, including a co-operative bank, is regulated as a bank holding company. The term “company” is defined by the Massachusetts banking laws similarly to the definition of “company” under the Bank Holding Company Act. Each Massachusetts bank holding company: (i) must obtain the approval of the Massachusetts Board of Bank Incorporation before engaging in certain transactions, such as the acquisition of more than 5% of the voting stock of another banking institution; (ii) must register and file reports with the Massachusetts Commissioner of Bank; and (iii) is subject to examination by the Massachusetts Commissioner of Banks.

Federal Securities Laws

Melrose Bancorp common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Melrose Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” Melrose Bancorp qualifies as an emerging growth company under the JOBS Act.

An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, Melrose Bancorp will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. Melrose Bancorp, Inc. has elected to comply with new or amended accounting pronouncements in the same manner as a private company.

A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer will be required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. We have implemented policies, procedures and systems designed to ensure compliance with these regulations.

ITEM 1A.

Risk Factors

The presentation of Risk Factors is not required for smaller reporting companies such as Melrose Bancorp.

ITEM 1B.

Unresolved Staff Comments

The presentation of Unresolved Staff Comments is not required for smaller reporting companies such as Melrose Bancorp.

ITEM 2.

Properties

As of December 31, 2016, the net book value of our properties was $1.1 million. The following table sets forth information regarding our offices:

Location

Leased or
Owned

Year Acquired
or Leased

Net Book Value of
Real Property

(In thousands)

Main Office:

Owned

1934

656

638 Main Street

Melrose, Massachusetts 02176

Other Properties:

Owned

1999

400

630 Main Street

Melrose, Massachusetts 02176

ITEM 3.

Legal Proceedings

At December 31, 2016, we were not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which management believes will not materially adversely affect our financial condition, our results of operations and our cash flows.

ITEM 4.

Mine Safety Disclosures

Not applicable.

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Information, Holders and Dividend Information. Our common stock is quoted on the Nasdaq Capital Market under the symbol “MELR.” The approximate number of holders of record of Melrose Bancorp common stock as of December 31, 2016 was 252. Certain shares of Melrose Bancorp are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.

The following table presents the high and low intra-day sales prices for our common stock for the periods indicated.


	2016
Sales Price Per Share	High		Low
Fourth quarter	$	18.00	$	14.90
Third quarter	$	15.63	$	14.70
Second quarter	$	15.85	$	14.60
First quarter	$	15.36	$	14.86

	2015
Sales Price Per Share	High		Low
Fourth quarter	$	15.69	$	13.95
Third quarter	$	14.83	$	13.75
Second quarter	$	14.99	$	13.55
First quarter	$	13.99	$	13.00

Melrose Bancorp does not currently pay cash dividends on its common stock. Dividend payments by Melrose Bancorp are dependent on dividends it receives from Melrose Cooperative Bank, because Melrose Bancorp has no source of income other than dividends from Melrose Cooperative Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by Melrose Bancorp and interest payments with respect to Melrose Bancorp’s loan to the Employee Stock Ownership Plan. See “Item 1. Business –Supervision and Regulation – Federal Banking Regulation – Capital Distributions.”

(b) Sales of Unregistered Securities. Not applicable.

(d) Securities Athorized for Issuance Under Equity Compensation Plans


Plan Category	Plan Name	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)		Weighted Average Exercise Price of Oustanding Options, Warrants and Rights (b)		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)
Equity compensation plans approved by stockholders	Melrose Bancorp, Inc 2015 Equity Incentive Plan		268,500	$	15.13		127,640
Equity compensation plans not approved by stockholders	None		—		—		—
Total			268,500	$	15.13		127,640

(e) Stock Repurchases. From time to time, our board of directors has authorized 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. In November 2015, 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.


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
October 1, 2016 to October 31, 2016		1,000	$	15.21		1,000		13,700
November 1, 2016 to November 30, 2016		2,500		15.55		2,500		11,200
December 1, 2016 to December 31, 2016		—		—		—		11,200

(f) Stock Performance Graph. Not required for smaller reporting companies.

ITEM 6.

Selected Financial Data


	At or For the Years Ended December 31,
	2016			2015			2014			2013			2012
Performance Ratios:
Return on average assets		0.56	%		0.28	%		-0.08	%		0.37	%		0.66	%
Return on average equity		3.23	%		1.06	%		-0.52	%		3.61	%		6.23	%
Average equity to average assets		17.44	%		26.54	%		15.85	%		10.37	%		10.66	%

ITEM 7.

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

This section is intended to help a reader understand the financial performance of Melrose Bancorp and its subsidiaries through a discussion of the factors affecting our financial condition at December 31, 2016 and December 31, 2015 and our results of operations for the years ended December 31, 2016 and 2015. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K.

Overview

Our principal business consists of attracting retail 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, and to a much lesser extent, commercial real estate loans, construction loans and consumer loans.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of fees and service charges, gains on sales of loans, gains net of writedowns of securities, and income on bank-owned life insurance. Noninterest expense currently consists primarily of expenses related to salary and employee benefits, occupancy and equipment, data processing, advertising, professional fees, federal deposit insurance assessments, and other expense, consisting primarily of other general and administrative expenses.

Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Critical Accounting Policies

Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and

circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 2 of the Notes to Consolidated Financial Statements included in this annual report.

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of December 31, 2016, there is not a significant difference in the presentation of our financial statements as compared to other public companies as a result of this transition guidance.

The following represents our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for losses on loans which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.

The allowance for loan losses is evaluated on a quarterly basis by management. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry 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 that may be susceptible to significant change.

The analysis has two components, specific and general allocations. Specific percentage allocations can be made for unconfirmed losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. For collateral-dependent loans, if the fair value of the loan is less than the loan’s carrying amount, a charge-off is recorded for the difference. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.

Securities Valuation and Impairment. We classify our investments in debt and equity securities as either held-to-maturity or available-for-sale. Securities classified as held-to maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. We obtain our fair values from a third party service. This service’s fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, we expense the impairment of the investment in the period in which the event or change occurred. For all debt securities that are considered other-than-temporarily impaired and do not meet either condition, the credit loss portion of impairment will be recognized in earnings as realized losses. The other-than-temporary impairment related to all other factors will be recorded in other comprehensive income. We also consider how long a security has been in a loss position in determining if it is other than temporarily impaired. Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread widening, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral.

Deferred Tax Assets. We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities

and assets. These judgments may require us to make projections of future taxable income and/or to carryback to taxable income in prior years. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.

Comparison of Financial Condition at December 31, 2016 and December 31, 2015

Total assets increased $37.9 million, or 16.4%, to $268.6 million at December 31, 2016 from $230.7 million at December 2015. The increase was primarily the result of increases in net loans, partly offset by a decrease in cash and cash equivalents and available-for-sale securities.

Cash and cash equivalents decreased $3.1 million, or 18.3%, to $13.8 million at December 31, 2016 from $16.9 million at December 31, 2015. Federal funds sold decreased $3.3 million, or 100%, to $0 at December 31, 2016 from $3.3 million at December 31, 2015. Cash and due from banks decreased $219,000, or 1.8%, to $11.7 million at December 31, 2016 from $11.9 million at December 31, 2015. These decreases were partially offset by an increase in money market funds of $472,000, or 29.4%, to $2.1 million at December 31, 2016 from $1.6 million at December 31, 2015. These decreases resulted primarily from the cash being used to fund loan originations.

Securities available-for-sale decreased $13.3 million, or 29.5%, to $31.8 million at December 31, 2016 from $45.1 million at December 31, 2015. The decrease during 2016 was a result of the sales, maturities and calls of available-for-sale securities. The proceeds from the sales, maturities, and calls were used to fund new loan originations.

Federal Home Loan Bank (FHLB) stock increased $527,000, or 120.6%, to $964,000 at December 31, 2016 from $437,000 at December 31, 2015. The increase in FHLB stock was the result of an increase in FHLB borrowings to $10 million at December 31, 2016, from $0 at December 31, 2015. The bank borrowed from the FHLB to fund new loan originations.

Net loans increased $52.8 million, or 33.0%, to $213.1 million at December 13, 2016 from $160.3 million at December 31, 2015. The increase in net loans in 2016 was due primarily to an increase of $35.9 million, or 27.1%, in one-to-four family residential loans, an increase of $9.8 million, or 73.7%, in commercial real estate loans, as well as an increase of $7.4 million, or 172.8%, in residential and commercial construction loans during the year. The increase in one- to four- family residential real estate loans includes loan purchases of $31.3 million for the year ended December 31, 2016.

At December 31, 2016 our investment in bank-owned life insurance was $5.9 million, an increase of $644,000, or 12.3%, 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.

Total deposits increased $30.3 million, or 16.4%, to $214.8 million at December 31, 2016 from $184.5 million at December 31, 2015. The increase in deposits in 2016 was due to an increase of $26.3 million, or 30.1%, in certificates of deposits, an increase of $3.3 million, or 9.6%, in money market accounts, and an increase of $4.2 million, or 31.2%, in demand deposit accounts; offset of by a decrease of $3.8 million, or 22.6%, in NOW accounts.

Total borrowings increased $10.0 million, to $10.0 million at December 31, 2016 from $0 at December 31, 2015. The $10.0 million in borrowings consisted of two fixed interest rate advances from the Federal Home Loan Bank, both with a term of three years. The funds from the borrowings were used to fund new loan originations. The remaining borrowing capacity with the Federal Home Loan Bank was approximately $102.5 million.

Total stockholders’ equity decreased $2.2 million, or 4.8%, to $43.3 million at December 31, 2016 from $45.5 million at December 31, 2015. The decrease in stockholders’ equity in 2016 was primarily due to stock repurchases totaling $3.5 million offset by earnings of $1.4 million for the year.

Comparison of Operating Results for the Years Ended December 31, 2016 and December 31, 2015

General. Net income increased $764,000, or 116.1%, to $1.4 million for the year ended December 31, 2016 from $658,000 for the year ended December 31, 2015. Net income increased primarily due to an increase of $1.5 million, or 25.4%, in interest and dividend income, and an increase in noninterest income of $993,000, partially offset by an increase in interest expense of $364,000, or 28.5%, an increase in noninterest expense of $647,000, and an increase in income tax expense of $467,000.

Interest and Dividend Income. Total interest and dividend income increased $1.5 million, or 25.4%, to $7.4 million for the year ended December 31, 2016 from $5.9 million for the year ended December 31, 2015 due to an increase in interest and fees on loans, which increased to $6.6 million for the year ended December 31, 2016 from $5.0 million for the year ended December 31, 2015. The increase of $1.6 million in interest and fees on loans was the result of an increase in net loans of $52.8 million to $213.2 million at December 31, 2016 from $160.3 million at December 31, 2015. The increase is due primarily to new originations and purchases of one-to-four family residential real estate loans and commercial real estate loans as well as increases in the balances of construction loans.

Interest and dividends on securities decreased $78,000, or 9.0%, to $799,000 for 2016 from $877,000 for 2015 resulting from a decrease in the average balance of securities of $7.7 million, or 17.3%. Despite the decrease in average balance, there was an increase of twenty basis points in the average yield on securities to 2.16% for 2016 from 1.96% for 2015.

Other interest income increased $20,000 for the year ended December 31, 2016 due to an interest rate increase of twenty five basis points at one of our correspondent banks, which resulted in an increase of eleven basis points to the average yield on other interest-earning assets from increased interest rates on correspondent bank accounts.

Interest Expense. Interest expense increased $364,000, or 28.5%, to $1.6 million for 2016 from $1.3 million for 2015. The increase was due to an increase in the average balance of interest-bearing deposits of $31.2 million, or 19.8%, to $189.0 million for the year ended 2016 from $157.8 million for 2015. This increase was also due to an increase of six basis points to 0.86% for 2016 from 0.80% for 2015 in the average rate paid on deposits.

Net Interest and Dividend Income. Net interest and dividend income increased $1.1 million, or 24.5%, to $5.8 million for the year ended December 31, 2016 from $4.6 million for the year ended December 31, 2015 primarily due to an increase in average interest earning assets of $33.4 million, or 15.8%, to $244.1 million at December 31, 2016 from $210.7 million at December 31, 2015, and an increase in the average yield on those assets of twenty-three basis points to 3.03% for 2016 from 2.80% for 2015. This was partially offset by an increase of $364,000, or 28.5%, in interest on interest-bearing liabilities to $1.6 million for the year ended December 31, 2016 from $1.3 million for the year ended December 31, 2015.

Provision for loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies – Allowance for loan Losses,” we recorded a provision for loan losses of $310,000 for the year ended December 31, 2016, an increase of $250,000, or 416.6%, from the provision of $60,000 for the year ended December 31, 2015.

The provision for loan losses for the year ended December 31, 2016 reflected no charge-offs for 2016 and 2015. The allowance for loan losses was $890,000, or 0.42%, of total loans at December 31, 2016, compared to $580,000, or 0.36%, of total loans at December 31, 2015. Total nonperforming loans were $9,000 at December 31, 2016 compared to $265,000 at December 31, 2015. As a percentage of nonperforming loans, the allowance for loan losses was 9,888.89% at December 31, 2016 compared to 218.87% at December 31, 2015. All nonperforming loans as of December 31, 2016 were deemed to be collectible in full.

Noninterest Income. Noninterest income increased $993,000, or 410.3%, to $1.2 million for the year ended December 31, 2016 from $242,000 for the year ended December 31, 2015 due primarily to the partial sales of Vanguard mutual funds throughout the year. The Bank owns shares in two mutual funds with Vanguard with a fair value of $3.1 million and an unrealized gain of $1.6 million at December 31, 2016, and during 2016 recognized gains of $941,000 on sales of these mutual funds. Based on the current market conditions, the Bank plans to sell the two mutual funds over a three year period and use the proceeds to fund new loan originations.

There were no securities deemed other-than-temporarily impaired during 2016. During 2015, there were five securities that were declared other-than-temporarily impaired and a total loss of $461,000 was realized. There were four securities sold in 2015 with a total gain of $409,000. The net loss was $52,000 for the year ending December 31, 2015.

Total fees and service charges decreased $15,000 to $76,000 for 2016 from $91,000 for 2015, primarily due to decreased overdraft fees, service charges on deposit accounts and ATM surcharges, partially offset by increased penalties for early withdrawals on time deposits.

Noninterest Expense. Noninterest expense increased $647,000, or 16.9%, to $4.5 million for the year ended December 31, 2016 from $3.8 million for the year ended December 31, 2015. Noninterest expense increased primarily due to an increase in salaries and employee benefits of $361,000, or 15.0%, to $2.8 million for the year ended December 31, 2016 from $2.4 million for 2015 resulting from normal salary increases, increases in payroll taxes and the stock based compensation expense of $191,000 in 2016 for stock options and restricted stock awards granted in May 2016. In addition, other professional services increased $151,000, or 85.4%, to $328,000 in 2016 from $177,000 in 2015, as a result of fees related to the stock options and restricted stock awards granted in May 2016. Audits and examinations expense increased $82,000, or 63.1%, to $212,000 in 2016 from $130,000 in 2015, a result of entering into contracts for an enhanced information technology audit and a new commercial loan review audit. Data processing increased $51,000, or 15.9%, to $370,000 in 2016 from $319,000 in 2015.

Income Tax Expense. Income tax expense increased $467,000, or 142.0%, to $796,000 for 2016 from $329,000 for 2015. The tax expense increase was due to the increase in income before taxes of $1.2 million, or 124.7%, to $2.2 million for 2016 from $987,000 for 2015. Income tax expense also increased because our effective tax rate was 35.9% for 2016 compared to an effective tax rate of 33.3% for 2015.

Average Balance Sheets

Average Balances and Yields. The following tables set forth the average balance sheet, average yields and costs, and certain other information for the periods indicated. All average balances are daily or weekly average balances. Management does not believe that the use of weekly average balances instead of daily average balances has caused any material difference in the information presented. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. Tax-free interest has not been tax-effected because it is not significant. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


	For the Years Ended December 31,
	2016								2015								2014
	Average Outstanding Balance			Interest		Yield/Rate			Average Outstanding Balance			Interest		Yield/Rate			Average Outstanding Balance			Interest		Yield/Rate
(Dollars in Thousands)
Interest-earning assets:
Loans	$	186,169		$	6,551		3.52	%	$	142,717		$	4,994		3.50	%	$	132,127		$	4,631		3.50	%
Securities ⁽¹⁾		36,976			799		2.16	%		44,714			877		1.96	%		39,904			748		1.87
Other interest-earning assets		20,905			55		0.26	%		23,236			35		0.15	%		20,275			25		0.12

Total interest-earning assets		244,050			7,405		3.03	%		210,667			5,906		2.80	%		192,306			5,404		2.81	%

Non-interest earning assets		8,270								23,755								15,988

Total assets	$	252,320							$	234,422							$	208,294

Interest-bearing liabilities:
Deposits:
Savings accounts	$	32,750		$	70		0.21	%	$	31,574		$	65		0.21	%	$	31,991		$	66		0.21
Certificates of deposit		106,624			1,402		1.31	%		77,231			1,067		1.38	%		74,545			1,034		1.39
Money market accounts		35,731			132		0.37	%		35,072			130		0.37	%		41,250			154		0.37
NOW accounts		13,960			14		0.10	%		13,960			14		0.10	%		12,528			12		0.09

Total interest-bearing deposits		189,065			1,618		0.86	%		157,837			1,276		0.80	%		160,314			1,266		0.79
Borrowings		2,363			22		0.93	%		—			—					—			—		—

Total interest-bearing liabilities		191,428			1,640		0.86	%		157,837			1,276		0.80	%		160,314			1,266		0.79

Demand deposit accounts		16,280								13,604								14,197
Other noninterest-bearing liabilities		596								756								23,475

Total liabilites		208,304								172,197								197,986
Stockholders’ equity		44,016								62,225								10,308

Total liabilities and stockholders’ equity	$	252,320							$	234,422							$	208,294

Net interest income				$	5,765							$	4,630							$	4,138

Net interest rate spread ⁽²⁾							2.17	%							2.00	%							2.02	%
Net interest-earning assets ⁽³⁾	$	52,622							$	52,830							$	31,992

Net interest margin ⁽⁴⁾							2.36	%							2.19	%							2.15	%
Average of interest-earning assets to interest-bearing liabilities		127.49	%							133.47	%							119.96	%

(1)	Includes Federal Home Loan Bank stock, correspondent bank accounts, federal funds sold, money market funds and Co-operative Central Bank Deposit.

(2)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and 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 rates and volumes on our net interest income for the fiscal years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.


	Year Ended December 31, 2016 compared to Year Ended December 31, 2015									Year Ended December 31, 2015 compared to Year Ended December 31, 2014
	Increase (Decrease) Due to						Total Increase (Decrease)			Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate			Total Increase (Decrease)			Volume			Rate			Total Increase (Decrease)
Interest-earning assets:
Loans (1)	$	1,474		$	83		$	1,557		$	363		$	—		$	363
Securities (2)		(190	)		112			(78	)		92			37			129
Other interest-earning assets (3)		(3	)		23			20			4			6			10

Total interest-earning assets		1,281		$	218		$	1,499			459			43			502

Interest-bearing liabilities
Deposits:
Savings accounts		5			—			5			(1	)		—			(1	)
Certificates of deposit		386			(51	)		335			41			(8	)		33
Money market accounts		2			—			2			(24	)		—			(24	)
NOW accounts		—			—			—			1			1			2

Total interest-bearing deposits		393			(51	)		342			17			(7	)		10
Borrowings		22			—			22			—			—			—

Total interest-bearing liabilities		415			(51	)		364			17			(7	)		10

Change in net interest income	$	866		$	269		$	1,135		$	442		$	50		$	492

(1)	Includes non-accrual loans and interest received on such loans.

(2)	Includes short-term investments.

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

Management of Market Risk

Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Our board of directors is responsible for the review and oversight of our asset/liability strategies. Our Asset/Liability Committee, which is comprised of our senior executive officers and one outside board member, meets quarterly and is charged with developing an asset/liability management plan. Senior management meets regularly to review pricing and liquidity needs and to assess our interest rate risk. This committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by our board of directors.

The techniques we are currently using to manage interest rate risk include:

•

maintaining a significant portfolio of adjustable-rate one- to four-family residential real estate loans and increasing the amount of adjustable-rate commercial real estate and construction loans in our portfolio;

•

funding a portion of our operations with deposits with terms greater than one year;

•

monitoring core deposit levels and pricing to allow us to remain competitive in obtaining funds and to respond to changes in customer demand and our liquidity needs;

•

focusing our business operations on local retail customers who value our community orientation and personal service and who may be somewhat less sensitive to interest rate changes than wholesale deposit customers; and

•

maintaining a strong capital position, which provides for a favorable level of interest-earning assets relative to interest-bearing liabilities.

Depending on market conditions, from time to time we may place more emphasis on enhancing net interest margin rather than matching the interest rate sensitivity of our assets and liabilities. In particular, we believe that the increased net interest income resulting from a mismatch in the maturity of our assets and liabilities can, during periods of stable or declining interest rates, provide high enough returns to justify increased exposure to sudden and unexpected increases in interest rates. As a result of this philosophy, our results of operations and the economic value of our equity will remain vulnerable to increases in interest rates and to declines due to the difference between long- and short-term interest rates.

Economic Value of Equity. In order to monitor and manage interest rate risk, we use the net present value of equity at risk methodology. This methodology calculates the difference between the present value of expected cash flows from assets and liabilities. The comparative scenarios assume an immediate parallel shift in the yield curve in increments of 100 basis point (bp) rate movements. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The model is run at least quarterly showing shocks from +300bp to -100bp, because a decline of greater than -100bp is currently highly unlikely. The board of directors and management review the methodology’s measurements on a quarterly basis.

The interest rate scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements. Results of the modeling are used to provide a measure of the degree of volatility interest rate movements may have on our earnings. Modeling the sensitivity of earnings to interest rate risk is decidedly reliant on numerous assumptions embedded in the model. These assumptions include, but are not limited to, management’s best assessment of the effect of changing interest rates on the prepayment speeds of certain assets and liabilities, projections for account balances in each of the product lines offered and the historical behavior of deposit rates and balances in relation to changes in interest rates. These assumptions are inherently changeable, and as a result, the model is not expected to precisely measure net interest income or precisely predict the impact of fluctuations in interest rate on net interest income. Actual results will differ from the simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions. Assumptions are supported with annual back testing of the model to actual market rate shifts.

The table below sets forth, as of December 31, 2016, the estimated changes in the net present value of equity that would result from the designated changes in the United States Treasury yield curve under an instantaneous parallel shift for Melrose Cooperative Bank. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.


	Economic Value of Equity								EVE as a % of Economic Value of Assets (3)
Change in Interest Rates (Basis Points) (1)	Estimated EVE (2)		Amount of Change			Percent			EVE Ratio			Change (1)
+ 300	$	48,438	$	(22,137	)		(31.4	%)		18.0	%		(5.9	%)
+ 200		55,910		(14,665	)		(20.8	%)		20.1	%		(3.8	%)
+ 100		63,212		(7,363	)		(10.4	%)		22.1	%		(1.8	%)
0		70,575		—			—			23.9	%		—
- 100		75,474		4,899			6.9	%		25.1	%		1.2	%

(1)	Assumes instantaneous parallel changes in interest rates.

(2)	EVE or Economic Value of Equity at Risk measures Melrose Cooperative Bank’s exposure to equity due to changes in a forecast interest rate environment.

(3)	EVE ratio represents Economic Value of Equity divided by the economic value of assets which should measure stability for future earnings.

The table above indicates that at December 31, 2016, in the event of a 100 basis point decrease in interest rates, we would experience a 6.9% increase in economic value of equity. In the event of a 300 basis point increase in interest rates, we would experience a 31.4% decrease in economic value of equity.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in the economic portfolio value of equity require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. In this regard, the table above assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that particular changes in interest rates occur at different times and in different amounts in response to a designed change in the yield curve for U.S. Treasuries. Furthermore, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income. Finally, the above table does not take into account the changes in the credit risk of our assets that can occur in connection with changes in interest rates.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from sale of loans and proceeds from maturities and calls of securities. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Committee, under the direction of our Chief Executive Officer, 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.

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2016, cash and cash equivalents totaled $13.8 million. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of December 31, 2016.

We regularly monitor and 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 (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities.

Net cash provided by operating activities, which consists primarily of net income of $1.4 million, was $909,000 for the year ended December 31, 2016.

Net cash used in investing activities, which consists primarily of disbursements for purchases of available-for-sale securities and net loan originations, purchases and principal collections, offset by proceeds from sales, maturities and calls of available-for-sale securities, was $40.7 million for the year ended December 31, 2016.

Financing activities consist of activity in deposit accounts, borrowings and repurchases of stock. We experienced a net increase in deposits of $30.2 million during the year ended December 31, 2016 and an increase in deposits of $17.5 million during the year ended December 31, 2015. The 2016 increase was due primarily to an increase of $26.3 million or 30.1%, in time deposit accounts. Deposit flows were also affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

At December 31, 2016, we had $3.4 million in commitments to originate loans. In addition to commitments to originate loans, we had $13.7 million in unused lines of credit to borrowers at this date. Certificates of deposit due within one year of December 31, 2016 totaled $63.5 million, or 29.6%, of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including utilizing additional Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required to pay higher rates on such deposits than we currently pay on the certificates of deposit due on or before December 31, 2017. We believe, however, that based on historical experience and current market interest rates, we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of December 31, 2016.

We are permitted to borrow funds from the Federal Home Loan Bank of Boston and the Co-Operative Central Bank, and at December 31, 2016, the remaining borrowing capacity was approximately $102.5 million from the Federal Home Loan Bank of Boston and $5.0 million from the Co-Operative Central Bank. During 2016 the Bank borrowed a total of $10 million from the Federal Home Loan Bank of Boston, consisting of two three year fixed rate borrowings of $5.0 million each at an interest rate of 1.42% and 1.48%. The interest expense for 2016 associated with the two borrowings was $22,000. The funds were used to fund the increase in new loan originations. A subsequent borrowing was made in January 2017, for an additional $3 million at a rate of 1.89%.

Melrose Cooperative Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2016, Melrose Cooperative Bank exceeded all regulatory capital requirements. Melrose Cooperative Bank is considered “well capitalized” under regulatory guidelines. See “Supervision and Regulation – Federal Regulations – Capital Requirements” and Note 13 of the Notes to our Consolidated Financial Statements.

Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. For additional information, see Note 10 of the Notes to our Consolidated Financial Statements.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include maintenance agreements for equipment, agreements with respect to borrowed funds, if any, and deposit liabilities.

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. GAAP, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit as well as commitments to sell loans. For information about our loan commitments and unused lines of credit, see Note 10 of the Notes to our Consolidated Financial Statements.

We have not engaged in any other off-balance-sheet transactions in the normal course of our lending activities.

Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see Note 2 of the Notes to our Consolidated Financial Statements.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

ITEM 8.

Financial Statements and Supplementary Data

The consolidated audited financial statements for Melrose Bancorp are a part of this Annual Report on Form 10-K and may be found beginning on page 47.

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

ITEM 9A

Controls and Procedures

(a) 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-15I promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

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

(b) Management’s annual report on internal control over financial reporting.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, including the principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework (2013).” Based on such assessment, management believes that, as of December 31, 2016, the Company’s internal control over financial reporting is effective, based on those criteria.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to provisions of the Dodd-Frank Act that permit the Company to provide only management’s report in this annual report.

ITEM 9B.

Other Information

None.

PART III

ITEM 10.

Directors, Executive Officers and Corporate Governance

Melrose Bancorp has adopted a Code of Ethics that applies to Melrose Bancorp’s principal executive officer, principal financial officer and all other employees and directors. The Code of Ethics is available on our website at www.melrosecoop.com.

Information concerning directors and executive officers of the Company is incorporated herein by reference to the Proxy Statement, specifically the section captioned “Proposal I – Election of Directors.”

ITEM 11.

Executive Compensation

Information concerning executive compensation is incorporated herein by reference to the Proxy Statement, specifically the section captioned “Executive Compensation.”

ITEM 12.

Security Ownership and Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning security ownership of certain owners and management is incorporated herein by reference to the Proxy Statement, specifically the section captioned “Voting Securities and Principal Holder Thereof.”

ITEM 13.

Certain Relationships and Related Transactions and Director Independence

Information concerning relationships, transactions and director independence is incorporated herein by reference to the Proxy Statement, specifically the section captioned “Transactions with Certain Related Persons” and “Board Independence.”

ITEM 14.

Principal Accounting Fees and Services

Information concerning principal accountant fees and services is incorporated herein by reference to the Proxy Statement, specifically the section captioned “Proposal II – Ratification of Appointment of Auditor.”

ITEM 15.

Form 10-K Summary

Not Applicable.

PART IV

ITEM 16.

Exhibits and Financial Statement Schedules

(a)(1) Financial Statements

The documents filed as a part of this Form 10-K are:

(A)

Report of Independent Registered Public Accounting Firm;

(B)

Consolidated Balance Sheets at December 31, 2016 and 2015;

(C)

Consolidated Statements of Income for the years ended December 31, 2016 and 2015;

(D)

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015;

(E)

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016 and 2015;

(F)

Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015; and

(G)

Notes to Consolidated Financial Statements.

(a)(2) Financial Statement Schedules

All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.

(a)(3) Exhibits


3.1		Articles of Incorporation of Melrose Bancorp*

3.2		Bylaws of Melrose Bancorp*

4		Form of Common Stock Certificate of Melrose Bancorp*

10.1		Form of Employment Agreement with Jeffrey D. Jones*

10.2		Form of Change in Control Agreement with Diane Indorato *

10.3		Form of Change in Control Agreement with James Oosterman *

10.4		Form of Employee Stock Ownership Plan*

10.5		Form of Melrose Cooperative Bank Supplemental Executive Retirement Plan*

10.6		Form of Melrose Cooperative Bank Executive Annual Incentive Plan*

10.7		Form of Executive Split Dollar Agreement between Melrose Cooperative Bank and Jeffrey Jones*

10.8		Melrose Bancorp, Inc. 2015 Equity Incentive Plan**

21		Subsidiaries

23		Consent of Auditor

31.1		Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

101		The following financial statements for the year ended December 31, 2016 and 2015, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

*	Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-194475), initially filed March 11, 2014.

**	Incorporated by reference to the Company’s definitive Proxy Statement filed on October 23, 2015.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF

MELROSE BANCORP, INC. AND SUBSIDIARY


Report of Independent Registered Public Accounting Firm			48

Consolidated Balance Sheets at December 31, 2016 and 2015			49

Consolidated Statements of Income for the years ended December 31, 2016 and 2015			50

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015			51

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016 and 2015			52

Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015			53

Notes to Consolidated Financial Statements			54

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Melrose Bancorp, Inc.

Melrose, Massachusetts

We have audited the accompanying consolidated balance sheets of Melrose Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Melrose Bancorp, Inc. and Subsidiary as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/S/ BAKER NEWMAN & NOYES LLC

Peabody, Massachusetts

March 21, 2017

Part I. – Financial Information

Item 1.

Financial Statements

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In Thousands, except share data)


	December 31, 2016			December 31, 2015
ASSETS
Cash and due from banks	$	11,715		$	11,934
Money market funds		2,077			1,605
Federal funds sold		—			3,315

Cash and cash equivalents		13,792			16,854
Investments in available-for-sale securities (at fair value)		31,831			45,143
Federal Home Loan Bank stock, at cost		964			437
Loans, net of allowance for loan losses of $890 at December 31, 2016 and $580 at December 31, 2015		213,165			160,303
Premises and equipment, net		1,248			1,226
Co-operative Central Bank deposit		881			881
Bank-owned life insurance		5,874			5,230
Accrued interest receivable		572			440
Deferred tax asset, net		120			—
Other assets		199			195

Total assets	$	268,646		$	230,709

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	17,586		$	13,400
Interest-bearing		197,180			171,127

Total deposits		214,766			184,527
Deferred tax liability, net		—			78
Federal Home Loan Bank advances		10,000			—
Other liabilities		576			559

Total liabilities		225,342			185,164

Stockholders’ equity:
Common stock, par value $0.01 per share, authorized 15,000,000 shares; issued 2,602,079 shares at December 31, 2016 and 2,787,579 shares at December 31, 2015		26			28
Additional paid-in-capital		23,292			25,994
Retained earnings		21,912			20,490
Unearned compensation - ESOP (203,728 shares unallocated at December 31, 2016 and 211,274 at December 31, 2015)		(2,037	)		(2,113	)
Unearned compensation - restricted stock (44,300 shares non-vested at December 31, 2016)		(585	)		—
Accumulated other comprehensive income		696			1,146

Total stockholders’ equity		43,304			45,545

Total liabilities and stockholders’ equity	$	268,646		$	230,709

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, except share and per share data)


	Years Ended December 31,
	2016		2015
Interest and dividend income:
Interest and fees on loans	$	6,551	$	4,994
Interest and dividends on securities:
Taxable		740		846
Tax-exempt		59		31
Other interest		55		35

Total interest and dividend income		7,405		5,906

Interest expense:
Interest on deposits		1,618		1,276
Interest on Federal Home Loan Bank advances		22		—

Total interest expense		1,640		1,276

Net interest and dividend income		5,765		4,630
Provision for loan losses		310		60

Net interest and dividend income after provision for loan losses		5,455		4,570

Noninterest income:
Fees and service charges		76		91
Gain on sales of securities, net		1,004		409
Writedown of securites		—		(461	)
Income on bank-owned life insurance		141		140
Other income		14		63

Total noninterest income		1,235		242

Noninterest expense:
Salaries and employee benefits		2,772		2,411
Occupancy expense		300		311
Equipment expense		37		49
Data processing expense		370		319
Advertising expense		146		143
Printing and supplies		39		53
FDIC assessment		116		111
Audits and examinations		212		130
Other professional services		328		177
Other expense		152		121

Total noninterest expense		4,472		3,825

Income before income tax expense		2,218		987
Income tax expense		796		329

Net income	$	1,422	$	658

Weighted average common shares oustanding:
Basic		2,426,687		2,607,027
Diluted		2,427,498		2,607,027
Earnings per share:
Basic	$	0.59	$	0.25

Diluted	$	0.59	$	0.25

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)


	Years Ended December 31,
	2016			2015
Net income	$	1,422		$	658

Other comprehensive loss, net of tax:
Net unrealized holding gain (loss) on available-for-sale securities		285			(190	)
Reclassification adjustment for net realized (gain) loss in net income		(1,004	)		52

Other comprehensive loss before income tax effect		(719	)		(138	)
Income tax benefit		269			68

Other comprehensive loss, net of tax		(450	)		(70	)

Comprehensive income	$	972		$	588

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2016 and 2015

(Dollars In Thousands)


	Common Stock						Additional Paid-in-			Retained		Unearned Compensation			Unearned Compensation			Accumulated Other Comprehensive
	Shares			Amount			Capital			Earnings		- ESOP			- RSA			Income			Total
Balance, December 31, 2014		2,829,579		$	28		$	26,575		$	19,832	$	(2,188	)	$	—		$	1,216		$	45,463
Net income		—			—			—			658		—			—			—			658
Other comprehensive loss, net of tax		—			—			—			—		—			—			(70	)		(70	)
Buyback of common stock		(42,000	)		—			(613	)		—		—			—			—			(613	)
Common stock held by ESOP committed to be allocated (7,546 shares annually)		—			—			32			—		75			—			—			107

Balance, December 31, 2015		2,787,579			28			25,994			20,490		(2,113	)		—			1,146			45,545
Net income		—			—			—			1,422		—			—			—			1,422
Other comprehensive loss, net of tax		—			—			—			—		—			—			(450	)		(450	)
Restricted stock awarded		44,300			—			670			—		—			(670	)		—			—
Restricted stock award expense		—			—			—			—		—			85			—			85
Stock option expense		—			—			106			—		—			—						106
Buyback of common stock		(229,800	)		(2	)		(3,518	)		—		—			—			—			(3,520	)
Common stock held by ESOP committed to be allocated (7,546 shares annually)		—			—			40			—		76			—			—			116

Balance, December 31, 2016		2,602,079		$	26		$	23,292		$	21,912	$	(2,037	)	$	(585	)	$	696		$	43,304

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	Years Ended December 31,
	2016			2015
Cash flows from operating activities:
Net income	$	1,422		$	658
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net of accretion		37			42
Gain on sales of available-for-sale securities, net		(1,004	)		(409	)
Writedown of available-for-sale securities		—			461
Provision for loan losses		310			60
Change in net deferred loan costs		77			(29	)
Change in unamortized premiums		(372	)		—
Depreciation and amortization		85			97
Increase in accrued interest receivable		(132	)		(58	)
Increase in other assets		(4	)		(20	)
Increase (decrease) in other liabilities		17			(34	)
Deferred tax expense (benefit)		71			(68	)
Income on bank-owned life insurance		(141	)		(140	)
ESOP expense		116			107
Stock-based compensation expense		191			—

Net cash provided by operating activities		673			667

Cash flows from investing activities:
Purchases of available-for-sale securities		(4,991	)		(15,451	)
Proceeds from sales of available-for-sale securities		9,321			2,911
Proceeds from maturities and calls of available-for-sale securities		9,230			8,939
Purchase of Federal Home Loan Bank stock		(527	)		—
Loan originations and principal collections, net		(18,286	)		(23,589	)
Loans purchased		(34,591	)		(2,835	)
Capital expenditures		(107	)		(69	)
Premiums paid on bank-owned life insurance		(503	)		(53	)

Net cash used in investing activities		(40,454	)		(30,147	)

Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		3,969			1,366
Net increase in time deposits		26,270			16,090
Proceeds from Federal Home Loan Bank advances		10,000			—
Repurchase of Melrose Bancorp, Inc. Common Stock		(3,520	)		(613	)

Net cash provided by financing activities		36,719			16,843

Net decrease in cash and cash equivalents		(3,062	)		(12,637	)
Cash and cash equivalents at beginning of year		16,854			29,491

Cash and cash equivalents at end of year	$	13,792		$	16,854

Supplemental disclosures:
Interest paid	$	1,634		$	1,276
Income taxes paid		644			379

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

MELROSE BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2016 and 2015

NOTE 1 - NATURE OF OPERATIONS

Melrose Cooperative Bank (the “Bank”) is a state chartered co-operative bank which was incorporated in 1890 and is headquartered in Melrose, Massachusetts. The Bank operates its business from one banking office located in Melrose, Massachusetts. The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in commercial and residential real estate loans, and in consumer loans.

On October 21, 2014, in accordance with a Plan of Conversion (Conversion), Melrose Cooperative Bank completed a mutual-to-stock conversion pursuant to which the Bank became a wholly owned subsidiary of Melrose Bancorp, Inc. (Company), a stock holding company incorporated in February 2014. In connection with the conversion, the Company sold 2,723,409 shares of common stock, at an offering price of $10 per share, and issued an additional 106,170 shares of its common stock to the Melrose Cooperative Bank Foundation, resulting in an aggregate issuance of 2,829,579 shares of common stock. The net proceeds from the stock offering, net of offering costs of $1,716,000, amounted to $25,518,000. The Company’s stock began trading on October 22, 2014 on the NASDAQ Capital Market under the symbol “MELR”.

As set forth above, in connection with the Conversion, the Bank established and funded the Melrose Cooperative Bank Foundation (Foundation) with 106,170 shares of the Company’s common stock, plus a cash contribution of $300,000. This contribution resulted in recognition of expense of $1,362,000 in the year ended December 31, 2014 based on the $10 per share offering price, plus $300,000 of cash. The Foundation supports charitable causes and community development activities in the Bank’s area of operations.

Also, in connection with the Conversion, the Bank established an employee stock ownership plan (ESOP), which purchased 226,366 shares of the Company’s common stock at a price of $10 per share.

The Bank, at the time of the Conversion, established a Liquidation Account in an amount equal to the net worth of the Bank as of the date of the latest consolidated statement of financial condition contained in the final prospectus distributed in connection with the Conversion. The function of the Liquidation Account is to establish a priority on liquidation. The Liquidation Account will be maintained by the Company for the benefit of the eligible account holders who continue to maintain deposit accounts with the Bank following the conversion. Each eligible account holder shall, with respect to each deposit account, hold a related inchoate interest in a portion of the Liquidation Account balance, in relation to each deposit account balance at the eligibility record date, or to such balance as it may be subsequently reduced, as hereinafter provided. The initial Liquidation Account balance shall not be increased, and shall be subject to downward adjustment to the extent of any downward adjustment of any subaccount balance of any eligible account holder in accordance with the Regulations of the Division of Banks of the Commonwealth of Massachusetts.

In the unlikely event of a complete liquidation of the Bank (and only in such event), following all liquidation payments to creditors (including those to depositors to the extent of their deposit accounts) each eligible account holder shall be entitled to receive a liquidating distribution from the Liquidation Account, in the amount of the then-adjusted subaccount balances for his or her deposit accounts then held, before any liquidating distribution may be made to any holder of the Bank’s capital stock.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America (GAAP) and predominant practices within the banking industry. The consolidated financial statements were prepared using the accrual basis of accounting. 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 accounting principles generally accepted in the United States of America, 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 and the valuation of deferred tax assets.

RECLASSIFICATIONS:

Certain amounts in the prior year have been reclassified to be consistent with the current year’s presentation.

CASH AND CASH EQUIVALENTS:

For purposes of reporting cash flows, cash and cash equivalents include cash, amounts due from banks, money market funds and federal funds sold.

As of December 31, 2016, the Company has total cash and cash equivalents in the following banks:

Eastern Bank $815,000 which represents approximately 1.9% of total stockholders’ equity

State Street Bank $2,992,000 which represents approximately 6.9% 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 stockholders’ equity

State Street Bank $2,993,000 which represents approximately 6.6% of stockholders’ equity

SECURITIES:

Investments in debt securities are adjusted for amortization of premiums and accretion of discounts computed so as to approximate the interest method. Gains or losses on sales of investment securities are computed on a specific identification basis.

The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. These security classifications may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale.

•

Held-to-maturity securities are measured at amortized cost in the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings or in a separate component of stockholders’ equity; they are merely disclosed in the notes to the consolidated financial statements.

•

Available-for-sale securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings, but are reported as a net amount (less expected tax) in a separate component of stockholders’ equity until realized.

•

Trading securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings.

For any debt security with a fair value less than its amortized cost basis, the Company will determine whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, the Company will recognize a full impairment charge to earnings. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the credit loss portion of impairment will be recognized in earnings as realized losses. The other-than-temporary impairment related to all other factors will be recorded in other comprehensive income.

Declines in marketable equity securities below their cost that are deemed other-than-temporary are reflected in earnings as realized losses.

As a member of the Federal Home Loan Bank of Boston (FHLB), the Company is required to invest in $100 par value stock of the FHLB. The FHLB capital structure mandates that members must own stock as determined by their Total Stock Investment Requirement which is the sum of a member’s Membership Stock Investment Requirement and Activity-Based Stock Investment Requirement. Management evaluates the Company’s investment in FHLB stock for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. Based on its most recent analysis of the FHLB as of December 31, 2016, management deems its investment in FHLB stock to be not other-than-temporarily impaired.

LOANS:

Loans receivable that management has the intent and ability to hold until maturity or payoff are reported at their outstanding principal balances adjusted for amounts due to borrowers on unadvanced loans, any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.

Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount amortized as an adjustment of the related loan’s yield. The Company is amortizing these amounts over the contractual lives of the related loans.

Residential real estate loans are generally placed on nonaccrual when reaching 90 days past due or in process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a period of time, generally six months.

Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans are recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

ALLOWANCE FOR LOAN LOSSES:

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance are confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

General Component:

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: one- to four-family residential real estate, home equity loans and lines of credit, commercial real estate, construction, and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the years ending December 31, 2016 and 2015.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

One- to four-family residential real estate: The Company generally does not originate loans with a loan-to-value ratio greater than 80% and does not grant subprime loans. Loans with loan-to-value ratios greater than 80% require private mortgage insurance. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. Loans in this segment also include home equity loans and lines of credit. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate: Loans in this segment are primarily income-producing properties throughout Massachusetts. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Loans in this segment also include loans secured by multifamily dwellings. Management periodically obtains rent rolls and continually monitors the cash flows of these loans.

Construction loans: Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Consumer loans: Loans in this segment are generally secured and repayment is dependent on the credit quality of the individual borrower. Loans in this segment include auto loans and other consumer loans.

Allocated Component:

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial real estate and construction loans 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. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and one- to four-family residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

A loan is considered impaired when, based on current information and events, it is probable that the Company 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.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.

Unallocated Component:

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 allocated and general reserves in the portfolio.

PREMISES AND EQUIPMENT:

Land is carried at cost. Buildings and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in income or expense. Depreciation and amortization are calculated principally on the straight-line method over the estimated useful lives of the assets. Estimated lives are 15 to 40 years for buildings and 3 to 10 years for furniture and equipment.

Premises and equipment are periodically evaluated for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash flows of premises and equipment are less than its carrying amount. In that event, the Company records a loss for the difference between the carrying amount and the fair value of the asset based on quoted market prices, if applicable, or a discounted cash flow analysis.

BANK-OWNED LIFE INSURANCE:

The Company has purchased insurance policies on the lives of certain directors, executive officers and employees. Bank-owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value. Changes in net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the consolidated statements of income and are not subject to income taxes.

ADVERTISING:

The Company directly expenses costs associated with advertising as they are incurred. Advertising expense for the years ended December 31, 2016 and 2015 amounted to $146,000 and $143,000, respectively.

INCOME TAXES:

The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled.

EMPLOYEE STOCK OWNERSHIP PLAN:

Compensation expense for the Employee Stock Ownership Plan (“ESOP”) is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair value of the shares during the period. The Company recognizes compensation expense based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP. Unearned compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity in the consolidated balance sheet. The difference between the average fair value and the cost of shares allocated by the ESOP is recorded as an adjustment to additional paid-in-capital.

STOCK-BASED COMPENSATION:

The Company recognizes stock-based compensation based on the grant-date fair value of the award adjusted for expected forfeitures. The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time.

EARNINGS PER SHARE (EPS):

When presented, basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could 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 the earnings of the entity. For the purposes of computing diluted EPS, the treasury stock method is used. Unallocated ESOP shares and unearned shares of restricted stock are not deemed outstanding for earnings per share calculations.

The calculation of basic and diluted EPS is presented below.


	Year Ended December 31, 2016			Year Ended December 31, 2015
	(Dollars in Thousands)
Net income	$	1,422		$	658

Basic Common Shares:
Weighted average common shares outstanding		2,660,521			2,825,847
Weighted average shares - unearned restricted stock		(26,333	)		—
Weighted average unallocated ESOP shares		(207,501	)		(218,820	)

Basic weighted average shares outstanding		2,426,687			2,607,027

Dilutive effect of unvested restricted stock awards		811			—

Diluted weighted average shares outstanding		2,427,498			2,607,027

Basic earnings per share	$	0.59		$	0.25

Diluted earnings per share ⁽¹⁾	$	0.59		$	0.25

(1)

Options to purchase 224,200 shares, representing all outstanding options, were not included in the computation of diluted earnings per share for the year ended December 31, 2016 because the effect is anti-dilutive. As of and during the year ended December 31, 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 balance sheets for cash and cash equivalents approximate those assets’ fair values.

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 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 its 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.

Federal Home Loan Bank advances: The fair values of Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates for similar types of borrowing arrangements.

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 December 31, 2016, there is no significant difference in the comparability of the consolidated financial statements as a result of this extended transition period.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), that revises the criteria for determining when to recognize revenue from contracts with customers and expands disclosure requirements. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 to annual reporting periods and interim periods within those annual periods beginning after December 15, 2017. Additionally, the FASB has recently issued proposed updates to certain aspects of the guidance. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In January 2016, 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.

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.

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.

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.

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.

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 fiscal years beginning after December 15, 2019. Early adoption of item 5 above is permitted for fiscal years 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 2016-09, “Compensation – Stock Compensation (Topic 718): 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. Under the extended transition period for an emerging growth company, ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 31, 2018. 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 2016-09 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgement to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Under the extended transition period for an emerging growth company, this update will be effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted in interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the amendments of ASU 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. Under the extended transition period for an emerging growth company, this update will be effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU 2016-15 is not expected to have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18 to provide clarifying guidance on the classification and presentation of changes in restricted cash on an entity’s statements of cash flows. The guidance requires that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amended guidance is effective for the Company on January 1, 2018, with an early adoption permitted, and is to be applied retrospectively to all periods presented. As this guidance only affects the classification within the statement of cash flows, ASU 2016-18 is not expected to have a material impact 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 as of December 31:


	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In Thousands)
December 31, 2016:
U.S. Government and federal agency obligations	$	5,819	$	—	$	131	$	5,688
Debt securities issued by states of the United States and political subdivisions of the states		2,695		2		41		2,656
Corporate bonds and notes		12,537		17		61		12,493
Preferred stock		3,000		20		82		2,938
Mortgage-backed securities		1,498		—		66		1,432
Marketable equity securities		5,072		1,557		5		6,624

	$	30,621	$	1,596	$	386	$	31,831

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 as of December 31, 2016 are as follows:


	Fair Value
	(In Thousands)
Due within one year	$	3,170
Due after one year through five years		13,073
Due after five years through ten years		1,946
Due after ten years		3,164
Mortgage-backed securities		1,432
Asset-backed securities		1,491

	$	24,276

Not included in the maturity table above is preferred stock with no stated maturity of $931,000 at December 31, 2016.

There were no securities of issuers whose aggregate carrying amount exceeded 10% of stockholders’ equity at December 31, 2016.

During the year ended December 31, 2016, proceeds from the sale of available-for-sale securities amounted to $9.3 million. The gross realized gains on these sales amounted to $1.0 million and there were no gross realized losses. The tax expense applicable to these net realized gains amounted to $359,000. During the year ended December 31, 2015, proceeds from the sale of available-for-sale securities amounted to $2.9 million. The gross realized gains on these sales amounted to $490,000 and the gross realized losses were $81,000. The tax expense applicable to these net realized gains amounted to $164,000.

The Company had no pledged securities as of December 31, 2016 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 as of December 31:


	Less than 12 months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In Thousands)
December 31, 2016
U.S. government and federal agency obligations	$	4,359	$	59	$	1,328	$	72	$	5,687	$	131
Debt securities issued by states of the United States and political subdivisions of the states		1,760		28		245		13		2,005		41
Corporate bonds and notes		5,784		61		—		—		5,784		61
Preferred stock		1,918		82		—		—		1,918		82
Mortgage-backed securities		370		8		1,062		58		1,432		66
Marketable equity securities		2,235		5		—		—		2,235		5

Total temporarily impaired securities	$	16,426	$	243	$	2,635	$	143	$	19,061	$	386

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

December 31, 2016

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. Based on the Company’s recent review of securities in the investment portfolio, management deemed securities with unrealized losses as of December 31, 2016 to be temporarily impaired and has the ability and intent to hold these securities until recovery to cost basis occurs. A summary of this review is as follows.

Unrealized losses on U.S. Government and federal agency obligations amounted to $131,000 and consisted of eleven securities; seven of which the unrealized losses were each individually less than 2% of amortized cost basis, and four had unrealized losses between 3% and 6% of amortized cost basis. Unrealized losses on municipal bonds amounted to $41,000 and consisted of six securities; four of which the unrealized losses were each individually less than 2% of amortized cost basis, and two had unrealized losses between 4% and 5% of amortized cost basis. Unrealized losses on corporate bonds and notes amounted to $61,000 and consisted of ten securities, all of which were 3% or less of amortized cost basis. Unrealized losses on mortgage-backed securities amounted to $66,000 and consisted of four securities; all with unrealized losses from 2% to 7% of amortized cost basis. The unrealized losses on all of these debt securities 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.

The Company’s investment in impaired preferred stocks consists of two investments which had unrealized losses of $13,000, or 1.3% of amortized cost, and $69,000, or 6.9% of amortized cost, respectively. The losses were due to changes in interest rates. The Company reviewed these investments for impairment by considering factors such as, among other things, the financial condition and ability of the issuer to continue to pay dividends, and any specific events that may affect the operations of the issuer.

Unrealized losses on marketable equity securities consist of two mutual funds. Both mutual funds invest mainly in short-term bonds, with unrealized losses amounting to $5,000, or 0.2% of cost basis. 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.

During 2016, there were there were no available-for-sale securities deemed to be other than temporarily impaired. During 2015, there were five marketable equity securities that were declared other-than-temporarily impaired and for which an impairment loss of $461,000 was recognized.

NOTE 4 - LOANS

Loans consisted of the following:


	December 31,			December 31,
	2016			2015
	(In Thousands)
Real estate loans:
One-to four-family residential	$	168,111		$	132,237
Home equity loans and lines of credit		10,720			10,862
Commercial		23,011			13,251
Construction		11,738			4,303

Consumer loans		71			121

Total loans		213,651			160,774

Allowance for loan losses		(890	)		(580	)
Deferred loan costs, net		32			109
Unamortized premiums		372			—

Net loans	$	213,165		$	160,303

Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during the year ended December 31, 2016. Total loans to such persons and their companies amounted to $1,531,000 as of December 31, 2016. During the year ended December 31, 2016, $122,000 of advances were made and principal payments totaled $239,000.

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


	Real Estate:
	One- to four- family Residential		Home Equity Loans and Lines of Credit		Commercial		Construction		Consumer Loans		Unallocated		Total
	(In Thousands)
Year Ended December 31, 2016
Allowance for loan losses:

Beginning balance	$	331	$	49	$	150	$	40	$	1	$	9	$	580

Charge offs		—		—		—		—		—		—		—

Recoveries		—		—		—		—		—		—		—

Provision		87		—		126		77		—		20		310

Ending balance	$	418	$	49	$	276	$	117	$	1	$	29	$	890

At December 31, 2016
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance:
Collectively evaluated for impairment		418		49		276		117		1		29		890

Total allowance for loan losses ending balance	$	418	$	49	$	276	$	117	$	1	$	29	$	890

Loans:
Ending balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance:
Collectively evaluated for impairment		168,111		10,720		23,011		11,738		71		—		213,651

Total loans ending balance	$	168,111	$	10,720	$	23,011	$	11,738	$	71	$	—	$	213,651


	Real Estate:
	One- to four- family Residential			Home Equity Loans and Lines of Credit			Commercial		Construction		Consumer Loans		Unallocated		Total
	(In Thousands)
Year Ended December 31, 2015
Allowance for loan losses:
Beginning balance	$	414		$	58		$	25	$	21	$	1	$	1	$	520
Charge offs		—			—			—		—		—		—		—
Recoveries		—			—			—		—		—		—		—
(Benefit) provision		(83	)		(9	)		125		19		—		8		60

Ending balance	$	331		$	49		$	150	$	40	$	1	$	9	$	580

At December 31, 2015
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 as of December 31:


	30 - 59 Days Past Due		60 - 89 Days Past Due		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 December 31, 2016:
Real estate loans:
One-to four-family residential	$	518	$	9	$	—	$	527	$	167,584	$	168,111	$	—	$	9
Home equity loans and lines of credit		—		—		—		—		10,720		10,720		—		—
Commercial		—		—		—		—		23,011		23,011		—		—
Construction		—		—		—		—		11,738		11,738		—		—
Consumer loans		—		—		—		—		71		71		—		—

Total	$	518	$	9	$	—	$	527	$	213,124	$	213,651	$	—	$	9

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 years ended December 31, 2016 and 2015 there were no loans that met the definition of an impaired loan in ASC 310-10-35.

During the years ended December 31, 2016 and 2015 there were no loans that met the definition of a troubled debt restructured loan in ASC 310-10-50.

At December 31, 2016, there was one consumer mortgage loan collateralized by residential real estate property in the process of foreclosure with a recorded investment of $321,000. As of December 31, 2016, the Bank had no foreclosed real estate owned.

Credit Quality Information

In early 2016, the Company implemented a new 10 point internal loan rating system for commercial real estate, construction and commercial loans. For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and subsequently monitors these loans based on the borrower’s ability to pay. 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: Loans with 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 over $350,000.

As of December 31, 2016 (unaudited), one- to four- family residential real estate loans with balances totaling $287,000 had a risk rating of “8 - substandard” and all other loans outstanding had a risk rating of “1 to 6 - 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 “8 - substandard” and all other loans outstanding had a risk rating of “1 to 6 - pass.”

NOTE 5 - PREMISES AND EQUIPMENT

The following is a summary of premises and equipment as of December 31:


	December 31,			December 31,
	2016			2015
	(In Thousands)
Land	$	393		$	393
Building and improvements		1,840			1,817
Furniture and equipment		549			514
Data processing equipment		303			254

		3,085			2,978
Accumulated depreciation		(1,837	)		(1,752	)

	$	1,248		$	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 December 31, 2016 and 2015 amounted to $23,434,000 and $16,876,000, respectively.

For time deposits as of December 31, 2016 the scheduled maturities for each of the following years ended December 31 are as follows:


	(In Thousands)
2017	$	63,523
2018		45,381
2019		1,825
2020		1,253
2021		1,624

	$	113,606

Deposits from related parties held by the Bank as of December 31, 2016 and 2015 amounted to $3,782,000 and $4,030,000, respectively.

NOTE 7 - BORROWED FUNDS

The Bank is a member of the Federal Home Loan Bank of Boston (FHLB). Borrowings from the FHLB are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one-to-four family properties, certain unencumbered investment securities and other qualified assets. The remaining maximum borrowing capacity with the FHLB at December 31, 2016 was approximately $102.5 million subject to the purchase of additional FHLB stock. The Bank had outstanding FHLB borrowings of $10.0 million at December 31, 2016, consisting of two $5.0 million advances, with interest rates of 1.42% and 1.48%, and both are scheduled to mature in 2019. At December 31, 2015, there were no FHLB borrowings outstanding. Additionally, at December 31, 2016, the Bank had the ability to borrow up to $5.0 million on a Fed Funds line of credit with the Co-Operative Central Bank.

NOTE 8 - INCOME TAXES

The components of income tax expense are as follows for the years ended December 31:


	Years Ended December 31,
	2016			2015
	(In Thousands)
Current:
Federal	$	543		$	327
State		182			70

		725			397

Deferred:
Federal		80			(96	)
State		(9	)		(2	)
Change in valuation allowance		—			30

		71			(68	)

Total income tax expense	$	796		$	329

The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows for the years ended December 31:


	Years Ended December 31,
	2016			2015
	% of Income			% of Income
Federal income tax at statutory rate		34.0	%		34.0	%
State tax, net of federal tax benefit		5.2			4.5
Dividends received deduction		(1.3	)		(3.3	)
Bank-owned life insurance		(2.2	)		(4.8	)
Stock compensation		1.1			0.0
Tax exempt income		(1.3	)		(1.7	)
ESOP		0.6			1.1
Other		0.2			0.5
Change in valuation allowance		—			3.0

Effective tax rates		35.9	%		33.3	%

The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31:


	December 31,
	2016			2015
	(In Thousands)
Deferred tax assets:
Allowance for loan losses	$	356		$	231
Interest on non-performing loans		—			5
Deferred compensation		83			90
Security writedowns		27			164
ESOP		12			1
Stock based compensation		47			—
Accrued expenses		13			—
Contribution to Melrose Cooperative Bank Foundation		406			483

Gross deferred tax assets		944			974
Valuation allowance		(90	)		(90	)

Gross deferred tax assets, net of valuation allowance		854			884

Deferred tax liabilities:
Accelerated depreciation		(220	)		(179	)
Net unrealized holding gain on available-for-sale securities		(514	)		(783	)

Gross deferred tax liabilities		(734	)		(962	)

Net deferred tax asset (liability)	$	120		$	(78	)

In connection with its initial public offering, the Company donated common stock and cash in the amount of $1,362,000 to the Melrose Cooperative Bank Foundation. As of December 31, 2016, the Company had a remaining gross deferred tax asset of $406,000. A valuation allowance of $90,000 has been established against the deferred tax assets related to the uncertain utilization of the charitable contribution carryforward created primarily by the donation to the Foundation.

The judgment applied by management considers the likelihood that sufficient taxable income will be realized within the carryforward period in light of its tax planning strategies and changes in market conditions. The charitable contribution carryforward of $1,007,000 at December 31, 2016 expires in 2019 and the related tax benefit, net of the valuation allowance, included in net deferred tax assets is $316,000.

It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As of December 31, 2016 and 2015, there were no material uncertain tax positions related to federal and state income tax matters. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2013 through December 31, 2016. Interest and penalties, if any, are recorded as income tax expense.

NOTE 9 - BENEFIT PLANS

401(k) Savings Plan

The Company participates in a 401(k) savings plan through Pentegra. Eligible employees may contribute up to 100% of their salary, subject to IRS limitations, which can be matched up to 5% by the Company on a dollar for dollar basis. The Company’s expense under this 401(k) plan was $80,000 and $70,000 for the years ended December 31, 2016 and 2015, respectively.

Supplemental Executive Retirement Benefits

The Bank adopted Supplemental Executive Retirement Agreements for two executive officers. These agreements were designed to supplement the benefits available through the Bank’s retirement plan. These agreements were frozen as of February 1, 2014. During 2015, payments totaling $88,000 were made to participants under the plan, and the remaining liability of $88,000 was paid out to participants under the plan in January 2016.

Effective January 1, 2014, the Company established a Supplemental Executive Retirement Plan (SERP Plan). Under the SERP Plan, on a yearly basis, the Company shall credit the participant’s SERP account with the annual contribution specified in the participant’s participation agreement, based on a fixed percent of each participant’s annual salary. The SERP account is an unfunded liability due to each participant and is accruing interest. For the plan years ended December 31, 2016 and 2015, the related liability amounted to $208,000 and $138,000, respectively, and is included in other liabilities. Participants vest in full upon attaining five years of service from the date of participation, or attainment of benefit age, or following a change in control. For each of the years ended December 31, 2016 and 2015, expense recognized under the plan for these benefits was $70,000.

Employee Stock Ownership Plan

The Company has adopted a tax-qualified employee stock ownership plan (“ESOP”) for the benefit of eligible employees. The Company completed its initial public offering and in connection with the conversion transaction, 226,366 shares of Company common stock were purchased by the ESOP at $10.00 per share.

The ESOP funded its stock purchase through a loan from the Company equal to 100% of the aggregate purchase price of the common stock. The ESOP trustee will repay the loan principally through the Bank’s contributions to the ESOP and, possibly, dividends paid on common stock held by the plan over the loan term of 29.2 years.

The trustee holds the shares purchased in a loan suspense account and will release the shares from the suspense account on a pro rata basis as it repays the loan. The trustee will allocate the shares released among active participants on the basis of each active participant’s proportional share of compensation compared to all active participants for the pan year. Participants vest in their benefit at a rate of 20% per year and will be fully vested upon completion of five years of credited service. Generally, participants will receive distributions from the ESOP upon separation from service. The trustee will reallocate any unvested shares of common stock forfeited by participants upon their separation from service among the remaining participants in the plan.

Eligible employees who were employed with the Bank shall receive credit for vesting purposes for each year of continuous employment prior to adoption of the ESOP.

The Company records compensation expense for the ESOP at an amount equal to the shares allocated by the ESOP multiplied by the average fair market value of shares during the period.

At December 31, 2016, the remaining principal balance on the ESOP debt was $2,070,000 and the number of shares held by the ESOP was 226,366.

Total compensation expense recognized in connection with the ESOP was $116,000 and $107,000 for the years ended December 31, 2016 and 2015, respectively.

The remaining principal balance on the ESOP debt as of December 31, 2016 is payable as follows:


Years Ending December 31,	Amount
	(In Thousands)
2017	$	49
2018		51
2019		52
2020		54
2021		56
Thereafter		1,808

	$	2,070

Shares held by the ESOP are as follows as of December 31:


	2016		2015
Allocated		22,638		15,092
Unallocated		203,728		211,274

Shares held by ESOP		226,366		226,366

The fair value of unallocated ESOP shares was $3,657,000 at December 31, 2016.

2015 Equity Incentive Plan

Melrose Bancorp, Inc. adopted the Melrose Bancorp, Inc. 2015 Equity Incentive Plan (the “2015 Equity Incentive Plan”) to provide directors, officers, and employees of the Company and Melrose Cooperative Bank with additional incentives to promote growth and performance of the Company and Melrose Cooperative Bank. The 2015 Equity Incentive Plan authorizes the issuance or delivery to participants of up to 396,140 shares of Melrose Bancorp, Inc. common stock pursuant to grants of incentive and non-statutory stock options, restricted stock awards, and restricted stock units. Of this number, the maximum number of shares of Melrose Bancorp, Inc. common stock that may be issued under the 2015 Equity Incentive Plan pursuant to the exercise of stock options is 282,957 shares, and the maximum number of shares of Melrose Bancorp, Inc. common stock that may be issued as restricted stock awards or restricted stock units is 113,183 shares. The 2015 Equity Incentive Plan was effective upon approval by stockholders at the November 23, 2015 annual meeting.

On May 12, 2016, the Company issued 44,300 shares of common stock restricted stock awards. The restricted stock award expense is based on $15.13 per share, and shares vest over 5 years commencing one year from the grant date. The total expense recognized in connection with the restricted stock awards was $85,000 for the year ended December 31, 2016, and the recognized tax benefit was $34,000.

On May 12, 2016, the Company granted 224,200 stock options. The stock options have an exercise price of $15.13 per share, and vest ratably over 5 years commencing one year from the date of the grant. The stock option expense is equal to the number of options expected to vest each year times the grant date fair value of the shares as determined using the Black-Scholes option pricing model. The Company completed an analysis of seven peer banks to determine the expected volatility of 20.24%. The exercise price used in the pricing model was $15.13, the closing price of the stock on the grant date. The expected life was estimated to be 6.5 years and the 7 year treasury rate of 1.54% was used as the annual risk free interest rate. The expected forfeiture rate is 0%. Using these variables, the estimated fair value is $3.71 per share. The aggregate intrinsic value is $632,000 as of December 31, 2016. The total expense recognized in connection with the stock options was $106,000 for the year ended December 31, 2016, and the recognized tax benefit was $13,000.

At December 31, 2016 the unrecognized share based compensation expense related to the 44,300 unvested restricted stock awards amounted to $585,000. The unrecognized expense will be recognized over a weighted average life of 4.3 years.

At December 31, 2016, none of the 224,200 stock options outstanding are exercisable, and the remaining contractual life is 9.3 years. The unrecognized expense related to the unvested options is $725,000, and will be recognized over a weighted average life of 4.3 years.

Other Agreements

The Company has entered into employment agreements and change in control agreements with certain executive officers which provide the executive officers with severance payments based on salary, and the continuation of other benefits, upon a change in control as defined in the agreements.

NOTE 10 - 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 Bank 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.

Financial instrument liabilities with off-balance sheet credit risk are as follows as of December 31:


	December 31,		December 31,
	2016		2015
	(In Thousands)
Commitments to originate loans	$	7,864	$	5,214
Unused lines of credit		13,742		11,986
Due to borrowers on unadvanced construction loans		3,852		1,796

	$	25,458	$	18,996

NOTE 11 - FAIR VALUE MEASUREMENTS

ASC 820-10, “Fair Value Measurement - Overall,” 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. Level 1 also includes U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. 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 December 31, 2016 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 years ended December 31, 2016 and 2015.

The Company’s marketable equity securities and preferred stocks 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 Company’s impaired loans, if any, are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using level 2 inputs based upon appraisals of similar properties obtained from a third party. For level 3 inputs, fair value is based upon management estimates of the value of the underlying collateral or the present value of the expected cash flows.

The following summarizes assets measured at fair value on a recurring basis as of December 31:


	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)
December 31, 2016:
U.S. Government and federal agency obligations	$	5,688	$	—	$	5,688	$	—
Debt securities issued by states of the United States and political subdivisions of the states		2,656		—		2,656		—
Corporate bonds and notes		12,493		—		12,493		—
Preferred stock		2,938		2,938		—		—
Mortgage-backed securities		1,432		—		1,432		—
Marketable equity securities		6,624		6,624		—		—

Totals	$	31,831	$	9,562	$	22,269	$	—

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 an ongoing basis. At December 31, 2016 and 2015, there were no financial instruments carried on the consolidated balance sheet 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:


	December 31, 2016
	Carrying Amount		Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	13,792	$	13,792	$	—	$	—	$	13,792
Available-for-sale securities		31,831		9,562		22,269		—		31,831
Federal Home Loan Bank stock		964		964		—		—		964
Loans, net		213,165		—		—		213,582		213,582
Co-operative Central Bank deposit		881		881		—		—		881
Accrued interest receivable		572		572		—		—		572
Financial liabilities:
Deposits		214,766		—		215,443		—		215,443
FHLB advances		10,000		—		9,930		—		9,930

	December 31, 2015
	Carrying Amount		Fair Value
	Carrying 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 table are included in the consolidated balance sheets under the indicated captions. Accounting policies related to financial instruments are described in Note 2.

NOTE 12 - OTHER COMPREHENSIVE LOSS

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 loss included in stockholders’ equity are as follows:


	For the years ended December 31,
	2016			2015
	(In Thousands)
Net unrealized holding gain (loss) on available-for-sale securities	$	285		$	(190	)
Reclassification adjustment for net realized (gain) loss in net income ⁽¹⁾		(1,004	)		52

Other comprehensive loss before income tax effect		(719	)		(138	)
Income tax benefit		269			68

Other comprehensive loss, net of tax	$	(450	)	$	(70	)

(1)

Reclassification adjustments include net realized securities gains and losses. Realized gains and losses have been reclassified out of accumulated other comprehensive income and affect certain captions in the consolidated statements of income as follows: pre-tax amount for the years ended December 31, 2016 and 2015 is reflected as a gain on sale of securities, net of $1.0 million for 2016 and a gain on sale of securities, net of $409,000 and a writedown of securities of $461,000 for 2015. The tax effect, included in income tax expense for the year ended December 31, 2016 is $359,000 and was an income tax benefit of $17,000 for the year ended December 31, 2015. The after tax amount is included in net income.

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

NOTE 13 - 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 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 regulations require a common equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and 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 prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5%, a Tier 1 risk based capital ratio of 8.0%, a total risk based capital ratio of 10.0%, and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that phases 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. 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. At December 31, 2016, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer.

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

As of December 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 Common Equity Tier 1 risked-based, total risk-based, Tier 1 risk-based and Tier 1 leverage capital 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 are also presented in the 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 December 31, 2016:
Total Capital (to Risk Weighted Assets)	$	35,236		21.09	%	$	13,368		8.0	%	$	16,710		10.0	%
Tier 1 Capital (to Risk Weighted Assets)		33,648		20.14			10,026		6.0			13,368		8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		33,648		20.14			7,519		4.5			10,861		6.5
Tier 1 Capital (to Average Assets)		33,648		13.58			9,909		4.0			12,386		5.0

As of December 31, 2015:
Total Capital (to Risk Weighted Assets)	$	33,580		24.78	%	$	10,839		8.0	%	$	13,549		10.0	%
Tier 1 Capital (to Risk Weighted Assets)		32,060		23.66			8,129		6.0			10,839		8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		32,060		23.66			6,097		4.5			8,807		6.5
Tier 1 Capital (to Average Assets)		32,060		14.45			8,877		4.0			11,096		5.0

NOTE 14 - COMMON STOCK REPURCHASES

From time to time, our board of directors has authorized 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. In November 2015, 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 2016, 229,800 shares of common stock were repurchased at an average cost of $15.32. In 2015, 42,000 shares of common stock were repurchased at an average cost of $14.60.

NOTE 15 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

Most of the Bank’s business activity is with customers located within the Commonwealth of Massachusetts. There are no concentrations of credit to borrowers that have similar economic characteristics. The majority of the Bank’s loan portfolio is comprised of loans collateralized by real estate located in the Commonwealth of Massachusetts.

NOTE 16 - SUBSEQUENT EVENTS

The Company borrowed an additional $3 million, with a three year term at a fixed interest rate of 1.89% from the FHLB in January 2017.

NOTE 17 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS

MELROSE BANCORP, INC.

PARENT COMPANY ONLY

BALANCE SHEETS

(In Thousands)


	December 31,
	2016		2015
Assets
Non-interest bearing deposit in the Bank	$	1,881	$	5,170
Money market funds		1,558		645

Cash and cash equivalents		3,439		5,815
Investments in available-for-sale securities (at fair value)		2,980		3,835
Investment in subsidiary, Melrose Cooperative Bank		34,399		33,246
Loan receivable ESOP		2,070		2,116
Accrued interest receivable		5		4
Deferred tax assets		388		418
Other assets		147		111

Total assets	$	43,428	$	45,545

Liabilities and Stockholders’ Equity
Other liabilities	$	124	$	—
Stockholders’ equity		43,304		45,545

Total liabilities and stockholders’ equity	$	43,428	$	45,545

MELROSE BANCORP, INC.

PARENT COMPANY ONLY

STATEMENTS OF INCOME

(In Thousands)


	For the year ended			For the year ended
	December 31, 2016			December 31, 2015
Interest and dividend income:
Interest on ESOP loan	$	69		$	70
Interest and dividends on securities		71			89

Total interest and dividend income		140			159

Noninterest expense:
Salaries and employee benefits		191			—
Other expenses		1			—

Total noninterest expense		192			—

(Loss) income before undistributed income of subsidiary and income tax (benefit) expense		(52	)		159
Undistributed income of subsidiary		1,472			589

Income before income taxes		1,420			748
Income tax (benefit) expense		(2	)		90

Net income	$	1,422		$	658

MELROSE BANCORP, INC.

PARENT COMPANY ONLY

STATEMENT OF CASH FLOWS

(In Thousands)


	For the year ended			For the year ended
	December 31, 2016			December 31, 2015
Cash flows from operating activities:
Net income	$	1,422		$	658

Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net of accretion		31			13
Increase in accrued interest receivable		(1	)		(1	)
Deferred tax expense		29			71
Increase in other assets		(36	)		(97	)
Increase in other liabilities		124
Stock based compensation expense		191			—
Equity in undistributed earnings of subsidiary		(1,472	)		(589	)

Net cash provided by operating activities		288			55

Cash flows from investing activities:
Purchases of available-for-sale securities		—			(1,945	)
Proceeds from maturities of available-for-sale securities		810			923
Repayment of principal on ESOP loan		46			46

Net cash provided by (used in) investing activities		856			(976	)

Cash flows from financing activities:
Cash paid for stock repurchases		(3,520	)		(613	)

Net cash used in financing activities		(3,520	)		(613	)

Net decrease in cash and cash equivalents		(2,376	)		(1,534	)
Cash and cash equivalents at beginning of year		5,815			7,349

Cash and cash equivalents at end of year	$	3,439		$	5,815

NOTE 18 - QUARTERLY DATA (UNAUDITED)


	Year Ended December 31,
	2016
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(In Thousands)
Interest and dividend income	$	1,695	$	1,769	$	1,911	$	2,030
Interest expense		361		395		429		455

Net interest and dividend income		1,334		1,374		1,482		1,575
Provision for loan losses		60		103		117		30

Net interest and dividend income, after provision for loan losses		1,274		1,271		1,365		1,545
Total noninterest income		45		336		325		529
Total noninterest expense		1,039		1,194		1,082		1,157

Income before income taxes		280		413		608		917
Provision for income taxes		87		138		222		349

Net income	$	193	$	275	$	386	$	568

Earnings per share:
Basic	$	0.08	$	0.11	$	0.16	$	0.24
Diluted	$	0.08	$	0.11	$	0.16	$	0.24

	2015
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(In Thousands)
Interest and dividend income	$	1,394	$	1,432	$	1,545	$	1,605
Interest expense		316		336		344		351

Net interest and dividend income		1,078		1,096		1,201		1,254
Provision for loan losses		—		9		35		16

Net interest and dividend income, after provision for loan losses		1,078		1,087		1,166		1,238
Total noninterest income		43		79		104		16
Total noninterest expense		913		929		973		1,010

Income before income taxes		208		237		297		244
Provision for income taxes		59		88		91		90

Net income	$	149	$	149	$	206	$	154

Earnings per share:
Basic	$	0.06	$	0.06	$	0.08	$	0.06
Diluted	$	0.06	$	0.06	$	0.08	$	0.06

Signatures

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		Melrose Bancorp, Inc.

Date: March 21, 2017	By:	/s/ Jeffrey D. Jones
		Jeffrey D. Jones
		President and Chief Executive Officer
		(Duly Authorized Representative)

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Signatures	Title	Date

/s/ Jeffrey D. Jones Jeffrey D. Jones	President, Chief Executive Officer and Director (Principal Executive Officer)	March 21, 2017


/s/ Diane Indorato Diane Indorato	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 21, 2017


/s/ Frank Giso III Frank Giso III	Chairman of the Board	March 21, 2017


/s/ Candy Brower Candy Brower	Director	March 21, 2017


/s/ Elizabeth W. McNelis Elizabeth W. McNelis	Director	March 21, 2017


/s/ F. Peter Waystack F. Peter Waystack	Director	March 21, 2017


/s/ Alan F. Whitney Alan F. Whitney	Director	March 21, 2017


/s/ Stephen E. Anderson Stephen E. Anderson	Director	March 21, 2017

EXHIBIT INDEX



3.1		Articles of Incorporation of Melrose Bancorp, Inc.*

3.2		Bylaws of Melrose Bancorp, Inc.*

4		Form of Common Stock Certificate of Melrose Bancorp, Inc.*

10.1		Form of Employment Agreement with Jeffrey D. Jones*

10.2		Form of Change in Control Agreement with Diane Indorato *

10.3		Form of Change in Control Agreement with James Oosterman *

10.4		Form of Employee Stock Ownership Plan*

10.5		Form of Melrose Cooperative Bank Supplemental Executive Retirement Plan*

10.6		Form of Melrose Cooperative Bank Executive Annual Incentive Plan*

10.7		Form of Executive Split Dollar Agreement between Melrose Cooperative Bank and Jeffrey Jones*

10.8		Melrose Bancorp, Inc. 2015 Equity Incentive Plan**

21		Subsidiaries

23		Consent of Auditor

31.1		Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification required 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.

101		The following financial statements for the year ended December 31, 2016 and 2015, formatted in XBRL:(i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

*	Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-194475), initially filed March 11, 2014.

**	Incorporated by reference to the Company’s definitive Proxy Statement filed on October 23, 2015.

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