Melrose Bancorp, Inc. - FORM 10-Q

Melrose Bancorp, Inc. - FORM 10-Q - November 13, 2017

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EX-32 - EX-32 - Melrose Bancorp, Inc.	d438414dex32.htm
EX-31.2 - EX-31.2 - Melrose Bancorp, Inc.	d438414dex312.htm
EX-31.1 - EX-31.1 - Melrose Bancorp, Inc.	d438414dex311.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

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

For the transition period from to

Commission File No. 001-36702

Melrose Bancorp, Inc.

(Exact name of registrant as specified in its charter)


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

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

(781) 665-2500

(Registrant’s telephone number)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐

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

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

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

As of November 13, 2017, 2,600,743 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

Melrose Bancorp, Inc.

Form 10-Q


		Page
Part I. Financial Information

Item 1.	Condensed Consolidated Financial Statements

	Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016		1

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)		2

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)		3

	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 (unaudited)		4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)		5

	Notes to Condensed Consolidated Financial Statements (unaudited)		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		31

Item 4.	Controls and Procedures		31

Part II. Other Information

Item 1.	Legal Proceedings		32

Item 1A.	Risk Factors		32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32

Item 3.	Defaults upon Senior Securities		32

Item 4.	Mine Safety Disclosures		32

Item 5.	Other Information		32

Item 6.	Exhibits		32

	Signature Page		33

Part I. – Financial Information

Item 1.

Condensed Consolidated Financial Statements

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)


	September 30, 2017			December 31, 2016
	(unaudited)
ASSETS
Cash and due from banks	$	15,678		$	11,715
Money market funds		3,201			2,077
Federal funds sold		4,212			—

Cash and cash equivalents		23,091			13,792
Investments in available-for-sale securities, at fair value		29,392			31,831
Federal Home Loan Bank stock, at cost		1,680			964
Loans, net of allowance for loan losses of $984 at September 30, 2017 and $890 at December 31, 2016		234,757			213,165
Premises and equipment, net		1,484			1,248
Co-operative Central Bank deposit		886			881
Bank-owned life insurance		6,048			5,874
Accrued interest receivable		668			572
Deferred tax asset, net		404			120
Other assets		292			199

Total assets	$	298,702		$	268,646

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	16,219		$	17,586
Interest-bearing		210,925			197,180

Total deposits		227,144			214,766
Federal Home Loan Bank advances		26,000			10,000
Other liabilities		737			576

Total liabilities		253,881			225,342

Stockholders’ equity:
Common stock, par value $0.01 per share, authorized 15,000,000 shares; issued 2,600,743 shares at September 30, 2017 and 2,602,079 at December 31, 2016		26			26
Additional paid-in-capital		23,437			23,292
Retained earnings		23,491			21,912
Unearned compensation - ESOP (198,070 shares unallocated at September 30, 2017 and 203,728 shares at December 31, 2016)		(1,980	)		(2,037	)
Unearned compensation - restricted stock		(484	)		(585	)
Accumulated other comprehensive income		331			696

Total stockholders’ equity		44,821			43,304

Total liabilities and stockholders’ equity	$	298,702		$	268,646

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Share and Per Share Data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Interest and dividend income:
Interest and fees on loans	$	2,139	$	1,737	$	6,025	$	4,753
Interest and dividends on securities:
Taxable		129		164		398		587
Tax-exempt		18		15		51		44
Other interest		62		13		112		41

Total interest and dividend income		2,348		1,929		6,586		5,425

Interest expense:
Interest on deposits		479		429		1,339		1,186
Interest on Federal Home Loan Bank advances		112		—		217		—

Total interest expense		591		429		1,556		1,186

Net interest and dividend income		1,757		1,500		5,030		4,239
Provision for loan losses		3		117		94		279

Net interest and dividend income after provision for loan losses		1,754		1,383		4,936		3,960

Noninterest income:
Fees and service charges		22		21		62		57
Gain on sales of available-for-sale securities, net		388		279		1,195		572
Income on bank-owned life insurance		84		22		133		68
Other income		—		2		4		9

Total noninterest income		494		324		1,394		706

Noninterest expense:
Salaries and employee benefits		807		708		2,428		2,071
Occupancy expense		155		80		307		227
Equipment expense		11		9		32		27
Data processing expense		100		97		297		269
Advertising expense		45		36		146		114
Printing and supplies		9		8		38		26
FDIC assessment		15		30		55		86
Audits and examinations		50		67		150		163
Other professional services		80		35		230		278
Other expense		45		29		151		104

Total noninterest expense		1,317		1,099		3,834		3,365

Income before income tax expense		931		608		2,496		1,301
Income tax expense		300		222		917		448

Net income	$	631	$	386	$	1,579	$	853

Weighted average common shares outstanding:
Basic		2,368,989		2,366,802		2,365,661		2,450,698
Diluted		2,377,491		2,367,225		2,370,063		2,450,920
Earnings per share:
Basic	$	0.27	$	0.16	$	0.67	$	0.35

Diluted	$	0.27	$	0.16	$	0.67	$	0.35

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	631		$	386		$	1,579		$	853
Other comprehensive (loss) income, net of tax:
Net unrealized holding gain on available-for-sale securities		48			31			545			721
Reclassification adjustment for net realized gain included in net income		(388	)		(279	)		(1,195	)		(572	)

Other comprehensive (loss) income before income tax effect		(340	)		(248	)		(650	)		149
Income tax benefit (expense)		133			86			285			(13	)

Other comprehensive (loss) income, net of tax		(207	)		(162	)		(365	)		136

Comprehensive income	$	424		$	224		$	1,214		$	989

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2017 and 2016

(In Thousands, Except Share Data)

(Unaudited)


	Common Stock						Additional Paid-in-			Retained		Unearned Compensation			Unearned Compensation			Accumulated Other Comprehensive
	Shares			Amount			Capital			Earnings		- ESOP			- RSA			Income			Total
Balance, December 31, 2015		2,787,579		$	28		$	25,994		$	20,490	$	(2,113	)	$	—		$	1,146		$	45,545
Net income		—			—			—			853		—			—			—			853
Other comprehensive income, net of tax		—			—			—			—		—			—			136			136
Restricted stock awarded		44,300			—			670			—		—			(670	)		—			—
Restricted stock award expense		—			—			—			—		—			56			—			56
Stock option expense		—			—			64			—		—			—			—			64
Buyback of common stock		(226,300	)		(2	)		(3,463	)		—		—			—			—			(3,465	)
Common stock held by ESOP committed to be allocated (7,546 shares annually)		—			—			28			—		57			—			—			85

Balance, September 30, 2016		2,605,579		$	26		$	23,293		$	21,343	$	(2,056	)	$	(614	)	$	1,282		$	43,274

Balance, December 31, 2016		2,602,079		$	26		$	23,292		$	21,912	$	(2,037	)	$	(585	)	$	696		$	43,304
Net income		—			—			—			1,579		—			—			—			1,579
Other comprehensive loss, net of tax		—			—			—			—		—			—			(365	)		(365	)
Shares repurchased for tax withholdings on stock-based compensation		(1,336	)		—			(22	)		—		—			—			—			(22	)
Restricted stock award expense		—			—			—			—		—			101			—			101
Stock option expense		—			—			124			—		—			—			—			124
Common stock held by ESOP committed to be allocated (7,546 shares annually)		—			—			43			—		57			—			—			100

Balance, September 30, 2017		2,600,743		$	26		$	23,437		$	23,491	$	(1,980	)	$	(484	)	$	331		$	44,821

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

MELROSE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	1,579		$	853
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net of accretion		100			38
Gain on sales of available-for-sale securities, net		(1,195	)		(572	)
Provision for loan losses		94			279
Change in net deferred loan costs		4			(281	)
Change in unamortized premiums		(74	)		—
Depreciation		160			63
Increase in accrued interest receivable		(96	)		(102	)
Increase/decrease in other assets		(93	)		16
Increase/decrease in other liabilities		161			(91	)
Income on bank-owned life insurance		(133	)		(68	)
ESOP expense		100			85
Stock-based compensation expense		225			120

Net cash provided by operating activities		832			340

Cash flows from investing activities:
Purchases of available-for-sale securities		(3,193	)		(3,670	)
Proceeds from sales of available-for-sale securities		2,264			8,439
Proceeds from maturities and calls of available-for-sale securities		3,814			8,958
Purchase of Federal Home Loan Bank stock		(716	)		(302	)
Increase in Cooperative Central Bank Deposit		(5	)		—
Loan originations and principal collections, net		(9,011	)		(15,969	)
Loans purchased		(12,605	)		(29,248	)
Capital expenditures		(396	)		(43	)
Premiums paid on bank-owned life insurance		(41	)		(39	)

Net cash used in investing activities		(19,889	)		(31,874	)

Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		1,951			3,528
Net increase in time deposits		10,427			29,822
Proceeds from Federal Home Loan Bank advances		16,000			5,000
Payment of income taxes for shares withheld in stock based award activity		(22	)		—
Repurchase of Melrose Bancorp, Inc. common stock		—			(3,465	)

Net cash provided by financing activities		28,356			34,885

Net increase in cash and cash equivalents		9,299			3,351
Cash and cash equivalents at beginning of the period		13,792			16,854

Cash and cash equivalents at end of the period	$	23,091		$	20,205

Supplemental disclosures:
Interest paid	$	1,551		$	1,186
Income taxes paid		785			478

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

Melrose Bancorp, Inc. and Subsidiary

Form 10-Q

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 1 - NATURE OF OPERATIONS

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

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited interim, consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and Rule 10-01 of Regulation S-X. Information included herein as of September 30, 2017 and for the interim periods ended September 30, 2017 and 2016 is unaudited; however, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and were of a normal recurring nature. These statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 21, 2017. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for future periods, including the year ending December 31, 2017.

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

BASIS OF PRESENTATION:

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

USE OF ESTIMATES:

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

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.

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 all debt and equity securities as available-for-sale. Available-for-sale securities are carried at fair value in 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. The security classification may be modified after acquisition only under certain specified conditions.

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.

FEDERAL HOME LOAN BANK STOCK:

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 September 30, 2017, 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 outstanding home equity lines of credit, commercial lines of credit and construction 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 expected lives of the related loans.

Residential real estate loans are generally placed on nonaccrual when reaching 90 days past due or are in the 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 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 is 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.

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.

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.

ADVERTISING:

The Company directly expenses costs associated with advertising as they are incurred.

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. Unearned compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity in the consolidated balance sheets. 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. Forfeitures will be recognized when they occur. 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):

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

The calculation of basic and diluted EPS (unaudited) is presented below.


	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016			Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016
	(In Thousands, except share data)
Net income	$	631		$	386		$	1,579		$	853

Basic Common Shares:
Weighted average common shares outstanding		2,600,743			2,573,360			2,601,485			2,658,828
Weighted average shares - unearned restricted stock		(32,741	)		—			(34,925	)		—
Weighted average unallocated ESOP shares		(199,013	)		(206,558	)		(200,899	)		(208,130	)

Basic weighted average shares outstanding		2,368,989			2,366,802			2,365,661			2,450,698

Diluted effect of unvested stock options		3,329			—			—			—
Dilutive effect of unvested restricted stock awards		8,502			423			4,402			222

Diluted weighted average shares outstanding		2,380,730			2,367,225			2,370,063			2,450,920

Basic earnings per share	$	0.27		$	0.16		$	0.67		$	0.35

Diluted earnings per share ⁽¹⁾	$	0.27		$	0.16		$	0.67		$	0.35

(1)	Options to purchase 224,200 shares, representing all outstanding options, were not included in the computation of diluted earnings per share for the nine months ended September 30, 2017 and the three and nine months ended September, 30 2016, because the effect is anti-dilutive.

FAIR VALUES OF FINANCIAL INSTRUMENTS:

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

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

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

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

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

Deposit liabilities: The fair values 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 similar certificates to a schedule of aggregated expected monthly maturities on certificate accounts.

Federal Home Loan Bank advances: Fair values for Federal Home Loan Bank advances are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregate expected monthly maturities on Federal Home Loan Bank advances.

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 September 30, 2017, there is no significant difference in the comparability of the financial statements as a result of this extended transition period. The extended transition period under the “emerging growth company” is five years the Company’s emerging growth status will end December 31, 2019.

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards 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 and makes targeted improvements to GAAP as follows:

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

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

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

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

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

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

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

Under the extended transition period for an emerging growth company, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of item 5 above is permitted as of the beginning of 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 is currently evaluating the amendments of ASU No. 2016-01 to determine the potential impact the new standard will have on the Company’s 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. The amendments in this ASU are effective for fiscal years beginning after December 31, 2018, and interim periods there in. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “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 No. 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 has adopted this ASU early, during the annual reporting period ending December 31, 2017. Forfeitures will be recognized when they occur. The Company has evaluated the provisions of ASU No. 2016-09 and determined the new standard will have an immaterial effect on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 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 judgment 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. This update will be effective for fiscal years beginning after December 15, 2019, 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 No. 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for annual reporting beginning after December 15, 2018, and interim periods there in; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company anticipates the adoption of ASU No. 2017-08 will not have a material impact on the 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 September 30, 2017 (unaudited) and December 31, 2016:


	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In Thousands)
September 30, 2017:
U.S. Government and federal agency obligations	$	6,220	$	—	$	78	$	6,142
Debt securities issued by states of the United States and political subdivisions of the states		2,905		20		24		2,901
Corporate bonds and notes		11,033		31		38		11,026
Preferred stock		3,000		36		—		3,036
Mortgage-backed securities		1,594		—		41		1,553
Marketable equity securities		4,080		654		—		4,734

	$	28,832	$	741	$	181	$	29,392

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

The scheduled maturities of debt securities were as follows as of September 30, 2017 (unaudited):


	Fair Value
	(In Thousands)
Due within one year	$	4,669
Due after one year through five years		10,617
Due after five years through ten years		2,258
Due after ten years		3,050
Mortgage-backed securities		1,553
Asset-backed securities		1,506

	$	23,653

Not included in the maturity table above is preferred stock with no stated maturity of $1.0 million at September 30, 2017 (unaudited).

There were no securities of issuers whose aggregate carrying amount exceeded 10% of stockholders’ equity as of September 30, 2017 (unaudited) and December 31, 2016.

During the three and nine months ended September 30, 2017 (unaudited) proceeds from the sales of available-for-sale securities were $718,000 and $2.3 million, respectively, and gross realized gains on these sales amounted to $388,000 and $1.2 million, respectively. The tax expense on the realized gains during the three and nine months ended September 30, 2017 was $136,000 and $420,000, respectively. During the three and nine months ended September 30, 2016 (unaudited) proceeds from the sales of available-for-sale securities were $576,000 and $8.4 million and gross realized gains on these sales amounted to $279,000 and $572,000, respectively. The tax expense on the realized gains during the three and nine months ended September 30, 2016 was $92,000 and $188,000, respectively.

The Company had no pledged securities as of September 30, 2017 (unaudited) and December 31, 2016.

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 September 30, 2017 (unaudited) and December 31, 2016:


	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In Thousands)
September 30, 2017
U.S. government and federal agency obligations	$	1,002	$	4	$	4,399	$	74	$	5,401	$	78
Debt securities issued by states of the United States and political subdivisions of the states		1,030		8		241		16		1,271		24
Corporate bonds and notes		1,987		10		2,971		28		4,958		38
Mortgage-backed securities		459		1		1,094		40		1,553		41

Total temporarily impaired securities	$	4,478	$	23	$	8,705	$	158	$	13,183	$	181

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

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. 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.

During the three and nine months ended September 30, 2017 and 2016, the Company had no writedowns of securities. A summary of the Company’s reviews of investment securities deemed to be temporarily impaired is as follows:

Unrealized losses on U.S. Government and federal agency obligations amounted to $78,000 and consisted of eleven securities. The unrealized losses on all but three of these debt securities were individually less than 3.0% of amortized cost basis, with three of these U.S. government and federal agency obligations between 3.40% and 4.6% of amortized cost basis. Unrealized losses on municipal bonds amounted to $24,000 and consisted of three securities. The unrealized losses on these three debt securities were individually 0.1%, 1.9% and 6.1% of amortized cost basis. Unrealized losses on corporate bonds amounted to $38,000 and consisted of eight securities. The unrealized losses on all but one of these debt securities were individually less than 2.0% of amortized cost basis, with one of these corporate bonds at 2.4%. Unrealized losses on mortgage-backed securities amounted to $41,000 and consisted of five securities. The unrealized losses on these debt securities range from 0.3% to 6.6% of amortized cost basis. These unrealized losses relate principally to the effect of interest rate changes on the fair value of debt securities and not to an increase in credit risk of the issuers. As the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost basis, which may be at maturity, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2017.

NOTE 4 - LOANS

Loans consisted of the following at:


	September 30,			December 31,
	2017			2016
	(In Thousands)
	(unaudited)
Real estate loans:
One-to four-family residential	$	184,007		$	168,111
Home equity loans and lines of credit		12,111			10,720
Commercial		26,712			23,011
Construction		12,392			11,738
Consumer loans		45			71

Total loans		235,267			213,651

Allowance for loan losses		(984	)		(890	)
Deferred loan costs, net		28			32
Unamortized premiums		446			372

Net loans	$	234,757		$	213,165

The following tables set forth information on loans and the allowance for loan losses at and for the periods ending September 30, 2017 and 2016 (unaudited) and as of December 31, 2016:


	Real Estate:
	One- to four- family Residential		Home Equity Loans and Lines of Credit		Commercial		Construction		Consumer Loans		Unallocated		Total
	(In Thousands)
At September 30, 2017 (unaudited)
Allowance for loan losses:
Ending Balance:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance:
Collectively evaluated for impairment		457		55		349		93		1		29		984

Total allowance for loan losses ending balance	$	457	$	55	$	349	$	93	$	1	$	29	$	984

Loans:
Ending balance:
Individually evaluated for impairment	$	100	$	—	$	—	$	—	$	—	$	—	$	100
Ending balance:
Collectively evaluated for impairment		183,907		12,111		26,712		12,392		45		—		235,167

Total loans ending balance	$	184,007	$	12,111	$	26,712	$	12,392	$	45	$	—	$	235,267


	Real Estate:
	One- to four- family Residential		Home Equity Loans and Lines of Credit		Commercial		Construction		Consumer Loans		Unallocated		Total
	(In Thousands)
December 31, 2016
Allowance for loan losses:
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)
Nine Months Ended September 30, 2017 (unaudited)
Allowance for loan losses:
Beginning balance	$	418	$	49		$	276	$	117		$	1	$	29	$	890
Charge offs		—		—			—		—			—		—		—
Recoveries		—		—			—		—			—		—		—
Provision (benefit)		39		6			73		(24	)		—		—		94

Ending balance	$	457	$	55		$	349	$	93		$	1	$	29	$	984


	Real Estate:
	One- to four- family Residential		Home Equity Loans and Lines of Credit			Commercial		Construction			Consumer Loans		Unallocated		Total
	(In Thousands)
Nine Months Ended September 30, 2016 (unaudited)
Allowance for loan losses:
Beginning balance	$	331	$	49		$	150	$	40		$	1	$	9	$	580
Charge offs		—		—			—		—			—		—		—
Recoveries		—		—			—		—			—		—		—
Provision (benefit)		74		(2	)		104		83			—		20		279

Ending balance	$	405	$	47		$	254	$	123		$	1	$	29	$	859


	Real Estate:
	One- to four- family Residential		Home Equity Loans and Lines of Credit			Commercial		Construction			Consumer Loans		Unallocated		Total
	(In Thousands)
Three Months Ended September 30, 2017 (unaudited)
Allowance for loan losses:
Beginning balance	$	451	$	52		$	317	$	131		$	1	$	29	$	981
Charge offs		—		—			—		—			—		—		—
Recoveries		—		—			—		—			—		—		—
Provision (benefit)		6		3			32		(38	)		—		—		3

Ending balance	$	457	$	55		$	349	$	93		$	1	$	29	$	984


	Real Estate:
	One- to four- family Residential		Home Equity Loans and Lines of Credit			Commercial		Construction			Consumer Loans		Unallocated		Total
	(In Thousands)
Three Months Ended September 30, 2016 (unaudited)
Allowance for loan losses:
Beginning balance	$	366	$	49		$	252	$	68		$	1	$	6	$	742
Charge offs		—		—			—		—			—		—		—
Recoveries		—		—			—		—			—		—		—
Provision (benefit)		39		(2	)		2		55			—		23		117

Ending balance	$	405	$	47		$	254	$	123		$	1	$	29	$	859

The following tables set forth information regarding nonaccrual loans and past-due loans as of September 30, 2017 (unaudited) and December 31, 2016:


	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 September 30, 2017 (unaudited)
Real estate loans:
One-to four-family residential	$	178	$	—	$	—	$	178	$	183,829	$	184,007	$	—	$	191
Home equity loans and lines of credit		—		—		—		—		12,111		12,111		—		—
Commercial		—		—		—		—		26,712		26,712		—		—
Construction		—		—		—		—		12,392		12,392		—		—
Consumer loans		—		—		—		—		45		45		—		—

Total	$	178	$	—	$	—	$	178	$	235,089	$	235,267	$	—	$	191

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

As of and during the three and nine months ended September 30, 2017 (unaudited) there was one, one- to four-family residential loan, with an outstanding balance of $100,000, meeting the definition of an impaired loan in ASC 310-10-35. During the three and nine months ended September 30, 2016, there were no loans meeting the definition of an impaired loan.

During the three and nine months ended September 30, 2017 (unaudited) there was one, one- to four-family residential real estate loan with a recorded balance of $100,000, modified that met the definition of a troubled debt restructured loan in ASC 310-40. During the three and nine months ended September 30, 2016 there were no loans modified that met the definition of a troubled debt restructured loan.

As of September 30, 2017 (unaudited) there were no loans in the process of foreclosure. As of December 31, 2016 the Bank had one consumer mortgage loan with a recorded balance of $321,000 in the process of foreclosure.

Credit Quality Information

The Company has established an 11 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 risk rating system will assist the Company in better understanding the risk inherent in each loan. The 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 September 30, 2017 (unaudited), there were no one- to four- family residential real estate loans that had a risk rating of “8 - substandard.” There were two, one- to four- family residential real estate loans with a total balance of $369,000 with a risk rating of “6W,” and all other loans outstanding had a risk rating of “1 to 6 - pass.”

As of December 31, 2016, 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.”

NOTE 5 - PREMISES AND EQUIPMENT

The following is a summary of premises and equipment:


	September 30,			December 31,
	2017			2016
	(In Thousands)
	(unaudited)
Land	$	393		$	393
Building and improvements		2,180			1,840
Furniture and equipment		553			549
Data processing equipment		355			303

		3,481			3,085
Accumulated depreciation		(1,997	)		(1,837	)

	$	1,484		$	1,248

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 September 30, 2017 (unaudited) and December 31, 2016 amounted to $27,384,000 and $23,434,000, respectively.

For time deposits as of September 30, 2017 (unaudited) the scheduled maturities for each of the following periods ending September 30 are as follows:


	(In Thousands)
2018	$	100,461
2019		12,347
2020		1,467
2021		8,184
2022		1,574

	$	124,033

Deposits from related parties held by the Bank as of September 30, 2017 (unaudited) and December 31, 2016 amounted to $3,521,000 and $3,782,000, 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 September 30, 2017 (unaudited) was approximately $84.8 million subject to the purchase of additional FHLB stock. The Bank had outstanding FHLB borrowings of $26.0 million at September 30, 2017 (unaudited). Additionally, at September 30, 2017, the Bank had the ability to borrow up to $5.0 million on a Federal Funds line of credit with the Co-Operative Central Bank.

The following is a summary of FHLB borrowings as of September 30, 2017 (unaudited) and December 31, 2016:


	At September 30,			At December 31,
	2017			2016
	(Dollars in thousands)
Balance	$	26,000		$	10,000
Average balance during the year		19,888			2,363
Maximum outstanding at any month end		26,000			10,000
Weighted average interest rate at period end		1.71	%		1.45	%

NOTE 8 - FINANCIAL INSTRUMENTS

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

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

Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income-producing properties.

Amounts of financial instrument liabilities with off-balance sheet credit risk are as follows as of September 30, 2017 (unaudited) and December 31, 2016:


	September 30,		December 31,
	2017		2016
	(In Thousands)
Commitments to originate loans	$	5,206	$	7,864
Unused lines of credit		16,515		13,742
Due to borrowers on unadvanced construction loans		3,121		3,852

	$	24,842	$	25,458

NOTE 9 - FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for September 30, 2017 (unaudited) and December 31, 2016. The Company did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the three and nine months ended September 30, 2017 (unaudited) and the year ended December 31, 2016.

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

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

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

The following summarizes assets measured at fair value on a recurring basis as of September 30, 2017 (unaudited) and December 31, 2016:


	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)
September 30, 2017:
U.S. Government and federal agency obligations	$	6,142	$	—	$	6,142	$	—
Debt securities issued by states of the United States and political subdivisions of the states		2,901		—		2,901		—
Corporate bonds and notes		11,026		—		11,026		—
Preferred stock		3,036		3,036		—		—
Mortgage-backed securities		1,553		—		1,553		—
Marketable equity securities		4,734		4,734		—		—

Totals	$	29,392	$	7,770	$	21,622	$	—

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	$	—

Under certain circumstances the Company makes adjustments to fair value for its assets and liabilities although they are not measured at fair value on a recurring basis. At September 30, 2017 (unaudited) and December 31, 2016, there were no assets or liabilities carried on the consolidated balance sheets for which a nonrecurring change in fair value has been recorded.

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


	September 30, 2017 (unaudited)
	Carrying Amount		Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	23,091	$	23,091	$	—	$	—	$	23,091
Available-for-sale securities		29,392		7,770		21,622		—		29,392
Federal Home Loan Bank stock		1,680		1,680		—		—		1,680
Loans, net		234,757		—		—		235,605		235,605
Co-operative Central Bank deposit		886		886		—		—		886
Accrued interest receivable		668		668		—		—		668
Financial liabilities:
Deposits		227,144		—		227,445		—		227,445
FHLB advances		26,000		—		25,939		—		25,939


	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

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

NOTE 10 - OTHER COMPREHENSIVE (LOSS) INCOME

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

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


	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
	(In Thousands)
	(unaudited)
Net unrealized holding gain on available-for-sale securities	$	48		$	31		$	545		$	721
Reclassification adjustment for net realized gain included in net income ⁽¹⁾		(388	)		(279	)		(1,195	)		(572	)

Other comprehensive (loss) income before income tax effect		(340	)		(248	)		(650	)		149
Income tax benefit (expense)		133			86			285			(13	)

Other comprehensive (loss) income, net of tax	$	(207	)	$	(162	)	$	(365	)	$	136

(1)

Reclassification adjustments include net realized securities gains. Realized gains have been reclassified out of accumulated other comprehensive income and affect certain captions in the consolidated statements of income as follows: pre-tax amount for the three and nine months ended September 30, 2017, is reflected as a gain on sale of available-for-sale securities, net of $388,000 and $1.2 million, respectively. The tax effect, included in income tax expense for the three and nine months ended September 30, 2017, was $136,000 and $420,000, respectively. Pre-tax amounts for the three and nine months ended September 30, 2016 is reflected as a gain on sale of securities, net of $279,000 and $572,000, respectively. The tax effect, included in income tax expense for the three and nine months ended September 30, 2016 was $92,000 and $188,000, respectively.

Accumulated other comprehensive income as of September 30, 2017 (unaudited) and December 31, 2016 consists of net unrealized holding gains on available-for-sale securities, net of taxes.

NOTE 11 - REGULATORY MATTERS

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

Effective January 1, 2015, (with a phase-in period of two to four years for certain components), the Bank became subject to 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 September 30, 2017, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer.

Management believes, as of September 30, 2017, that the Bank meets all capital adequacy requirements to which it is subject.

As of September 30, 2017, 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 risk-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 as of September 30, 2017 (unaudited) and December 31, 2016 are presented in the following table.


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars In Thousands)
As of September 30, 2017 (unaudited):
Total Capital (to Risk Weighted Assets)	$	36,715		19.83	%	$	14,977		8.0	%	$	18,721		10.0	%
Tier 1 Capital (to Risk Weighted Assets)		35,437		19.14			11,233		6.0			14,977		8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		35,437		19.14			8,424		4.5			12,169		6.5
Tier 1 Capital (to Average Assets)		35,437		12.98			11,186		4.0			13,983		5.0

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

NOTE 12 – COMMON STOCK REPURCHASES

From time to time, our board of directors authorizes stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On September 14, 2017, the board of directors of the Company authorized an increase in the number of shares that may be repurchased pursuant to the Company’s stock repurchase plan that was previously announced on November 12, 2015. Under the expanded repurchase plan, the Company is authorized to repurchase an additional 130,037 shares, representing approximately 5.0% of the Company’s issued and outstanding shares of common stock as of September 14, 2017. As of September 14, 2017, the Company had 11,200 shares remaining to be purchased under its previously announced share repurchase plan of 283,000. The actual amount and timing of future share repurchases, if any, will depend on market conditions, applicable SEC rules and various other factors.

During the nine months ended September 30, 2017 (unaudited), 1,336 shares of common stock were repurchased, as a result of the first annual installment of the stock awards vesting. The Company was required to purchase these shares for the payment of income taxes withheld in the stock based award activity.

During the nine months ended September 30, 2016 (unaudited), a total of 226,300 shares of common stock were repurchased at an average cost of $15.31.

NOTE 13 – STOCK BASED COMPENSATION

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 for the three and nine months ended September 30, 2017, in connection with the restricted stock awards was $34,000, and $101,000 (unaudited), respectively, and the recognized tax benefit was $12,000 and $35,000 (unaudited), respectively. During the three and nine month periods ending September 30, 2016, the expense was $31,000 and $56,000 (unaudited), respectively. The recognized tax benefit was $11,000 and $19,000 (unaudited), respectively.

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 $1.1 million as of September 30, 2017. The total expense recognized for the three and nine months ended September 30, 2017, in connection with the stock options was $42,000 and $124,000 (unaudited), respectively, and the recognized tax benefit was $4,000 and $13,000 (unaudited), respectively. During the three and nine month periods ending September 30, 2016 the stock option expense was $42,000 and $64,000, respectively. The recognized tax benefit was $4,000 and $7,000, respectively.

At September 30, 2017 (unaudited), the unrecognized share based compensation expense related to the 35,440 unvested restricted stock awards amounted to $484,000. The unrecognized expense will be recognized over a weighted average life of 3.6 years.

At September 30, 2017 (unaudited), 44,840 of the 224,200 stock options outstanding are exercisable, and the remaining contractual life is 8.6 years. The unrecognized expense related to the unvested options is $600,000 and will be recognized over a weighted average life of 3.6 years.

The Company adopted ASU 2016-09, “Compensation – Stock Compensation (Topic 718),” early during the annual reporting period ending December 31, 2017. One provision of this new ASU is that, the Company will no longer record excess tax benefits and certain deficiencies in additional paid-in-capital (APIC); instead, we will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. The Company has evaluated this and the other provisions of this ASU and determined the new standard to have an immaterial effect on the Company’s consolidated financial statements.

Item 2.

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

General

Management’s discussion and analysis of the financial condition at September 30, 2017 and the results of operations for the three and nine months ended September 30, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•

statements of our goals, intentions and expectations;

•

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

•

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

•

estimates of our risks and future costs and benefits.

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

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

•

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

•

our success in growing our commercial real estate loan portfolio;

•

increased competition among depository and other financial institutions;

•

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

•

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

•

our ability to manage operations in the current economic conditions;

•

our ability to capitalize on growth opportunities;

•

changes in consumer spending, borrowing and savings habits;

•

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

•

changes in our organization, compensation and benefit plans;

•

changes in the level of government support for housing finance;

•

significant increases in delinquencies and our loan losses; and

•

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

Comparison of Financial Condition at September 30, 2017 (unaudited) and December 31, 2016

Total assets increased $30.1 million, or 11.2%, to $298.7 million at September 30, 2017 from $268.6 million at December 31, 2016. The increase was primarily the result of an increase in cash and cash equivalents and net loans, partly offset by a decrease in available-for-sale securities.

Cash and cash equivalents increased $9.3 million, or 67.4%, to $23.1 million at September 30, 2017 from $13.8 million at December 31, 2016. This increase was due primarily to an increase of $12.4 million in deposits, $16.0 million in Federal Home Loan Bank advances, and sales, calls, and maturities of available-for-sale securities of $6.1 million during the nine months ended September 30, 2017, partly offset by net loan originations and purchases of $21.6 million and purchases of available-for-sale investments of $3.2 million.

Securities available-for-sale decreased $2.4 million, or 7.5%, to $29.4 million at September 30, 2017 from $31.8 million at December 31, 2016. The decrease in securities available-for-sale during the period was primarily a result of changes in fair value, sales, maturities, and calls of available-for-sale securities of $6.1 million, offset by purchases of $3.2 million.

Federal Home Loan Bank (FHLB) stock increased $716,000, or 74.3%, to $1.7 million at September 30, 2017 from $964,000 at December 31, 2016. The increase in FHLB stock was the result of an increase in FHLB borrowings to $26.0 million at September 30, 2017, from $10.0 million at December 31, 2016. The borrowings are being used to fund new loan originations and purchases of one- to four-family residential real estate loans.

Net loans increased $21.6 million, or 10.1%, to $234.8 million at September 30, 2017 from $213.2 million at December 31, 2016. The increase in net loans was due primarily to an increase of $15.9 million, or 9.5%, in one-to four-family residential loans, an increase of $1.4 million, or 13.1%, in home equity lines of credit, and an increase of $3.7 million, or 16.1%, in commercial real estate loans. The increase in one-to four-family residential loans includes $12.6 million in purchased loans.

At September 30, 2017 our investment in bank-owned life insurance was $6.1 million, an increase of $174,000, or 3.0%, from $5.9 million at December 31, 2016. 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 $12.3 million, or 5.7%, to $227.1 million at September 30, 2017 from $214.8 million at December 31, 2016. The increase in deposits was due primarily to an increase of $9.4 million, or 9.7%, in time deposits, an increase of $1.0 million, or 6.2%, in listed certificates of deposit, an increase of $1.5 million, or 4.6%, in savings accounts, and an increase of $2.3 million, or 17.4%, in NOW accounts, partially offset by a decrease of $1.4 million, or 7.8%, in demand deposit accounts, and $598,000, or 1.6%, in money market accounts. The increase in time deposits was a result of special promotions, as well as, offering listed certificates of deposit through QwickRate. QwickRate is an online marketplace for CD buyers and sellers. The bank utilizes this national CD market as a source of time certificates of deposit. Depositors in this market are institutional, non-consumer entities such as credit unions, banking institutions, public entities, CD brokers and some private corporations or non-profit organizations.

Borrowings increased $16.0 million, or 160.0%, to $26.0 million at September 30, 2017 from $10.0 million at December 31, 2016. At September 30, 2017, we had the ability to borrow an additional $84.8 million from the Federal Home Loan Bank of Boston, subject to certain collateral requirements. The proceeds from the borrowings are used to fund new loan originations and purchases of one- to four-family residential loans. Additionally at September 30, 2017, we had the ability to borrow up to $5.0 million on a Federal Funds line of credit with the Co-operative Central Bank.

Total stockholders’ equity increased $1.5 million, or 3.5%, to $44.8 million at September 30, 2017 from $43.3 million at December 31, 2016. The increase was primarily due to net income of $1.6 million, a decrease in unearned compensation of $101,000, and an increase in additional paid-in-capital of $145,000, partly offset by a decrease in accumulated other comprehensive income of $365,000.

Comparison of Operating Results for the Three Months Ended September 30, 2017 and 2016 (unaudited)

General. Net income increased $245,000, or 63.5%, to $631,000 for the three months ended September 30, 2017 from $386,000 for the three months ended September 30, 2016. Net income increased primarily due to gains on sales of available-for-sale securities, and an increase in interest income, partially offset by an increase in interest expense, noninterest expense and income tax expense.

Interest and Dividend Income. Interest and dividend income increased $419,000, or 21.7%, to $2.3 million for the three months ended September 30, 2017 from $1.9 million for the three months ended September 30, 2016 primarily due to an increase in interest and fees on loans of $402,000, or 23.1%, to $2.1 million for the three months ended September 30, 2017 from $1.7 million for the three months ended September 30, 2016. The increase in interest and fees on loans was primarily the result of an increase in new loan originations and purchases.

Interest and dividends on securities decreased $32,000, or 17.9%, to $147,000 for the three months ended September 30, 2017 from $179,000 for the three months ended September 30, 2016 resulting primarily from a decrease in the average balance of available-for-sale securities of $2.6 million, or 7.5%, to $30.8 million for the three months ended September 30, 2017 from $33.4 million for the three months ended September 30, 2016.

Other interest income increased $49,000, or 376.9%, to $62,000 for the three months ended September 30, 2017 from $13,000 for the three months ended September 30, 2016, primarily due to higher average interest rates on balances held at correspondent banks. In addition, there was an increase of $3.2 million, or 15.0%, in the average balance of other interest-earning assets quarter to quarter.

Interest Expense. Interest expense increased $162,000, or 37.8%, to $591,000 for the three months ended September 30, 2017 from $429,000 for the three months ended September 30, 2016. The increase was primarily due to an increase of $12.9 million, or 6.6%, in the average balance of interest-bearing deposits. In addition, there was an increase in interest paid on Federal Home Loan Bank borrowings of $112,000, for the three months ended September 30, 2017, as there was no interest paid on borrowings for the three months ended September 30, 2016.

Net Interest and Dividend Income. Net interest and dividend income increased $257,000, or 17.1%, to $1.8 million for the three months ended September 30, 2017 from $1.5 million for the three months ended September 30, 2016 primarily due to the increase in interest and fees on loans as a result of the increase in average loans of $37.4 million, or 19.1%, to $232.7 million for the three months ended September 30, 2017 from $195.2 million for the three months ended September 30, 2016. There was an increase in the net interest margin of four basis points to 2.44% for the three months ended September 30, 2017 from 2.40% for the three months ended September 30, 2016. This was due primarily to an increased yield on average other interest-earning assets, specifically deposits held at correspondent banks, of 77 basis points to 1.01% for three months ended September 30, 2017, from 0.24% for the three months ended September 30, 2016, partially offset by interest expense on Federal Home Loan Bank advances, of $112,000, at a weighted interest rate of 1.72%.

Provision for Loan Losses. We recorded a provision for loan losses of $3,000 for the three months ended September 30, 2017, a decrease of $114,000 from the provision of $117,000 for the three months ended September 30, 2016. The decreased provision was a result of a decrease in our loan originations and principal collections net, quarter to quarter of $18.3 million.

There were no charge-offs for the quarters ended September 30, 2017 and September 30, 2016. The allowance for loan losses was $984,000, or 0.42%, of total loans, at September 30, 2017, an increase of $94,000, or 10.6%, compared to $890,000, or 0.42%, of total loans, at December 31, 2016. There was $191,000 in nonperforming loans at September 30, 2017 and $9,000 in nonperforming loans as of December 31, 2016.

Noninterest Income. Noninterest income increased $170,000, or 52.5%, to $494,000 for the three months ended September 30, 2017 from $324,000, for the three months ended September 30, 2016, primarily due to an increase in the gain on sales of available-for-sale securities, net to $388,000 for the three months ended September 30, 2017, from $279,000, for the three months ended September 30, 2016. In addition, there was an increase in income on bank-owned life insurance of $62,000, or 281.8%, to $84,000 for the three months ended September 30, 2017, from $22,000, for the three months ended September 30, 2016.

Noninterest Expense. Noninterest expense increased $218,000, or 19.8%, to $1.3 million for the three months ended September 30, 2017 from $1.1 million for the three months ended September 30, 2016. Noninterest expense increased primarily due to an increase in salary and employee benefits, occupancy expense, and professional services, partially offset by a decrease in audit and examination expenses.

Salaries and employee benefits expense increased $99,000, or 14.0%, to $807,000 for the three months ended September 30, 2017 from $708,000 for the three months ended September 30, 2016, primarily due to an increase in stock based compensation, new hires, normal salary increases and increases in payroll taxes. Occupancy expenses increased $75,000, or 93.8%, to $155,000 for the three months ended September 30, 2017 from $80,000 for the three months ended September 30, 2016, as a result of the lobby renovation that began in September 2017

and accelerating depreciation on selected fixed assets. Other professional services expense increased $45,000, or 128.6%, to $80,000 for the three months ended September 30, 2017, from $35,000 for the three months ended September 30, 2016. Other expenses increased $16,000, or 55.2%, to $45,000 for the three months ended September 30, 2017, from $29,000 for the three months ended September 30, 2016. The increase in other expenses was due primarily to an increase in the off balance sheet reserve of $19,000. These increases were partially offset by a decrease in the audits and examinations, including the FDIC assessment, of $32,000, or 32.9%, to $65,000 for the three months ended September 30, 2017, from $97,000 for the three months ended September 30, 2016. Audit expense decreased $17,000, quarter to quarter. Also, the FDIC assessment was decreased as based on the result of management’s re-evaluation of the terms and charges assessed.

Income Tax Expense. The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income, and the effect of changes in valuation allowances maintained against deferred tax benefits. Income tax expense for the three months ended September 30, 2017 was $300,000 compared to $222,000 for the three months ended September 30, 2016. The increase in income tax expense period over period is consistent with the increase in pre-tax income of $323,000, or 53.1%, to $931,000 for the three months ended September 30, 2017 from $608,000 for the three months ended September 30, 2016. The effective tax rate for the three months ended September 30, 2017 and September 30, 2016 was 32.2% and 36.5%, respectively.

Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the three months ended September 30, 2017 and 2016 (unaudited). All average balances are daily average balances based upon amortized cost. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Yields/rates for the three months ended September 30, 2017 and 2016 are annualized.


	Three Months Ended September 30,								Three Months Ended September 30,
	2017								2016
(Dollars in Thousands)	Average Outstanding Balance			Interest		Yield/Rate			Average Outstanding Balance			Interest		Yield/Rate
Interest-earning assets:
Loans	$	232,674		$	2,139		3.68	%	$	195,251		$	1,737		3.56	%
Securities ⁽¹⁾		30,856			147		1.91	%		33,404			179		2.14	%
Other interest-earning assets		24,536			62		1.01	%		21,313			13		0.24	%

Total interest-earning assets		288,066			2,348		3.26	%		249,968			1,929		3.09	%

Non-interest earning assets		9,278								9,031

Total assets	$	297,344							$	258,999

Interest-bearing liabilities:
Deposits:
Savings accounts	$	33,666		$	19		0.23	%	$	32,768		$	16		0.20	%
Certificates of deposit		122,644			416		1.36	%		114,450			375		1.31	%
Money market accounts		37,904			35		0.37	%		35,741			33		0.37	%
NOW accounts		14,716			9		0.24	%		13,115			5		0.15	%

Total interest-bearing deposits		208,930			479		0.92	%		196,074			429		0.88	%
Borrowings		26,000			112		1.72	%		870			—		0.00	%

Total interest-bearing liabilities		234,930			591		1.01	%		196,944			429		0.87	%
Demand deposit accounts		17,247								17,875
Other noninterest-bearing liabilities		399								653

Total liabilites		252,576								215,472
Stockholders’ equity		44,768								43,527

Total liabilities and stockholders’ equity	$	297,344							$	258,999

Net interest income				$	1,757							$	1,500

Net interest rate spread ⁽²⁾							2.25	%							2.22	%
Net interest-earning assets ⁽³⁾	$	53,136							$	53,024

Net interest margin ⁽⁴⁾							2.44	%							2.40	%

Average of interest-earning assets to interest-bearing liabilities		122.62	%							126.92	%

(1)	No tax equivalent adjustment was applied to tax exempt income for the three months ended September 30, 2017 and 2016 as the amount is not significant.

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

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

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

Rate/Volume Analysis. The following table presents the effects of changing interest rates and volumes on our net interest income for the time period indicated. The rate column shows the effects attributable to changes in rate (change in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (change in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.


	Three months ended September 30, 2017, compared to three months ended September 30, 2016
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate			Total Increase (Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	342		$	60		$	402
Securities (2)		(13	)		(19	)		(32	)
Other interest-earning assets (3)		2			47			49

Total interest-earning assets		331			88			419

Interest-bearing liabilities
Deposits:
Savings accounts		—			3			3
Certificates of deposit		27			14			41
Money market accounts		2			—			2
NOW accounts		1			3			4

Total interest-bearing deposits		30			20			50
Borrowings		112			—			112

Total interest-bearing liabilities		142			20			162

Change in net interest income	$	189		$	68		$	257

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

(2)	Includes short-term investments.

(3)	Includes Federal Home Loan Bank of Boston stock and deposits with Cooperative Central Bank.

Comparison of Operating Results for the Nine Months Ended September 30, 2017 and 2016

General. Net income increased $726,000, or 85.1%, to $1.6 million for the nine months ended September 30, 2017 from $853,000 for the nine months ended September 30, 2016. Net income increased primarily due to gains on sales of available-for-sale securities, and an increase in interest income, partially offset by an increase in interest expense, noninterest expense and income tax expense.

Interest and Dividend Income. Interest and dividend income increased $1.2 million, or 22.2%, to $6.6 million for the nine months ended September 30, 2017 from $5.4 million for the nine months ended September 30, 2016 primarily due to an increase in interest and fees on loans of $1.2 million, or 25.0%, to $6.0 million for the nine months ended September 30, 2017 from $4.8 million for the nine months ended September 30, 2016. The increase in interest and fees on loans was primarily the result of an increase in new loan originations and purchases.

Interest and dividends on securities decreased $182,000, or 28.9%, to $449,000 for the nine months ended September 30, 2017 from $631,000 for the nine months ended September 30, 2016 resulting primarily from a decrease in the average balance of available-for-sale securities of $7.4 million, or 19.2%, to $31.2 million for the nine months ended September 30, 2017 from $38.6 million for the nine months ended September 30, 2016.

Other interest income increased $71,000, or 173.2%, to $112,000 for the nine months ended September 30, 2017 from $41,000 for the nine months ended September 30, 2016, primarily due to higher average interest rates on balances held at correspondent banks. There was a decrease of $2.2 million in the average balance of other interest earning assets for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

Interest Expense. Interest expense increased $370,000, or 31.2%, to $1.6 million for the nine months ended September 30, 2017 from $1.2 million for the nine months ended September 30, 2016. The increase was primarily due to an increase of $16.6 million, or 8.9%, in the average balance of interest-bearing deposits. In addition, interest expense on Federal Home Loan Bank borrowings increased to $217,000, for the nine months ended September 30, 2017, as the Bank did not incur any interest expense on Federal Home Loan Bank borrowings for the nine months ended September 30, 2016.

Net Interest and Dividend Income. Net interest and dividend income increased $791,000, or 18.7%, to $5.0 million for the nine months ended September 30, 2017 from $4.2 million for the nine months ended September 30, 2016 primarily due to the increase in interest and fees on loans as a result of the increase in average loans of $46.1 million, or 25.8%, to $224.4 million for the nine months ended September 30, 2017 from $178.3 million for the nine months ended September 30, 2016. There was an increase in the net interest margin of seven basis points to 2.44% for the nine months ended September 30, 2017 from 2.37% for the nine months ended September 30, 2016. This was due primarily to an increase in yield on average interest-earning assets for the period of 16 basis points to 3.19%, primarily due to the increase in yield on other interest-earning assets of 51 basis points. This increase was partially offset by an increase in yield on interest-bearing liabilities of 8 basis points, primarily due to interest on Federal Home Loan Bank advances.

Provision for Loan Losses. We recorded a provision for loan losses of $94,000 for the nine months ended September 30, 2017, a decrease of $185,000 from the provision of $279,000 for the nine months ended September 30, 2016. The decreased provision was a result of a decrease in our loan originations and principal collections net, of $23.6 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

Noninterest Income. Noninterest income increased $688,000, or 97.5%, to $1.4 million for the nine months ended September 30, 2017 from $706,000 for the nine months ended September 30, 2016, primarily due to an increase in the gain on sales of available-for-sale securities, net to $1.2 million for the nine months ended September 30, 2017, from $572,000 for the nine months ended September 30, 2016.

Noninterest Expense. Noninterest expense increased $469,000, or 13.9%, to $3.8 million for the nine months ended September 30, 2017 from $3.4 million for the nine months ended September 30, 2016. Noninterest expense increased primarily due to an increase to salary and employee benefits, occupancy expenses, advertising and other expenses, partially offset by a decrease in other professional services and audits and examinations.

Salaries and employee benefit expense increased $357,000, or 17.2%, to $2.4 million for the nine months ended September 30, 2017 from $2.1 million for the nine months ended September 30, 2016, primarily due to an increase in stock based compensation, new hires, normal salary increases and increases in payroll taxes. Occupancy expenses increased $80,000, or 35.2%, to $307,000 for the nine months ended September 30, 2017 from $227,000 for the nine months ended September 30, 2016, as a result of the renovation that began in September 2017 and accelerating depreciation on selected fixed assets. Data processing expenses increased $28,000, or 10.4%, to $297,000 for the nine months ended September 30, 2017, from $269,000 for the nine months ended September 30, 2016. The increase was primarily due to the beginning stages of purchasing software and preparing systems to provide online account opening to customers. Advertising expenses increased $32,000, or 28.1%, to $146,000 for the nine months ended September 30, 2017, from $114,000 for the nine months ended September 30, 2016. Printing and supplies expense increased $12,000, or 46.2%, to $38,000 for the nine months ended September 30, 2017, from $26,000 for the nine months ended September 30, 2016. The increases in advertising expense and printing and supplies expense are due primarily to the Bank’s re-branding efforts of changing the Bank’s name and logo to Melrose Bank, in conjunction with the online account opening project. Other expenses increased $47,000, or 45.2%, to $151,000 for the nine months ended September 30, 2017, from $104,000 for the nine months ended September 30, 2016. The increase in other expenses was primarily due to the Bank recording an off-balance sheet reserve of $19,000 during the nine months ended September 30, 2017. The increases were partially offset by a decrease in other professional services expense of $48,000, or 17.3%, to $230,000 for the nine months ended September 30, 2017, from $278,000 for the nine months ended September 30, 2016. The decrease in other professional services was primarily due to additional legal services associated with the 2015 Equity Incentive Plan and strategic planning occurring during the nine months ended September 30, 2016. In addition, there was a

decrease in the audit and examination expense, including the FDIC Assessment, of $44,000, or 17.6%, to $205,000 for the nine months ended September 30, 2017, from $249,000 for the nine months ended September 30, 2016. The decrease in audit and examination expense was primarily the result of a $31,000, or 36.0%, decrease in the FDIC assessment based on the result of management’s re-evaluation of the terms and charges assessed.

Income Tax Expense. The amount of income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income, and the effect of changes in valuation allowances maintained against deferred tax benefits. Income tax expense for the nine months ended September 30, 2017 was $917,000 compared to $448,000 for the nine months ended September 30, 2016. The increase in income tax expense period over period is consistent with the increase in pre-tax income of $1.2 million, or 91.9%, to $2.5 million for the nine months ended September 30, 2017 from $1.3 million for the nine months ended September 30, 2016. The effective tax rate for the nine months ended September 30, 2017 and September 30, 2016 was 36.7% and 34.4%, respectively.

Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the nine months ended September 30, 2017 and 2016 (unaudited). All average balances are daily average balances based upon amortized cost. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Yields/rates for the nine months ended September 30, 2017 and 2016 are annualized.


	Nine Months Ended September 30,								Nine Months Ended September 30,
	2017								2016
(Dollars in Thousands)	Average Outstanding Balance			Interest		Yield/Rate			Average Outstanding Balance			Interest		Yield/Rate
Interest-earning assets:
Loans	$	224,413		$	6,025		3.58	%	$	178,295		$	4,753		3.55	%
Securities ⁽¹⁾		31,157			449		1.92	%		38,626			631		2.18	%
Other interest-earning assets		19,596			112		0.76	%		21,812			41		0.25	%

Total interest-earning assets		275,166			6,586		3.19	%		238,733			5,425		3.03	%

Non-interest earning assets		9,166								8,254

Total assets	$	284,332							$	246,987

Interest-bearing liabilities:
Deposits:
Savings accounts	$	33,209		$	54		0.22	%	$	32,651		$	48		0.20	%
Certificates of deposit		118,485			1,166		1.31	%		103,773			1,025		1.32	%
Money market accounts		37,407			103		0.37	%		35,438			98		0.37	%
NOW accounts		13,670			16		0.16	%		14,290			15		0.14	%

Total interest-bearing deposits		202,771			1,339		0.88	%		186,152			1,186		0.85	%
Borrowings		19,267			217		1.50	%		292			—		0.00	%

Total interest-bearing liabilities		222,038			1,556		0.93	%		186,444			1,186		0.85	%
Demand deposit accounts		17,533								15,764
Other noninterest-bearing liabilities		470								596

Total liabilities		240,041								202,804
Stockholders’ equity		44,291								44,183

Total liabilities and stockholders’ equity	$	284,332							$	246,987

Net interest income				$	5,030							$	4,239

Net interest rate spread ⁽²⁾							2.26	%							2.18	%
Net interest-earning assets ⁽³⁾	$	53,128							$	52,289

Net interest margin ⁽⁴⁾							2.44	%							2.37	%

Average of interest-earning assets to interest-bearing liabilities		123.93	%							128.05	%

(1)	No tax equivalent adjustment was applied to tax exempt income for the nine months ended September 30, 2017 and 2016 as the amount is not significant.

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

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

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


	Nine months ended September 30, 2017, compared to nine months ended September 30, 2016
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate			Total Increase (Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	1,238		$	34		$	1,272
Securities (2)		(113	)		(69	)		(182	)
Other interest-earning assets (3)		(4	)		75			71

Total interest-earning assets		1,121			40			1,161

Interest-bearing liabilities
Deposits:
Savings accounts		1			5			6
Certificates of deposit		145			(4	)		141
Money market accounts		5			—			5
NOW accounts		(1	)		2			1

Total interest-bearing deposits		150			3			153
Borrowings		217			—			217

Total interest-bearing liabilities		367			3			370

Change in net interest income	$	754		$	37		$	791

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

(2)	Includes short-term investments.

(3)	Includes Federal Home Loan Bank of Boston stock and deposits with Cooperative Central Bank.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2017. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2017, 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.

Part II – Other Information

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Sales of Unregistered Securities. Not applicable.

(b)

Use of Proceeds. Not applicable

(c)

During the nine months ended September 30, 2017 (unaudited), 1,336 shares of common stock were repurchased, as a result of the first annual installment of the stock options vesting. The Company was required to purchase these shares for the payment of income taxes withheld in the stock based award activity.

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

July 1, 2017 through September 30, 2017

1,336

16.80

1,336

N/A

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits



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

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

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

SIGNATURES

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


						MELROSE BANCORP, INC.

Date: November 13, 2017						/s/ Jeffrey D. Jones
						Jeffrey D. Jones
						President and Chief Executive Officer

Date: November 13, 2017						/s/ Diane Indorato
						Diane Indorato
						Senior Vice President and Chief Financial Officer

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