Heritage NOLA Bancorp, Inc. - FORM 10-Q

Attached files

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EX-32 - EXHIBIT 32 - Heritage NOLA Bancorp, Inc.	v472413_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Heritage NOLA Bancorp, Inc.	v472413_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Heritage NOLA Bancorp, Inc.	v472413_ex31-1.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 June 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. 000-55817

Heritage NOLA Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland		82-0688069
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

205 North Columbia Street Covington, Louisiana		70433
(Address of Principal Executive Offices)		(Zip Code)

(985) 892-4565

(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 x

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 x

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)	Emerging growth company x

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x

As of August 7, 2017, 1,653,125 shares of the Company’s common stock, par value $0.01 per share, were issued and outstanding.

Heritage NOLA Bancorp, Inc.

Form 10-Q

Index

		Page
Part I. Financial Information

Item 1.	Financial Statements

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

	Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	2

	Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	3

	Statements of Changes in Equity for the Six Months Ended June 30, 2017 and 2016 (unaudited)	4

	Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)	5

	Notes to Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	27

Part II. Other Information

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults upon Senior Securities	28

Item 4.	Mine Safety Disclosures	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

	Signature Page	29

EXPLANATORY NOTE

Heritage NOLA Bancorp, Inc., a Maryland corporation (the “Company” or the “Registrant”), was formed on February 13, 2017 to serve as the savings and loan holding company for Heritage Bank of St. Tammany (the “Bank”) as part of the Bank’s mutual-to-stock conversion. As of June 30, 2017, the conversion had not been completed, and, as of that date, the Registrant had no assets or liabilities, and had not conducted any business other than that of an organizational nature. Accordingly, financial and other information of the Bank is included in this Quarterly Report. The Bank’s mutual to stock conversion and the Company’s stock offering were consummated on July 12, 2017.

Part I. – Financial Information

Item 1.

Financial Statements

Heritage Bank of St. Tammany

Balance Sheets

June 30, 2017 (Unaudited) and December 31, 2016

(In Thousands)

	June 30, 2017		December 31, 2016

ASSETS
Cash and Due from Banks	$	368	$	530
Interest Earning Deposits in Banks		20,174		7,484
Total Cash and Cash Equivalents		20,542		8,014

Securities Available for Sale, at Fair Value		6,344		7,175
Securities Held to Maturity		737		832
Federal Home Loan Bank Stock		776		495
Other Investments		178		178
Mortgage Loans Held for Sale		311		-
Loans Receivable, Net of Allowance for Loan Losses of $742 at June 30, 2017 and $692 at December 31, 2016		83,705		74,659
Premises and Equipment		3,630		3,716
Bank Owned Life Insurance		2,026		2,001
Foreclosed Real Estate		84		93
Mortgage Servicing Rights		336		325
Accrued Interest Receivable		335		318
Prepaid Expenses and Other Assets		734		209
Total Assets	$	119,738	$	98,015

LIABILITIES AND EQUITY
Interest Bearing Deposits	$	87,349	$	69,901
Noninterest Bearing Deposits		3,570		4,350
Total Deposits		90,919		74,251

Borrowed Funds		17,720		13,274
Advances from Borrowers for Taxes and Insurance		490		275
Accrued Expenses and Other Liabilities		918		755
Total Liabilities		110,047		88,555

Retained Earnings		9,662		9,429
Accumulated Other Comprehensive Income		29		31
Total Equity		9,691		9,460
Total Liabilities and Equity	$	119,738	$	98,015

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

Heritage Bank of St. Tammany

Statements of Income

For the Three and Six Months Ended June 30, 2017 and 2016, (Unaudited)

(In Thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017		2016

Interest Income
First Mortgage Loans	$	1,044	$	1,002		$	1,992	$	1,909
HELOC's		28		24			54		47
Securities		33		34			73		71
Second Mortgages		9		7			17		13
Commercial Loans		10		-			16		-
Consumer Loans (Secured by Deposits)		3		2			6		5
Other Interest Earning Assets		36		23			60		45
Total Interest Income		1,163		1,092			2,218		2,090

Interest Expense
Deposits		210		209			412		413
Borrowed Funds		58		40			109		82
Total Interest Expense		268		249			521		495

Net Interest Income		895		843			1,697		1,595

Provision for Loan Losses		40		40			50		55
Net Interest Income after Provision for Loan Losses		855		803			1,647		1,540

Noninterest Income
Gain on Sale of Loans Originated for Sale		9		26			27		42
Loan Servicing Income		41		59			83		95
Gain (Loss) on Sale of Foreclosed Real Estate		-		(51	)		1		(51	)
Other Income		23		23			45		45
Total Noninterest Income		73		57			156		131

Noninterest Expense
Salaries and Employee Benefits		426		396			845		791
Data Processing		47		47			105		95
Occupancy and Equipment - Other		33		46			71		91
Occupancy and Equipment - Depreciation		43		46			86		93
FDIC Insurance and Examination Fees		29		32			52		64
Director Compensation		17		21			36		41
Expense on Foreclosed Real Estate		1		13			1		25
Write-down of Foreclosed Real Estate		-		50			-		71
Advertising		28		20			49		44
Other		102		87			200		174
Total Noninterest Expense		726		758			1,445		1,489

Income Before Income Tax Expense		202		102			358		182
Income Tax Expense		76		30			125		30
Net Income	$	126	$	72		$	233	$	152

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

Heritage Bank of St. Tammany

Statements of Comprehensive Income (Loss)

For the Three and Six Months Ended June 30, 2017 and 2016, (Unaudited)

(In Thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017			2016

Net Income	$	126	$	72		$	233		$	152

Other Comprehensive Income (Loss):
Unrealized Holding Gains (Losses) on Securities Available for Sale		-		22			(4	)		47
Income Tax Effect		-		(8	)		2			(16	)

Total Other Comprehensive Income (Loss)		-		14			(2	)		31

Comprehensive Income	$	126	$	86		$	231		$	183

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

Heritage Bank of St. Tammany

Statements of Changes in Equity

For the Six Months Ended June 30, 2017 and 2016, (Unaudited)

(In Thousands)

			Accumulated
			Other
	Retained		Comprehensive
	Earnings		Income (Loss)			Total

Balance at January 1, 2016	$	9,271	$	55		$	9,326

Net Income		152		-			152

Other Comprehensive Income		-		31			31

Balance at June 30, 2016	$	9,423	$	86		$	9,509

Balance at January 1, 2017	$	9,429	$	31		$	9,460

Net Income		233		-			233

Other Comprehensive Loss		-		(2	)		(2	)

Balance at June 30, 2017	$	9,662	$	29		$	9,691

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

Heritage Bank of St. Tammany

Statements of Cash Flows

For the Six Months Ended June 30, 2017 and 2016, (Unaudited)

(in Thousands)

	Six Months Ended June 30,
	2017			2016

Cash Flows from Operating Activities
Net Income	$	233		$	152
Adjustments to reconcile net income (loss) to net cash from operating activities
Provision for Loan Losses		50			55
Writedowns of Foreclosed Real Estate		-			71
Provision for Depreciation		86			93
Deferred Income Tax Expense (Benefit)		(29	)		-
Change in Mortgage Servicing Rights		(11	)		(24	)
(Accretion) Amortization of Premiums and Discounts on Securities		24			24
(Accretion) Amortization of Deferred Loan Origination Fees		5			(35	)
Gain on Sale of Loans Originated for Sale		(27	)		(42	)
Originations of Loans Held for Sale		(311	)		-
Gain on Sale of Foreclosed Real Estate		(1	)		-
Loss on Sale of Foreclosed Real Estate		-			51
(Increase) Decrease in Accrued Interest Receivable		(17	)		8
(Increase) Decrease in Bank Owned Life Insurance		(25	)		(27	)
(Increase) Decrease in Prepaid Expenses and Other Assets		(494	)		(27	)
Increase (Decrease) in Accrued Expenses and Other Liabilities		163			86

Net Cash provided by (used in) Operating Activities		(354	)		385

Cash Flows from Investing Activities
Principal Collected on Securities Available for Sale		807			838
Principal Collected on Securities Held to Maturity		91			144
Purchase of Federal Home Loan Bank Stock		(281	)		(32	)
Net (Increase) Decrease in Loans		(9,074	)		(222	)
Purchases of Premises and Equipment		-			(8	)
Proceeds from Sales of Foreclosed Real Estate		10			400

Net Cash provided by (used in) Investing Activities		(8,447	)		1,120

Cash Flows from Financing Activities
Net Increase (Decrease) in Deposits		16,668			2,066
Advances from Borrowers for Taxes and Insurance		215			170
Funds Borrowed		8,550			3,800
Repayments of Borrowed Funds		(4,104	)		(4,331	)

Net Cash provided by Financing Activities		21,329			1,705

Net Change in Cash and Cash Equivalents		12,528			3,210

Cash and Cash Equivalents - Beginning of Period		8,014			8,572
Cash and Cash Equivalents - End of Period
Ending Cash and Cash Equivalents	$	20,542		$	11,782

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest Paid on Deposits and Borrowed Funds	$	521		$	495

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

Heritage Bank of St. Tammany

Notes to Financial Statements (Unaudited)

Note A – Basis of Presentation

The accompanying unaudited financial statements of Heritage Bank of St. Tammany (the “Bank”) were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, comprehensive income, changes in equity and cash flows in conformity with accounting principles generally accepted in the United States of America.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and six month periods ended June 30, 2017 are not necessarily indicative of the results which may be expected for the entire year. These statements should be read in conjunction with the Financial Statements and notes thereto for the year ended December 31, 2016 included in the Form S-1 of Heritage NOLA Bancorp, Inc. as filed with the Securities and Exchange Commission (“SEC”). Reference is made to the accounting policies of the Bank described in the Notes to the Financial Statements contained in the Form S-1.

In preparing the financial statements, the Bank is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the Bank’s financial condition, results of operations, comprehensive income, changes in shareholders’ equity and cash flows for the interim periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.

Note B – Recent Accounting Pronouncements

Recent Accounting Pronouncements

Emerging Growth Company Status

The Bank qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as the Bank is an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies. An emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. The Bank has elected to use the extended transition period described above and intends to maintain its emerging growth company status as allowed under the JOBS Act.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The provisions of the update requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March, 2016 the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications. For an emerging growth company, the amendments in this update are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. The Bank is currently assessing the amendment but does not anticipate it will have a material impact on our Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825- 10), Recognition and Measurement of Financial Assets and Financial Liabilities. The provisions of the update require equity investments to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment. The update also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. It also eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities, and eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. ASU No. 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. It also requires an entity to present separately in other comprehensive income the portion of the total change in the 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. The update requires separate presentation of financial assets and financial liabilities by category and form on the balance sheet or the accompanying notes to the financial statements. In addition, the update clarifies 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. For an emerging growth company, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods. The adoption of this ASU is not expected to have a material impact on the Bank’s financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), Conforming Amendments Related to Leases. This ASU amends the codification regarding leases in order to increase transparency and comparability. The ASU requires companies to recognize lease assets and liabilities on the statement of condition and disclose key information about leasing arrangements. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. For an emerging growth company, the amendments in this update are effective for annual periods beginning after December 15, 2019. The adoption of this ASU is not expected to have a material effect on the Bank’s financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments introduce an impairment model that is based on expected credit losses (“ECL”), rather than incurred losses, to estimate credit losses on certain types of financial instruments (ex. loans and held to maturity securities), including certain off-balance sheet financial instruments (ex. commitments to extend credit and standby letters of credit that are not unconditionally cancellable). The ECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Financial instruments with similar risk characteristics may be grouped together when estimating the ECL. The ASU also amends the current available for sale security impairment model for debt securities whereby credit losses relating to available for sale debt securities should be recorded through an allowance for credit losses. For an emerging growth company, the amendments in this update are effective for fiscal years beginning after December 31, 2020. The amendments will be applied through a modified retrospective approach, resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Bank is currently planning for the implementation of this accounting standard. It is too early to assess the impact this guidance will have on the Bank’s financial statements.

In August 2016, FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. The amendments in this ASU clarify the proper classification for certain cash receipts and cash payments, including clarification on debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, among others. For an emerging growth company, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Bank is currently assessing the amendment but does not anticipate it will have a material impact on our Financial Statements.

Note C – Investment Securities

The amortized costs and estimated fair values of investment securities classified as available for sale and held to maturity as of June 30, 2017 and December 31, 2016 is as follows:

	June 30, 2017
(in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
Available for Sale:
Mortgage-Backed Securities	$	6,299	$	74	$	(29	)	$	6,344

Held to Maturity:
Mortgage-Backed Securities	$	737	$	1	$	(8	)	$	730

	December 31, 2016
(in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
Available for Sale:
Mortgage-Backed Securities	$	7,126	$	87	$	(38	)	$	7,175

Held to Maturity:
Mortgage-Backed Securities	$	832	$	1	$	(9	)	$	824

There were no securities sold in 2017 or 2016.

All mortgage-backed securities held on June 30, 2017 and December 31, 2016 were government-sponsored mortgage-backed securities.

The amortized cost and fair value of investment securities at June 30, 2017 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
(in thousands)	Cost		Value
Available for Sale:
Less than One Year	$	3	$	3
After One Year Through Five Years		6		6
After Five Years Through Ten Years		1,480		1,487
After Ten Years		4,810		4,848
	$	6,299	$	6,344

Held to Maturity:
After Five Years Through Ten Years	$	401	$	401
After Ten Years		336		329
	$	737	$	730

The following table reflects gross unrealized losses, fair values, and length of time in a continued unrealized loss position for all securities with fair values below amortized cost at June 30, 2017 and December 31, 2016:

	June 30, 2017
(in thousands)	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Available for Sale:
Mortgage-Backed
Securities	$	2,218	$	8	$	1,073	$	21	$	3,291	$	29

Held to Maturity:
Mortgage-Backed
Securities	$	-	$	-	$	312	$	8	$	312	$	8

	December 31, 2016
(in thousands)	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Available for Sale:
Mortgage-Backed
Securities	$	2,300	$	15	$	1,231	$	23	$	3,531	$	38

Held to Maturity:
Mortgage-Backed
Securities	$	587	$	2	$	218	$	7	$	805	$	9

On a quarterly basis (and more frequently when economic or market conditions warrant), management evaluates the investment securities portfolio on an individual security basis for other-than- temporary impairment (“OTTI”). If a security is in a loss position, management will determine if OTTI exists and will consider the following. First, if it is probable that the issuer of the security will be unable to pay all amounts due according to the contractual terms of the debt security, OTTI will be recognized. Second, if management intends to sell the security and does not expect to recover the loss before the anticipated sale date, OTTI will be recognized. In both instances, OTTI will be recognized for the affected security equal to the difference between the fair value and amortized cost through a charge to earnings. Third, if a security does not meet either of the criteria above and is both in a loss position for greater than one year and at a current loss of 10% or more, management will evaluate its ability and intent to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.

Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other-than-temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. No declines at June 30, 2017 and December 31, 2016, were deemed to be other-than-temporary. The unrealized losses on the securities available for sale generally result from changes in market interest rates and not credit quality. The Bank does not intend to sell any such investments before recovery of their amortized cost bases, which may be at maturity.

Note D – Credit Quality and Allowance for Loan Losses

A selection of the Bank’s loan and allowance for loan losses policies are as follows:

Loans Receivable

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred loan fees or costs on originated loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of direct loan origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on the loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Loans are typically charged off not later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The performing one-to-four family residential, commercial real estate, and commercial loans are pledged, under a blanket lien, as collateral securing advances from the Federal Home Loan Bank of Dallas, (“FHLB”), at June 30, 2017 and December 31, 2016.

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.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience. Other adjustments may be made to the allowance for pools of loans after an assessment of internal and external influence on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based upon current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls are considered on a case by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Loans receivable at June 30, 2017 and December 31, 2016 are summarized as follows:

(in thousands)	June 30, 2017			December 31, 2016

Real Estate:
Secured by one-to four family residential properties
Owner-occupied	$	50,084		$	46,353
Non-owner-occupied		12,164			11,237
Home Equity Lines of Credit		2,364			2,246
Commercial (Nonresidential) Properties		13,852			7,234
Land		2,766			2,907
Construction		2,028			3,475
Multi-family		1,215			2,629
Commercial		838			295
Consumer Loans		282			285
Total Loans		85,593			76,661

Less: Net Deferred Loan Fees		(454	)		(459	)
Loans in Process		(692	)		(851	)
Allowance for Loan Losses		(742	)		(692	)
Net Loans	$	83,705		$	74,659

The tables below provide a summary of activity in the allowance for loan losses by loan type as of and for the six months ended June 30, 2017 and the year ended December 31, 2016. The allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories.

Allowance for Credit Losses and Recorded Investment in Loans Receivable

For the Six Months Ended June 30, 2017

(in thousands)

	Real Estate
	Commercial		Land			One-to-Four Family		Construction			Multi-Family			Consumer		Commercial		Total

Allowance for Credit Losses:
Balance, December 31, 2016	$	43	$	101		$	528	$	8		$	3		$	-	$	9	$	692
Charge-offs		-		-			-		-			-			-		-		-
Recoveries		-		-			-		-			-			-		-		-
Provision		15		(25	)		54		(3	)		(2	)		-		11		50
Ending Balance	$	58	$	76		$	582	$	5		$	1		$	-	$	20	$	742

Ending Balance:
Individually Evaluated for Impairment	$	14	$	2		$	29	$	-		$	-		$	-	$	-	$	45

Ending Balance:
Collectively Evaluated for Impairment	$	44	$	74		$	553	$	5		$	1		$	-	$	20	$	697

Loans Receivable:
Ending Balance	$	13,852	$	2,766		$	64,612	$	2,028		$	1,215		$	282	$	838	$	85,593

Ending Balance:
Individually Evaluated for Impairment	$	142	$	14		$	280	$	-		$	-		$	-	$	-	$	436

Ending Balance:
Collectively Evaluated for Impairment	$	13,710	$	2,752		$	64,332	$	2,028		$	1,215		$	282	$	838	$	85,157

Allowance for Credit Losses and Recorded Investment in Loans Receivable

For the Year Ended December 31, 2016

(in thousands)

	Real Estate
	Commercial			Land			One-to-Four Family			Construction			Multi-Family		Consumer		Commercial Business		Total

Allowance for Credit Losses:
Beginning Balance	$	48		$	85		$	447		$	9		$	3	$	-	$	-	$	592
Charge-offs		-			(10	)		(108	)		-			-		-		-		(118	)
Recoveries		-			-			38			-			-		-		-		38
Provision		(5	)		26			151			(1	)		-		-		9		180
Ending Balance	$	43		$	101		$	528		$	8		$	3	$	-	$	9	$	692

Ending Balance:
Individually Evaluated for Impairment	$	-		$	2		$	36		$	-		$	-	$	-	$	-	$	38

Ending Balance:
Collectively Evaluated for Impairment	$	43		$	99		$	492		$	8		$	3	$	-	$	9	$	654

Loans Receivable:
Ending Balance	$	7,234		$	2,907		$	59,836		$	3,475		$	2,629	$	285	$	295	$	76,661

Ending Balance:
Individually Evaluated for Impairment	$	-		$	17		$	501		$	-		$	-	$	-	$	-	$	518

Ending Balance:
Collectively Evaluated for Impairment	$	7,234		$	2,890		$	59,335		$	3,475		$	2,629	$	285	$	295	$	76,143

Credit quality indicators as of June 30, 2017 and December 31, 2016:

Pass - A pass asset is properly approved, documented, collateralized, and performing. It does not reflect an abnormal amount of risk.

Special mention - A special mention asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Bank's credit position at some future date. Special mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

Substandard - An asset classified as substandard has a well-defined weakness or weaknesses. A substandard asset is inadequately protected by the current net worth or paying capacity of the obligor or pledged collateral, if any. It is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful - Assets classified as doubtful have all the weaknesses inherent in those classified as substandard. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions, and values.

Loss - Assets classified as loss are considered uncollectible or of such little value that the continuance of the loan or other asset on the books of the Bank is not warranted. Some recovery of funds could be possible in the future, but the amount and probability of this recovery are not determinable thus providing little justification for the assets to remain on the books.

The following tables represent the Bank's credit exposure by credit quality indicator as of June 30, 2017 and December 31, 2016:

Credit Risk Profile by Internally Assigned Grade

(in thousands)

	June 30, 2017

	Real Estate
	Commercial RE		Land		One-to-Four Family		Construction		Multi-Family		Consumer		Commercial		Total
Pass	$	13,535	$	2,718	$	64,113	$	2,028	$	1,215	$	282	$	838	$	84,729
Special Mention		-		-		-		-		-		-		-		-
Substandard		317		48		499		-		-		-		-		864
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
	$	13,852	$	2,766	$	64,612	$	2,028	$	1,215	$	282	$	838	$	85,593

	December 31, 2016

	Real Estate
	Commercial RE		Land		One-to-Four Family		Construction		Multi-Family		Consumer		Commercial		Total
Pass	$	7,050	$	2,852	$	59,183	$	3,475	$	2,629	$	285	$	295	$	75,769
Special Mention		-		-		-		-		-		-		-		-
Substandard		184		55		653		-		-		-		-		892
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
	$	7,234	$	2,907	$	59,836	$	3,475	$	2,629	$	285	$	295	$	76,661

The following tables are an aging analysis of loans as of June 30, 2017 and December 31, 2016:

Aged Analysis of Past Due Loans Receivable

(in thousands)

					June 30, 2017
			Greater
	30-89		Than								Total
	Days		90 Days		Total		Nonaccrual				Loans
	Past Due		Past Due		Past Due		Status		Current		Receivable

Real Estate:
Commercial	$	-	$	-	$	-	$	142	$	13,710	$	13,852
Land		19		-		19		14	$	2,733		2,766
Residential		999		-		999		279	$	63,334		64,612
Construction		-		-		-		-	$	2,028		2,028
Multi-family		-		-		-		-	$	1,215		1,215
Consumer		-		-		-		-	$	282		282
Commercial		-		-		-		-	$	838		838
	$	1,018	$	-	$	1,018	$	435	$	84,140	$	85,593

					December 31, 2016
			Greater
	30-89		Than								Total
	Days		90 Days		Total		Nonaccrual				Loans
	Past Due		Past Due		Past Due		Status		Current		Receivable
Real Estate:
Commercial	$	141	$	-	$	141	$	-	$	7,093	$	7,234
Land		20		-		20		17		2,870		2,907
Residential		1,588		-		1,588		501		57,747		59,836
Construction		-		-		-		-		3,475		3,475
Multi-family		-		-		-		-		2,629		2,629
Consumer		5				5		-		280		285
Commercial
Business		-		-		-		-		295		295
	$	1,754	$	-	$	1,754	$	518	$	74,389	$	76,661

The following tables below present impaired loans disaggregated by class as of and for the six months ended June 30, 2017 and the year ended December 31, 2016:

	As Of And For The Six Months Ended June 30, 2017
			Unpaid		Allowance for Loan		Average		Interest
(in thousands)	Recorded Investment		Principal Balance		Losses Allocated		Recorded Investment		Income Recognized

Loans with an allowance recorded:
Real estate
Commercial	$	142	$	142	$	14		142	$	-
Land		14		19		2		15		-
1-4 family residential		280		296		29		280		-
Multi-Family		-		-		-		-		-
Construction		-		-		-		-		-
Consumer and Commercial		-		-		-		-		-

Loans with no allowance recorded:
Real estate
Commercial		-		-		-		-		-
Land		-		-		-		-		-
1-4 family residential		-
Multi-Family		-		-		-		-		-
Construction		-
Consumer and Commercial		-		-		-		-		-

Totals	$	436	$	457	$	45	$	437	$	-

	As Of And For The Year Ended December 31, 2016
			Unpaid		Allowance for Loan		Average		Interest
(in thousands)	Recorded Investment		Principal Balance		Losses Allocated		Recorded Investment		Income Recognized

Loans with an allowance recorded:
Real estate
Commercial	$	-	$	-	$	-	$	-	$	-
Land		17		20		2		18		-
1-4 family residential		501		686		36		538		-
Multi-Family		-		-		-		-		-
Construction		-		-		-		-		-
Consumer and Commercial		-		-		-		-		-


Loans with no allowance recorded:
Real estate
Commercial		-		-		-		-		-
Land		-		-		-		-		-
1-4 family residential		-		-		-		-		-
Multi-Family		-		-		-		-		-
Construction		-		-		-		-		-
Consumer and Commercial		-		-		-		-		-

Totals	$	518	$	706	$	38	$	556	$	-

The tables below present modifications disaggregated by class for the six months ended June 30, 2017 and the year ended December 31, 2016:

Troubled Debt Restructuring

(in thousands)	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Modifications as of June 30, 2017:

Residential - modified amortization		3	$	305	$	182

Modifications as of December 31, 2016:

Residential - modified amortization		4	$	441	$	290

None of the 2017 or 2016 troubled debt restructurings defaulted subsequent to the modification.

The Bank's troubled debt restructurings are generally due to a modification of terms allowing the customer to make interest-only payments for an amount of time, an extension of the loan term, and/or a reduction in interest rate to obtain a lower payment for the customer. The Bank is not committed to lend additional funds to debtors whose loans have been modified.

Note E - Fair Value of Financial Statements

Fair Value Disclosures

The Bank groups its financial assets and liabilities measured at fair value in three levels. Fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 - Includes the most reliable sources, and includes quoted prices in active markets for identical assets or liabilities.

Level 2 - Includes observable inputs. Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

Level 3 - Includes unobservable inputs and should be used only when observable inputs are unavailable.

Recurring Basis

Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service. This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.

The following tables present the balance of assets and liabilities measured on a recurring basis as of June 30, 2017 and December 31, 2016. The Bank did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

(In thousands)			Fair Value Measurement Using
Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

June 30, 2017

Mortgage-Backed Securities	$	6,344	$	-	$	6,344	$	-

December 31, 2016

Mortgage-Backed Securities	$	7,175	$	-	$	7,175	$	-

Nonrecurring Basis

The Bank has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. The Bank did not record any liabilities at fair value for which measurement of the fair value was made on a non-recurring basis.

The fair value of the impaired loans is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are Level 2 assets measured using appraisals from external parties of the collateral less any prior liens. Repossessed assets are initially recorded at fair value less estimated costs to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Bank records repossessed assets as Level 2.

			Fair Value Measurement Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

June 30, 2017

Assets
Impaired Loans	$	391	$	-	$	391	$	-
Repossessed Assets		84		-		84		-
Total	$	475	$	-	$	475	$	-

December 31, 2016

Assets
Impaired Loans	$	480	$	-	$	480	$	-
Repossessed Assets		93		-		93		-
Total	$	573	$	-	$	573	$	-

Fair values of financial instruments

In cases where quoted market prices of financial instruments are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. The fair values of certain financial instruments and all non-financial instruments are not required to be disclosed. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. The following methods and assumptions were used by the Bank in estimating fair values of financial instruments:

Cash, due from banks, federal funds sold and interest-earning deposits with banks - The carrying amount is a reasonable estimate of fair value.

Securities - Fair value is based on quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Mortgage Loans Held for Sale - Fair value is the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements.

Loans Receivable - Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Cash Value of Life Insurance - The carrying amount approximates its fair value.

Deposits - The fair value of demand, savings, NOW and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowings - The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other borrowings are estimated using discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements.

Commitments to extend credit and standby letters of credit - The fair values of commitments to extend credit and standby letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.

The carrying amounts and estimated fair values of the Bank’s financial instruments at June 30, 2017 and December 31, 2016, are as follows:

					Fair Value Measurement Using
(In thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

June 30, 2017
Financial Assets:
Cash, Short-Term Investments and Federal Funds Sold	$	20,542	$	20,542	$	20,542	$	-	$	-
Securities-Available for Sale		6,344		6,344		-		6,344		-
Securities-Held to Maturity		737		730		-		730		-
Other Equity Securities		954		954		-		-		954
Cash Value of Life Insurance		2,026		2,026		-		2,026		-
Loans Held for Sale		311		311		-		311		-
Loans-Net		83,705		85,354		-		-		85,354
	$	114,619	$	116,261	$	20,542	$	9,411	$	86,308

Financial Liabilities:
Deposits	$	91,409	$	91,720	$	-	$	-	$	91,720
Borrowed Funds		17,720		17,630		-		17,630		-
	$	109,129	$	109,350	$	-	$	17,630	$	91,720

					Fair Value Measurement Using
(In thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

December 31, 2016
Financial Assets:
Cash, Short-Term Investments and Federal Funds Sold	$	8,014	$	8,014	$	8,014	$	-	$	-
Securities-Available for Sale		7,175		7,175		-		7,175		-
Securities-Held to Maturity		832		824		-		824		-
Other Equity Securities		673		673		-		-		673
Cash Value of Life Insurance		2,001		2,001		-		2,001		-
Loans-Net		74,659		74,866		-		-		74,866
	$	93,354	$	93,553	$	8,014	$	10,000	$	75,539

Financial Liabilities:
Deposits	$	74,251	$	75,732	$	-	$	-	$	75,732
Borrowed Funds		13,274		13,209		-		13,209		-
	$	87,525	$	88,941	$	-	$	13,209	$	75,732

NOTE F - Plan of Conversion

On March 7, 2017, the Bank’s Board of Directors adopted a Plan of Conversion (the “Plan”) to convert from the mutual form of organization to the fully stock form of organization (the “Conversion”). A new Maryland-chartered corporation, Heritage NOLA Bancorp, Inc. (the “Company”), was formed in February 2017, which, upon consummation of the Conversion and offering, will become the savings and loan holding company of the Bank. The Plan was approved by the members of the Bank at a Special Meeting of Members on June 20, 2017. The Plan received all of the required regulatory approvals, and the Bank’s mutual to stock conversion and the Company’s stock offering were consummated on July 12, 2017. In the offering, the Company sold 1,653,125 shares of common stock at a per share price of $10.00 for gross offering proceeds of $16,531,250.

The cost of the Conversion and issuing the capital stock was deferred and deducted from the proceeds of the offering. Through June 30, 2017, the Bank had incurred approximately $550,000 in conversion costs, which are included in prepaid expenses and other assets on the balance sheet.

In accordance with OCC regulations, at the time of the Conversion, the Bank will substantially restrict retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after the Conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

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 June 30, 2017 and results of operations for the three and six months ended June 30, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of the Bank. 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:

our ability to manage our operations under the economic conditions in our market area;

adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);

significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses;

credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

the use of estimates in determining fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuations;

competition among depository and other financial institutions;

our success in increasing our one- to four-family residential real estate lending and commercial real estate lending;

our ability to attract and maintain deposits and to grow our core deposits, and our success in introducing new financial products;

our ability to maintain our asset quality even as we continue to grow our commercial real estate and commercial business loan portfolios;

changes in interest rates generally, including changes in the relative differences between short-term and long-term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

fluctuations in the demand for loans;

changes in consumer spending, borrowing and savings habits;

declines in the yield on our assets resulting from the current low interest rate environment;

risks related to a high concentration of loans secured by real estate located in our market area;

the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

changes in the level of government support of housing finance;

our ability to enter new markets successfully and capitalize on growth opportunities;

changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, particularly the new capital regulations, and the resources we have available to address such changes;

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 and the Public Company Accounting Oversight Board;

changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans;

loan delinquencies and changes in the underlying cash flows of our borrowers;

our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;

the failure or security breaches of computer systems on which we depend;

the ability of key third-party service providers to perform their obligations to us;

changes in the financial condition or future prospects of issuers of securities that we own; and

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services.

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

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in Heritage NOLA Bancorp, Inc.’s Prospectus dated May 15, 2017, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 23, 2017.

Comparison of Financial Condition at June 30, 2017 and December 31, 2016

Total Assets. Total assets were $119.7 million at June 30, 2017, an increase of $21.7 million, or 22.2%, compared to $98.0 million at December 31, 2016. The increase was due primarily to an increase of $12.7 million in interest earning deposits in banks resulting primarily from subscription funds received in the stock offering, and an increase of $9.0 million in net loans. Other assets also increased $525,000 in the six months ended June 30, 2017, primarily due to deferred expenses for the Conversion from the mutual to stock form of ownership. These increases were offset in part by a decrease in investment securities of $926,000.

Cash and Cash Equivalents. Cash and Cash Equivalents increased $12.5 million, or 156.3%, to $20.5 million at June 30, 2017, from $8.0 million at December 31, 2016. This increase was primarily due to the increase in interest earning deposits in banks from the funds received for the stock offering. The increase was offset somewhat by the funding of loans and maturing of FHLB advances.

Loans, net and Loans Held for Sale. Loans, net increased $9.0 million, or 12.1%, to $83.7 million at June 30, 2017 from $74.7 million at December 31, 2016. Owner-occupied one- to four-family residential real estate loans increased $3.7 million, or 8.1%, to $50.1 million at June 30, 2017 from $46.4 million at December 31, 2016, non-owner-occupied, one- to four-family residential real estate loans increased $927,000, or 8.3%, and commercial real estate loans increased $6.6 million, or 91.5%, to $13.9 million at June 30, 2017. The increase in our owner-occupied residential real estate portfolio resulted in part from a loan participation purchase of $984,000 on a single-family home in St. Tammany Parish. The increase in commercial real estate loans resulted primarily from purchases of $6.2 million, including the repurchase of a portion of a grocery store loan and participation purchases of a commercial office building loan, a big box store loan, two restaurant loans and 1 yacht storage facility loan. These increases were offset, in part, by a decrease in construction loans which decreased $1.4 million, or 41.6%, to $2.0 million at June 30, 2017, due to these loans moving to permanent status, and a decrease in multi-family loans, which decreased $1.4 million, or 53.8%, to $1.2 million at June 30, 2017 due to a single payoff of a $1.4 million loan. Commercial loans increased $543,000, or 184.1%, for the six months ended June 30, 2017, due to purchases of $606,000 in loans from Bankers Healthcare Group, a nationally recognized lender to healthcare professionals. Loans held for sale increased to $311,000 from $0 at December 31, 2016, representing a single loan whose sale had not concluded at June 30, 2017.

Changes in loan balances reflect our strategy to maximize our income by growing and diversifying our loan portfolio, with an emphasis on increasing our commercial real estate and commercial business loans, and continually reviewing our existing portfolio for income, liquidity and interest rate risk mitigation opportunities consistent with our strategic objectives. Recent loan originations have been achieved amid strong competition for commercial real estate and residential real estate loans in our market area in the current low interest rate environment. Most recent loan purchases have been related to the opportunity to find quality loans in our local market area. We will continue to look for quality loan purchase opportunities to augment our portfolio of loans.

Securities. Securities were $7.1 million at June 30, 2017, a decrease of $926,000, or 11.6%, from $8.0 million at December 31, 2016. This decrease reflects normal repayments and maturities of the mortgage backed securities.

Federal Home Loan Bank Stock. Stock in FHLB of Dallas increased $281,000, or 56.8%, to $776,000 at June 30, 2017 from $495,000 at December 31, 2016. This increase was due to stock purchases in conjunction with advances taken to fund the growth in our loan portfolio.

Prepaid Expenses and Other Assets. Prepaids and other assets increased $525,000, or 251.2%, to $734,000 at June 30, 2017 from $209,000 at December 31, 2016. The increase resulted from an increase of $550,000 in deferred expenses in connection with the impending mutual to stock conversion.

Deposits. Deposits increased $16.7 million, or 22.5%, to $90.9 million at June 30, 2017 from $74.2 million at December 31, 2016. Our interest-bearing deposits increased $17.4 million, or 25.0% due primarily to the $15.7 million received and placed in an interest-bearing escrow for the stock offering. Certificates of deposit also increased $1.3 million, or 2.6%, to $52.3 million at June 30, 2017 from $51.0 million at December 31, 2016. These increases were offset in part by a decrease in demand deposit accounts of $784,000, or 18.0% to $3.6 million from $4.4 million at December 31, 2016, due to the transition of many demand deposit accounts to interest-bearing transaction accounts.

Borrowings. Borrowings, including Federal Home Loan Bank advances and federal funds purchased, totaled $17.7 million at June 30, 2017 compared to $13.3 million at December 31, 2016. The increase in borrowings of $4.4 million was directly related to the growth of the loan portfolio for the same time period.

Total Equity. Total equity increased $231,000, or 2.4%, to $9.7 million at June 30, 2017 from $9.5 million at December 31, 2016. The increase resulted from net income of $233,000 during the six months ended June 30, 2017.

Comparison of Operating Results for the Three Months Ended June 30, 2017 and 2016

General. Net income for the three months ended June 30, 2017 was $126,000, compared to $72,000 for the three months ended June 30, 2016, an increase of $54,000. The increase in net income was primarily due to a $52,000 increase in net interest income, an increase in noninterest income of $16,000, a decrease in noninterest expense of $32,000 and an increase in provision for income taxes of $46,000 for the three months ended June 30, 2017 compared to the quarter ended June 30, 2016.

Interest Income. Interest income increased $71,000, or 6.5%, to $1.2 million for the three months ended June 30, 2017 from $1.1 million for the three months ended June 30, 2016. The increase was primarily attributable to a $59,000 increase in interest on loans receivable, and a $13,000 increase in interest on other interest-earning assets. The average balance of loans during the three months ended June 30, 2017 increased $9.2 million, or 12.6%, to $82.6 million from $73.4 million for the three months ended June 30, 2016, while the average yield on loans decreased 34 basis points to 5.30% for the three months ended June 30, 2017 from 5.64% for the three months ended June 30, 2016, reflecting payoffs of higher-yielding mature loans being replaced by lower-yielding loans in the ongoing low interest rate environment. The average balance of investment securities and other interest-earning deposits, including certificates of deposit in other banks, increased $1.4 million to $18.3 million for the three months ended June 30, 2017 from $16.9 million for the three months ended June 30, 2016, while the average yield increased by 16 basis points to 1.51% for the three months ended June 30, 2017 from 1.35% for the three months ended June 30, 2016.

Interest Expense. Total interest expense increased $19,000, or 7.6%, to $268,000 for the three months ended June 30, 2017 from $249,000 for the three months ended June 30, 2016. Interest expense on deposit accounts increased $1,000, or 0.5%, to $210,000 for the three months ended June 30, 2017 from $209,000 for the three months ended June 30, 2016. Interest expense on borrowings increased $18,000 to $58,000 for the three months ended June 30, 2017 from $40,000 for the three months ended June 30, 2016. The average balance of FHLB advances increased $6.9 million to $19.4 million for the three months ended June 30, 2017 compared to $12.5 million for the three months ended June 30, 2016, while the average cost of these advances decreased eight basis points to 1.20% from 1.28%. As noted above, management elected to increase outstanding advances as a source of funding for the increase in the loan portfolio.

Net Interest Income. Net interest income increased $52,000, or 6.2%, to $895,000 for the three months ended June 30, 2017 compared to $843,000 for the three months ended June 30, 2016. The increase reflected a higher percentage of assets in higher-yielding loans period to period.

Our net interest margin decreased to 3.55% for the three months ended June 30, 2017 from 3.74% for the three months ended June 30, 2016 reflecting the shift in our interest-earning assets and the impact of the additional borrowings. Net interest rate spread also decreased to 3.43% for the 2017 quarter compared to 3.66% for the 2016 quarter.

Provision for Loan Losses. The provision for loan losses for the three months ended June 30, 2017 of $40,000 was the same as the provision recorded for the three months ended June 30, 2016. The allowance for loan losses was $742,000, or 0.87% of total loans, at June 30, 2017, compared to $692,000, or 0.90% of total loans, at December 31, 2016, and $529,000, or 0.71% of total loans, at June 30, 2016. Total nonperforming loans were $435,000 at June 30, 2017, compared to $518,000 at December 31, 2016 and $961,000 at June 30, 2016. Classified (substandard, doubtful and loss) loans were $865,000 at June 30, 2017, $892,000 at December 31, 2016 and $1.2 million at June 30, 2016. There were no charge-offs or recoveries in the three months ending June 30, 2017. As a percentage of nonperforming loans, the allowance for loan losses was 170.57% at June 30, 2017, compared to 133.59% at December 31, 2016 and 55.05% at June 30, 2016.

The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at the applicable balance sheet date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations.

Noninterest Income. Noninterest income increased $16,000, or 28.1%, to $73,000 for the three months ended June 30, 2017 from $57,000 for the three months ended June 30, 2016. The increase was primarily due to a loss on the sale of a foreclosed real estate property in the three months ended June 30, 2016. There was a decrease of $17,000 in gain on sale of loans and a decrease in loan servicing income of $18,000 for the three months ended June 30, 2017, compared to the same three month period in 2016. These decreases were due to decreased activity in the secondary mortgage market.

Noninterest Expense. Noninterest expense decreased $32,000, or 4.2%, to $726,000 for the three months ended June 30, 2017 compared to $758,000 for the three months ended June 30, 2016. The decrease was due primarily to a $50,000 decrease in write-downs of foreclosed real estate, a $12,000 decrease in expense on foreclosed real estate, and a decrease in occupancy expenses of $13,000. These decreases were partially offset by an increase of $30,000, or 7.6%, in salaries and employee benefits and a $15,000, or 17.2% increase in other expenses. The decrease in expense on foreclosed real estate was due to the sale of most of our Other Real Estate Owned (“OREO”) properties. The OREO average balance for the three months ending June 30, 2017 was $84,000 compared to an average of $484,000 for the three months ended June 30, 2016.

We expect our noninterest expense to increase in future periods because of the anticipated costs associated with operating as a public company as well as increased compensation expense related to possible implementation following the conversion of one or more stock-based benefit plans, if approved by our stockholders.

Income Tax Expense. We recorded an income tax expense of $76,000 for the three months ended June 30, 2017 compared to $30,000 for the three months ended June 30, 2016. The increase was due to increased income period to period.

Comparison of Operating Results for the Six Months Ended June 30, 2017 and 2016

General. Net income for the six months ended June 30, 2017 was $233,000, compared to $152,000 for the six months ended June 30, 2016, an increase of $81,000. The increase in net income was primarily due to a $102,000 increase in net interest income, an increase in noninterest income of $25,000, a decrease in noninterest expense of $44,000 and an increase in provision for income taxes of $95,000 for the six months ended June 30, 2017 compared to the six months ended June 30, 2016.

Interest Income. Interest income increased $128,000, or 6.1%, to $2.2 million for the six months ended June 30, 2017 from $2.1 million for the six months ended June 30, 2016. The increase was primarily attributable to a $111,000 increase in interest on loans receivable, and a $15,000 increase in interest on other interest-earning assets. The average balance of loans during the six months ended June 30, 2017 increased $7.8 million, or 10.7%, to $80.8 million from $72.9 million for the six months ended June 30, 2016, while the average yield on loans decreased 25 basis points to 5.16% for the six months ended June 30, 2017 from 5.41% for the six months ended June 30, 2016, reflecting payoffs of higher-yielding mature loans being replaced by lower-yielding loans in the ongoing low interest rate environment. The average balance of investment securities and other interest-earning deposits, including certificates of deposit in other banks, increased $241,000 to $16.9 million for the six months ended June 30, 2017 from $16.7 million for the six months ended June 30, 2016, while the average yield increased by 18 basis points to 1.57% for the six months ended June 30, 2017 from 1.39% for the six months ended June 30, 2016.

Interest Expense. Total interest expense increased $26,000, or 5.3%, to $521,000 for the six months ended June 30, 2017 from $495,000 for the six months ended June 30, 2016. Interest expense on deposit accounts decreased $1,000, or 0.2%, to $412,000 for the six months ended June 30, 2017 from $413,000 for the six months ended June 30, 2016. Interest expense on borrowings increased $27,000 to $109,000 for the six months ended June 30, 2017 from $82,000 for the six months ended June 30, 2016. The average balance of FHLB advances increased $5.4 million to $18.2 million for the six months ended June 30, 2017 compared to $12.8 million for the six months ended June 30, 2016, while the average cost of these advances decreased ten basis points to 1.20% from 1.30%. As noted above, management elected to increase outstanding advances as a source of funding for the increase in the loan portfolio.

Net Interest Income. Net interest income increased $102,000, or 6.4%, to $1.7 million for the six months ended June 30, 2017 compared to $1.6 million for the six months ended June 30, 2016. The increase reflected a higher percentage of assets in higher-yielding loans period to period.

Our net interest margin decreased to 3.48% for the six months ended June 30, 2017 from 3.56% for the six months ended June 30, 2016 reflecting the shift in our interest-earning assets and the impact of the additional borrowings. Net interest rate spread also decreased to 3.36% for the six months ended June 30, 2017 compared to 3.49% for the same period in 2016.

Provision for Loan Losses. The provision for loan losses for the six months ended June 30, 2017 was $50,000, or $5,000 less than the provision recorded for the six months ended June 30, 2016. The allowance for loan losses was $742,000, or 0.87% of total loans, at June 30, 2017, compared to $692,000, or 0.90% of total loans, at December 31, 2016, and $529,000, or 0.71% of total loans, at June 30, 2016. Total nonperforming loans were $435,000 at June 30, 2017, compared to $518,000 at December 31, 2016 and $961,000 at June 30, 2016. Classified (substandard, doubtful and loss) loans were $865,000 at June 30, 2017, $892,000 at December 31, 2016 and $1.2 million at June 30, 2016. There were no charge-offs or recoveries in the six months ending June 30, 2017. As a percentage of nonperforming loans, the allowance for loan losses was 170.57% at June 30, 2017, compared to 133.59% at December 31, 2016 and 55.05% at June 30, 2016.

Noninterest Income. Noninterest income increased $25,000, or 19.1%, to $156,000 for the six months ended June 30, 2017 from $131,000 for the six months ended June 30, 2016. The increase was primarily due to a loss on the sale of a foreclosed real estate property of $51,000 in the six months ended June 30, 2016. There was a decrease of $15,000 in gain on sale of loans and a decrease in loan servicing income of $12,000 for the six months ended June 30, 2017, compared to the same six month period in 2016. These decreases were due to decreased activity in the secondary mortgage market.

Noninterest Expense. Noninterest expense decreased $44,000, or 3.0%, to $1.4 million for the six months ended June 30, 2017 compared to $1.5 million for the three months ended June 30, 2016. The decrease was due primarily to a $71,000 decrease in write-downs of foreclosed real estate, a $24,000 decrease in expense on foreclosed real estate, and a decrease in occupancy expenses of $20,000. These decreases were partially offset by an increase of $54,000, or 6.8%, in salaries and employee benefits and a $26,000, or 14.9% increase in other expenses. The decrease in expense on foreclosed real estate was due to the sale of most of our OREO properties. The OREO average balance for the six months ending June 30, 2017 was $86,000 compared to an average of $569,000 for the six months ended June 30, 2016.

Income Tax Expense. We recorded an income tax expense of $125,000 for the six months ended June 30, 2017 compared to $30,000 for the six months ended June 30, 2016. The increase was to increased income period to period and an increase in the effective tax rate.

Liquidity and Capital Resources. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB-Dallas. At June 30, 2017, we had $17.7 million outstanding in advances from the FHLB-Dallas, and had the capacity to borrow approximately an additional $18.4 million from the FHLB-Dallas and an additional $3.0 million on a line of credit with First National Bankers’ Bank, Baton Rouge, Louisiana at this date.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was ($354,000) and $385,000 for the six months ended June 30, 2017 and 2016, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable, net change in investment securities and proceeds from the sale of loans, was ($8.5 million) and $1.1 million for the six months ended June 30, 2017 and 2016, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and Federal Home Loan Bank advances, was $21.3 million and $1.7 million for the six months ended June 30, 2017 and 2016, respectively. The 2017 period increase was primarily from the increase in deposits resulting from the receipt of funds for the stock offering.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

At June 30, 2017, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $9.7 million, or 8.88% of adjusted total assets, which is above the well-capitalized required level of $5.4 million, or 5.0%; and total risk-based capital of $10.4 million, or 16.82% of risk-weighted assets, which is above the well-capitalized required level of $6.2 million, or 10.0%; and common equity Tier 1 capital of $9.7 million or 15.62% of risk weighted assets, which is above the well-capitalized required level of $4.0 million, or 6.5% of risk weighted assets. Accordingly, Heritage Bank of St. Tammany was categorized as well capitalized at June 30, 2017. Management is not aware of any conditions or events since the most recent notification that would change our category.

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 June 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 June 30, 2017, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

There were no sales of unregistered securities during the period covered by this Report.

(b)

On July 12, 2017, Heritage NOLA Bancorp, Inc. (the “Company”) filed a Registration Statement on Form S-1 with the Securities and Exchange Commission in connection with the mutual to stock conversion of Heritage Bank of St. Tammany and the Company’s related offering of common stock. The Registration Statement (File No. 333-216613) was declared effective by the Securities and Exchange Commission on May 15, 2017. The Company registered 1,653,125 shares of common stock, par value $0.01 per share, pursuant to the Registration Statement for an aggregate offering price of $16.5 million. The stock offering commenced on May 22, 2017, and ended on June 14, 2017.

FIG Partners, LLC (“FIG”) was engaged to assist in the marketing of the common stock and records management services.

The stock offering resulted in gross proceeds of $16.5 million, through the sale of 1.65 million shares of common stock at a price of $10.00 per share. Expenses related to the offering were approximately $1.1 million, including $371,000 paid to FIG. Net proceeds of the offering were approximately $15.4 million.

The Company contributed approximately $7.7 million of the net proceeds of the offering to the Bank. In addition, $1.3 million of the net proceeds were used to fund the loan to the employee stock ownership plan and approximately $6.4 million of the net proceeds were retained by the Company. The net proceeds contributed to the Bank have been invested in cash and short term instruments. Over the long term, the bank will attempt to use the proceeds to increase loan production. The net proceeds retained by the Company have been deposited with the Bank.

(c)

There were no issuer repurchases of securities during the period covered by this Report.

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

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

	101.INS	XBRL Instance Document

	101.SCH	XBRL Taxonomy Extension Schema Document

	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

	101.LAB	XBRL Taxonomy Extension Labels Linkbase Document

	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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.

	HERITAGE NOLA BANCORP, INC.

Date: August 14, 2017	/s/ W. David Crumhorn
	W. David Crumhorn
	President and Chief Executive Officer

Date: August 14, 2017	/s/ Lisa B. Hughes
	Lisa B. Hughes
	Chief Financial Officer

Heritage NOLA Bancorp, Inc. - FORM 10-Q - August 14, 2017

Attached files

Heritage NOLA Bancorp, Inc. Reports