SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2016

OR

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

For the transition period from              to             

Commission File Number: 001-35595

Georgetown Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland	80-0817763
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
2 East Main Street, Georgetown, Massachusetts	01833
(Address of Principal Executive Office)	(Zip Code)

(978) 352-8600
(Registrant’s Telephone Number including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

	Name of Each
Title of Each Class	Exchange on Which Registered
Common Stock, par value $0.01 per share	The NASDAQ Stock Market, LLC

Securities Registered Pursuant to Section 12(g) of the Act: None

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

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

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

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

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

Large Accelerated Filer ☐	Accelerated Filer ☐
Non-Accelerated Filer ☐	Smaller Reporting Company ☒

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the closing price at which the common equity as of June 30, 2016 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $30.5 million.

As of March 23, 2017, there were 1,836,250 shares issued and outstanding of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

None

Georgetown Bancorp, Inc.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED

DECEMBER 31, 2016

TABLE OF CONTENTS

ITEM		PAGE
PART I
1	BUSINESS	1
1A	RISK FACTORS	36
1B	UNRESOLVED STAFF COMMENTS	45
2	PROPERTIES	46
3	LEGAL PROCEEDINGS	46
4	MINE SAFETY DISCLOSURES	46
PART II
5	MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES	47
6	SELECTED FINANCIAL DATA	49
7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	50
7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	61
8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	F-1
9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	62
9A	CONTROLS AND PROCEDURES	62
9B	OTHER INFORMATION	62
PART III
10	DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE	63
11	EXECUTIVE COMPENSATION	67
12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	72
13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	72
14	PRINCIPAL ACCOUNTANT FEES AND SERVICES	73
PART IV
15	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	75
16	FORM 10-K SUMMARY	77
	SIGNATURES	78

PART I

ITEM 1.Business

Forward Looking Statements

This Annual Report contains certain “forward-looking statements” that may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage and other loans, real estate values, competition, changes in accounting principles, policies, or guidelines, changes in legislation or regulation or regulatory policies and procedures, and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services. Because of this and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not place undue reliance on forward-looking statements.

Georgetown Bancorp, Inc.

Georgetown Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in March 2012 to be the successor corporation to Georgetown Bancorp, Inc., a federal corporation (“Georgetown Federal”) and the former stock holding company for Georgetown Bank, upon completion of the mutual-to-stock conversion of Georgetown Bancorp, MHC, the former mutual holding company for Georgetown Bank.  Georgetown Bank is a wholly-owned subsidiary of the Company.

The conversion was completed July 11, 2012. The Company sold a total of 1,100,000 shares of common stock at $10.00 per share in the related offering. Concurrent with the completion of the offering, shares of Georgetown Federal common stock owned by public stockholders were exchanged for 0.72014 shares of the Company’s common stock. Options and shares of restricted stock granted under the Company’s 2009 Equity Incentive Plan, as well as common shares held by the Bank’s Employee Stock Ownership Plan (“ESOP”) before the second-step conversion, were also exchanged using the exchange ratio of 0.72014-to-one.

The executive office of the Company is located at 2 East Main Street, Georgetown, Massachusetts 01833. Our telephone number at this address is (978) 352-8600 and our website address is www.georgetownbank.com. Information on our website is not considered and should not be considered part of this Form 10-K. The Company is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System.

Georgetown Bank

Georgetown Bank (the “Bank”) is a federally chartered savings bank headquartered in Georgetown, Massachusetts. The Bank was originally founded in 1868. In connection with its initial mutual holding company reorganization and stock offering, the Bank converted from a Massachusetts-chartered savings bank to a federally chartered savings bank in 2005. The Bank conducts business from its main office located at 2 East Main Street in Georgetown, Massachusetts, and its branch offices located in North Andover and Rowley, Massachusetts and Stratham, New Hampshire. The telephone number at its main office is (978) 352-8600. The Bank is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency (“OCC”).

Merger

On October 5, 2016, Salem Five Bancorp, a Massachusetts mutual holding company, Bright Star, Inc., a Maryland corporation and wholly-owned subsidiary of Salem Five Bancorp, and the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Bright Star, Inc. will merge with and into the Company (the “Merger”).  Consummation of the Merger is subject to certain conditions and is expected to occur in

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the second quarter of 2017.  Immediately following this, the Bank will merge with and into Salem Five Bancorp’s wholly-owned subsidiary, Salem Five Cents Savings Bank (“Salem Five Bank”).  Immediately following the merger of the two banks, the Company will dissolve and liquidate into Salem Five Bancorp. 

General

Our principal business consists of attracting deposits from businesses and the general public primarily in Essex County, Massachusetts and investing those deposits, together with borrowings and funds generated from operations, in commercial and multi-family real estate loans, one- to four-family investment property loans and commercial business loans, one- to four-family residential real estate loans, home equity loans and lines of credit and consumer loans, as well as investing in investment securities. We primarily originate loans in eastern Massachusetts (which includes the Boston metropolitan area) and southern New Hampshire. For a description of our business strategy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy.”

Our revenues are derived principally from interest on loans and securities, loan commitment and customer service fees. Our primary sources of funds are deposits, borrowings and principal and interest payments on loans and securities, as well as the brokering of residential loans.

Market Area

We primarily serve communities located in Essex County, Massachusetts, eastern Massachusetts (which includes the Boston metropolitan area) and southern New Hampshire for deposit and lending products.

Essex County is located in the northeastern portion of Massachusetts, a largely suburban area adjacent to the city of Boston. Georgetown is located 30 miles north of Boston near Interstate 95, the major north-south highway that runs along the East Coast of the United States. Consistent with suburban areas located near large metropolitan areas in general, the economy in our primary deposit market area is based on a mixture of service, manufacturing, wholesale/retail trade, and state and local government. The primary deposit market area also serves as a bedroom community for individuals employed in nearby Boston. Maintaining operations near a large metropolitan area serves as a benefit to us in periods of economic growth, while at the same time fostering significant competition for financial services. Our future growth opportunities depend in part on national economic growth factors, the future economic growth in our primary deposit market area and the intensity of the competitive environment for financial services. Rockingham County, New Hampshire, where the majority of our business in southern New Hampshire is located, has similar characteristics as Essex County.

The greater Boston metropolitan area is the 10th largest metropolitan area in the United States. Located adjacent to major transportation corridors, the Boston metropolitan area provides a highly diversified economic base, with major employment sectors ranging from services, manufacturing and wholesale/retail trade, to finance, technology and medical care.

The population in Essex County, Massachusetts grew 4.66% from 2010 to 2016, compared to a growth rate of 2.28% for Rockingham County, New Hampshire (located in southern New Hampshire), 4.01% for the Commonwealth of Massachusetts and 4.43% for the United States as a whole during the same time period. Median household income for 2016 was $68,821 in Essex County, Massachusetts compared to $79,141, $69,807 and $55,551 for Rockingham County, New Hampshire, the Commonwealth of Massachusetts and the United States as a whole, respectively, for the same year. The average unemployment rate for Essex County, Massachusetts, was 3.4% for 2016, compared to 4.9% for 2015. The average unemployment rate for Rockingham County, New Hampshire decreased to 2.9% for 2016 compared to 3.8% for 2015, and the average unemployment rate for the Commonwealth of Massachusetts decreased to 3.8% for 2016 compared to 4.7% for 2015. By comparison, the average unemployment rates for the United States as a whole were 4.9% for 2016 and 5.3% for 2015.

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Competition

We face intense competition within our primary market area both in making loans and attracting deposits. Our primary market area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking.

Our competition for loans and deposits comes principally from commercial banks, savings and cooperative institutions, mortgage banking firms and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business, while maintaining our role as a community bank.

As of June 30, 2016 (the latest date for which information is available), our market share was 1.06% of total deposits in Essex County, Massachusetts, making us the 20th  largest out of 36 financial institutions in Essex County based upon deposit share as of that date. This data does not reflect deposits held by credit unions.

Lending Activities

In recent years, we have diversified our lending activities by increasing our origination of commercial and multi-family real estate loans, one- to four-family investment property loans and commercial business loans. Our commercial loan portfolio, including construction loans, has grown significantly since 2011, to $173.2 million, or 62.0% of our total loan portfolio as of December 31, 2016 compared to $82.6 million, or 50.8% of our loan portfolio at December 31, 2011.  We plan to continue to emphasize our commercial lending activities in the future.  We also originate consumer loans that are not secured by real estate, including automobile loans, deposit account loans and unsecured personal loans. For a description of our business strategy, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy.”

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

	At December 31,
	2016				2015				2014				2013				2012
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Residential loans:
One- to four-family	$	90,190	32.27	%	$	86,472	33.78	%	$	84,199	36.12	%	$	92,450	40.93	%	$	95,546	52.54	%
Home equity loans and lines of credit		15,879	5.68			18,263	7.13			16,499	7.08			15,399	6.82			15,560	8.56
Total residential mortgage loans		106,069	37.95			104,735	40.91			100,698	43.20			107,849	47.75			111,106	61.10
Commercial loans:
One- to four-family investment property		13,081	4.68			15,255	5.96			8,345	3.58			11,089	4.91			11,355	6.25
Multi-family real estate		30,748	11.00			30,709	12.00			15,020	6.44			14,462	6.40			5,346	2.94
Commercial real estate		83,583	29.90			67,152	26.23			62,227	26.69			54,272	24.02			32,730	18.00
Commercial business		20,675	7.40			17,548	6.85			17,838	7.65			16,681	7.39			8,653	4.76
Total commercial loans		148,087	52.98			130,664	51.04			103,430	44.36			96,504	42.72			58,084	31.95
Construction loans:
One- to four-family		12,599	4.51			12,967	5.07			13,056	5.60			9,848	4.36			7,379	4.06
Multi-family		5,725	2.05			1,486	0.58			10,842	4.65			7,304	3.24			3,665	2.02
Non-residential		6,830	2.44			5,925	2.31			4,828	2.07			3,955	1.75			1,161	0.64
Total construction loans		25,154	9.00			20,378	7.96			28,726	12.32			21,107	9.35			12,205	6.72
Consumer		182	0.07			237	0.09			289	0.12			408	0.18			414	0.23
Total loans		279,492	100.00	%		256,014	100.00	%		233,143	100.00	%		225,868	100.00	%		181,809	100.00	%
Other items:
Net deferred loan costs		484				377				379				440				570
Allowance for loan losses		(2,605)				(2,408)				(2,229)				(2,396)				(1,780)
Total loans, net	$	277,371			$	253,983			$	231,293			$	223,912			$	180,599

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Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2016. Demand loans, loans having no stated repayment schedule or maturity and overdraft loans are reported as being due in one year or less.

	Residential								Commercial
					Home Equity Loans and				One- to four-family
	One- to four-family				Lines of Credit				investment property				Multi-family real estate				Commercial real estate				Commercial business
			Weighted				Weighted				Weighted				Weighted				Weighted				Weighted
Due During the Years			Average				Average				Average				Average				Average				Average
Ending December 31,	Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate
	(Dollars in thousands)
2017	$	639	5.25	%	$	82	5.29	%	$	5,780	6.45	%	$	1,463	4.50	%	$	1,507	5.60	%	$	1,480	4.71	%
2018		379	5.12	%		20	7.00	%		—	—	%		825	5.50	%		5,648	4.42	%		2,429	5.27	%
2019		135	4.83	%		—	—	%		565	4.86	%		—	—	%		3,253	5.72	%		2,061	5.52	%
2020-2021		377	6.29	%		87	5.13	%		1,903	4.98	%		—	—	%		848	5.81	%		3,998	5.02	%
2022-2026		1,029	5.08	%		1,025	3.97	%		4,123	4.37	%		28,460	4.22	%		43,311	4.78	%		9,832	5.09	%
2027-2031		5,078	3.67	%		4,914	4.95	%		248	4.88	%		—	—	%		8,000	4.30	%		655	4.23	%
2032 and beyond		82,553	4.04	%		9,751	4.31	%		462	4.98	%		—	—	%		21,016	4.12	%		220	4.95	%
Total	$	90,190	4.06	%	$	15,879	4.50	%	$	13,081	5.43	%	$	30,748	4.27	%	$	83,583	4.61	%	$	20,675	5.08	%

	Construction
	One- to four-family				Multi-family				Non-residential				Consumer				Total
			Weighted				Weighted				Weighted				Weighted				Weighted
Due During the Years			Average				Average				Average				Average				Average
Ending December 31,	Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate
	(Dollars in thousands)
2017	$	9,313	6.30	%	$	3,211	6.18	%	$	—	—	%	$	69	16.66	%	$	23,544	6.06	%
2018		915	6.25	%		2,030	4.44	%		—	—	%		49	7.06	%		12,295	4.84	%
2019		—	—	%		—	—	%		—	—	%		2	4.01	%		6,016	5.55	%
2020-2021		—	—	%		—	—	%		—	—	%		56	9.35	%		7,269	5.20	%
2022-2026		110	5.50	%		484	4.25	%		837	4.39	%		5	10.99	%		89,216	4.61	%
2027-2031		—	—	%		—	—	%		3,440	4.42	%		—	—	%		22,335	4.32	%
2032 and beyond		2,261	4.84	%		—	—	%		2,553	3.99	%		1	2.10	%		118,817	4.10	%
Total	$	12,599	6.03	%	$	5,725	5.40	%	$	6,830	4.25	%	$	182	10.71	%	$	279,492	4.54	%

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The following table sets forth the scheduled repayments of fixed and adjustable-rate loans at December 31, 2016 that are contractually due after December 31, 2017.

	Due After December 31, 2016
	Fixed		Adjustable		Total
	(In thousands)
Residential:
One- to four-family	$	72,582	$	16,969	$	89,551
Home equity loans and lines lines of credit		602		15,195		15,797
Total residential mortgage loans		73,184		32,164		105,348
Commercial:
One- to four-family investment property		2,961		4,340		7,301
Multi-family real estate		5,792		23,493		29,285
Commercial real estate		11,570		70,506		82,076
Commercial business		6,595		12,600		19,195
Total commercial loans		26,918		110,939		137,857
Construction:
One- to four-family		2,261		1,025		3,286
Multi-family		1,903		611		2,514
Non-residential		—		6,830		6,830
Total construction		4,164		8,466		12,630
Consumer		113		—		113
Total loans	$	104,379	$	151,569	$	255,948

One- to Four-Family Residential Loans. The Company generally originates residential loans on a brokered basis, whereby loans are processed and closed by a third party generating fee income for the Company. We brokered $15.5 million in one- to four-family loans, which generated fees of $194,000, and sold $430,000 in one- to four-family loans during the year ended December 31, 2016. We originated $6.5 million in one- to four-family loans for our portfolio and purchased $20.2 million during the year ended December 31, 2016. At December 31, 2016, $90.2 million, or 32.3% of our loan portfolio consisted of one- to four-family residential mortgage loans. One- to four-family mortgage loan originations are generally obtained from our outside and in-house loan representatives, from existing or past customers, through advertising, and through referrals from local real estate brokers and attorneys, and are underwritten pursuant to our policies and standards. Generally, one- to four-family residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. Fixed-rate mortgage loans generally are originated for terms of 10 to 40 years. Generally, all fixed-rate residential mortgage loans are underwritten according to secondary market policies and procedures, which allows for sale in the secondary market, consistent with our asset-liability management and portfolio needs.

We also offer adjustable-rate mortgage loans for one- to four-family properties, primarily with an interest rate based on the one-year LIBOR Index, which adjusts annually from the outset of the loan or which adjusts annually after a three-or five-year initial fixed-rate period. We originated $1.3 million of adjustable-rate, one- to four-family residential loans during the year ended December 31, 2016 and $6.1 million of fixed-rate one- to four-family residential loans during the same period. Of these fixed-rate originations, $907,000, or 11.0%, were originated for sale in the secondary mortgage market. Our adjustable-rate mortgage loans generally provide for maximum rate adjustments of 2% per adjustment, with a lifetime maximum adjustment up to 5%, regardless of the initial rate. Our adjustable-rate mortgage loans amortize over terms of up to 30 years. Generally, all adjustable-rate residential mortgage loans are underwritten according to secondary market policies and procedures.

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Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable-rate mortgage loans with respect to interest rate risk may be limited during periods of rapidly rising interest rates. At December 31, 2016, $17.0 million, or 18.8%  of our one- to four-family residential loans, had adjustable rates of interest.

In an effort to provide financing for first-time homebuyers, we offer the first-time homebuyer loan program from Massachusetts Housing Finance Agency (“Mass Housing”). This program offers one- to four-family residential mortgage loans to qualified individuals. These loans are offered with terms and fixed rates of interest similar to our other one- to four-family mortgage loan products. Such loans must be secured by an owner-occupied residence. These loans are originated using Mass Housing “expanded” underwriting guidelines. Such loans are originated in amounts of up to 95% of the lower of the property’s appraised value or the sale price. Private mortgage insurance is required for loans with loan-to-value ratios of over 80%.

All residential mortgage loans that we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. Regulations limit the amount that a savings bank may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated. All borrowers are required to obtain title insurance for the benefit of Georgetown Bank. We also require homeowner’s insurance and fire and casualty insurance and, where circumstances warrant, flood insurance on properties securing real estate loans. Our loan policy provides that we will not originate loans secured by real estate that contains underground fuel storage tanks. At December 31, 2016, our largest residential mortgage loan had a principal balance of $1.2 million and was secured by a residence located in Essex County, Massachusetts. This loan was performing in accordance with its original repayment terms at December 31, 2016.

Home Equity Loans and Home Equity Lines of Credit. We also offer home equity loans and home equity lines of credit, both of which are secured by one- to four-family residences. At December 31, 2016, home equity loans and equity lines of credit totaled $15.9 million, or 5.7% of total loans. Additionally, at December 31, 2016, the unadvanced amounts of home equity lines of credit totaled $10.3 million. The underwriting standards utilized for home equity loans and equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. The combined loan-to-value ratio for home equity loans and equity lines of credit is generally limited to 85%. Home equity loans are offered with fixed-rates of interest and with terms of up to 15 years. Our home equity lines of credit have adjustable-rates of interest that are generally equal to the prime rate, as reported in The Wall Street Journal, plus 0.50%.

Commercial Real Estate Loans. We originate commercial real estate loans, including commercial lines of credit, generally in our primary lending market area, that are secured by properties used for business purposes such as small office buildings, retail facilities and owner-occupied properties. At December 31, 2016, commercial real estate loans totaled $83.6 million, which amounted to 29.9% of total loans. Our real estate underwriting policies provide that such loans may be made in amounts of up to 80% of the appraised value of the property, provided such loans comply with our loans-to-one borrower limit for these types of loans. Our loans-to-one borrower limit is 15% of Georgetown Bank’s unimpaired capital, which limit was $5.0 million at December 31, 2016, but we generally target commercial real estate loans with balances of up to $3.0 million. At December 31, 2016, our average commercial real estate loan had a balance of $753,000. Our commercial real estate loans may be made with terms of up to 20 years with an amortization of up to 30 years, are offered with interest rates that are fixed or adjust periodically, and are generally indexed to Federal Home Loan Bank of Boston borrowing rates. When possible these loans provide for a pre-payment penalty.

In reaching a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise and credit history, and the profitability of the underlying business occupant and the value of the underlying property. In addition, with respect to real estate rental properties, we will also consider the term of the lease and the quality of the tenants. We generally require that the properties securing these real estate loans

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have debt service coverage ratios (the ratio of net operating income before debt service to debt service) of at least 1.20 times. Environmental surveys are generally required for commercial real estate loans. Generally, commercial real estate loans made to corporations, partnerships and other business entities require the principals to execute the loan agreements in their individual capacity, as well as signing on behalf of such business entity.

A commercial borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews and periodic face-to-face meetings with the borrower, except for existing amortizing loan relationships less than $350,000. We require commercial borrowers to provide annually updated financial statements and federal tax returns. These requirements also apply to the individual principals of our commercial borrowers. We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a tenant list and copies of leases, as applicable. The largest commercial real estate loan in our portfolio at December 31, 2016 was a $3.5 million loan collateralized by a self-storage facility located in Norfolk County, Massachusetts. This loan was performing according to its original repayment terms at December 31, 2016.

Loans secured by commercial real estate properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by one- to four-family investment properties are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

One- to Four-Family Investment Property Loans. We originate commercial real estate loans on one- to four-family investment properties. The subject properties are non-owner occupied and are generally under a business name or in an individual’s name in instances where an individual owns more investment property than what is allowed under Fannie Mae guidelines. At December 31, 2016, one- to four-family investment property loans totaled $13.1 million, which amounted to 4.7% of total loans. Our real estate underwriting policies provide that such loans may be made in amounts of up to 80% of the appraised value of the property, provided such loans comply with our loans-to-one borrower limit for these types of loans. We generally target one- to four-family investment property loans with balances up to $750,000. At December 31, 2016, our average one- to four-family investment property loan had a balance of $256,500. Our loans for one- to four-family investment properties may be made with terms of up to 20 years with an amortization period of up to 25 years, are offered with interest rates that are fixed or adjust periodically, and are generally indexed to Federal Home Loan Bank of Boston advance rates. When possible these loans provide for a pre-payment penalty.

In reaching a decision on whether to make one- to four-family investment loans, we consider the net operating income of the property, the borrower’s expertise and credit history, the global cash flow of the borrowers and the value of the underlying property. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of net operating income before debt service to debt service) of at least 1.20 times. Generally, one- to four-family real estate loans made to business entities require the principals to execute the loan agreements in their individual capacity, as well as signing on behalf of such business entity.

A commercial borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews and periodic face-to-face meetings with the borrower, except for existing amortizing loan relationships less than $350,000. We require commercial borrowers to provide annually updated financial statements and federal tax returns. These requirements also apply to the individual principals of our commercial borrowers. We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a rent roll and copies of leases, as applicable. The largest one- to four-family investment property loan in our portfolio at December 31, 2016 was a $2.0 million loan collateralized by multiple residential properties located in Massachusetts and southern New Hampshire. This loan was performing according to its original repayment terms at December 31, 2016.

Loans secured by one- to four-family investment properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by one- to four-family investment properties are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

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Multi-Family Real Estate Loans. We originate commercial real estate loans on multi-family properties. The subject properties are non-owner occupied rental properties greater than four units and generally under a business name or in an individual’s name. At December 31, 2016, multi-family real estate loans totaled $30.7 million, which amounted to 11.0% of total loans. Our real estate underwriting policies provide that such loans may be made in amounts of up to 80% of the appraised value of the property, provided such loans comply with our loans-to-one borrower limit for these types of loans. We generally target multi-family loans with balances up to $2.5 million. At December 31, 2016, our average multi-family real estate loan had a balance of $1.2 million. Our loans for multi-family real estate properties may be made with terms of up to 20 years with an amortization of up to 30 years and are offered with interest rates that are fixed or adjust periodically and are generally indexed to Federal Home Loan Bank of Boston advance rates. When possible these loans provide for a pre-payment penalty.

In reaching a decision on whether to make multi-family real estate loans, we consider the net operating income of the property, the borrower’s expertise and credit history, the global cash flow of the borrowers and the value of the underlying property. We generally require that the properties securing these real estate loans have debt service coverage ratios of at least 1.20 times. Environmental surveys may be required for multi-family real estate loans. Generally, multi-family real estate loans made to business entities require the principals to execute the loan agreements in their individual capacity, as well as signing on behalf of such business entity.

A commercial borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews and periodic face-to-face meetings with the borrower, except for existing amortizing loan relationships less than $350,000. We require commercial borrowers to provide annually updated financial statements and federal tax returns. These requirements also apply to the individual principals of our commercial borrowers. We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a rent roll and copies of leases, as applicable. The largest multi-family real estate loan in our portfolio at December 31, 2016 was a $3.5 million loan collateralized by a 30 unit multi-family property located in Middlesex County, Massachusetts. This loan was performing according to its original repayment terms at December 31, 2016.

Loans secured by multi-family real investment loans generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family real investment properties are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

Commercial Business Loans. At December 31, 2016, we had $20.7 million in commercial business loans, which amounted to 7.4% of total loans. We make commercial business loans in our primary lending market area to a variety of professionals, sole proprietorships and small businesses. Commercial lending products include term loans and revolving lines of credit. The maximum amount of a commercial business loan is limited by our loans-to-one-borrower limit, which was $5.0 million at December 31, 2016. Such loans are generally used for short and long-term working capital purposes such as providing working capital for purchasing inventory or to acquire fixed assets such as machinery or equipment. Commercial business loans are made with either adjustable or fixed-rates of interest. Variable rates are generally based on the prime rate, as published in The Wall Street Journal, plus a margin. Fixed-rate commercial business loans are set either at a margin above the Federal Home Loan Bank of Boston comparable advance rate or the prime rate. When making commercial business loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral, if applicable. Commercial business loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and equipment, and we also require the business principals to execute such loans in their individual capacities. Depending on the amount of the loan and the collateral used to secure the loan, commercial business loans are generally made in amounts of up to 80% of the value of the collateral securing the loan. Commercial business loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may

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depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our underwriting standards. At December 31, 2016, our largest outstanding commercial business loan had an outstanding balance of $1.0 million, which was secured by multi-family and residential properties located in Essex County, Massachusetts. This loan was performing according to its original repayment terms at December 31, 2016.

Construction Loans. We originate construction loans for the development of one- to four and multi-family residential properties and non-residential properties located in our primary lending market area to experienced local developers and to individuals for the construction of their personal residences. At December 31, 2016, one- to four-family residential construction loans amounted to $12.6 million, or 4.5% of total loans. At December 31, 2016, the unadvanced portion of these residential construction loans totaled $6.5 million. At December 31, 2016, construction loans collateralized by multi-family properties totaled $5.7 million, or 2.0% of total loans. The unadvanced portion of these construction loans totaled $7.3 million at December 31, 2016. Construction loans collateralized by non-residential properties totaled $6.8 million, or 2.4% of total loans. The unadvanced portion of these construction loans totaled $2.5 million at December 31, 2016.

Our one- to four- and multi-family residential construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 months. We originate one- to four and multi-family residential construction loans with a maximum loan-to-value ratio of 90% for single unit owner occupied construction projects, provided that the borrower obtains private mortgage insurance on the loan if the loan balance exceeds 80% of the appraised value or sales price, whichever is less, of the secured property. The maximum loan-to-value on two- to four and multi-family residential properties is 80% of the appraised value or sales price, whichever is less, of the secured property. Before making a commitment to fund a one- to four- or multi-family residential construction loan, we require an appraisal on the property by an independent licensed appraiser. We also review and inspect each property before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. At December 31, 2016, the largest outstanding one- to four-family residential construction loan commitment was for $2.4 million for the construction of a condominium project located in Essex County, Massachusetts, $915,000 of which was outstanding. This loan was performing according to its original repayment terms at December 31, 2016. At December 31, 2016, the largest multi-family construction loan commitment was $4.3 million for the construction of a property located in Suffolk County, Massachusetts, $611,000 of which was outstanding. This loan was performing according to its original repayment terms at December 31, 2016.

To a lesser extent, our construction loan projects include apartment, retail and office buildings, and strip malls. These loans generally have an interest-only phase during construction and are generally set at a fixed-rate. Disbursement of funds is at our sole discretion and is based on independent third-party inspections of the progress of construction. The maximum loan-to-value ratio limit applicable to these loans is generally 80%. At December 31, 2016, the largest non-residential construction loan commitment was for $4.3 million, collateralized by a commercial property located in Rockingham County, New Hampshire, $2.6 million of which was outstanding. This loan was performing according to its original repayment terms at December 31, 2016.

Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value that is insufficient to assure full repayment.

The maximum amount of a construction loan is limited by our loans-to-one-borrower limit, which was $5.0 million at December 31, 2016.

Consumer Loans. We offer consumer loans to customers residing in our primary lending market area with acceptable credit ratings. Our consumer loans generally consist of loans on new and used automobiles, loans secured by

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deposit accounts and unsecured personal loans. Consumer loans totaled $182,000 or 0.1% of our total loan portfolio at December 31, 2016.

Largest Lending Relationship. At December 31, 2016, our largest lending relationship was a $4.3 million multi-family construction loan, $611,000 of which was outstanding. This loan was performing in accordance with its original repayment terms at December 31, 2016.  In addition, our largest outstanding loan balance was a $3.5 million commercial real estate loan collateralized by a self-storage facility located in Norfolk County, Massachusetts.  This loan was performing in accordance with its original payment terms at December 31, 2016.

Origination, Participation and Servicing of Loans. Lending activities are conducted primarily by our loan personnel operating at our main and branch office locations. All loans we originate are underwritten pursuant to our policies and procedures. We originate both adjustable-rate and fixed-rate loans. Our ability to originate fixed or adjustable-rate loans depends upon the relative customer demand for such loans, which is affected by the current and expected future levels of market interest rates. From time to time, we will participate in loans, sometimes as the “lead lender.” Whether we are the lead lender or not, we underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At December 31, 2016, we had $2.4 million in loan participation interests in which we were the lead bank and $9.7 million in loan participation interests in which we were the participating bank.  Our primary emphasis continues to be the origination of commercial loans.

Future residential loan originations may be sold on a servicing-retained or servicing-released basis, depending on secondary market pricing at the time of sale. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments are made on behalf of the borrowers and generally administering the loans. During the year ended December 31, 2016, we originated $7.4 million of fixed-rate and adjustable-rate one- to four-family loans, $6.5 million of which were placed in our portfolio.

The following table shows our loan originations and repayment activities for the periods indicated.

	Years Ended
	December 31,
	2016		2015		2014		2013		2012
	(In thousands)
Total loans at beginning of period	$	256,014	$	233,143	$	225,868	$	181,809	$	162,797
Loans originated:
Residential mortgage loans		14,851		12,740		35,901		64,386		104,080
Commercial loans		48,372		34,706		29,837		60,708		26,707
Construction loans		21,510		33,525		14,682		25,137		15,911
Consumer		68		95		56		184		189
Total loans originated		84,801		81,066		80,476		150,415		146,887
Loans purchased:		20,246		12,350		374		—		17,398
Deduct:
Principal repayments		(80,658)		(66,591)		(51,945)		(64,734)		(81,734)
Loan sales		(640)		(3,954)		(20,640)		(40,621)		(60,933)
Loans held for sale		(271)		—		(990)		(1,001)		(2,606)
Net loan activity		23,478		22,871		7,275		44,059		19,012
Total loans at end of period	$	279,492	$	256,014	$	233,143	$	225,868	$	181,809

Loan Approval Procedures and Authority. Our lending activities follow written non-discriminatory underwriting standards and loan origination procedures established by Georgetown Bank’s Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan, and the adequacy

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of the value of the collateral that will secure the loan. To assess the borrower’s ability to repay, we review the employment and credit history and information on the historical and projected income and expenses of borrowers.

Our policies and loan approval limits are established by the Board of Directors. The Board of Directors has designated certain individuals of Georgetown Bank (ranging from senior management to senior loan underwriter) (the “Designated Individuals”) to consider and approve loans within their designated authority. Loans in amounts above the authorized limits of the Designated Individuals and loans outside of the designated authority of the Designated Individuals require the approval of our Loan Committee. The Loan Committee consists of three non-employee directors and four employees of Georgetown Bank. All loans that are approved by the Designated Individuals are reviewed and ratified by the Loan Committee and the full Board of Directors.

With regard to the lending authority of the Designated Individuals, our President and Chief Executive Officer and Executive Vice President and Chief Operating Officer each possess individual authority to approve all residential types of credit in amounts up to $750,000. Our President and Chief Executive Officer and our Executive Vice President and Chief Operating Officer may approve all residential and commercial loan types of credits in amounts up to $1.0 million on a combined basis. Senior Vice President/Commercial Loan Officers possess individual authority to approve all commercial types of credit in amounts up to $500,000.

We typically require appraisals of all real property securing loans. Appraisals are performed by independent licensed appraisers. All appraisers are approved by the Board of Directors annually. We require fire and extended coverage insurance in amounts at least equal to the principal amount of the loan.

Non-performing and Problem Assets

We commence collection efforts when a loan becomes ten days past due with system generated reminder notices. Subsequent late charge and delinquent notices are issued and the account is monitored on a regular basis thereafter. Personal, direct contact with the borrower is attempted early in the collection process as a courtesy reminder and later to determine the reason for the delinquency and to safeguard the collateral. When a loan is more than 60 days past due, the credit file is reviewed and, if deemed necessary, information is updated or confirmed and collateral re-evaluated. We make every effort to contact the borrower and develop a plan of repayment to cure the delinquency. All loans 30 days past due are reported to the Loan Committee and the Board of Directors. Upon direction of the Loan Committee, if no repayment plan is in process, the file is referred to legal counsel for the commencement of foreclosure or other collection efforts.

Loans are generally placed on non-accrual status when they are 90 days or more delinquent, unless the credit is well secured and in process of collection. When loans are placed on a non-accrual status, unpaid accrued interest is fully reserved, and further income is recognized only to the extent cash payments are received.

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Non-Performing Loans and Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. Delinquent loans that are 90 days or more past due are generally considered non-performing assets.

	December 31,
	2016			2015			2014			2013			2012
	(Dollars in thousands)
Non-accrual loans:
Residential mortgage loans	$	953		$	776		$	951		$	399		$	1,070
Commercial loans		—			—			—			—			2,105
Construction loans		—			—			—			—			—
Consumer		—			—			2			—			—
Total non-accrual loans		953			776			953			399			3,175
Non-performing restructured loans		—			—			—			—			—
Total non-performing loans		953			776			953			399			3,175
Other real estate owned		—			—			—			—			203
Total non-performing assets	$	953		$	776		$	953		$	399		$	3,378
Ratios:
Non-performing loans to total loans		0.34	%		0.30	%		0.41	%		0.18	%		1.75	%
Non-performing assets to total assets		0.30	%		0.26	%		0.35	%		0.15	%		1.60	%
Allowance for loan losses to non-performing loans		273.35	%		310.31	%		233.89	%		600.50	%		56.06	%

At December 31, 2016, non-accrual loans totaled $953,000 and consisted of two one- to four-family residential loans and two home equity loans and lines of credit. For the year ended December 31, 2016, gross interest income that would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $41,000. Interest income recognized on non-performing loans for the year ended December 31, 2016 was $10,000.

At December 31, 2016, troubled debt restructured (“TDR”) loans totaled $1.4 million and consisted of two one- to four-family residential loans, two home equity loans, one one- to four-family investment property loan and one commercial real estate loan.  For the year ended December 31, 2016, gross interest income that would have been recorded had the TDR loans been in accordance with their original terms amounted to $62,000.  Interest income recognized on TDR loans for the year ended December 31, 2016 was $68,000.  There were no loan relationships that were modified as TDRs during the year ended December 31, 2016.

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Delinquent Loans. The following table sets forth the number and amount of delinquent loans by type at the dates indicated.

	Loans Delinquent For
	60-89 Days			90 Days and Over			Total
	Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
At December 31, 2016
Residential mortgage loans	1	$	20	3	$	796	4	$	816
Commercial loans	—		—	—		—	—		—
Construction loans	—		—	—		—	—		—
Consumer	2		3	—		—	2		3
Total	3	$	23	3	$	796	6	$	819
At December 31, 2015
Residential mortgage loans	—	$	—	1	$	649	1	$	649
Commercial loans	—		—	—		—	—		—
Construction loans	—		—	—		—	—		—
Consumer	1		4	—		—	1		4
Total	1	$	4	1	$	649	2	$	653
At December 31, 2014
Residential mortgage loans	2	$	633	1	$	641	3	$	1,274
Commercial loans	—		—	—		—	—		—
Construction loans	—		—	—		—	—		—
Consumer	—		—	1		2	1		2
Total	2	$	633	2	$	643	4	$	1,276
At December 31, 2013
Residential mortgage loans	1	$	245	1	$	399	2	$	644
Commercial loans	1		267	—		—	1		267
Construction loans	—		—	—		—	—		—
Consumer	—		—	—		—	—		—
Total	2	$	512	1	$	399	3	$	911
At December 31, 2012
Residential mortgage loans	1	$	284	2	$	773	3	$	1,057
Commercial loans	—		—	—		—	—		—
Construction loans	—		—	—		—	—		—
Consumer	2		2	—		—	2		2
Total	3	$	286	2	$	773	5	$	1,059

Potential problem loans are loans that are currently performing and are not included in non-accrual loans above, but may be delinquent. These loans require an increased level of management attention, because we have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and as a result such loans may be included at a later date in non-accrual loans. At December 31, 2016, $1.9 million, or 0.7% of total loans, had been identified as potential problem loans, of which $221,000 is delinquent and consists of two one- to four-family loans, five home equity loans, one one- to four-family investment property loan, one commercial real estate loan, one commercial business loan and five consumer loans.

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Classified Assets. Federal regulations provide that loans and other assets of lesser quality should be classified as “substandard”, “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that we will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets is not warranted. We designate an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention.

On the basis of management’s review of our assets, at December 31, 2016, we had classified $2.9 million of our assets as substandard, which consisted of ten loans, four of which have been restructured. These loans consisted of four one- to four-family residential real estate loans with a principal balance of $1.7 million, three home equity loans and lines of credit with a principal balance of $278,000, one one- to four-family investment property loan with a principal balance of $85,000, one commercial real estate loan with a principal balance of $710,000 and one commercial business loan with a principal balance of $149,000. At December 31, 2016, we had specific valuation allowances of $7,000 related to the loans classified as substandard. At December 31, 2015, we had classified $1.9 million of our assets as substandard, which consisted of six loans, four of which have been restructured.  At December 31, 2015, we had specific valuation allowances of $14,000 related to the loans classified as substandard. At December 31, 2016 and 2015, we had no loans classified as doubtful or loss. The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets.

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 uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a monthly basis by management and is based upon management’s monthly review of the collectability of the loans in light of known and inherent risks in 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. Additionally, as part of the evaluation of the level of the allowance for loan losses, on a quarterly basis management analyzes several qualitative loan portfolio risk factors including, but not limited to, charge-off history, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans that are classified as impaired, an allowance for loan losses is established when the discounted cash flows or the fair value of the existing collateral (less costs to sell) of the impaired loan are lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

As described above, we periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a

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troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.  Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.

Loans secured by commercial real estate, multi-family and one- to four-family investment properties, generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate, including multi-family and one- to four-family investment properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value that is insufficient to assure full repayment.

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The following table sets forth activity in our allowance for loan losses for the years indicated.

	Years Ended
	December 31,
	2016			2015			2014			2013			2012
	(Dollars in thousands)
Balance at beginning of year	$	2,408		$	2,229		$	2,396		$	1,780		$	1,824
Charge-offs:
Residential mortgage loans		—			—			(14)			(130)			(144)
Commercial loans		—			(22)			(248)			—			(13)
Construction loans		—			—			—			—			(191)
Consumer		(3)			(4)			(7)			(9)			(38)
Total charge-offs		(3)			(26)			(269)			(139)			(386)
Recoveries:
Residential mortgage loans		2			1			1			43			137
Commercial loans		—			—			—			—			—
Construction loans		—			—			—			—			—
Consumer		4			4			3			4			5
Total recoveries		6			5			4			47			142
Net recoveries (charge-offs)		3			(21)			(265)			(92)			(244)
Provision for loan losses		194			200			98			708			200
Balance at end of year	$	2,605		$	2,408		$	2,229		$	2,396		$	1,780
Ratios:
Net recoveries (charge-offs) to average loans outstanding		—	%		(0.01)	%		(0.12)	%		(0.05)	%		(0.15)	%
Allowance for loan losses to non-performing loans at end of year		273.35	%		310.31	%		233.89	%		600.5	%		56.06	%
Allowance for loan losses to total loans at end of year		0.93	%		0.94	%		0.96	%		1.06	%		0.98	%

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

	December 31,
	2016				2015				2014				2013				2012
			Percent of				Percent of				Percent of				Percent of				Percent of
	Allowance		Loans in Each		Allowance		Loans in Each		Allowance		Loans in Each		Allowance		Loans in Each		Allowance		Loans in Each
	for		Category to		for		Category to		for		Category to		for		Category to		for		Category to
	Loan Losses		Total Loans		Loan Losses		Total Loans		Loan Losses		Total Loans		Loan Losses		Total Loans		Loan Losses		Total Loans
	(Dollars in thousands)
Residential loans:
One- to four-family	$	171	32.26	%	$	197	33.79	%	$	273	36.12	%	$	284	40.93	%	$	378	52.54	%
Home equity loans and lines of credit		238	5.68			276	7.13			249	7.08			274	6.82			254	8.56
Total residential mortgage loans		409	37.94			473	40.92			522	43.20			558	47.75			632	61.10
Commercial loans:
One- to four-family investment property		79	4.68			90	5.96			46	3.58			61	4.91			62	6.25
Multi-family real estate		234	11.00			233	12.00			113	6.44			108	6.40			40	2.94
Commercial real estate		1,262	29.91			1,021	26.23			943	26.69			1,056	24.02			668	18.00
Commercial business		364	7.40			305	6.85			311	7.65			291	7.39			159	4.76
Total commercial loans		1,939	52.99			1,649	51.04			1,413	44.36			1,516	42.72			929	31.95
Construction loans:
One- to four-family		104	4.51			113	5.06			117	5.60			133	4.36			149	4.06
Multi-family		47	2.05			12	0.58			97	4.65			66	3.24			34	2.02
Non-residential		104	2.44			91	2.31			77	2.07			63	1.75			25	0.64
Total construction loans		255	9.00			216	7.95			291	12.32			262	9.35			208	6.72
Consumer		2	0.07			2	0.09			3	0.12			15	0.18			11	0.23
Unallocated		—	—			68	—			—	—			45	—			—	—
Total	$	2,605	100.00	%	$	2,408	100.00	%	$	2,229	100.00	%	$	2,396	100.00	%	$	1,780	100.00	%

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Management establishes provisions for loan losses, which are charged to operations, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses quarterly, management analyzes several qualitative loan portfolio risk factors including, but not limited to, charge-off history, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Historically, our loan portfolio has primarily consisted of one- to four-family residential mortgage loans. The composition of our loan portfolio has gradually changed in recent years to include more one- to four-family residential investment properties, multi-family, commercial real estate and commercial business loans. In addition, our current strategic plan calls for increases in these loans. Management’s evaluation of the allowance for loan losses, the composition of the loan portfolio and increased risk associated with multi-family, commercial real estate and commercial business loans (because they present larger non-homogeneous credits and because they may be more sensitive to changes in economic conditions) may result in larger additions to the allowance for loan losses in future periods.

Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary, based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, the OCC, as an integral part of its examination process, will periodically review our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance, based on its judgments about information available to it at the time of its examination.

Investments

Our Investment Policy is reviewed annually by management and any changes to the policy are recommended to and are subject to the approval of our Board of Directors. Authority to make investments under the approved Investment Policy guidelines is delegated to appropriate officers. While general investment strategies are developed by the Finance Committee and authorized by the Board of Directors, the execution of specific actions rests with our President and Chief Executive Officer or our Chief Financial Officer, who may act individually or jointly. Our President and Chief Executive Officer and Chief Financial Officer are both responsible for ensuring that the guidelines and requirements included in the Investment Policy are followed and that all securities are considered prudent for investment. Each of these individuals is authorized to execute investment transactions (purchases and sales) up to $2.5 million per transaction without the prior approval of the Finance Committee and within the scope of the established Investment Policy. Each transaction in excess of $2.5 million must receive prior approval of the Finance Committee. All investment transactions are reviewed at regularly scheduled meetings of the Board of Directors. The Finance Committee is comprised of three non-employee directors.

Federally chartered savings institutions have authority to invest in various types of assets, including government-sponsored enterprise obligations, securities of various federal agencies, residential mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, corporate debt instruments and debt instruments of municipalities.

Our investment portfolio at December 31, 2016, at amortized cost, included $2.9 million in state and municipal securities. We also invest in residential mortgage-backed securities, which consist of United States government agencies and government-sponsored enterprise obligations. At December 31, 2016, the amortized cost of our residential mortgage-backed securities portfolio totaled $19.4 million, or 6.1% of total assets, and included $13.6 million in fixed-rate and $5.8 million in adjustable-rate securities guaranteed by Fannie Mae and Freddie Mac. Securities are classified as held to maturity or available for sale at the date of purchase.  At December 31, 2016, we owned $2.3 million in Federal Home Loan Bank of Boston stock. As a member of the Federal Home Loan Bank of Boston, we are required to purchase stock in the Federal Home Loan Bank of Boston based on our level of outstanding advances.

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The following table sets forth the amortized cost and fair value of our securities portfolio at the dates indicated.

	December 31,
	2016				2015				2014
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
	(In thousands)
Securities available for sale
State and municipal	$	2,362	$	2,385	$	2,410	$	2,470	$	2,458	$	2,507
Residential mortgage-backed securities		17,472		17,387		16,543		16,558		16,844		17,019
Total securities available for sale	$	19,834	$	19,772	$	18,953	$	19,028	$	19,302	$	19,526
Securities held to maturity
State and municipal	$	570	$	565	$	573	$	585	$	—	$	—
Residential mortgage-backed securities		1,933		1,925		2,539		2,543		837		916
Total securities held to maturity	$	2,503	$	2,490	$	3,112	$	3,128	$	837	$	916

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Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2016 are summarized in the following table. Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur.

					More than One Year				More than Five Years
	One Year or Less				through Five Years				through Ten Years				More than Ten Years				Total Securities
			Weighted				Weighted				Weighted				Weighted						Weighted
	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized				Average
	Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Fair Value		Yield
	(Dollars in thousands)
Securities available for sale
State and municipal	$	—	—	%	$	—	—	%	$	528	5.00	%	$	1,834	4.64	%	$	2,362	$	2,385	4.72	%
Residential mortgage-backed securities		7	5.32	%		—	—	%		803	3.29	%		16,662	2.69	%		17,472		17,387	2.72	%
Total securities available for sale	$	7	5.32	%	$	—	—	%	$	1,331	3.97	%	$	18,496	2.88	%	$	19,834	$	19,772	2.96	%
Securities held to maturity
State and municipal	$	—	—	%	$	—	—	%	$	—	—	%	$	570	4.00	%	$	570	$	565	4.00	%
Residential mortgage-backed securities		—	—	%		11	6.00	%		—	—	%		1,922	2.53	%		1,933		1,925	2.55	%
Total securities held to maturity	$	—	—	%	$	11	6.00	%	$	—	—	%	$	2,492	2.87	%	$	2,503	$	2,490	2.88	%

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Sources of Funds

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily Federal Home Loan Bank of Boston advances, and to a lesser extent brokered deposits, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, funds are derived from scheduled loan payments, investment maturities, loan prepayments, loan sales, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Our deposits are generated primarily from residents within our primary deposit market area, as 68.5% of total deposits at December 31, 2016, were from Essex County, Massachusetts. Our strategic plan includes a greater emphasis on developing commercial business activities, both deposit and lending customer relationships. We offer a selection of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We have used brokered deposits in the past and it is anticipated that their future use could increase. As of December 31, 2016, brokered deposits totaled $3.3 million and certificate accounts obtained through the QwickRate listing service totaled $22.1 million.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service and long-standing relationships with customers are relied upon to attract and retain deposits.  “On us” deposit accounts represent outstanding checks drawn on demand accounts owned by the Bank.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At December 31, 2016, $93.5 million, or 38.9%, of our deposit accounts were certificates of deposit, of which $35.6 million had maturities of one year or less.

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The following table sets forth the distribution of total deposits by account type and related weighted average rates, at the dates indicated.

	At December 31,
	2016						2015						2014
					Weighted						Weighted						Weighted
					Average						Average						Average
	Balance		Percent		Rate		Balance		Percent		Rate		Balance		Percent		Rate
	(Dollars in thousands)
Deposit type
Demand	$	30,773	12.80	%	—	%	$	27,718	13.34	%	—	%	$	26,066	14.29	%	—	%
On us accounts		975	0.41		—	%		599	0.29		—	%		783	0.43		—	%
NOW		32,810	13.64		0.27	%		30,036	14.46		0.29	%		30,049	16.48		0.20	%
Money market deposits		66,256	27.55		0.64	%		61,617	29.66		0.52	%		52,202	28.63		0.34	%
Regular and other savings		16,226	6.75		0.02	%		15,492	7.46		0.02	%		14,226	7.80		0.02	%
Total non-certificate accounts		147,040	61.15		0.35	%		135,462	65.21		0.30	%		123,326	67.63		0.19	%
Certificates of deposit		93,468	38.85		1.62	%		72,264	34.79		1.40	%		59,028	32.37		1.10	%
Total deposits	$	240,508	100.00	%	0.84	%	$	207,726	100.00	%	0.68	%	$	182,354	100.00	%	0.49	%

The following table sets forth the deposit activities for the periods indicated.

	Years Ended
	December 31,
	2016		2015		2014
	(In thousands)
Beginning balance	$	207,726	$	182,354	$	175,961
Net increase in deposits before interest credited		30,914		24,296		5,557
Interest credited		1,868		1,076		836
Net increase in deposits		32,782		25,372		6,393
Ending balance	$	240,508	$	207,726	$	182,354

As of December 31, 2016, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was $68.0 million. The following table indicates the amount of those certificates of deposit as of December 31, 2016 by time remaining until maturity.

	At
	December 31, 2016
	(In thousands)
Three months or less	$	4,773
Over three months through six months		7,277
Over six months through one year		12,672
Over one year to three years		35,379
Over three years		7,851
Total	$	67,952

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The following table presents, by rate category, our certificate of deposit accounts as of the dates indicated.

	At December 31,
	2016		2015		2014
	(In thousands)
Interest Rate
Less than 1%	$	5,851	$	10,042	$	24,525
1.00%-1.99%		64,242		48,354		30,414
2.00%-2.99%		23,375		13,868		4,089
Total	$	93,468	$	72,264	$	59,028

The following table sets forth the amount and maturities of certificate of deposits at December 31, 2016.

	Maturing During the Years Ended								Maturing
	December 31,		December 31,		December 31,		December 31,		After December 31,
	2017		2018		2019		2020		2020		Total
	(In thousands)
Interest Rate
Less than 1%	$	5,821	$	30	$	—	$	—	$	—	$	5,851
1.00%-1.99%		28,832		12,616		13,086		8,957		751		64,242
2.00%-2.99%		966		19,730		940		1,052		687		23,375
Total	$	35,619	$	32,376	$	14,026	$	10,009	$	1,438	$	93,468

Borrowings. Our borrowings consist primarily of advances from the Federal Home Loan Bank of Boston. As of December 31, 2016, we had Federal Home Loan Bank of Boston advances in the amount of $41.9 million, which represented 14.6% of total liabilities and had a weighted average maturity of 0.84 years. We can currently borrow up to approximately $89.3 million from the Federal Home Loan Bank of Boston through our membership.

The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank of Boston advances at the dates and for the periods indicated.

	At or For the Years ended
	December 31,
	2016			2015			2014
	(Dollars in thousands)
Short-Term Advances (1)
Balance at end of period	$	17,500		$	23,500		$	30,000
Average balance during period		10,953			21,882			30,257
Maximum outstanding at any month end		23,000			31,000			33,575
Weighted average rate at end of period		0.73	%		0.44	%		0.25	%
Average interest rate during period		0.51	%		0.25	%		0.20	%
Long-Term Advances
Balance at end of period	$	24,600		$	27,100		$	24,600
Average balance during period		25,832			28,340			23,735
Maximum outstanding at any month end		27,100			29,600			24,600
Weighted average rate at end of period		2.00	%		2.09	%		2.20	%
Average interest rate during period		2.08	%		2.09	%		2.31	%

(1) Represents advances with original maturities of nine months or less.

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Subsidiary Activities

Georgetown Securities Corporation, established in 1995 as a Massachusetts securities corporation for the purpose of buying, selling and holding securities on its own behalf, is a wholly owned subsidiary of Georgetown Bank. The income earned on Georgetown Securities Corporation’s securities is subject to a significantly lower rate of state tax than that assessed on income earned on securities maintained at Georgetown Bank. At December 31, 2016, Georgetown Securities Corporation had total assets of $20.1 million, all of which were in securities and cash to be invested.

Expense and Tax Allocation

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

Personnel

As of December 31, 2016, we had 46 full-time employees, four part-time employees and three seasonal employees. Our employees are not represented by any collective bargaining group. Management believes that we have good working relations with our employees.

FEDERAL AND STATE TAXATION

Federal Taxation

General.  The Company, Georgetown Bank and Georgetown Security Corporation file combined federal tax returns. The Company’s and Georgetown Bank’s federal tax returns are not currently under audit, and have not been audited during the past five years.

Method of Accounting.  For federal income tax purposes, the Company currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns.

Bad Debt Reserves.  Georgetown Bank is permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions can, within specified formula limits, be deducted in arriving at our taxable income. Pursuant to the Small Business Protection Act of 1996 (the “1996 Act”), savings institutions were required to recapture any excess reserves over those established as of October 31, 1988 (base year reserve).

Taxable Distributions and Recapture.  Prior to the 1996 Act, bad debt reserves created prior to November 1, 1988 were subject to recapture into taxable income should Georgetown Bank fail to meet certain thrift asset and definitional tests. Federal legislation has eliminated these thrift related recapture rules.

At December 31, 2016, our total federal pre-1988 base year reserve was $723,000. However, under current law, pre-1988 base year reserves remain subject to recapture should Georgetown Bank make certain non-dividend distributions, repurchase any of its stock, pay dividends in excess of tax earnings and profits, or cease to maintain a bank charter.

Alternative Minimum Tax.  The Internal Revenue Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.

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Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2016, Georgetown Bank had no net operating loss carryforwards for federal income tax purposes.

Capital Loss Carryovers. A financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. At December 31, 2016, Georgetown Bank had no capital loss carry forward for federal income tax purposes.

Corporate Dividends-Received Deduction.  The Company may exclude from its income 100% of dividends received from Georgetown Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is 80% in the case of dividends received from corporations in which a corporate recipient owns more than 20% of the stock of a corporation distributing a dividend, and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf.

State Taxation

For tax years beginning after December 31, 2008, the Company and Georgetown Bank were required to file a combined return pursuant to a Massachusetts law change enacted in July 2008, unless the Company elects security corporation status.

The Company and the Bank are subject to a Massachusetts tax rate of 9.0% of its combined net income apportioned to Massachusetts.  In general, Massachusetts net income is defined as gross income from all sources without any exclusions, less the deductions, but not credits, allowable under the federal Internal Revenue Code, as amended and in effect for the taxable year, plus the interest from bonds, notes and evidence of indebtedness of any state, including Massachusetts.  The following deductions are not allowed:  dividends received, except as otherwise provided, losses sustained in other taxable years, taxes on or measured by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business and capital stock taxes imposed by a state and  the federal bonus depreciation deduction allowed by IRC section 168 (k).

Beginning in 2014, the Company and the Bank are subject to the New Hampshire Business Enterprise Tax (“BET”) and the Business Profits Tax (“BPT”).

The New Hampshire BET is a minimum tax imposed at 0.72% of the combined apportioned amounts of payroll, interest expense and dividends paid.  The tax imposed can be a credit against the BPT and is subject to a five year carry forward period.

The New Hampshire BPT is imposed on the combined apportioned taxable income of the Company and the Bank at a tax rate of 8.2%.  The taxable income is determined using the U. S. Internal Revenue Code, in effect as of December 31, 2000 subject to certain adjustments.  The following adjustments are made: taxes on or measured by income, franchise taxes measured by net income and capital stock taxes imposed by a state are disallowed, and a deduction for interest of United States obligation is allowed.  Earnings and distributions received from unconsolidated affiliates and partnerships are eliminated.

SUPERVISION AND REGULATION

General

Georgetown Bank is a federally chartered savings bank that is primarily regulated, examined and supervised by the OCC. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s (“FDIC”) deposit insurance fund and depositors, and not for the protection of security holders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to

26

their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Georgetown Bank also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System, or Federal Reserve Board, governing reserves to be maintained against deposits and other matters. The OCC examines Georgetown Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Georgetown Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Georgetown Bank’s loan documents. Georgetown Bank is also a member of and owns stock in the Federal Home Loan Bank of Boston, which is one of the twelve regional banks in the Federal Home Loan Bank System.

As a savings and loan holding company, the Company is required to comply with the rules and regulations of the Federal Reserve Board. It is also required to file certain reports with and is subject to examination by and the enforcement authority of the Federal Reserve Board. The Company is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in applicable laws or regulations, whether by the FDIC, the OCC, the Federal Reserve Board or Congress, could have a material adverse impact on the Company and Georgetown Bank and their operations.

Set forth below is a brief description of material regulatory requirements that are or will be applicable to Georgetown Bank and the Company. The description is limited to certain material aspects of the statutes and regulations addressed and is not intended to be a complete description of such statutes and regulations and their effects on Georgetown Bank.

Dodd-Frank Act

The Dodd-Frank Act significantly changed the bank regulatory structure and is affecting the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act eliminated our primary federal regulator, the Office of Thrift Supervision, as of July 21, 2011, and required Georgetown Bank to be supervised and examined by the OCC, the primary federal regulator for national banks. On the same date, the Federal Reserve Board assumed regulatory jurisdiction over savings and loan holding companies, in addition to its role of supervising bank holding companies.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with expansive powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as Georgetown Bank, continue to be examined by their applicable federal bank regulators. The legislation gives state attorneys general the ability to enforce applicable federal consumer protection laws.

The Dodd-Frank Act broadened the base for FDIC assessments for deposit insurance and permanently increased the maximum amount of deposit insurance to $250,000 per depositor. The legislation also, among other things, required originators of certain securitized loans to retain a portion of the credit risk, stipulated regulatory rate-setting for certain debit card interchange fees, repealed restrictions on the payment of interest on commercial demand deposits and contained a number of reforms related to mortgage originations. The Dodd-Frank Act increased shareholder influence over boards of directors by requiring companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to company executives, regardless of whether the company is publicly traded or not.

Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and/or require the issuance of implementing regulations.  Their impact on operations cannot yet fully be assessed. However, the Dodd-Frank Act has already increased regulatory burden, compliance costs and interest expense for Georgetown Bank and the Company, and is expected to continue to do so in the future.

27

Business Activities

A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OCC.  Under these laws and regulations, Georgetown Bank may originate mortgage loans secured by residential and commercial real estate, commercial business loans and consumer loans, and it may invest in certain types of debt securities and certain other assets. Certain types of lending, such as commercial and consumer loans, are subject to aggregate limits calculated as a specified percentage of Georgetown Bank’s capital or assets. Georgetown Bank also may establish subsidiaries that may engage in a variety of activities, including some that are not otherwise permissible for Georgetown Bank, including real estate investment and securities and insurance brokerage.  Certain expansion proposals by the Bank, such as establishing or acquiring new branches or acquiring other institutions by merger, require OCC approval.

Loans-to-One-Borrower

We generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of our unimpaired capital and unimpaired surplus. An additional amount may be lent, equal to 10% of unimpaired capital and unimpaired surplus, if the loan is secured by readily marketable collateral, which is defined to include certain financial instruments and bullion, but generally does not include real estate. As of December 31, 2016, we were in compliance with our loans-to-one-borrower limitations.

Qualified Thrift Lender Test

We are required to satisfy a qualified thrift lender (“QTL”) test, under which we either must qualify as a “domestic building and loan” association as defined by the Internal Revenue Code or maintain at least 65% of our “portfolio assets” in “qualified thrift investments.” “Qualified thrift investments” consist primarily of residential mortgages and related investments, including mortgage-backed and related securities. “Portfolio assets” generally means total assets less specified liquid assets up to 20% of total assets, goodwill and other intangible assets and the value of property used to conduct business. A savings institution that fails the qualified thrift lender test must operate under specified restrictions. The Dodd-Frank Act made noncompliance with the QTL test also subject to agency enforcement action for a violation of law. As of December 31, 2016, we maintained 68.8% of our portfolio assets in qualified thrift investments and, therefore, we met the qualified thrift lender test.

Standards for Safety and Soundness

Federal law requires each federal banking agency to prescribe for insured depository institutions under its jurisdiction standards relating to, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, employee compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to submit or implement an acceptable plan, the appropriate federal banking agency may issue an enforceable order requiring correction of the deficiencies.

Capital Requirements

Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards:  a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk weighted assets ratio of 6.0%, a total capital to risk weighted assets ratio of 8%, and a 4% Tier 1 capital to total assets leverage ratio.  The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

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For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings.  Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital.  Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries.  Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital.  Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.  Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values.  Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities).   Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.  The Bank exercised the AOCI opt-out option.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset.  Higher levels of capital are required for asset categories believed to present greater risk.  For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one- to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on specified factors.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.  The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.  The buffer requirement rose to 1.25% at January 1, 2017.

In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

Prompt Corrective Regulatory Action

Under the federal Prompt Corrective Action statutory framework, the OCC is required to take supervisory actions against undercapitalized savings institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital.  For this purpose, a savings institution is placed in one of the following five categories based on the bank’s capital.  The categories were adjusted, effective January 1, 2015, to reflect the final capital rule discussed previously:

· well-capitalized (at least 5% leverage capital, 8% Tier 1 risk-based capital, 10% total risk-based capital and 6.5% common equity Tier 1 risk-based capital);

· adequately capitalized (at least 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital and 4.5% common equity Tier 1 risk-based capital);

· undercapitalized (less than 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital or 4.5% common equity Tier 1 risk-based capital);

· significantly undercapitalized (less than 3% leverage capital, 4% Tier 1 risk-based capital, 6% total risk-based capital or 3% common equity Tier 1 risk-based capital); and

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· critically undercapitalized (less than 2% tangible capital).

Generally, the OCC is required to appoint a receiver or conservator for a savings institution that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for the savings institution required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the savings institution’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the savings institution to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings institution that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the OCC has the authority to require payment and collect payment under the guarantee.  Various restrictions, such as on capital distributions and growth, also apply to “undercapitalized” institutions. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Capital Distributions

Federal regulations restrict capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution. A federal savings institution must file an application with the OCC for approval of the capital distribution if:

· the total capital distributions for the applicable calendar year exceeds the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years that is still available for dividend;

· the institution would not be at least adequately capitalized following the distribution;

· the distribution would violate any applicable statute, regulation, agreement or written regulatory condition; or

· the institution is not eligible for expedited review of its filings (i.e., generally, institutions that fail to satisfy a capital requirement or do not have safety and soundness, compliance and Community Reinvestment Act ratings in the top two categories.

Regardless of whether an application to the OCC is required, a savings institution that is a subsidiary of a holding company, which is the case with Georgetown Bank, must file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.

Applications or notices may be denied if the institution will be undercapitalized after the dividend, the proposed dividend raises safety and soundness concerns or the proposed dividend would violate a law, regulation, enforcement order or regulatory condition.

In the event that a savings institution’s capital falls below its regulatory requirements or it is notified by the regulatory agency that it is in need of more than normal supervision, its ability to make capital distributions would be restricted. In addition, any proposed capital distribution could be prohibited if the regulatory agency determines that the distribution would constitute an unsafe or unsound practice.

Transactions with Related Parties

A savings institution’s authority to engage in transactions with related parties or “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing regulation, Federal Reserve Board Regulation W. The term “affiliate” generally means any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries. Applicable law limits the aggregate amount of

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“covered” transactions with any individual affiliate, including loans to the affiliate, to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain covered transactions with affiliates, such as loans to or guarantees issued on behalf of affiliates, are required to be secured by specified amounts of collateral. Purchasing low quality assets from affiliates is generally prohibited.  Federal law also provides that transactions with affiliates, including covered transactions, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited by law from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

Our authority to extend credit to executive officers, directors and 10% or greater shareholders (“insiders”), as well as entities controlled by these persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and its implementing regulation, Federal Reserve Board Regulation O.  Among other things, loans to insiders must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment.  There is an exception for bank-wide lending programs that do not discriminate in favor of insiders.  Regulation O also places individual and aggregate limits on the amount of loans that may be made to insiders based, in part, on the institution’s capital position, and requires that certain prior board approval procedures be followed. Extensions of credit to executive officers are subject to additional restrictions on the types and amounts of loans that may be made. At December 31, 2016, we were in compliance with these regulations.

Enforcement

The OCC has primary enforcement responsibility over federal savings institutions.  The OCC has authority to bring enforcement action against “institution-related parties,” including officers, directors, certain shareholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution, receivership or conservatorship.  Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day.

Deposit Insurance

Georgetown Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in Georgetown Bank are insured up to a maximum of $250,000 for each separately insured depositor.

The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund.  Under the FDIC’s risk-based assessment system, institutions deemed less risky pay lower assessments.  Assessments for institutions of less than $10 billion of assets are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure of an institution’s failure within three years.  That technique, effective July 1, 2016, replaced the previous system under which institutions were placed into risk categories.

The Dodd-Frank Act required the FDIC to revise its procedures to base assessments upon each insured institution’s total assets less tangible equity instead of deposits.  The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.  In conjunction with the Deposit Insurance Fund’s reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10 billion of total assets to 1.5 basis points to 30 basis points, effective July 1, 2016.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits.  The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020.  The Dodd-Frank Act requires insured institutions with assets of $10 billion or more to fund the increase from 1.15% to 1.35% and, effective July 1, 2016, such institutions are subject to a surcharge to achieve that goal.  The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the

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discretion of the Federal Deposit Insurance Corporation, and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long-range fund ratio of 2%

In addition to the FDIC assessments, the Financing Corporation is authorized to impose and collect, through the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the Financing Corporation in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the Financing Corporation are due to mature in 2017 through 2019. For the quarter ended December 31, 2016, the annualized Financing Corporation assessment was equal to 0.56 basis points of total assets less tangible capital.

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

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

Federal Home Loan Bank System

Georgetown Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Boston, we are required to acquire and hold a specified amount of shares of capital stock in the Federal Home Loan Bank.

Qualified Mortgages and Retention of Credit Risk

The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition are presumed to have complied with the new ability-to-repay standard.  Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:

· excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

· interest-only payments;

· negative-amortization; and

· terms longer than 30 years.

Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%.  Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments.  The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could limit our growth or profitability.

In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain not less than 5% of the credit risk for any asset that is not a “qualified residential mortgage.”  The regulatory agencies have issued a rule to implement this requirement, and provided that the definition of “qualified

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residential mortgage” is the same as the definition of “qualified mortgage” issued by the Consumer Financial Protection Bureau for purposes of its regulations (as described above).  The final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans.

Community Reinvestment Act and Fair Lending Laws

Savings institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on certain activities such as branching and acquisitions. Georgetown Bank received a “Satisfactory” Community Reinvestment Act rating in its most recent examination.

Other Regulations

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

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

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

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

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

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

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

· Truth in Savings Act; and

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

The operations of Georgetown Bank also are subject to the:

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

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

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

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

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

Holding Company Regulation

The Company is a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, that authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Georgetown Bank.

As a savings and loan holding company, the Company’s activities are limited to those activities permissible by law for financial holding companies or multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending activities, insurance and underwriting equity securities. The Dodd-Frank Act requires that any savings and loan holding company that engages in activities permissible for a financial holding company must meet the qualitative requirements for a bank holding company to be a financial holding company and conduct the activities in accordance with the requirements that would apply to a financial holding company’s conduct of the activity.  A multiple savings and loan holding company may, upon receiving any necessary Federal Reserve Board approvals, engage in activities specified in Federal Reserve Board regulations, including those permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act.

Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board and from acquiring or retaining control of any depository not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. An acquisition by a savings and loan holding company of a savings institution in another state to be held as a separate subsidiary may not be approved unless it is a supervisory acquisition under Section 13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.

Savings and loan holding companies were not historically subjected to consolidated regulatory capital requirements. However, the Dodd-Frank Act required the Federal Reserve Board to set for all depository institution holding companies minimum consolidated capital levels that are as stringent as those required for the insured depository subsidiaries. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to savings and loan holding companies.  Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions applied to savings and loan holding companies as of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer is being phased in between 2016 and 2019.  However, legislation was enacted in December 2014 which required the FRB to amend its “Small Bank Holding Company” exemption from consolidated holding company capital requirements to (1) extend its applicability to savings and loan

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holding companies and (2) raise the threshold for the exemption from $500 million to $1 billion in consolidated assets.  Regulations doing so were effective May 15, 2015. Consequently, both bank and savings and loan holding companies with under $1 billion in consolidated assets are exempt from the consolidated regulatory capital requirements unless the FRB determines otherwise on a case by case basis.

The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing the “source of strength” policy, which require holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

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

Federal Securities Laws

The Company’s common stock is registered with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of common stock issued in the offering did not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If the Company meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of the Company that complies  with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of  other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1.0% of the outstanding shares of the Company, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, the Company may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 was enacted to address, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. Under Section 302(a) of the Sarbanes-Oxley Act, the Chief Executive Officer and Chief Financial Officer of the Company are required to certify that its quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact. Rules promulgated under the Sarbanes-Oxley Act require that these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal controls; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal controls; and they have included information in our quarterly and annual reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could significantly affect internal controls. The Company has

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existing policies, procedures and systems designed to comply with these regulations, and is further enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations.

Change in Control Regulations

Under the Change in Bank Control Act, no person or company may acquire control of a savings and loan holding company, such as the Company, unless the Federal Reserve Board has been given at least 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition.  In evaluating the notice, the Federal Reserve Board considers factors, such as the financial condition and competence, experience and integrity of the proposed acquirer, the future prospects of the holding company and its subsidiary institution and the competitive effects of the proposed acquisition.  Control, as generally defined for this purpose, means ownership, control of or power to vote 25% or more of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as is the case with the Company, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board Savings and Loan Holding Company Act. Any company that acquires more than 25% of any class of a savings and loan holding company’s voting stock also becomes a “savings and loan holding company” subject to registration, examination and regulation by the Federal Reserve Board.

ITEM 1A.Risk Factors

Failure to complete our merger with Salem Five Bancorp and Salem Five Bank could negatively impact our stock price and our future business and financial results.

If the Merger is not completed for any reason, the ongoing business of the Company and the Bank may be adversely affected and, without realizing any of the benefits of having completed the Merger, we would be subject to a number of risks, including the following:

· we may experience negative reactions from the financial markets, including negative impacts on our stock price;

· we may experience negative reactions from our customers, vendors and employees;

· we will have incurred substantial expenses and will be required to pay certain costs relating to the Merger, whether or not the Merger is completed;

· the Merger Agreement places certain restrictions on the conduct of our business prior to completion of the Merger. Such restrictions may prevent us from taking actions during the pendency of the Merger that would otherwise be beneficial to us as an independent company; and

· matters relating to the Merger (including integration planning) will require substantial commitments of time and resources by our management, which would otherwise have been devoted to other opportunities that may have been beneficial to us as an independent company.

In addition to the above risks, if the Merger Agreement is terminated and our board of directors seeks another merger or business combination, our stockholders cannot be certain that we will be able to find a party willing to offer

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equivalent or more attractive consideration than the consideration Salem Five Bancorp has agreed to provide in the Merger. If the Merger Agreement is terminated under certain circumstances, we may be required to pay a termination fee of $2.0 million to Salem Five Bancorp.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated.

Before the Merger may be completed, various approvals and consents must be obtained from regulatory entities. These regulators may impose conditions on the completion of the Merger or require changes to the terms of the Merger. Any such conditions or changes could have the effect of delaying completion of the Merger.

Either Salem Five Bancorp or the Company may terminate the Merger Agreement if the Merger has not been completed by January 5, 2018, unless the failure of the Merger to be completed has resulted from the failure of the party seeking to terminate the Merger Agreement to perform its obligations under the Merger Agreement.

Historically low interest rates may adversely affect our net interest income and profitability.

In recent years it has been the policy of the Board of Governors of the Federal Reserve System to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities.  As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which have resulted in increases in net interest income in the short term. However, our ability to lower our interest expense is limited at these interest rate levels while the average yield on our interest-earning assets may continue to decrease. Accordingly, our net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may decrease, which may have an adverse affect on our profitability. For information with respect to changes in interest rates, see “—Changes in interest rates could adversely affect our results of operations and financial condition.”

Our emphasis on commercial lending may expose us to increased lending risks, which could hurt our profits.

We originate commercial business loans, commercial real estate loans, multi-family real estate loans and one- to four-family investment property loans generally within our primary lending market area. These loans, which totaled $148.1 million, or 53.0% of our loan portfolio at December 31, 2016, generally have a higher risk of loss compared to our one- to four-family residential real estate loans. Commercial business loans and commercial real estate loans may expose us to greater credit risk than our loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, commercial business loans and commercial real estate loans may also involve relatively large loan balances to individual borrowers or groups of borrowers. These loans also have greater credit risk than residential real estate for the following reasons:

· commercial business loans - repayment is generally dependent upon the successful operation of the borrower’s business.

· commercial real estate loans - repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service.

· residential investment property loans (one- to four-family and multi-family) — repayment is dependent on income being generated in amounts sufficient to cover property maintenance and debt service.

In addition, if loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition. Also, the collateral underlying commercial business loans may fluctuate in value. Some of our commercial business loans are collateralized by equipment, inventory, accounts

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receivable or other business assets, and the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use.

Our construction lending may expose us to increased lending risks, which could hurt our profits.

At December 31, 2016, we had $25.2 million of construction loans, representing 9.0% of our total loan portfolio at that date. Additionally, we had $16.3 million in unadvanced construction funds as of December 31, 2016. These loans generally have a higher risk of loss compared to our one- to four-family residential real estate loans. Construction lending involves additional risks because of the inherent difficulty in estimating a property’s value both before and at completion of the project. Construction costs may exceed original estimates as a result of increased materials, labor or other costs. In addition, because of current uncertainties in the residential and commercial real estate markets, property values have become more difficult to determine than they have been historically. Repayment of construction loans often depends on the ability of the borrower to sell or lease the property. These loans also require ongoing monitoring.

Our level of non-performing loans increased to $953,000, or 0.34%, of total loans at December 31, 2016 from $776,000, or 0.30%, of total loans at December 31, 2015. A higher level of non-performing loans could result in charge-offs and provisions for loan losses that are higher than our historical levels. See “—If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.”

A significant portion of our loan portfolio consists of recently originated or purchased loans.

Our commercial loan portfolio (including commercial and multi-family real estate loans, residential investment property loans, and business loans and construction loans) has grown to $173.2 million at December 31, 2016 from $82.6 million at December 31, 2011. Additionally, our residential loan portfolio (including home equity loans) has grown to $106.1 million at December 31, 2016 from $79.7 million at December 31, 2011. It is difficult to assess the future performance of these recently originated loans. As a result, these loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance.

The level of our commercial real estate loan portfolio subjects us to additional regulatory scrutiny.

The OCC and the other federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending.  Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (1) total reported loans for construction, land acquisition and development, and other land represent 100% or more of total capital, or (2) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital.  At December 31, 2016, the Bank’s ratios under these tests were 69.0% and 259.1%, respectively.  The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution).  The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations.  The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing.  While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us or that may result in a curtailment of our multi-family and commercial real estate lending and/or the requirement that we maintain higher levels of regulatory capital, either of which would adversely affect our loan originations and profitability.

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A worsening of economic conditions could adversely affect our financial condition and results of operations.

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in the Boston Metropolitan area, Northeastern Massachusetts and Southern New Hampshire.  Local economic conditions have a significant impact on our commercial real estate and construction and consumer loans, the ability of our borrowers to repay these loans and the value of the collateral securing these loans.  Almost all of our loans are to borrowers located in or secured by collateral located in the Boston Metropolitan area, Northeastern Massachusetts and Southern New Hampshire.

Deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

· demand for our products and services may decline;

· loan delinquencies, problem assets and foreclosures may increase;

· collateral for loans, especially real estate, may decline in value, in turn reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans;

· the value of our securities portfolio may decline; and

· the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations.  In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

Our loan customers may not repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We therefore may experience significant loan losses, which could have a material adverse effect on our operating results. At December 31, 2016, our allowance for loan losses totaled $2.6 million, or 0.93% of total loans and 273.35% of non-performing loans at that date.

Material additions to our allowance for loan losses also would materially decrease our net income, and the charge-off of loans may cause us to increase the allowance. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We rely on our experience and our evaluation of economic conditions, among other factors, in determining the amount of the allowance for loan losses. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses in Financial Instruments”, which sets forth a “current expected credit loss” (CECL) model. The guidance in this ASU will be effective for the Company for the fiscal years beginning after December 15, 2019, including interim periods within the fiscal years.  This ASU changes the current incurred loss model of providing allowances for loan losses to an expected loss model, which will likely require us to increase our allowance for loan losses, and to greatly increase the types of data we need to collect and review to determine the appropriate level of the allowance for loan losses.

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Changes in interest rates could adversely affect our results of operations and financial condition.

Our profitability depends substantially on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. Increases in interest rates may decrease loan demand (which would also decrease our ability to generate non-interest income through the sale of loans into the secondary market and related fees for continuing to service those sold loans) and make it more difficult for borrowers to repay adjustable-rate loans. Increases in interest rates can also result in lower loan originations, as borrowers who may qualify for a loan based on certain mortgage repayments, may not be able to afford repayments based on higher interest rates for the same loan amounts. In addition, as market interest rates rise, we will have competitive pressures to increase the rates we pay on deposits. Because an increase in rates we pay on deposits would be expected to be faster than an increase in the yields we earn on our interest-earning assets, such an increase would be expected to result in a decrease of our net interest income.

We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities.

Our business strategy includes significant growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

We intend to experience growth in the amount of our assets, the level of our deposits and the scale of our operations.  Achieving growth requires us to attract customers that currently bank at other financial institutions in our market, thereby increasing our share of the market.  Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth.  Growth opportunities may not be available or we may not be able to manage our growth successfully.  If we do not manage our growth effectively, our financial condition and operating results could be negatively affected.

We operate in a highly regulated environment, and changes in laws and regulations to which we are subject may adversely affect our results of operations.

Georgetown Bank is subject to extensive regulation, supervision and examination by the OCC, as its chartering authority, and by the FDIC as the insurer of its deposits up to certain limits. In addition, the Board of Governors of the Federal Reserve System regulates and oversees the Company. We also belong to the Federal Home Loan Bank system and, as a member of such system, we are subject to certain limited regulations promulgated by the Federal Home Loan Bank of Boston. This regulation and supervision limits the activities in which we may engage. The purpose of regulation and supervision is primarily to protect our depositors and borrowers and, in the case of FDIC regulation, the FDIC’s insurance fund. Regulatory authorities have extensive discretion in the exercise of their supervisory and enforcement powers. They may, among other things, impose restrictions on the operation of a banking institution, the classification of assets by such institution and such institution’s allowance for loan losses. Regulatory and law enforcement authorities also have wide discretion and extensive enforcement powers under various consumer protection and civil rights laws, including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, and the Real Estate Settlement Procedures Act. Any change in the laws or regulations applicable to us, or in banking regulators’ supervisory policies or examination procedures, whether by the OCC, the Board of Governors of the Federal Reserve System, the FDIC, other state or federal regulators, or the U.S. Congress could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The Dodd-Frank Act has significantly changed the regulation of banks and savings institutions and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.  The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress.  The federal agencies have been given significant discretion in drafting the implementing rules and regulations, many of which are not in final form.  As a result, we cannot at this time

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predict the full extent to which the Dodd-Frank Act will impact our business, operations or financial condition.  However, compliance with the Dodd-Frank Act and its implementing regulations and policies has already resulted in changes to our business and operations, as well as additional costs, and has diverted management’s time from other business activities, which have adversely affected our financial condition and results of operations.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities.  If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network.  These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts.  Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches.  The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations.

We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.

A final capital rule, which became effective for us January 1, 2015, includes minimum risk-based capital and leverage ratios and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The minimum capital requirements are: (1) a common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 to risk-based assets capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1 leverage ratio of 4%. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised.  We have elected to exercise our one-time option to opt-out of the requirement under the final rule to include certain “available-for-sale” securities holdings for purposes of calculating our regulatory capital requirements.  The final rule also establishes a “capital conservation buffer” of 2.5%, and will result in the following minimum ratios when fully phased in: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 to risk-based assets capital ratio of 8.5%, and (3) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were unable to comply with such requirements.  Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel Committee on Banking Supervision (“Basel III”) could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets.  Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, including paying out dividends or buying back shares.  Specifically, beginning in 2016, Georgetown Bank’s ability to pay dividends is limited if does not have the capital conservation buffer required by the new capital rules, which may limit our ability to pay dividends to stockholders.  See “Supervision and Regulation—Capital Requirements.”

Strong competition within our market area may limit our growth and profitability.

Competition in the banking and financial services industry within our market area is intense. In our market area we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms, and unregulated or less regulated non-banking entities, operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we have and offer certain services that we do not or cannot provide. Our competitors often aggressively price loan and deposit products when they enter into new lines of business or new market areas.  Our

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profitability depends upon our continued ability to successfully compete in our market area. The greater resources and broader range of deposit and loan products offered by our competition may limit our ability to increase our interest-earning assets and profitability. We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Competition for deposits and the origination of loans could limit our ability to successfully implement our business plan, and could adversely affect our results of operations in the future.

Changes in the valuation of our securities portfolio could hurt our profits.

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings.  Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand.  Management evaluates securities for other-than-temporary impairment on a monthly basis, with more frequent evaluation for selected issues.  In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in our debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates.  In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame.  If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur.  Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates.  We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes.  The declines in market value could result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.

We must maintain sufficient funds to respond to the needs of depositors and borrowers.  As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments.  These additional sources consist primarily of Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased and brokered certificates of deposit.  As we continue to grow, we are likely to become more dependent on these sources. Adverse operating results or changes in industry conditions could lead to difficulty or an inability in accessing these additional funding sources.  Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates.  If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs.  In this case, our operating margins and profitability would be adversely affected.

We rely on our management team for the successful implementation of our business strategy.

We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services. We believe that our continued growth and future success will depend in large part upon the skills of our management team. The competition for qualified personnel in the financial services industry is intense, and the loss of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional qualified personnel. Although we have employment agreements with our President and Chief Executive Officer, our Chief Operating Officer and our Chief Financial Officer, the loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to develop our business strategy.

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Legal and regulatory proceedings and related matters could adversely affect us or the financial services industry in general.

We, and other participants in the financial services industry upon whom we rely to operate, have been and may in the future become involved in legal and regulatory proceedings.  Most of the proceedings we consider to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters and, other participants in the financial services industry or we may not prevail in any proceeding or litigation.  There could be substantial cost and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.

Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes.  Nationally, reported incidents of fraud and other financial crimes have increased.  We have also experienced losses due to apparent fraud and other financial crimes.  While we have policies and procedures designed to prevent such losses, losses may still occur.

Risks associated with managing reputational risk may negatively impact our ability to attract and maintain customers, investors and employees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers.  We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective.  Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur and may not be adequately addressed if they do occur. In addition any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

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Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.

Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, compliance and operational risks. While we use a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.

Various factors may make takeover attempts more difficult to achieve.

Provisions of the Company’s articles of incorporation and bylaws, federal regulations, Georgetown Bank’s federal stock charter, Maryland law, shares of restricted stock and stock options that we have granted or may grant to employees and directors, stock ownership by our management and directors and employment agreements that we have entered into with our executive officers, and various other factors may make it more difficult for companies or persons to acquire control of the Company without the consent of our board of directors.  You may want a takeover attempt to succeed because, for example, a potential acquirer could offer a premium over the then prevailing price of our common stock.

Our ability to originate and sell loans could be restricted by recently adopted federal regulations.

The Consumer Financial Protection Bureau has issued a rule intended to clarify how lenders can avoid legal liability under the Dodd-Frank Act, which holds lenders accountable for ensuring a borrower’s ability to repay a mortgage loan. Under the rule, loans that meet the “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard.  Under the rule, a “qualified mortgage” loan must not contain certain specified features, including:

· excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

· interest-only payments;

· negative amortization; and

· terms of longer than 30 years.

Also, to qualify as a “qualified mortgage,” a loan must be made to a borrower whose total monthly debt-to-income ratio does not exceed 43%.  Lenders must also verify and document the income and financial resources relied upon to qualify a borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments.

The Dodd-Frank Act also requires the regulatory agencies to issue regulations that require securitizers of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.”  The regulatory agencies have issued a final rule to implement this requirement.  The final rule provides that the definition of “qualified residential mortgage” includes loans that meet the definition of “qualified mortgage” under the Consumer Financial Protection Bureau’s rule.

In addition, the Dodd-Frank Act requires the Consumer Finance Protection Bureau to adopt rules and publish forms that combine certain disclosures that consumers receive in connection with applying for and closing on certain mortgage loans loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act (“TRID”).  The Consumer Financial Protection Bureau has implemented a final rule to implement this requirement, and the final rule was effective in October 2015.

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These final rules could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict or delay our ability to make loans, any of which could limit our growth or profitability.

Our ability to pay dividends is substantially dependent on capital distributions from Georgetown Bank and these distributions are subject to regulatory limits and other restrictions.

We may not be able to pay dividends in the future. We are dependent primarily upon the Bank for our earnings and funds to pay dividends on our common stock. The payment of dividends also is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the Bank’s earnings, capital requirements, financial condition and other factors considered relevant by our Board of Directors.

If we are required to repurchase mortgage loans that we have previously sold, it would negatively affect our earnings.

One of our sources of non-interest income is our mortgage banking, which involves originating residential mortgage loans for sale in the secondary market under agreements that contain representations and warranties related to, among other things, the origination and characteristics of the mortgage loans.  We may be required to repurchase mortgage loans that we have sold in cases of borrower default or breaches of these representations and warranties.  We have experienced more frequent disputes and repurchase demands from these buyers.  If we are required to repurchase mortgage loans or provide indemnification or other recourse, this could increase our costs and thereby affect our future earnings.

We are subject to environmental liability risk associated with lending activities

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

In preparing this annual report as well as other periodic reports we are required to file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty.  Materially different results may occur as circumstances change and additional information becomes known.

ITEM 1B.Unresolved Staff Comments

None.

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ITEM 2.Properties

The net book value of our premises, land and equipment was $4.1 million at December 31, 2016. The following table provides certain information with respect to our properties as of December 31, 2016.

	Owned or	Year Acquired or		Net Book Value
Location	Leased	Leased	Square Footage	of Real Property
				(In thousands)
Main Office:
2 East Main Street	Owned	2003 (1)	14,400	$	2,415
Georgetown, MA 01833
Branch Office:
303 Haverhill Street	Leased (2)	1999	3,500	$	418
Rowley, MA 01969
Branch Office:
562A Turnpike Street/Route 114	Leased (3)	2015	1,585	$	522
North Andover, MA 01845
Branch Office:
1 Portsmouth Avenue	Leased (4)	2014	1,412	$	234
Stratham, NH 03885

(1) In 2003, we constructed a new main office upon this property, which we have owned since 1985.

(2) We own the building but lease the land. The lease has a term of 40 years with an option to renew for an additional 10 years.

(3) We are leasing the office space. The lease has a term of 10 years with an option to renew for an additional 10 years.

(4) We are leasing the office space. The lease has a term of 10 years with an option to renew for two additional five year terms.

ITEM 3.Legal Proceedings

From time to time, we are involved as plaintiff or defendant in various legal proceedings arising in the ordinary course of business. At December 31, 2016, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

ITEM 4.Mine Safety Disclosures

Not applicable.

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PART II

ITEM 5.Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Securities

(a) Our common stock is traded on the NASDAQ Capital Market under the symbol “GTWN.” The approximate number of holders of record of the Company’s common stock as of March 23, 2017 was 270. Certain shares of the Company are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.

The following table presents quarterly market information for the Company’s common stock during the periods indicated. The following information was based on data received from the NASDAQ Capital Market and represents the actual high and low sales prices for the periods indicated.

Year Ended December 31, 2016	High		Low		Dividends
Quarter ended March 31, 2016	$	23.75	$	18.30	$	0.0475
Quarter ended June 30, 2016	$	21.91	$	19.54	$	0.0500
Quarter ended September 30, 2016	$	21.00	$	19.67	$	0.0500
Quarter ended December 31, 2016	$	26.00	$	20.88	$	0.0500

Year Ended December 31, 2015	High		Low		Dividends
Quarter ended March 31, 2015	$	18.41	$	16.45	$	0.0425
Quarter ended June 30, 2015	$	19.94	$	17.80	$	0.0475
Quarter ended September 30, 2015	$	19.00	$	17.80	$	0.0475
Quarter ended December 31, 2015	$	18.95	$	17.80	$	0.0475

Dividend payments by the Company are dependent primarily on dividends it receives from the Bank, because the Company has no source of funding other than dividends from the Bank, interest payments with respect to the Company’s loan to the Employee Stock Ownership Plan and any cash balances available at the Company. In addition, the Company is subject to state law limitations on the payment of dividends. Maryland law generally limits dividends if the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend or if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.

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Equity Compensation Plans. Other than our employee stock ownership plan, we do not have any equity compensation plans that were not approved by stockholders. The following table sets forth information with respect to the Company’s equity compensation plans at December 31, 2016.

				Number of securities
				remaining available for
				future issuance under
	Number of securities to be	Weighted		equity compensation
	issued upon exercise of	average		plans (excluding
	outstanding options	exercise		securities
	and rights	price (1)		in first column)
Georgetown Bancorp, Inc. 2009 Equity Incentive Plan (approved by stockholders)	79,022	$	13.56	—
Georgetown Bancorp, Inc. 2014 Equity Incentive Plan (approved by stockholders)	43,753		18.97	93,494
Equity compensation plans not approved by stockholders	—		—	—
Total	122,775	$	15.49	93,494

(1) Reflects weighted average exercise price of stock options only.

The Company has sold no securities within the past three years that were not registered under the Securities Act of 1933.

(b) Not applicable

(c) There were no share repurchases during the quarter ended December 31, 2016.  On July 23, 2013 the Company announced that its Board of Directors had authorized a second stock repurchase program pursuant to which the Company intends to purchase up to approximately 5.0% of its issued and outstanding shares, or up to 93,765 shares.  The repurchase program has no expiration date.  As of Decemmber 31, 2016, 15,973 shares remain available for repurchase under the repurchase program.

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ITEM 6.Selected Financial Data

	At December 31,
	2016		2015		2014		2013		2012
	(In thousands)
Selected Financial Condition Data:
Total assets	$	318,632	$	296,502	$	271,020	$	263,033	$	211,602
Cash and cash equivalents		6,129		7,758		4,918		6,295		6,789
Investment securities		22,275		22,140		20,363		19,331		9,778
Loans receivable, net		277,371		253,983		231,293		223,912		180,599
Allowance for loan losses		2,605		2,408		2,229		2,396		1,780
Deposits		240,508		207,726		182,354		175,961		154,439
Borrowings		41,850		50,600		54,600		54,925		23,600
Total stockholders’ equity		32,156		31,908		30,712		28,942		30,563

	Years Ended
	December 31,
	2016		2015		2014		2013		2012
	(In thousands, except per share data)
Selected Operating Data:
Interest and dividend income	$	12,810	$	11,876	$	11,174	$	9,645	$	9,045
Interest expense		2,468		1,726		1,448		1,172		1,688
Net interest and dividend income		10,342		10,150		9,726		8,473		7,357
Provision for loan losses		194		200		98		708		200
Net interest and dividend income, after provision for loan losses		10,148		9,950		9,628		7,765		7,157
Non-interest income		1,005		1,189		1,074		1,703		2,013
Non-interest expense		10,542		8,690		8,373		8,313		7,663
Income before income taxes		611		2,449		2,329		1,155		1,507
Income tax provision		417		931		850		420		559
Net income	$	194	$	1,518	$	1,479	$	735	$	948
Net income per share: Basic	$	0.11	$	0.87	$	0.85	$	0.41	$	0.51
Net income per share: Diluted	$	0.11	$	0.86	$	0.85	$	0.41	$	0.51
Dividends declared per share	$	0.20	$	0.19	$	0.17	$	0.16	$	—

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	At or For the Years
	Ended December 31,
	2016		2015		2014		2013		2012
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)	0.06	%	0.55	%	0.56	%	0.32	%	0.46	%
Return on stockholders' equity (ratio of net income to average stockholders' equity)	0.62	%	5.00	%	5.06	%	2.46	%	3.80	%
Interest rate spread (1)	3.30	%	3.60	%	3.65	%	3.72	%	3.57	%
Net interest margin (2)	3.46	%	3.76	%	3.78	%	3.85	%	3.75	%
Efficiency ratio (3)	92.91	%	76.63	%	77.53	%	81.69	%	81.79	%
Non-interest expense to average total assets	3.46	%	3.12	%	3.14	%	3.63	%	3.73	%
Average interest-earning assets to averageinterest-bearing liabilities	123.31	%	124.42	%	123.02	%	125.90	%	121.35	%
Dividend payout ratio	179.55	%	21.51	%	19.71	%	39.02	%	N/A
Asset Quality Ratios:
Non-performing assets to total assets	0.30	%	0.26	%	0.35	%	0.15	%	1.60	%
Non-performing loans to total loans	0.34	%	0.30	%	0.41	%	0.18	%	1.75	%
Allowance for loan losses to non-performing loans	273.35	%	310.31	%	233.89	%	600.50	%	56.06	%
Allowance for loan losses to total loans	0.93	%	0.94	%	0.96	%	1.06	%	0.98	%
Capital Ratios:
Stockholders’ equity to total assets at end of period	10.09	%	10.76	%	11.33	%	11.00	%	14.44	%
Total capital to risk-weighted assets (4)	13.50	%	14.30	%	14.30	%	14.30	%	17.90	%
Tier 1 capital to risk-weighted assets (4)	12.40	%	13.20	%	13.20	%	13.10	%	16.70	%
Common equity tier 1 capital to risk-weighted assets (4)	12.40	%	13.20	%	N/A		N/A		N/A

(1) The interest rate spread represents the difference between the weighted-average yield on interest-earning assets, before a tax equivalent adjustment, and the weighted-average cost of interest-bearing liabilities for the period.

(2) The net interest margin represents net interest income, before a tax equivalent adjustment, as a percent of average interest-earning assets for the period.

(3) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.

(4) Calculation is for Georgetown Bank.

ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Annual Report contains certain “forward-looking statements” that may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage and other loans, real estate values, competition, changes in accounting principles, policies, or guidelines, changes in legislation or regulation or regulatory policies and procedures, and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services. Because of this and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not place undue

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reliance on forward-looking statements.  We do not assume and expressly disclaim any obligation to update or revise forward-looking statements except as may be required by law.

Overview

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets (primarily cash equivalents), and the interest paid on our interest-bearing liabilities, consisting primarily of savings accounts, NOW accounts, money market accounts, certificates of deposit and borrowings. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income consists of fees and service charges, mortgage banking income, gain on sale of Small Business Administration (“SBA”) loans, income from bank-owned life insurance and miscellaneous other income. Non-interest expense consists primarily of salaries and employee benefits, occupancy and equipment, data processing, professional fees, advertising and other administrative expenses.

Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities. Additionally, because our lending activity is concentrated in loans secured by residential and commercial real estate located in the Essex and Suffolk counties, Massachusetts region and southern New Hampshire, downturns in this regional economy could have a negative impact on our earnings.

Net income for the year ended December 31, 2016 was $194,000, which was $1.3 million, or 87.2%, lower than net income for 2015. The decrease in net income was primarily due to a $1.9 million, or 21.3% increase in non-interest expense and a $184,000 decrease in non-interest income, partially offset by an increase in net interest and dividend income of $192,000. The increase in non-interest expense was primarily due to salaries and benefits expense, reflecting the costs associated with an increase in commercial lending support and regulatory compliance staff, professional fees reflecting the expense associated with enhancements to our regulatory compliance staff and compliance programs, as well as merger related expenses, a portion of which the majority were not tax deductible for income tax purposes. 

We do not originate subprime, Alt-A or option ARM residential mortgage loans. All of our mortgage-backed securities have been issued by Freddie Mac, Fannie Mae or Ginnie Mae, which are U.S. Government agencies or Government-sponsored enterprises. These entities guarantee the payment of principal and interest on our mortgage-backed securities. We do not own any common or preferred stock issued by Fannie Mae or Freddie Mac.

On October 5, 2016, Salem Five Bancorp, a Massachusetts mutual holding company, Bright Star, Inc., a Maryland corporation and wholly-owned subsidiary of Salem Five Bancorp, and the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Bright Star, Inc. will merge with and into the Company (the “Merger”).  Consummation of the Merger is subject to certain conditions and is expected to occur in the second quarter of 2017.  Immediately following this, the Bank will merge with and into Salem Five Bancorp’s wholly-owned subsidiary, Salem Five Cents Savings Bank (“Salem Five Bank”).  Immediately following the merger of the two banks, the Company will dissolve and liquidate into Salem Five Bancorp. 

Business Strategy

Our principal objective is to build long-term value for our stockholders by operating a profitable community bank dedicated to meeting the banking needs of our customers. Our board of directors has sought to accomplish this objective with a strategy designed to increase profitability, while maintaining a strong capital position and high asset quality. We cannot assure you that we will successfully implement our business strategy.

Highlights of our business strategy are as follows:

· Continuing to emphasize the origination of commercial loans. In recent years, we have diversified our lending activities by increasing our origination of commercial and multi-family real estate loans, residential one- to four-family investment property loans and commercial business loans. We recently added depth to our commercial loan department that now includes four commercial loan officers, a

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credit manager, three credit analysts, two commercial loan assistants, and two commercial loan servicing representatives. We intend to focus on the origination of more permanent, longer term loans that will help us establish more profitable relationships with our borrowers and grow our core deposit base. However, originating more one- to four-family investment property, multi-family, commercial real estate and commercial business loans exposes us to increased risks.

· Continuing to emphasize core deposit growth to reduce our funding costs. Our balance of demand deposit accounts, NOW accounts, savings accounts and money market deposits, which we consider core deposits, has continued to increase. We intend to continue to increase core deposits by cross-selling existing customers and establishing new relationships. With our continued focus on building commercial loan and deposit service relationships, we will continue to seek lower cost core deposits primarily in the form of our commercial demand deposit and money market accounts. Additionally, we will continue to promote the growth of retail core deposits through the continued marketing of our retail checking accounts.

· Maintaining strong asset quality through conservative underwriting and aggressive monitoring of our assets. We have emphasized maintaining strong asset quality by following conservative underwriting criteria, and primarily originating loans secured by real estate, and when appropriate, guaranteed by state or government programs like the U.S. Small Business Administration. In the current economic environment, we intend to continue to aggressively monitor our loan portfolio.

We use an outside loan review firm to review a majority of our commercial loan portfolio on an annual basis. This review provides management with an objective third-party analysis of the quality of our commercial loan portfolio. In addition, we conduct periodic reviews of individual commercial credits and meet periodically, in person and at their place of business, with our commercial customers in order to stay abreast of any and all issues that may affect the quality of the credit relationship. We have also conducted multiple reviews of our home equity line of credit portfolio to determine the effect of the housing market on the quality of this portion of our loan portfolio. We plan to continue this practice annually.  We will continue to emphasize strong asset quality as we further diversify our loan portfolio. Our ratio of non-performing assets to total assets was 0.30% at December 31, 2016 and 0.26% at December 31, 2015.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions made by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses and deferred income taxes.

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 uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a monthly basis by management and is based upon management’s monthly review of the collectibility of the loans in light of known and inherent risks in 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. Additionally, as part of the evaluation of the level of the allowance for loan losses, on a quarterly basis management analyzes several qualitative loan portfolio risk factors including, but not limited to, charge-off history, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans that are classified as impaired, an allowance for loan losses is established when the discounted cash flows or the fair value of the existing collateral (less cost to sell) of the impaired loan are lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.

Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.

Loans secured by commercial real estate, multi-family and one- to four-family investment properties, generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate, including multi-family and one- to four-family investment properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value that is insufficient to assure full repayment.

Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.

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Comparison of Financial Condition at December 31, 2016 and 2015

Total assets increased $22.1 million, or 7.5%, to $318.6 million at December 31, 2016 from $296.5 million at December 31, 2015. The increase resulted primarily from increases in commercial loans, construction loans and residential mortgage loans.

Cash and cash equivalents decreased $1.6 million, or 21.0% to $6.1 million at December 31, 2016 from $7.8 million at December 31, 2015. The decrease in cash and cash equivalents resulted primarily from a decrease in overnight investments, which were used to fund loan demand.

Our securities portfolio, excluding Federal Home Loan Bank (“FHLB”) and Bankers’ Bank Northeast (“BBN”) stock, increased $135,000, or 0.6%, to $22.3 million at December 31, 2016.

Net loans (excluding loans held for sale) increased $23.4 million, or 9.2%, to $277.4 million at December 31, 2016 from $254.0 million at December 31, 2015, due primarily to increases in commercial real estate loans, non-residential construction loans, commercial business loans and residential mortgage loans, partially offset by a decrease in home equity loans and lines of credit. Residential mortgage loans increased $3.7 million, or 4.3%, to $90.2 million at December 31, 2016 from $86.5 million at December 31, 2015. Home equity loans and lines of credit decreased $2.4 million, or 13.1%, to $15.9 million at December 31, 2016 from $18.3 million at December 31, 2015. Our primary emphasis continues to be the origination of commercial loans. Despite the current competitive market, we have decided to maintain our historically high underwriting standards instead of relaxing these standards, and we have not reduced loan rates below levels at which we could not operate profitably. Commercial loans collateralized by one- to four-family investment properties decreased $2.2 million, or 14.2%, to $13.1 million at December 31, 2016 from $15.3 million at December 31, 2015.  Commercial real estate loans increased $16.4 million, or 24.5%, to $83.6 million at December 31, 2016 from $67.2 million at December 31, 2015. Commercial business loans increased $3.1 million, or 17.8%, to $20.7 million at December 31, 2016 from $17.5 million at December 31, 2015. One- to four-family construction loans decreased $368,000, or 2.8%, to $12.6 million at December 31, 2016 from $13.0 million at December 31, 2015. Multi-family construction loans increased $4.2 million, or 285.3%, to $5.7 million at December 31, 2016 from $1.5 million at December 31, 2015. Non-residential construction loans increased $905,000, or 15.3%, to $6.8 million at December 31, 2016 from $5.9 million at December 31, 2015. The majority of our construction loans remain collateralized by residential real estate (71.1% at December 31, 2016 and 70.7% at December 31, 2015).

Deposits increased $32.8 million, or 15.8%, to $240.5 million at December 31, 2016 from $207.7 million at December 31, 2015. The increase was primarily due to increases in certificates of deposit, money market deposits, demand deposits and NOW accounts. Demand deposits increased $3.1 million, or 11.0%.  NOW accounts increased $2.8 million, or 9.2%. Money market deposits increased $4.6 million, or 7.5%. The increases in demand deposits, NOW accounts and money market deposits resulted from business and consumer deposit products established in 2015, which reflects our continued strategic focus on generating lower-costing deposits. Certificates of deposit increased $21.2 million, or 29.3%, reflecting a $28.0 million, or 70.0% increase in retail certificates of deposit, a $498,000, or 17.6%, increase in brokered certificate accounts and a $7.3 million, or 24.8%, decrease in funds gathered through the use of a listing service. The increase in retail certificates of deposit was achieved primarily through the use of promotional rates in an effort to reduce our loan to deposit ratio. The weighted average rate and maturity term of listing service certificates of deposit at December 31, 2016 was 1.39% and 40.2 months, respectively, compared to 1.31% and 38.7 months, respectively, at December 31, 2015.

Total FHLB advances decreased $8.8 million, or 17.3%, to $41.9 million at December 31, 2016 compared to $50.6 million at December 31, 2015. Short-term FHLB advances totaled $17.5 million with an original maturity of nine-months or less, compared to $23.5 million at December 31, 2015. Long-term FHLB advances totaled $24.6 million with an original maturity of greater than nine-months, compared to $27.1 million at December 31, 2015.

Stockholders’ equity increased $248,000, or 0.8%, to $32.2 million at December 31, 2016. The increase resulted primarily from the net increase in additional paid in capital (“APIC”) and $562,000 related to equity benefit plans and net income of $194,000, partially offset by $87,000 in other comprehensive loss, the cost of  shares repurchased to pay the tax liability for vesting restricted shares and by dividend payments. There were 3,818 shares

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repurchased at an average price of $19.40 totaling $74,000 during the year ended December 31, 2016. Dividend payments totaled $347,000 for the year ended December 31, 2016. Other comprehensive loss of $87,000 reflects the change in net unrealized gains/losses on securities available for sale, net of taxes, from a net unrealized gain of $45,000 at December 31, 2015 to a net unrealized loss of $42,000 at December 31, 2016. The decrease in unrealized gains on securities available for sale was attributable to changes in market interest rates.

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

General. Net income decreased $1.3 million, or 87.2%, to $194,000 for the year ended December 31, 2016 from $1.5 million for the year ended December 31, 2015. The decrease in net income was primarily due to a $1.9 million, or 21.3% increase in non-interest expense and a $184,000 decrease in non-interest income, partially offset by an increase in net interest and dividend income of $192,000.

Interest and Dividend Income. Interest and dividend income increased $934,000, or 7.9%, to $12.8 million for the year ended December 31, 2016, primarily due to an increase in interest income on loans. Interest income on loans increased $909,000, or 8.0%, to $12.2 million for the year ended December 31, 2016, due to a $25.2 million, or 10.5%, increase in the average balance of loans, partially offset by an 11 basis point decrease in yield to 4.58% for the year ended December 31, 2016 from 4.69% for the year ended December 31, 2015.

Interest and dividend income on investment securities increased $14,000, or 2.4% to $590,000 for the year ended December 31, 2016, due to a $1.1 million, or 4.8%, increase in the average balance of investment securities for the year ended December 31, 2016, partially offset by a five basis point decrease in yield to 2.37% for the year ended December 31, 2016 from 2.42% for the year ended December 31, 2015. Interest income on short-term investment securities increased $11,000, or 137.5%, to $19,000 for the year ended December 31, 2016, primarily due to a 23 basis point increase in yield to 0.39% for the year ended December 31, 2016 from 0.16% for the year ended December 31, 2015, partially offset by a $171,000, or 3.4%, decrease in the average balance of short-term investments.

Interest Expense. Interest expense increased $742,000, or 43.0%, to $2.5 million for the year ended December 31, 2016 from $1.7 million for the year ended December 31, 2015. We experienced an increase in interest expense on deposits and a decrease in interest expense on FHLB advances. Interest expense on deposits increased $795,000, or 73.7%, to $1.9 million for the year ended December 31, 2016 from $1.1 million for the year ended December 31, 2015, due to an increase in rates we paid on interest-bearing deposits, as well as an increase in the average balance of deposits.  The increase in interest expense on deposits was primarily related to certificates of deposit, as promotional rates were offered during most of the first quarter of 2016.  The average rate we paid on interest-bearing deposits increased to 0.92% for the year ended December 31, 2016 compared to 0.65% for the year ended December 31, 2015. The average balance of interest-bearing deposits increased $36.6 million, or 22.0%, to $203.2 million for the year ended December 31, 2016 from $166.6 million for the year ended December 31, 2015.

Interest expense on FHLB advances decreased $53,000, or 8.2%, to $594,000 for the year ended December 31, 2016 from $647,000 for the year ended December 31, 2015. The decrease was primarily due to a $13.4 million, or 26.8%, decrease in the average balance of FHLB advances to $36.8 million for the year ended December 31, 2016 from $50.2 million for the year ended December 31, 2015, partially offset by a 32 basis point increase in the average rate we paid on FHLB advances to 1.61% for the year ended December 31, 2016 compared to 1.29% for the year ended December 31, 2015

Net Interest and Dividend Income. Net interest and dividend income increased $192,000, or 1.9%, to $10.3 million for the year ended December 31, 2016. The increase in net interest income was primarily the result of a $2.9 million, or 5.6%, increase in net average interest-earning assets to $55.9 million for the year ended December 31, 2016, from $53.0 million for 2015, partially offset by a 27 basis point decrease in net interest margin to 3.49% for the year ended December 31, 2016, from 3.76% for the year ended December 31, 2015. Our net interest margin may compress in the future due to competitive pricing in our market area and increases in interest rates.

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses quarterly, management analyzes several qualitative loan portfolio risk factors including but not limited to, charge-off history over a relevant period, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry

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concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. After an evaluation of these factors, we recorded a $194,000 provision for loan losses for the year ended December 31, 2016, as compared to a $200,000 provision for loan losses for the year ended December 31, 2015. We recorded $3,000 in loan charge-offs and $6,000 in loan recoveries during the year ended December 31, 2016 compared to $26,000 in loan charge-offs and $5,000 in loan recoveries during the year ended December 31, 2015. The allowance for loan losses was $2.6 million, or 0.93% of total loans and 273.35% of non-performing loans, at December 31, 2016, compared to an allowance for loan losses of $2.4 million, or 0.94% of total loans and 310.31% of non-performing loans, at December 31, 2015. See Note 6 of the Notes to the Consolidated Financial Statements for additional information.

The composition of our loan portfolio has changed in recent years to include more multi-family, commercial real estate and commercial business loans. In addition, we intend to emphasize increased originations of these loans. Management’s evaluation of the allowance for loan losses, the composition of the loan portfolio and increased risk associated with multi-family, commercial real estate and commercial business loans (because they present larger non-homogeneous credits and because they may be more sensitive to changes in economic conditions) may result in continued larger additions to the allowance for loan losses in future periods.

To the best of our knowledge, we have recorded all losses that are both probable and reasonable to estimate at December 31, 2016 and 2015. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provisions for loan losses. In addition, the OCC, as an integral part of its examination process, will periodically review our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance, based on its judgments about information available to it at the time of its examination.

Non-interest Income.  Non-interest income decreased $184,000, or 15.5%, to $1.0 million for the year ended December 31, 2016 from $1.2 million for the year ended December 31, 2015, primarily due to an decrease in the gain on sale of SBA loans, the gain on sale of securities and customer service fees, partially offset by an increase in mortgage banking income. The Company had one SBA loan sale with a related gain of $15,000 for the year ended December 31, 2016, compared to five SBA loan sales totaling $116,000, reflecting the Company’s primary focus on other market opportunities in 2016. The Company did not sell any securities during the year ended December 31, 2016, compared to the sale of three mortgage backed securities at a $60,000 net gain on the sale of securities during the year ended December 31, 2015. Income from customer service fees decreased $42,000, or 5.7%, to $689,000 for the year ended December 31, 2016 from $731,000 for the year ended December 31, 2015. The decrease was primarily from the Company’s retail customer base. Mortgage banking income increased $12,000, or 8.4%, to $155,000 for the year ended December 31, 2016 from $143,000 for the year ended December 31, 2015 primarily due to a higher level of mortgage loan activity.

Non-interest Expense. Non-interest expense increased $1.9 million, or 21.3%, to $10.5 million for the year ended December 31, 2016 from $8.7 million for the year ended December 31, 2015. Salaries and benefits expense increased $793,000, or 16.3%, primarily due to the costs associated with an increase in commercial lending support and regulatory compliance staff. Expenses associated with our announced merger with Salem Five totaled $499,000 during the year ended December 31, 2016, of which $490,000 were not deductible for income tax purposes. Professional fees increased $358,000, or 67.5%, primarily due to the expenses associated with enhancements to our regulatory compliance staff and compliance programs. Other general and administrative expenses increased $141,000, or 14.9%, due primarily to recruitment fees associated with the commercial lending staff and costs associated with XBRL.

Income Tax Expense. The income before income taxes of $611,000 resulted in income tax expense of $417,000 for the year ended December 31, 2016, compared to income before income taxes of $2.4 million in 2015, resulting in an income tax expense of $931,000 for the year ended December 31, 2015. The effective income tax rate was 68.2% for the year ended December 31, 2016 compared to 38.0% for the year ended December 31, 2015. The increase in the effective tax rate was primarily due to $490,000 of merger related expenses that were not deductible for income tax purposes. See Note 10 of the Notes to the consolidated financial statements for additional information.

Average Balance Sheet

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Information for all years presented include a tax-equivalent adjustment on investment

56

securities. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and costs, and discounts and premiums that are amortized or accreted to interest income or expense.

	Year Ended December 31,
	2016						2015						2014
	Average						Average						Average
	Outstanding				Yield/		Outstanding				Yield/		Outstanding				Yield/
	Balance		Interest (1)		Rate (1)		Balance		Interest (1)		Rate (1)		Balance		Interest (1)		Rate (1)
	(Dollars in thousands)
Interest-earning assets:
Loans (2)	$	266,183	$	12,201	4.58	%	$	240,984	$	11,292	4.69	%	$	230,385	$	10,592	4.60	%
Investment securities (1)		24,924		629	2.52	%		23,773		606	2.55	%		23,306		606	2.60	%
Short-term investments		4,849		19	0.39	%		5,020		8	0.16	%		3,524		6	0.17	%
Total interest-earning assets		295,956		12,849	4.34	%		269,777		11,906	4.41	%		257,215		11,204	4.36	%
Non-interest-earning assets		8,879		—				8,329		—				9,127		—
Total assets	$	304,835		12,849			$	278,106		11,906			$	266,342		11,204
Interest-bearing liabilities:
Savings deposits	$	16,231		3	0.02	%	$	15,023		3	0.02	%	$	14,177		3	0.02	%
NOW accounts		32,223		92	0.29	%		30,779		83	0.27	%		29,887		56	0.19	%
Money market accounts		62,884		368	0.59	%		59,601		274	0.46	%		47,591		105	0.22	%
Certificates of deposit		91,888		1,411	1.54	%		61,197		719	1.17	%		63,430		674	1.06	%
Total interest-bearing deposits		203,226		1,874	0.92	%		166,600		1,079	0.65	%		155,085		838	0.54	%
FHLB advances		36,785		594	1.61	%		50,222		647	1.29	%		53,992		610	1.13	%
Total interest-bearing liabilities		240,011		2,468	1.03	%		216,822		1,726	0.80	%		209,077		1,448	0.69	%
Non-interest-bearing liabilities:
Demand deposits		30,148						27,600						25,002
Other non-interest-bearing liabilities		3,607						3,299						3,051
Total liabilities		273,766						247,721						237,130
Stockholders’ equity		31,069						30,385						29,212
Total liabilities and stockholders’ equity	$	304,835					$	278,106					$	266,342
Net interest-earning assets (3)	$	55,945					$	52,955					$	48,138
Fully tax-equivalent net interest income				10,381						10,180						9,756
Less: tax-equivalent adjustments				(39)						(30)						(30)
Net interest income			$	10,342					$	10,150					$	9,726
Net interest rate spread (1)(4)					3.31	%					3.61	%					3.67	%
Net interest margin (1)(5)					3.51	%					3.77	%					3.79	%
Average of interest-earning assets to interest-bearing liabilities					123.31	%					124.42	%					123.02	%

(1) For the years ended December 31, 2016, 2015 and 2014, interest and yield on investment securities, interest rate spread and net interest margin, are presented on a tax-equivalent basis using a tax rate of 34%. Tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of income. For the years ended December 31, 2016, 2015 and 2014, the yield on investment securities before tax-equivalent adjustments was 2.37%,  2.42% and 2.47%, respectively, and the yield on total interest-earning assets was 4.33%, 4.40% and 4.34%, respectively. Net interest rate spread before tax-equivalent adjustments for the years ended December 31, 2016, 2015 and 2014 was 3.30%, 3.60% and 3.65%, respectively, while net interest margin before tax-equivalent adjustments was 3.49%, 3.76% and 3.78%, respectively.

(2) Includes loans held for sale.

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

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

(5) Net interest margin represents net interest income divided by average total interest-earning assets.

57

Rate/Volume Analysis

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

	Years Ended December 31,
	2016 vs.2015						2015 vs.2014
	Increase (Decrease) Due to						Increase (Decrease) Due to
	Volume		Rate		Net		Volume		Rate		Net
	(In thousands)
Interest-earning assets:
Loans	$	1,181	$	(272)	$	909	$	487	$	213	$	700
Investment securities (1)		29		(6)		23		12		(12)		—
Short-term investments		—		11		11		3		(1)		2
Total interest-earning assets		1,210		(267)		943		502		200		702
Interest-bearing liabilities:
Savings deposits		—		—		—		—		—		—
NOW accounts		4		5		9		2		25		27
Money market accounts		15		79		94		26		143		169
Certificates of deposit		361		331		692		(24)		69		45
Total interest-bearing deposits		380		415		795		4		237		241
FHLB advances		(173)		120		(53)		(43)		80		37
Total interest-bearing liabilities		207		535		742		(39)		317		278
Change in net interest income	$	1,003	$	(802)	$	201	$	541	$	(117)	$	424

(1) Municipal securities income and net interest income are presented on a tax-equivalent basis using a tax rate of 34% resulting in an adjustment of $39,000 for the year ended December 31, 2016 and $30,000 for the years ended December 31, 2015 and 2014.

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established a Finance Committee, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and the Finance Committee meets on a regular basis to review our asset/liability policies and position, interest rate risk position and to discuss and implement interest rate risk strategies.

58

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk: (1) offering a variety of adjustable rate loan products, including adjustable rate one- to four-family, multi-family and non-residential mortgage loans, and short-term consumer loans; (2) offering shorter-term fixed-rate mortgage loans; (3) using alternative funding sources, such as advances from the FHLB and deposit listing services; and (4) deposit pricing strategies and short duration investments. By following these strategies, we believe that we are better positioned to react to changes in market interest rates.

Net Interest Income Simulation. Interest rate risk can result from timing differences in the maturity/repricing of an institution’s assets, liabilities and off-balance sheet contracts; the effect of embedded options, such as call or convertible options, loan prepayments, interest rate caps, and deposit withdrawals; unexpected shifts of the yield curve that affect both the slope and shape of the yield curve and differences in the behavior of lending and funding rates, sometimes referred to as basis risk. Given the potential types and differing related characteristics of interest rate risk, it is important that we maintain an appropriate process and set of measurement tools, which enables us to identify and quantify our sources of interest rate risk. Our primary tool in measuring interest rate risk in this manner is an income simulation model. This model measures the net interest income at risk under various interest rate scenarios. At December 31, 2016 and 2015, net interest income was measured assuming market interest rates remain unchanged, where rates increased 300 basis points and where rates decreased 100 basis points from current market rates over a one-year time horizon. The changes in net interest income due to changes in market interest rates reflect the rate sensitivity of our interest-bearing assets and liabilities.

The following table presents the estimated changes in net interest income of Georgetown Bank, calculated on a bank-only basis that would result from changes in market interest rates over twelve-month periods beginning December 31, 2016 and 2015:

	At December 31,
Changes in	2016				2015
Interest Rates	Net Interest				Net Interest
(Basis Points)	Income		% Change		Income		% Change
	(Dollars in thousands)
300	$	9,855	(7.0)	%	$	9,659	(5.3)	%
0	$	10,593	—		$	10,195	—
(100)	$	10,460	(1.3)	%	$	10,070	(1.2)	%

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net interest income simulation requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income simulation table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net interest income simulation table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of loans and securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities,

59

and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2016, cash and cash equivalents totaled $6.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $19.8 million at December 31, 2016. In addition, at December 31, 2016, we had the ability to borrow a total of approximately $89.3 million from the FHLB. On that date, we had $41.9 million in advances outstanding.

We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the FHLB.

At December 31, 2016 and 2015, we had $7.9 million and $16.3 million in commitments to originate loans outstanding, respectively. In addition to commitments to originate loans, at December 31, 2016 and 2015, we had $50.3 million and $41.6 million in unadvanced funds to borrowers, respectively. We also had $227,000 and $62,000 in outstanding letters of credit at December 31, 2016 and 2015, respectively.

 Certificates of deposit due within one year of December 31, 2016 totaled $35.6 million, or 14.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit at December 31, 2016. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of securities. During the year ended December 31, 2016, we originated $84.8 million of loans, including $83.9 million of loans to be held in our portfolio, purchased $20.2 million in residential loans and purchased $7.1 million of securities. During the year ended December 31, 2015, we originated $81.1 million of loans, including $79.7 million of loans to be held in our portfolio, purchased $12.3 million in residential loans and purchased $3.1 million of securities.

Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced a net increase in total deposits of $32.8 million and $25.4 million for the years ended December 31, 2016 and 2015, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. FHLB advances reflected a net decrease of $8.7 million and $4.0 million during the years ended December 31, 2016 and 2015, respectively. FHLB advances have primarily been used to fund loan demand and purchase securities during periods of lower liquidity.

Capital

Georgetown Bank is subject to various regulatory capital requirements administered by the OCC, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2016, Georgetown Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 11 of the Notes to the Consolidated Financial Statements for additional information.

Off-Balance Sheet Arrangements and Contractual Obligations

Georgetown Bank is a 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 extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance

60

sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as 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 commitments for all lines of credit may expire without being drawn upon, therefore, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s credit worthiness on a case-by-case basis. Substantially all of these financial instruments, except for unadvanced lines of credit on unsecured personal loans and commercial lines of credit, are secured by real estate.

Standby letters of credit are conditional commitments we issue to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Our outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, we may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, we may take possession of the collateral, if any, securing the line of credit.

In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities, agreements with respect to investments and employment agreements with certain of our executive officers. See Note 13 of the Notes to the Company’s Consolidated Financial Statements for additional information.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements that are applicable to the Company, please see Note 2 of the Notes to the Company’s Consolidated Financial Statements.

Effect of Inflation and Changing Prices

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

ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk

See “ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations — Management of Market Risk.”.

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ITEM 8.    Financial Statements and Supplementary Data

GEORGETOWN BANCORP, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Income	F-4
Consolidated Statements of Comprehensive Income	F-5
Consolidated Statements of Changes in Stockholders’ Equity	F-6
Consolidated Statements of Cash Flows	F-7 to F-8
Notes to Consolidated Financial Statements	F-9 to F-50

F-1

To the Board of Directors and Stockholders

Georgetown Bancorp, Inc.

Georgetown, Massachusetts

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

As discussed in Note 18 to the consolidated financial statements, the Company entered into an Agreement and Plan of Merger on October 5, 2016 whereby the Company will merge with and into another financial institution.  Our opinion is not modified with respect to this matter.

/s/ Baker Newman & Noyes LLC

Peabody, Massachusetts

March 30, 2017

F-2

GEORGETOWN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

At December 31, 2016 and 2015

	December 31,
	2016		2015
	(In thousands, except share data)
ASSETS
Cash and due from banks	$	2,945	$	1,927
Short-term investments		3,184		5,831
Total cash and cash equivalents		6,129		7,758
Securities available for sale, at fair value		19,772		19,028
Securities held to maturity, at amortized cost (fair value of $2,490 at December 31, 2016 and $3,128 at December 31, 2015)		2,503		3,112
Federal Home Loan Bank stock, at cost		2,341		2,933
Bankers Bank Northeast stock, at cost		60		60
Loans held for sale		271		—
Loans, net of allowance for loan losses of $2,605 at December 31, 2016 and $2,408 at December 31, 2015		277,371		253,983
Premises and equipment, net		4,133		3,837
Accrued interest receivable		816		799
Bank-owned life insurance		3,206		3,101
Other assets		2,030		1,891
Total assets	$	318,632	$	296,502
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	240,508	$	207,726
Short-term Federal Home Loan Bank advances		17,250		23,500
Long-term Federal Home Loan Bank advances		24,600		27,100
Mortgagors’ escrow accounts		1,633		1,386
Due to broker for investment purchase		—		2,505
Accrued expenses and other liabilities		2,485		2,377
Total liabilities		286,476		264,594
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value per share: 50,000,000 shares authorized at December 31, 2016 and December 31, 2015; none outstanding		—		—
Common stock, $0.01 par value per share: 100,000,000 shares authorized, 1,840,920 shares issued at December 31, 2016 and 1,828,238 shares issued at December 31, 2015		18		18
Additional paid-in capital		19,871		19,402
Retained earnings		13,635		13,788
Accumulated other comprehensive (loss) income		(41)		46
Unearned compensation - ESOP (72,405 shares unallocated at December 31, 2016 and 79,645 shares unallocated at December 31, 2015)		(753)		(835)
Unearned compensation - Restricted stock (46,449 shares non-vested at December 31, 2016 and 44,866 shares non-vested at December 31, 2015)		(574)		(511)
Total stockholders’ equity		32,156		31,908
Total liabilities and stockholders’ equity	$	318,632	$	296,502

See accompanying notes to consolidated financial statements.

F-3

GEORGETOWN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2016 and 2015

	2016		2015
	(In thousands, except share data)
Interest and dividend income:
Loans, including fees	$	12,201	$	11,292
Securities		590		576
Short-term investments		19		8
Total interest and dividend income		12,810		11,876
Interest expense:
Deposits		1,874		1,079
Short-term Federal Home Loan Bank advances		56		55
Long-term Federal Home Loan Bank advances		538		592
Total interest expense		2,468		1,726
Net interest and dividend income		10,342		10,150
Provision for loan losses		194		200
Net interest and dividend income, after provision for loan losses		10,148		9,950
Non-interest income:
Customer service fees		689		731
Mortgage banking income, net		155		143
Gain on sale of SBA loans		15		116
Income from bank-owned life insurance		105		102
Net gain on sale of securities		—		60
Other		41		37
Total non-interest income		1,005		1,189
Non-interest expenses:
Salaries and employee benefits		5,667		4,874
Occupancy and equipment expenses		1,031		1,055
Data processing expenses		687		623
Professional fees		888		530
Merger related expenses		499		—
Advertising expenses		354		373
FDIC insurance		189		165
ATM service charge expenses		142		126
Other general and administrative expenses		1,085		944
Total non-interest expenses		10,542		8,690
Income before income taxes		611		2,449
Income tax provision		417		931
Net income	$	194	$	1,518
Weighted-average number of common shares outstanding:
Basic		1,762,778		1,748,093
Diluted		1,779,672		1,756,819
Net income per share:
Basic	$	0.11	$	0.87
Diluted	$	0.11	$	0.86
Dividends paid per share	$	0.1975	$	0.185

See accompanying notes to consolidated financial statements.

F-4

GEORGETOWN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2016 and 2015

	2016		2015
	(In thousands)
Net income	$	194	$	1,518
Net unrealized loss on securities available for sale		(137)		(128)
Reclassification adjustment for gain realized in income (1)		—		(21)
Net unrealized loss on securities available for sale		(137)		(149)
Income tax benefit		50		52
Other comprehensive loss, net of tax		(87)		(97)
Comprehensive income	$	107	$	1,421

See accompanying notes to consolidated financial statements.

(1) Amounts are included in net gain on sale of securities in the Consolidated Statements of Income.  Provision for income tax associated with the reclassification adjustment for the year ended December 31, 2015 was $7,000 and is included in the income tax provision in the Consolidated Statements of Income.

F-5

GEORGETOWN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2016 and 2015

							Accumulated
			Additional				Other		Unearned		Unearned
	Common		Paid-in		Retained		Comprehensive		Compensation-		Compensation-
	Stock		Capital		Earnings		(Loss) Income		ESOP		Restricted Stock		Total
	(In thousands)
Balance at December 31, 2014	$	18	$	19,245	$	12,593	$	143	$	(918)	$	(369)	$	30,712
Net income		—		—		1,518		—		—		—		1,518
Other comprehensive loss		—		—		—		(97)		—		—		(97)
Cash dividends paid ($0.185 per share)		—		—		(323)		—		—		—		(323)
Repurchased stock related to buyback program (17,000 shares)		—		(315)		—		—		—		—		(315)
Common stock held by ESOP allocated or committed to be allocated (7,241 shares)		—		49		—		—		83		—		132
Restricted stock granted in connection with equity incentive plan (20,000 shares)		—		351		—		—		—		(351)		—
Purchased stock related to vested restricted stock (3,091 shares)		—		(54)		—		—		—		—		(54)
Exercise of stock options (1,198 shares)		—		11		—		—		—		—		11
Share based compensation - options		—		90		—		—		—		—		90
Share based compensation - restricted stock		—		—		—		—		—		209		209
Excess tax benefit from share-based compensation		—		25		—		—		—		—		25
Balance at December 31, 2015	$	18	$	19,402	$	13,788	$	46	$	(835)	$	(511)	$	31,908
Net income		—		—		194		—		—		—		194
Other comprehensive loss		—		—		—		(87)		—		—		(87)
Cash dividends paid ($0.1975 per share)		—		—		(347)		—		—		—		(347)
Common stock held by ESOP allocated or committed to be allocated (7,240 shares)		—		73		—		—		82		—		155
Restricted stock granted in connection with equity incentive plan (16,500 shares)		—		320		—		—		—		(320)		—
Purchased stock related to vested restricted stock (3,818 shares)		—		(74)		—		—		—		—		(74)
Share based compensation - options		—		124		—		—		—		—		124
Share based compensation - restricted stock		—		—		—		—		—		257		257
Excess tax benefit from share-based compensation		—		26		—		—		—		—		26
Balance at December 31, 2016	$	18	$	19,871	$	13,635	$	(41)	$	(753)	$	(574)	$	32,156

See accompanying notes to consolidated financial statements.

F-6

GEORGETOWN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2016 and 2015

	2016		2015
	(In thousands)
Cash flows from operating activities:
Net income	$	194	$	1,518
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		194		200
Amortization of securities, net		147		128
Net change in deferred loan fees and costs		(107)		2
Depreciation and amortization expense		422		385
Increase in accrued interest receivable		(17)		(47)
Income from bank-owned life insurance		(105)		(102)
Stock-based compensation expense		536		431
Excess tax benefit on share-based compensation		(26)		(25)
Gain on sale of loans		(23)		(153)
Loans originated for sale		(911)		(2,964)
Proceeds from sales of loans		663		4,107
Gain on sale of securities available for sale		—		(21)
Gain on sale of securities held to maturity		—		(39)
Net change in other assets and liabilities		45		1,382
Net cash provided by operating activities		1,012		4,802
Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls		3,538		2,580
Purchases		(4,561)		(2,544)
Proceeds from sale of securities		—		204
Activity in securities held to maturity:
Maturities, prepayments and calls		593		181
Purchases		(2,494)		(573)
Proceeds from sale of securities		—		663
Purchase of Federal Home Loan Bank stock		(330)		(26)
Redemption of Federal Home Loan Bank stock		922		—
Purchase of Bankers Bank Northeast stock		—		(60)
Loan originations, net		(3,229)		(10,542)
Principal balance of loans purchased		(20,246)		(12,350)
Purchase of premises and equipment		(718)		(480)
Proceeds from sale of premises and equipment		—		77
Net cash used by investing activities		(26,525)		(22,870)

(continued)

See accompanying notes to consolidated financial statements.

F-7

GEORGETOWN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

Years Ended December 31,  and 2015

	2016		2015
	(In thousands)
Cash flows from financing activities:
Net change in deposits		32,782		25,372
Net change in Federal Home Loan Bank advances with maturities of three months or less		(6,750)		(6,500)
Proceeds from Federal Home Loan Bank advances with maturities greater than three months		3,500		5,000
Repayments of Federal Home Loan Bank advances with maturities greater than three months		(5,500)		(2,500)
Net change in mortgagors’ escrow accounts		247		192
Repurchase of common stock		(74)		(369)
Cash dividends paid on common stock		(347)		(323)
Exercise of stock options		—		11
Excess tax benefit on share-based compensation		26		25
Net cash provided by financing activities		23,884		20,908
Net change in cash and cash equivalents		(1,629)		2,840
Cash and cash equivalents at beginning of period		7,758		4,918
Cash and cash equivalents at end of period	$	6,129	$	7,758
Supplementary information:
Interest paid on deposit accounts	$	1,868	$	1,076
Interest paid on advances		601		643
Income taxes paid		647		1,266
Change in due to broker for investment purchases		(2,505)		2,505

See accompanying notes to consolidated financial statements.

F-8

GEORGETOWN BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2016 and 2015

1.CORPORATE STRUCTURE

Georgetown Bancorp, Inc. (the “Company”) completed a “second step” conversion to a fully public stock holding company on July 11, 2012. Georgetown Bank (the “Bank”) is a wholly owned subsidiary of the Company. Georgetown Securities Corporation, established in 1995 as a Massachusetts securities corporation for the purpose of buying, selling and holding securities on its own behalf, is a wholly owned subsidiary of the Bank.

On October 5, 2016, Salem Five Bancorp, a Massachusetts mutual holding company, Bright Star, Inc., a Maryland corporation and wholly-owned subsidiary of Salem Five Bancorp, and the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Bright Star, Inc. will merge with and into the Company.  Consummation of the merger is subject to certain conditions and is expected to occur in the second quarter of 2017.  Immediately following this, the Bank will merge with and into Salem Five Bancorp’s wholly-owned subsidiary, Salem Five Cents Savings Bank (“Salem Five Bank”).  Immediately following the merger of the two banks, the Company shall dissolve and liquidate into Salem Five Bancorp.  Included in these consolidated financial statements is $499,000 or merger related expenses, $490,000 of which were not deductible for income tax purposes.  See Note 18 of the Notes to the Consolidated Financial Statements for additional information.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. The Bank’s financial statements include its wholly-owned subsidiary, Georgetown Securities Corporation, which engages in the buying, selling and holding of securities.  All significant intercompany balances and transactions have been eliminated in consolidation.

Nature of operations

The Company, through the Bank, provides a variety of financial services to individuals and small businesses in the eastern Massachusetts region and southern New Hampshire.  Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgage loans.

Segment reporting

Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. Management evaluates the Company’s performance and allocates resources based on a single segment concept.  Accordingly, there are no separately identified operating segments for which discrete financial information is available.  The Company does not derive revenues from, or have assets located in, foreign countries, nor does it derive revenues from any single customer that represents 10% or more of the Company’s total revenues.

Use of estimates

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates. 

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Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the realizability of deferred tax assets.

Fair value hierarchy

The Company groups its assets and 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, as follows:

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities.  Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market.

Level 2 - Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Reclassifications

Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation.

Cash and cash equivalents

Cash and cash equivalents include cash, amounts due from banks and short-term investments, all of which mature within 90 days, and are carried at cost.

Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and reflected at amortized cost.  Securities classified as “available for sale” are reflected at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income/loss, net of tax effects.

Purchase premiums and discounts are amortized to earnings by the interest method over the contractual lives of the securities. Gains and losses on sale of securities are recognized on the trade date and determined using the specific identification method.

Each reporting period, the Company evaluates all securities classified as available-for-sale or held-to-maturity with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).

For debt securities, OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income (loss), net of applicable taxes.

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Federal Home Loan Bank stock

The Company is required to own shares of capital stock in the Federal Home Loan Bank of Boston (''FHLB'') in order to borrow from the FHLB.  The stock is carried at its cost and evaluated for impairment based on the ultimate recoverability of the cost basis of the FHLB stock.

Loans held for sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate.  Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.  Fair value is based on committed secondary market prices.

Loans

The loan portfolio consists of mortgage, business and consumer loans to the Bank’s customers, principally in the eastern Massachusetts region and southern New Hampshire.  The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses and any deferred fees or costs on originated loans.  Interest income is accrued on the unpaid principal balance.  Loan origination costs, net of origination fees, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on loans, including impaired loans, is generally recognized on a simple interest basis and is generally discontinued at the time the loan is 90 days past due, unless the credit is both well secured and in the process of collection.  Past due status is based on the contractual terms of the loans.  Loans are placed on non-accrual 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 non-accrual 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.

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 monthly basis by management and is based upon management’s monthly review of the collectability of the loans in light of known and inherent risks in 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.  Additionally, as part of the evaluation of the level of the allowance for loan losses, on a quarterly basis, management analyzes several qualitative loan portfolio risk factors including, but not limited to, charge-off history, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance for loan losses consists of specific, general and unallocated components.  The specific component relates to loans that are classified as impaired.  For such loans that are classified as impaired, an allowance for loan losses is established when the discounted cash flows or the fair value of the existing

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collateral (less cost to sell) of the impaired loan are lower than the carrying value of that loan.  The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors.  An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

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

Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.

Loans secured by commercial real estate, multi-family and one- to four-family investment properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate, including multi-family and one- to four-family investment properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value that is insufficient to assure full repayment.

Other real estate owned and in-substance foreclosures

Other real estate owned includes properties acquired through foreclosure and properties classified as in-substance foreclosures in accordance with Accounting Standards Codification (“ASC”) 310-40, “Receivables - Troubled Debt Restructurings by Creditors.”  These properties are initially carried at the estimated fair value less estimated costs to sell at the date of foreclosure or transfer, establishing a new cost basis. Subsequent to foreclosure or transfer, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount of fair value less estimated costs to sell.  Any

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writedown from cost to estimated fair value required at the time of foreclosure or classification as in-substance foreclosure is charged to the allowance for loan losses.  Expenses incurred in connection with maintaining these assets, subsequent writedowns and gains or losses recognized upon sale are included in other expense.

The Company classifies commercial loans as in-substance repossessed or foreclosed if the Company receives physical possession of the debtor’s assets regardless of whether formal foreclosure proceedings take place.  An in-substance repossession or foreclosure occurs, and the Bank is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either:  (1) obtaining legal title to the residential real estate property upon completion of a foreclosure; or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.

Loan Servicing

The Bank services mortgage loans for others.  Mortgage servicing assets are initially recognized at fair value, as separate assets when rights are acquired through purchase or through sale of financial assets.  Initial fair value is determined using prices for similar assets with similar characteristics. Capitalized servicing rights are reported in other assets and are amortized into loan servicing fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.  Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost.  Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms.  Fair value is based on a quarterly, third-party valuation model that calculates the present value of estimated future net servicing income.  Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.  Changes in the valuation allowance are reported in mortgage banking income, net.

Derivative financial instruments

Derivative financial instruments are recognized as assets and liabilities on the consolidated balance sheets and measured at fair value.

Derivative Loan Commitments

Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding.  Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheets in other assets and other liabilities with changes in their fair values recorded in mortgage banking income, net. Fair value is determined using secondary market pricing, including expected normal servicing rights. In estimating fair value, the Bank assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded.

Forward Loan Sale Commitments

To protect against the price risk inherent in derivative loan commitments, the Bank utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the value of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments.  Generally, the Bank’s best efforts contracts meet the definition of derivative instruments when the loans to the underlying borrowers close and are accounted for as derivative instruments at that time.  Accordingly, forward loan sale commitments are recognized at fair value on the consolidated balance sheets in other assets and other liabilities with changes in their fair values recorded in mortgage banking income, net.

The Bank estimates the fair value of its forward loan sales commitments using a methodology similar to that used for derivative loan commitments.

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Premises and equipment

Land is carried at cost.  Buildings, leasehold improvements and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets or the expected terms of the leases, if shorter.  Useful lives are dependent upon the nature and condition of the asset and range from 3 to 40 years.  Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured.

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

Bank-owned life insurance

Bank-owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value. Changes in cash surrender value are reflected in non-interest income on the consolidated statements of income.

Transfers of financial assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Income taxes

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.  A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.  Interest and penalties, if any, are recorded in income tax provision.

Income tax benefits related to stock compensation in excess of grant date fair value less any proceeds on exercise are recognized as an increase to additional paid-in capital upon vesting or exercising and delivery of the stock. Any income tax effects related to stock compensation that are less than grant date fair value less any proceeds on exercise would be recognized as a reduction of additional paid in capital to the extent of previously recognized income tax benefits and then through income tax provision for the remaining amount. 

Advertising costs

Advertising costs are expensed when incurred.

Employee Stock Ownership Plan (ESOP)

Compensation expense for the ESOP is recorded at an amount equal to the shares committed to be allocated by the ESOP multiplied by the average fair market value of the shares during the period. The Bank recognizes compensation expense ratably over the year based upon the Bank’s estimate of the number of shares expected to be allocated by the ESOP. Unearned compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity in the consolidated balance sheets. The difference between the average

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fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital.

Share-based Compensation Plans

The Company measures and recognizes compensation cost relating to share-based payment transactions based on the grant-date fair value of the equity instruments issued.  Share-based compensation is recognized over the period the employee is required to provide services for the award.  The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options granted.

Earnings per share

Basic earnings per share represents net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period.  If rights to dividends on unvested options/awards are non-forfeitable, these unvested awards/options are considered outstanding in the computation of basic earnings per share.  Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock awards and are determined using the treasury stock method.

Unallocated ESOP shares are not deemed outstanding for earnings per share calculations.

Earnings per common share have been computed based on the following:

	Years Ended December 31,
	2016		2015
Net income available to common stockholders	$	194,000	$	1,518,000
Basic common shares:
Weighted average shares outstanding		1,792,853		1,787,909
Less: Weighted average unallocated ESOP shares		(76,296)		(83,535)
Add: Weighted average unvested restricted stock shares with non-forfeitable dividend rights		46,221		43,719
Basic weighted average common shares outstanding		1,762,778		1,748,093
Dilutive potential common shares		16,894		8,726
Diluted weighted average common shares outstanding		1,779,672		1,756,819
Basic earnings per share	$	0.11	$	0.87
Diluted earnings per share	$	0.11	$	0.86

Options to purchase 122,775 shares, representing all outstanding options, were included in the computation of diluted earnings per share for the year ended December 31, 2016. Options to purchase 89,725 shares, representing all outstanding options, were included in the computation of diluted earnings per share for the year ended December 31, 2015.

Comprehensive income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in operating results.  Although certain changes in assets and liabilities, such as unrealized gains and losses on

F-15

securities available for sale, 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.

Recent accounting pronouncements

In May 2014 and August 2015, respectively, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 and 2015-14, “Revenue from Contracts with Customers (Topic 606).” The objective of ASU 2014-09 is to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The guidance in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, and interim periods within that period. Earlier application is permitted only as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently reviewing ASUs 2014-09 and 2015-14 to determine if they will have an impact on its consolidated financial statements.

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

1. 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, an 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 issuer.

2. Simplify the impairment assessment of equity investments without readily 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.

5. Require 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.

6. Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (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.

The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of item 5 above is permitted as of the fiscal years or interim periods for which financial statements have not yet been issued.  Early adoption of all other amendments in this ASU is not permitted.  The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

F-16

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 public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “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. Under this ASU, 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. The guidance will 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 permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company is currently evaluating the provisions of ASU 2016-09 to determine the potential impact the new standard will have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.”  This ASU includes provisions intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by the entity.  In order to achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to inform credit loss estimates.  ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019.  Early adoption is permitted in interim and annual reporting periods beginning after December 15, 2018.  Any increase in the allowance for loan losses or expenses incurred to determine the appropriate level of allowance for loan losses may have a material adverse effect on the Company’s financial condition and results of operations. The Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on its consolidated financial statements.

3.RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

The Bank is required to maintain average balances of cash on hand or with the Federal Reserve Bank.  At December 31, 2016 and 2015, these reserve balances amounted to $1,413,000 and $1,373,000, respectively.

F-17

4.SHORT-TERM INVESTMENTS

A summary of short-term investments, included in cash and cash equivalents, is as follows:

	At December 31,
	2016		2015
	(In thousands)
FHLB Ideal Way	$	1,181	$	3,566
Federal Reserve		1,003		1,191
Federal funds sold		1,000		1,074
Total short-term investments	$	3,184	$	5,831

F-18

5.SECURITIES

A summary of securities is as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
At December 31, 2016
Securities available for sale
State and municipal	$	2,362	$	27	$	(4)	$	2,385
Residential mortgage-backed securities		17,472		57		(142)		17,387
Total securities available for sale	$	19,834	$	84	$	(146)	$	19,772
Securities held to maturity
State and municipal	$	570	$	—	$	(5)	$	565
Residential mortgage-backed securities		1,933		3		(11)		1,925
Total securities held to maturity	$	2,503	$	3	$	(16)	$	2,490
At December 31, 2015
Securities available for sale
State and municipal	$	2,410	$	62	$	(2)	$	2,470
Residential mortgage-backed securities		16,543		104		(89)		16,558
Total securities available for sale	$	18,953	$	166	$	(91)	$	19,028
Securities held to maturity
State and municipal	$	573	$	12	$	—	$	585
Residential mortgage-backed securities		2,539		4		—		2,543
Total securities held to maturity	$	3,112	$	16	$	—	$	3,128

All residential mortgage-backed securities have been issued by government-sponsored enterprises and government agencies.

There were no sales of securities for the year ended December 31, 2016.  For the year ended December 31, 2015, proceeds from the sale of securities amounted to $867,000, $204,000 from the sale of securities available for sale and $663,000 from the sale of securities held to maturity. The gain realized on the sales amounted to $60,000, $21,000 from the sale of securities available for sale and $39,000 from the sale of securities held to maturity.  Income tax expense recognized related to the realized gain on sales during the year ended December 31, 2015 was $21,000.  The held to maturity securities sold had a substantial portion, greater than 85%, of their principal balance collected through scheduled payments.  Since a substantial portion of the principal outstanding at acquisition was collected, the sale of the held to maturity securities

F-19

was considered equivalent to holding the securities to maturity, in accordance with ASC 320-10-25, and did not taint the holding of the other held to maturity securities.

The scheduled maturities of debt securities at December 31, 2016 are as follows:

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In thousands)
After five years through ten years	$	528	$	537	$	—	$	—
Over ten years		1,834		1,848		570		565
		2,362		2,385		570		565
Residential mortgage-backed securities		17,472		17,387		1,933		1,925
	$	19,834	$	19,772	$	2,503	$	2,490

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Certain securities are pledged as collateral for FHLB advances.  See Note 9 — Federal Home Loan Bank Advances for further information.

F-20

Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows:

	Less Than Twelve Months				Twelve Months Or Longer
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
	(In thousands)
At December 31, 2016
Securities available for sale
State and municipal	$	(4)	$	512	$	—	$	—
Residential mortgage-backed securities		(142)		8,718		—		—
Total securities available for sale		(146)		9,230		—		—
Securities held to maturity
State and municipal		(5)		565		—		—
Residential mortgage-backed securities		(11)		1,898		—		—
Total securities held to maturity		(16)		2,463		—		—
Total temporarily impaired securities	$	(162)	$	11,693	$	—	$	—
At December 31, 2015
Securities available for sale
State and municipal	$	—	$	—	$	(2)	$	244
Residential mortgage-backed securities		(20)		3,946		(69)		3,229
Total temporarily impaired securities	$	(20)	$	3,946	$	(71)	$	3,473

The unrealized losses on eleven securities in the December 31, 2016 table above were primarily caused by changes in interest rates and not by credit quality.  Seven of the investments are guaranteed by the U.S. Government or its agencies and the four remaining municipal securities were issued by the city of New York, Washington State, and the school districts of Circleville and Fremont, Ohio.  Management has not decided to sell these securities, nor is it likely that the Company will be required to sell the securities; as such no declines are deemed to be other than temporary.

F-21

6.LOANS AND SERVICING

Loans

A summary of loans is as follows:

	At		At
	December 31,		December 31,
	2016		2015
	Amount		Amount
	(In thousands)
Residential loans:
One- to four-family	$	90,190	$	86,472
Home equity loans and lines of credit		15,879		18,263
Total residential mortgage loans		106,069		104,735
Commercial loans:
One- to four-family investment property		13,081		15,255
Multi-family real estate		30,748		30,709
Commercial real estate		83,583		67,152
Commercial business		20,675		17,548
Total commercial loans		148,087		130,664
Construction loans:
One- to four-family		12,599		12,967
Multi-family		5,725		1,486
Non-residential		6,830		5,925
Total construction loans		25,154		20,378
Consumer		182		237
Total loans		279,492		256,014
Other items:
Net deferred loan costs		484		377
Allowance for loan losses		(2,605)		(2,408)
Total loans, net	$	277,371	$	253,983

F-22

Information pertaining to the allowance for loan losses at and for the year ended December 31, 2016 is as follows:

	Residential				Commercial								Construction
					One- to four-
			Home equity		family
	One- to four-		loans and lines		investment		Multi-family		Commercial		Commercial		One- to four-				Non-
	family		of credit		property		real estate		real estate		business		family		Multi-family		residential		Consumer		Unallocated		Total
	(In thousands)
Allowance for loan losses
Beginning Balance	$	197	$	276	$	90	$	233	$	1,021	$	305	$	113	$	12	$	91	$	2	$	68	$	2,408
Charge-offs		—		—		—		—		—		—		—		—		—		(3)		—		(3)
Recoveries		—		2		—		—		—		—		—		—		—		4		—		6
(Benefit) provision		(26)		(40)		(11)		1		241		59		(9)		35		13		(1)		(68)		194
Ending Balance	$	171	$	238	$	79	$	234	$	1,262	$	364	$	104	$	47	$	104	$	2	$	—	$	2,605
Ending balance:
individually evaluated for impairment	$	—	$	—	$	7	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	7
Ending balance:
collectively evaluated for impairment	$	171	$	238	$	72	$	234	$	1,262	$	364	$	104	$	47	$	104	$	2	$	—	$	2,598
Loans
Ending Balance	$	90,190	$	15,879	$	13,081	$	30,748	$	83,583	$	20,675	$	12,599	$	5,725	$	6,830	$	182	$	—	$	279,492
Ending balance:
individually evaluated for impairment	$	1,543	$	143	$	85	$	—	$	281	$	—	$	—	$	—	$	—	$	—	$	—	$	2,052
Ending balance:
collectively evaluated for impairment	$	88,647	$	15,736	$	12,996	$	30,748	$	83,302	$	20,675	$	12,599	$	5,725	$	6,830	$	182	$	—	$	277,440

F-23

Information pertaining to the allowance for loan losses at and for the year ended December 31, 2015 is as follows:

	Residential				Commercial								Construction
					One- to four-
			Home equity		family
	One- to four-		loans and lines		investment		Multi-family		Commercial		Commercial		One- to four-				Non-
	family		of credit		property		real estate		real estate		business		family		Multi-family		residential		Consumer		Unallocated		Total
	(In thousands)
Allowance for loan losses
Beginning Balance	$	273	$	249	$	46	$	113	$	943	$	311	$	117	$	97	$	77	$	3	$	—	$	2,229
Charge-offs		—		—		—		—		—		(22)		—		—		—		(4)		—		(26)
Recoveries		—		1		—		—		—		—		—		—		—		4		—		5
(Benefit) provision		(76)		26		44		120		78		16		(4)		(85)		14		(1)		68		200
Ending Balance	$	197	$	276	$	90	$	233	$	1,021	$	305	$	113	$	12	$	91	$	2	$	68	$	2,408
Ending balance:
individually evaluated for impairment	$	7	$	—	$	7	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	14
Ending balance:
collectively evaluated for impairment	$	190	$	276	$	83	$	233	$	1,021	$	305	$	113	$	12	$	91	$	2	$	68	$	2,394
Loans
Ending Balance	$	86,472	$	18,263	$	15,255	$	30,709	$	67,152	$	17,548	$	12,967	$	1,486	$	5,925	$	237	$	—	$	256,014
Ending balance:
individually evaluated for impairment	$	1,567	$	104	$	88	$	—	$	287	$	—	$	—	$	—	$	—	$	—	$	—	$	2,046
Ending balance:
collectively evaluated for impairment	$	84,905	$	18,159	$	15,167	$	30,709	$	66,865	$	17,548	$	12,967	$	1,486	$	5,925	$	237	$	—	$	253,968

F-24

The following is a summary of past-due and non-accrual loans at December 31, 2016:

	Loans delinquent for:												90 days
					90 days		Total		Total		Total		or more		Non-accrual
	30 - 59 Days		60 - 89 Days		or more		Past Due		Current		Loans		and accruing		Loans
	(In thousands)
Residential loans:
One- to four-family	$	—	$	—	$	755	$	755	$	89,435	$	90,190	$	—	$	755
Home equity loans and lines of credit		191		20		41		252		15,627		15,879		—		198
Commercial loans:
One- to four-family investment property		—		—		—		—		13,081		13,081		—		—
Multi-family real estate		—		—		—		—		30,748		30,748		—		—
Commercial real estate		—		—		—		—		83,583		83,583		—		—
Commercial business		—		—		—		—		20,675		20,675		—		—
Construction loans:
One- to four-family		—		—		—		—		12,599		12,599		—		—
Multi-family		—		—		—		—		5,725		5,725		—		—
Non-residential		—		—		—		—		6,830		6,830		—		—
Consumer		7		3		—		10		172		182		—		—
Total	$	198	$	23	$	796	$	1,017	$	278,475	$	279,492	$	—	$	953

The following is a summary of past-due and non-accrual loans at December 31, 2015:

	Loans delinquent for:												90 days
					90 days		Total		Total		Total		or more		Non-accrual
	30 - 59 Days		60 - 89 Days		or more		Past Due		Current		Loans		and accruing		Loans
	(In thousands)
Residential loans:
One- to four-family	$	—	$	—	$	649	$	649	$	85,823	$	86,472	$	—	$	776
Home equity loans and lines of credit		273		—		—		273		17,990		18,263		—		—
Commercial loans:
One- to four-family investment property		—		—		—		—		15,255		15,255		—		—
Multi-family real estate		—		—		—		—		30,709		30,709		—		—
Commercial real estate		—		—		—		—		67,152		67,152		—		—
Commercial business		12		—		—		12		17,536		17,548		—		—
Construction loans:
One- to four-family		—		—		—		—		12,967		12,967		—		—
Multi-family		—		—		—		—		1,486		1,486		—		—
Non-residential		—		—		—		—		5,925		5,925		—		—
Consumer		—		4		—		4		233		237		—		—
Total	$	285	$	4	$	649	$	938	$	255,076	$	256,014	$	—	$	776

F-25

The following is an analysis of impaired loans at and for the year ending December 31, 2016:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In thousands)
Impaired loans without a valuation allowance
Residential loans:
One- to four-family	$	1,543	$	1,555	$	—	$	1,560	$	42
Home equity loans and lines of credit		143		143		—		109		5
Commercial loans:
One- to four-family investment property		—		—		—		—		—
Multi-family real estate		—		—		—		—		—
Commercial real estate		281		281		—		284		17
Commercial business		—		—		—		—		—
Construction loans:
One- to four-family		—		—		—		—		—
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Consumer		—		—		—		—		—
Total impaired with no related allowance	$	1,967	$	1,979	$	—	$	1,953	$	64
Impaired loans with a valuation allowance
Residential loans:
One- to four-family	$	—	$	—	$	—	$	—	$	—
Home equity loans and lines of credit		—		—		—		—		—
Commercial loans:
One- to four-family investment property		85		85		7		87		4
Multi-family real estate		—		—		—		—		—
Commercial real estate		—		—		—		—		—
Commercial business		—		—		—		—		—
Construction loans:
One- to four-family		—		—		—		—		—
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Consumer		—		—		—		—		—
Total with an allowance recorded	$	85	$	85	$	7	$	87	$	4

No additional funds are committed to be advanced in connection with impaired loans.

F-26

The following is an analysis of impaired loans at and for the year ending December 31, 2015:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In thousands)
Impaired loans without a valuation allowance
Residential loans:
One- to four-family	$	1,255	$	1,255	$	—	$	236	$	12
Home equity loans and lines of credit		104		104		—		51		2
Commercial loans:
One- to four-family investment property		—		—		—		—		—
Multi-family real estate		—		—		—		—		—
Commercial real estate		287		287		—		292		17
Commercial business		—		—		—		74		9
Construction loans:
One- to four-family		—		—		—		—		—
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Consumer		—		—		—		—		—
Total impaired with no related allowance	$	1,646	$	1,646	$	—	$	653	$	40
Impaired loans with a valuation allowance
Residential loans:
One- to four-family	$	312	$	312	$	7	$	314	$	16
Home equity loans and lines of credit		—		—		—		—		—
Commercial loans:
One- to four-family investment property		88		88		7		55		4
Multi-family real estate		—		—		—		—		—
Commercial real estate		—		—		—		—		—
Commercial business		—		—		—		—		—
Construction loans:
One- to four-family		—		—		—		—		—
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Consumer		—		—		—		—		—
Total with an allowance recorded	$	400	$	400	$	14	$	369	$	20

The Company made no loan modifications that resulted in a TDR during the year ended December 31, 2016. As of December 31, 2016 there is no commitment to lend additional funds to those borrowers whose loans were previously modified as TDRs.  The Company had two loan relationships that were classified as TDRs totaling $776,000 during the year ended December 31, 2015. The first relationship involved two commercial business loans totaling $235,000 guaranteed by two individuals. During the year ended December 31, 2015, the business was sold and net proceeds of $100,000 were applied to the outstanding balances leaving a combined deficiency or pre-modification balance of $135,000. The $135,000 balance was modified into two loans held individually by the personal guarantors of the original loans on a pro-rated basis based on their respective ownership percentages. The first loan had a $45,000 balance and the borrower made a $23,000 cash payment and the remaining $22,000 balance was charged off to the allowance for loan losses resulting in a post-modification balance of zero.  The remaining balance was modified into a one- to four-family investment property loan with a post modification balance of $90,000.  The TDR did not result in a material impact to the allowance for loan losses. The second relationship involved a one- to four-family residential loan totaling $606,000 to one individual.   During the year ended

F-27

December 31, 2015, the loan was modified to include a second individual and additional residential collateral was added.  The loan, with a post modification balance of $606,000, was restructured into an interest-only note with maturity in 24 months.  A second loan, an interest-only home equity loan with maturity in 24 months, representing the real estate taxes paid by the Company on behalf of the borrower, was established as part of the Forbearance Agreement. The home equity loan had a post modification balance of $80,000. As part of the Forbearance Agreement, the borrower  1) will be working to develop land for potential sale which is collateralizing the TDR loan and the Company will receive 100% of the net proceeds to pay down the outstanding principal balance of the TDR and/or 2) have the second individual obligor pursue the sale of an additional parcel of land which would significantly reduce the loan balance by maturity.  When the loans mature, any remaining balance due must be paid in full or refinanced at that time.  The TDR did not result in a material impact to the allowance for loan losses. There is no commitment to lend additional funds to the borrowers whose loans were modified during the year ended December 31, 2015.  The TDRs did not result in a material impact to the allowance for loan losses.

At December 31, 2016 and 2015 there were no TDR loans in default of their modified terms.

The Company has two residential loans in the process of foreclosure with a combined recorded balance of $671,000 at December 31, 2016.  There were no loans in process of foreclosure at December 31, 2015.

F-28

The following tables present the Company’s loans by risk rating:

	Residential				Commercial								Construction
					One‑ to four‑
			Home equity		family
	One‑ to four‑		loans and lines		investment		Multi‑family		Commercial		Commercial		One‑ to four‑				Non-
	family		of credit		property		real estate		real estate		business		family		Multi‑family		residential		Consumer		Total
	(In thousands)
At December 31, 2016
Classification:
Not formally rated	$	88,522	$	15,601	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	182	$	104,305
Pass		—		—		12,996		30,748		82,873		20,526		12,599		5,725		6,830		—		172,297
Special mention		—		—		—		—		—		—		—		—		—		—		—
Substandard		1,668		278		85		—		710		149		—		—		—		—		2,890
Doubtful		—		—		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—		—		—
Total loans	$	90,190	$	15,879	$	13,081	$	30,748	$	83,583	$	20,675	$	12,599	$	5,725	$	6,830	$	182	$	279,492
At December 31, 2015
Classification:
Not formally rated	$	84,778	$	18,183	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	237	$	103,198
Pass		—		—		15,167		30,709		66,420		17,454		12,967		1,486		5,925		—		150,128
Special mention		—		—		—		—		732		94		—		—		—		—		826
Substandard		1,694		80		88		—		—		—		—		—		—		—		1,862
Doubtful		—		—		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—		—		—
Total loans	$	86,472	$	18,263	$	15,255	$	30,709	$	67,152	$	17,548	$	12,967	$	1,486	$	5,925	$	237	$	256,014

F-29

Credit Quality Information

The Bank utilizes a nine grade internal loan rating system for all commercial and construction loans as follows:

Loans rated 1 - 5:  Loans in these categories are considered “Pass” rated loans with low to average risk and are not formally rated.

Loans rated 6:  Loans in this category are considered “Special Mention.” These loans have risk profiles that are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 7:  Loans in this category are considered “Substandard.” These loans have a well defined weakness that jeopardizes the liquidation of the debt and is inadequately protected by the current sound worth and paying capacity of the borrower or pledged collateral. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Loans rated 8:  Loans in this category are considered “Doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 9:  Loans in this category are considered a “Loss.” The loan has been determined to be uncollectible and the chance of loss is inevitable. Loans in this category will be charged-off.

On an annual basis, or more often if needed, the Bank formally reviews the ratings on all commercial and construction loans with a one-obligor exposure greater than $350,000.  In addition, a complete financial review is performed for any commercial relationship (regardless of one-obligor exposure) reporting a revolving line of credit facility greater than $150,000.  More frequent reviews shall be performed depending on the quality rating of the relationship. For commercial relationships which report a current one-obligor exposure equal to or less than $350,000, and have a “Pass” risk rating, the annual review shall be more limited in scope.

Loans serviced for others and mortgage servicing rights

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $83,176,000 and $100,544,000 at December 31, 2016 and 2015, respectively.

The risks inherent in the mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The fair value of mortgage servicing rights was $601,000 and $1,100,000 at December 31, 2016 and 2015, respectively, and was determined using the moving average 10-year U.S. Treasury rate plus 5.0%, adjusted to reflect the current credit spreads and conditions in the market, as a discount rate. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a moving average of prepayment data published by the Securities Industry and Financial Markets Association, an independent third party proprietary analysis of prepayment rates embedded in liquid mortgage securities markets and modeled against the serviced loan portfolio by the independent third party valuation specialist.

F-30

The following summarizes mortgage servicing rights capitalized and amortized:

	Year Ended
	December 31,
	2016		2015
	(In thousands)
Mortgage servicing rights:
Balance at beginning of period	$	523	$	840
Additions		—		10
Amortization		(281)		(327)
Balance at end of period		242		523
Valuation allowance:
Balance at beginning of period		4		6
Additions		13		13
Reductions		(11)		(15)
Balance at end of period		6		4
Mortgage servicing rights, net	$	236	$	519
Fair value of mortgage servicing rights	$	601	$	1,100

7.PREMISES AND EQUIPMENT

A summary of premises and equipment is as follows:

	At December 31,
	2016		2015
	(In thousands)
Premises:
Land	$	226	$	226
Buildings and improvements		5,147		5,258
Equipment		2,644		2,568
		8,017		8,052
Less accumulated depreciation and amortization		(3,884)		(4,215)
Premises and equipment, net	$	4,133	$	3,837

Depreciation and amortization expense for the years ended December 31, 2016 and 2015 amounted to $422,000 and $385,000, respectively.

F-31

8.DEPOSITS

A summary of deposit balances is as follows:

	At December 31,
	2016		2015
	(In thousands)
Demand	$	30,773	$	27,718
On us accounts		975		599
NOW		32,810		30,036
Money market deposits		66,256		61,617
Regular and other savings		16,226		15,492
Total non-certificate accounts		147,040		135,462
Term certificates less than $100,000		25,516		17,832
Term certificates of $100,000 or more		67,952		54,432
Total certificate accounts		93,468		72,264
Total deposits	$	240,508	$	207,726

A summary of term certificate accounts by maturity is as follows:

	At December 31,
	2016				2015
			Weighted				Weighted
			Average				Average
	Amount		Rate		Amount		Rate
	(Dollars in thousands)
Within one year	$	35,619	1.30	%	$	22,487	1.02	%
Greater than one year to two years		32,376	1.82	%		22,885	1.36	%
Greater than two years to three years		14,026	1.69	%		18,797	1.78	%
Greater than three years to four years		10,009	1.91	%		6,238	1.64	%
Greater than four years to five years		1,438	2.00	%		1,857	1.74	%
Total certificate accounts	$	93,468	1.62	%	$	72,264	1.40	%

There were $3,326,000 and $2,828,000 of brokered certificate accounts at December 31, 2016 and 2015, respectively.  There were $22,129,000 and $29,437,000 of certificate accounts obtained through a listing service at December 31, 2016 and 2015, respectively.  The aggregate amount of time deposit accounts in denominations that meet or exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000 as of December 31, 2016 and 2015 was $19,663,000 and $15,329,000, respectively.

9.FEDERAL HOME LOAN BANK ADVANCES

All FHLB of Boston advances are secured by a blanket security agreement on qualified collateral, consisting principally of first mortgage loans on owner-occupied residential property in the amount of $76,904,000 and $74,277,000 at December 31, 2016 and 2015, respectively; commercial real estate loans in the amount of $23,959,000 and  $24,914,000 at December 31, 2016 and 2015, respectively; and mortgage-backed securities with a fair value of $19,308,000 and $16,590,000 at December 31, 2016 and 2015, respectively.

F-32

Short-term FHLB advances

Short-term FHLB advances consist of advances with an original term of nine months or less at a weighted average rate of 0.73% and 0.44% at December 31, 2016 and 2015, respectively.

The Bank also has a $2,000,000 line-of-credit with the FHLB.  There were no amounts outstanding at December 31, 2016 and 2015.

Long-term FHLB advances

Long-term, fixed-rate FHLB advances and maturities are as follows:

	At December 31,
	2016				2015
			Weighted				Weighted
			Average				Average
	Amount		Rate		Amount		Rate
	(Dollars in thousands)
Within one year	$	8,500	1.94	%	$	5,500	1.88	%
Greater than one year to two years		10,100	2.14	%		7,500	2.08	%
Greater than two years to three years		4,500	1.90	%		8,600	2.32	%
Greater than three years to four years		1,500	1.75	%		4,000	1.99	%
Greater than four years to five years		—	—	%		1,500	1.75	%
Total long-term FHLB advances	$	24,600	2.00	%	$	27,100	2.09	%

10.INCOME TAXES

Allocation of federal and state income taxes between current and deferred portions is as follows:

	Years Ended
	December 31,
	2016		2015
	(In thousands)
Current tax provision:
Federal	$	514	$	1,051
State		121		258
		635		1,309
Deferred tax benefit:
Federal		(170)		(293)
State		(48)		(85)
		(218)		(378)
Total tax provision	$	417	$	931

F-33

The differences between the statutory federal income tax rate and the effective tax rates are as follows:

	Years Ended
	December 31,
	2016		2015
Statutory rate	34.0	%	34.0	%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit	7.8		4.7
Bank-owned life insurance	(5.8)		(1.4)
Stock compensation plans	8.7		1.5
Interest income from municipal securities	(4.2)		(0.8)
Merger related expense, non-deductible	27.3		—
Other, net	0.4		—
Effective tax rates	68.2	%	38.0	%

The components of the net deferred tax asset included in other assets are as follows:

	At December 31,
	2016		2015
	(In thousands)
Deferred tax assets:
Federal	$	1,534	$	1,320
State		439		384
		1,973		1,704
Deferred tax liabilities:
Federal		(499)		(498)
State		(141)		(141)
		(640)		(639)
Net deferred tax asset	$	1,333	$	1,065

The tax effects of each item that gives rise to deferred taxes are as follows:

	At December 31,
	2016		2015
	(In thousands)
Deferred compensation	$	725	$	612
Net unrealized loss (gain) on securities available for sale		21		(29)
Depreciation and amortization		(543)		(363)
Allowance for loan losses		1,042		964
Mortgage servicing rights		(94)		(207)
Other, net		182		88
Net deferred tax asset	$	1,333	$	1,065

F-34

A summary of the change in the net deferred tax asset is as follows:

	Years Ended
	December 31,
	2016		2015
	(In thousands)
Balance at beginning of period	$	1,065	$	635
Deferred tax benefit		218		378
Deferred tax effects of net unrealized loss (gain) on securities
available for sale		50		52
Balance at end of period	$	1,333	$	1,065

The federal income tax reserve for loan losses at the Company’s base year is $726,000.  If any portion of the reserve is used for purposes other than to absorb loan losses, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the fiscal year in which it is used.  As the Company intends to use the reserve solely to absorb loan losses, a deferred tax liability of $290,000 has not been provided.

Uncertain tax positions

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

11.MINIMUM REGULATORY CAPITAL REQUIREMENTS

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

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to capital regulations adopted by the Board of Governors of the Federal Reserve System (“FRB”) and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act.  The regulations require a common equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%.  CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new 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 began phasing in on 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 to pay dividends, repurchase shares or pay discretionary bonuses.  As of December 31, 2016, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer.

F-35

Management believes, as of December 31, 2016 and 2015, that the Bank meets all capital adequacy requirements to which it is subject.

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

									Minimum
									To Be Well
					Minimum				Capitalized Under
					Capital				Prompt Corrective
	Actual				Requirement				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
At December 31, 2016
Total Capital to Risk Weighted Assets	$	33,177	13.5	%	$	19,645	8.0	%	$	24,556	10.0	%
Tier 1 Capital to Risk Weighted Assets		30,572	12.4			14,734	6.0			19,645	8.0
Common Equity Tier 1 Capital to Risk Weighted Assets		30,572	12.4			11,050	4.5			15,962	6.5
Tier 1 Capital to Total Assets		30,572	9.7			12,605	4.0			15,756	5.0

									Minimum
									To Be Well
					Minimum				Capitalized Under
					Capital				Prompt Corrective
	Actual				Requirement				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
At December 31, 2015
Total Capital to Risk Weighted Assets	$	31,701	14.3	%	$	17,721	8.0	%	$	22,151	10.0	%
Tier 1 Capital to Risk Weighted Assets		29,293	13.2			13,291	6.0			17,721	8.0
Common Equity Tier 1 Capital to Risk Weighted Assets		29,293	13.2			9,968	4.5			14,398	6.5
Tier 1 Capital to Total Assets		29,293	10.0			11,754	4.0			14,693	5.0

Other capital restrictions

Federal banking regulations place certain restrictions on dividends paid, stock repurchases and other transactions charged to the capital accounts of the Company and the Bank. Capital distributions in the form of dividends paid to the Bank’s stockholder for any one year may not exceed the Bank’s net income for the year to date plus the Bank’s retained net income for the preceding two years.  In addition, dividends paid would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. The Bank and the Company may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount. See Note 17 — Liquidation Account Related to Reorganization for further information.

F-36

12.EMPLOYEE BENEFIT PLANS

401(k) plan

The Bank provides a savings and retirement plan for employees, which qualifies under Section 401(k) of the Internal Revenue Code.  All employees who have attained age 21 and have completed one year of employment during which they worked at least 1,000 hours are eligible to participate.  The plan provides for voluntary contributions by participating employees ranging from 1% to 75% of their compensation, subject to certain limitations.  In addition, the Bank will make a matching contribution, equal to 50% of the employee’s contribution.  The Bank’s matching contribution will not exceed 3% of an employee’s salary.  In addition, the Bank may make a discretionary contribution not to exceed 3% of an employee’s salary.  For the years ended December 31, 2016 and 2015, expense attributable to the plan amounted to $152,000 and $146,000, respectively.

Incentive plan

The Bank has an Incentive Plan whereby all employees are eligible to receive a payment if the Bank or participant meets or exceeds certain base standards of performance for its fiscal year.  The structure of the Incentive Plan is to be reviewed on an annual basis by the Board of Directors.  Incentive compensation expense for the years ended December 31, 2016 and 2015 amounted to $130,000 and $167,000, respectively.

Executive supplemental retirement agreements

The Bank has entered into supplemental retirement agreements with certain executive officers, which provide for the payment of specified benefits upon retirement or early termination, as defined in the agreements. For the years ended December 31, 2016 and 2015, total expense applicable to these agreements amounted to $181,000 and $139,000, respectively. The recorded liability for these agreements was $1,713,000 and $1,532,000 at December 31, 2016 and 2015, respectively.

Employee Stock Ownership Plan

The Bank established an ESOP for the benefit of each employee who has reached the age of 21 and has completed at least one year of employment with the Bank.  Benefits may be paid in shares of common stock or in cash, subject to the employees’ right to demand shares.

The ESOP has a loan agreement with the Company whereby $1,237,000 was borrowed for the purpose of purchasing shares of the Company’s common stock.  At December 31, 2016, the loan has 10 remaining annual principal and interest payments of $104,000, all of which are due on the last business day of the respective year.  The loan documents provide that the loan may be repaid over a shorter period, without penalty for prepayments.

F-37

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

Years Ending
December 31,	Amount
	(In thousands)
2017	$	75
2018		78
2019		80
2020		83
2021		86
Thereafter		472
Total remaining principal balance on the ESOP debt	$	874

The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan.  The loan is secured by the shares purchased, which are held in a suspense account for allocation among the participants as the loan is paid.  Total compensation expense applicable to the ESOP amounted to $155,000 and $132,000 for the years ended December 31, 2016 and 2015, respectively.

Shares held by the ESOP are as follows:

	At December 31,
	2016	2015
Allocated	82,451	74,624
Committed to be allocated	7,240	7,241
Unallocated	72,405	79,645
Paid out to participants	(18,787)	(18,709)
Total shares held by ESOP	143,309	142,801

Any cash dividends received on allocated shares would be used to purchase additional shares and then allocated to participants and cash dividends received on shares held in suspense would be used to reduce the Bank’s annual contribution to the ESOP.  The fair value of unallocated ESOP shares at December 31, 2016 and 2015 is $1,872,000 and $1,507,000, respectively.

Share-based compensation plans

In accordance with the Company’s 2009 and 2014 Equity Incentive Plans, the Company awarded 33,500 stock options and 16,500 shares of restricted stock to eligible participants on February 22, 2016.  The 2009 Plan provides for total awards of 180,035 shares of the Company’s common stock pursuant to grants of restricted stock awards, incentive stock options, non-qualified stock options and stock appreciation rights; provided, however, that shares of stock used to fund stock options greater than 98,000 shares must be obtained through stock repurchases and shares of stock used to fund restricted stock awards greater than 39,200 shares must be obtained through stock repurchases.

The 2014 Equity Incentive Plan provides for total awards of 154,000 shares of the Company’s common stock pursuant to grants of restricted stock awards, restricted stock unit awards, performance awards, incentive stock options and non-qualified stock options; provided, however, that no more than 44,000 shares of stock may be issued as restricted stock awards and restricted stock units, and no more than 110,000 shares may be issued or delivered in the aggregate pursuant to the exercise of stock options. 

F-38

The exercise price of each option will be equal to or greater than the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. Vesting periods for options and restricted stock granted to directors and officers are three years and five years, respectively, from the date of grant.

The fair value of the stock options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2016		2015
Expected dividends	0.98	%	0.97	%
Expected term	6.4	years	6.4	years
Expected volatility	32.95	%	34.97	%
Risk-free interest rate	1.47	%	1.82	%

The expected volatility is based on historical volatility.  The risk-free interest rates for periods consistent with the expected term of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term is determined using the average of the mathematical mean of the vesting period and the full term of the option rather than estimating based on historical experience. The dividend yield assumption is based on the Company’s history, expectation of future dividend payouts and market value at the date of grant.

The following tables present the activity for the 2009 and 2014 Plans as of and for the years ended December 31, 2016 and 2015:

	Stock Options
	2016				2015
			Weighted				Weighted
			Average				Average
	Number of		Exercise		Number of		Exercise
	Shares		Price		Shares		Price
Outstanding at beginning of year		89,275	$	14.02		61,681	$	12.13
Granted		33,500	$	19.40		30,000	$	17.55
Exercised		—	$	—		(1,198)	$	9.48
Cancelled		—	$	—		(1,208)	$	9.90
Outstanding at end of period		122,775	$	15.49		89,275	$	14.02
Exercisable at end of period		51,740				34,417
Aggregate intrinsic value of outstanding options at end of period	$	1,272,000			$	438,000
Weighted average fair value of options granted during the period	$	6.07			$	5.91

F-39

Options Outstanding					Options Exercisable
Number	Weighted-Average		Weighted		Number	Weighted
Outstanding	Remaining		Average		Exercisable	Average
as of 12/31/2016	Contractual Life		Exercise Price		as of 12/31/2016	Exercise Price
8,712	3.15	Years	$	9.33	8,712	$	9.33
9,683	4.15	Years	$	9.55	9,683	$	9.55
8,570	5.15	Years	$	9.58	7,359	$	9.58
15,200	6.15	Years	$	14.00	10,500	$	14.00
17,110	7.15	Years	$	14.98	8,286	$	14.98
30,000	8.15	Years	$	17.55	7,200	$	17.55
33,500	9.15	Years	$	19.40	—	$	—
122,775	7.15	Years	$	15.49	51,740	$	12.40

	Non-vested
	Restricted Stock
	2016			2015
		Weighted			Weighted
		Average			Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Value		Shares	Value
Outstanding at beginning of year	44,866	$	15.21	37,071	$	12.85
Granted	16,500	$	19.40	20,000	$	17.55
Vested	(14,917)	$	14.27	(12,205)	$	11.89
Outstanding at end of period	46,449	$	17.00	44,866	$	15.21

As of December 31, 2016, unrecognized share-based compensation expense related to non-vested options amounted to $309,000 and the unrecognized share-based compensation expense related to non-vested restricted stock amounted to $574,000.  The unrecognized expense related to the non-vested options and non-vested restricted stock will be recognized over a weighted average period of 3.1 and 3.0 years, respectively.

For the year ended December 31, 2016, the Company recognized compensation expense for stock options of $124,000 with a related tax benefit of $16,000.  For the year ended December 31, 2016, the Company recognized compensation expense for restricted stock awards of $257,000, with a related tax benefit of $103,000. For the year ended December 31, 2015, the Company recognized compensation expense for stock options of $90,000 with a related tax benefit of $12,000.  For the year ended December 31, 2015, the Company recognized compensation expense for restricted stock awards of $209,000, with a related tax benefit of $84,000.

F-40

13.COMMITMENTS AND CONTINGENCIES

Loan commitments

The Bank is a 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 extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated balance sheets.  The Bank’s exposure to credit loss is represented by the contractual amount of the instruments.  The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments.  Financial instruments whose contract amounts represent credit risk consist of the following:

	At December 31,
	2016		2015
	(In thousands)
Commitments to grant loans	$	7,890	$	16,298
Unadvanced funds on home equity lines of credit		10,349		8,513
Unadvanced funds on commercial lines of credit		18,218		14,713
Unadvanced funds on construction loans		16,264		12,423
Unadvanced funds on other unsecured personal lines of credit		274		287
Unadvanced funds on commercial real estate loans		5,237		5,618
Standby letters of credit		227		62

Commitments to extend credit are agreements to lend to a customer as long as 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 commitments for all lines of credit may expire without being drawn upon, therefore, the total commitment amounts do not necessarily represent future cash requirements.  The Bank evaluates each customer’s credit worthiness on a case-by-case basis.  Substantially all of these financial instruments, except for unadvanced lines of credit on unsecured personal loans and commercial lines of credit, are secured by real estate.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The maximum potential amount of the Bank’s obligation for standby letters of credit was $227,000 and $62,000 as of December 31, 2016 and 2015, respectively.  The Bank’s outstanding letters of credit generally have a term of less than one year.  If a letter of credit is drawn upon, the Bank may seek recourse through the customer’s underlying line of credit.  If the customer’s line of credit is also in default, the Bank may take possession of the collateral, if any, securing the line of credit.

F-41

Lease commitments

Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2016, pertaining to branch facilities, future minimum rental payments are as follows:

Years Ending
December 31,	Payments
	(In thousands)
2017	$	132
2018		132
2019		132
2020		132
2021		137
Thereafter		1,288
Total future minimum rental payments	$	1,953

The leases contain options to extend. Two leases can extend for ten additional years, and one lease can extend for two additional five year terms.  The cost of such rentals is not included above.

Rental expense, including cancelable leases, amounted to $132,000 and $205,000 for the years ended December 31, 2016 and 2015, respectively.

Employment agreements

The Bank and Company have entered into employment agreements with its Chief Executive Officer and Chief Financial Officer, with initial terms of 36 months, that generally provide for a specified minimum annual compensation and the continuation of benefits currently received upon certain termination events, including a change in control, as defined in the agreements.  The employment agreements may be terminated for cause, as defined, without incurring any continuing obligations.  The Company employment agreements do not provide duplicative benefits, but rather, reinforce the obligation of the Bank by providing for the payments required under the employment agreements to the extent that such payments are not or cannot be made by the Bank. The agreements with the Company do not have an automatic reduction in benefits in the event of an excess parachute payment, but such agreements also do not provide for a tax “gross up.” In addition, certain regulatory requirements that are only required to be included in employment agreements between the executives and the Bank are not included in the employment agreements with the Company.

The Bank has also entered into change in control agreements with four officers of the Bank with an initial term of 12 months, which provide for a lump sum severance payment, subject to certain conditions.  These agreements are automatically renewed annually unless a notice of non-renewal is issued upon recommendation from the Board of Directors.

Other contingencies

Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial position or results of operations.

14.LOANS TO RELATED PARTIES

In the ordinary course of business, the Bank grants loans to its Executive Officers and Directors and their affiliates.  Total loans to such persons and their affiliates amounted to $1,947,000 and $2,017,000 as of December 31, 2016 and 2015, respectively.  During the year ended December 31, 2016, principal payments totaled $374,000 and principal advances amounted to $304,000.

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15.DERIVATIVE FINANCIAL INSTRUMENTS

Mortgage loan commitments

The Bank enters into commitments to originate mortgage loans for sale and uses forward commitments to sell such loans, both of which represent derivative instruments. These instruments involve both credit and market risk.

Commitments to originate loans require the Bank to originate a loan at an interest rate that may or may not be fixed upon completion of various underwriting requirements. At December 31, 2016 and 2015, the Bank had no outstanding commitments to grant mortgage loans that are intended to be sold.

Forward commitments to sell loans require the Bank to make delivery of loans at a specific future date, of a specified amount, at a specified price or yield. There were no such commitments at December 31, 2016 and 2015.

16.FAIR VALUE OF ASSETS AND LIABILITIES

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine their fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices 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. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Determination of fair value

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts of cash and short-term investments approximate fair values.

Securities: Fair values for the Company’s debt securities are obtained from a third-party pricing service and are based on models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. No further adjustments to such values are typically made by the Company.

Federal Home Loan Bank stock: Fair value is based on redemption provisions of the FHLB. The FHLB stock has no quoted market value.

Loans held for sale: Fair value is based on committed secondary market prices.

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

Capitalized mortgage servicing rights: Fair value is based on a quarterly, third-party valuation model that calculates the present value of estimated future net servicing income. The model utilizes

F-43

a variety of assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a moving average of prepayment data published by the Securities Industry and Financial Markets Association, third party proprietary analysis of prepayment rates embedded in liquid mortgage securities markets and modeled against the serviced loan portfolio by the third party valuation specialist. The discount rate is the moving average 10-year U.S. Treasury rate plus 5.0% and adjusted to reflect the current credit spreads and conditions in the market. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances and all are obtained from independent market sources.

Deposits: The fair values for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is the carrying amount.  Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term FHLB advances: The fair value of short-term FHLB advances approximate carrying value, as they generally mature within 90 days.

Long-term FHLB advances: The fair value for long-term FHLB advances is estimated using discounted cash flow analyses based on current market borrowing rates for similar types of borrowing arrangements.

Mortgagors’ escrow accounts: The fair values disclosed for mortgagors’ escrow accounts are equal to the amounts payable on demand at the reporting date (i.e. their carrying amounts).

Accrued interest:  The carrying amounts of accrued interest approximate fair value.

Forward loan sale commitments and derivative loan commitments: Fair value is determined using secondary market pricing, including expected normal servicing rights. In estimating fair value, the Bank assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded.

Off-balance sheet instruments:  Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  At December 31, 2016 and 2015, the fair value of commitments outstanding is not significant since fees charged are not material.

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Assets and liabilities measured at fair value on a recurring basis

Assets measured at fair value on a recurring basis are summarized as follows:

							Total
							Assets
	Level 1		Level 2		Level 3		at Fair Value
	(In thousands)
At December 31, 2016
Assets
Securities available for sale
State and municipal	$	—	$	2,385	$	—	$	2,385
Residential mortgage-backed securities		—		17,387		—		17,387
Total securities available for sale	$	—	$	19,772	$	—	$	19,772
At December 31, 2015
Assets
Securities available for sale
State and municipal	$	—	$	2,470	$	—	$	2,470
Residential mortgage-backed securities		—		16,558		—		16,558
Total securities available for sale	$	—	$	19,028	$	—	$	19,028

Assets and liabilities measured at fair value on a non-recurring basis

The Company did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the years ended December 31, 2016 and 2015.

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.  There are no liabilities measured at fair value on a non-recurring basis at December 31, 2016 and 2015.  The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of December 31, 2016 and 2015. The adjustments to fair value represent the amount of write down recorded during the years ended December 31, 2016 and 2015 on the assets held at December 31, 2016 and 2015, respectively.

							Assets		Adjustments
	Level 1		Level 2		Level 3		at Fair Value		to Fair Value
	(In thousands)
At December 31, 2016
Impaired loans	$	—	$	—	$	78	$	78	$	(7)

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							Assets		Adjustments
	Level 1		Level 2		Level 3		At Fair Value		to Fair Value
	(In thousands)
At December 31, 2015
Impaired loans	$	—	$	—	$	386	$	386	$	(14)

Fair values of impaired loans are based on the appraised value of the underlying collateral considering discounting factors, if deemed appropriate, and as adjusted for selling costs. These appraised values may be discounted based on management’s historical knowledge, expertise or changes in market conditions from time of valuation. Fair value adjustments are reflected in the provision for loan losses.

Summary of fair value of financial instruments

The estimated fair values and related carrying amounts of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements.  Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

	December 31, 2016
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	6,129	$	6,129	$	—	$	—	$	6,129
Securities available for sale		19,772		—		19,772		—		19,772
Securities held to maturity		2,503		—		2,490		—		2,490
FHLB stock		2,341		2,341		—		—		2,341
BBN stock		60		60		—		—		60
Loans held for sale		271		275		—		—		275
Loans, net		277,371		—		—		275,824		275,824
Accrued interest receivable		816		816		—		—		816
Capitalized mortgage servicing rights		236		—		601		—		601
Financial liabilities:
Deposits	$	240,508	$	—	$	241,264	$	—	$	241,264
Short-term FHLB advances		17,250		17,250		—		—		17,250
Long-term FHLB advances		24,600		—		24,699		—		24,699
Mortgagors’ escrow accounts		1,633		1,633		—		—		1,633
Accrued interest payable		58		58		—		—		58

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	December 31, 2015
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	7,758	$	7,758	$	—	$	—	$	7,758
Securities available for sale		19,028		—		19,028		—		19,028
Securities held to maturity		3,112		—		3,128		—		3,128
FHLB stock		2,933		2,933		—		—		2,933
BBN stock		60		60		—		—		60
Loans, net		253,983		—		—		254,095		254,095
Accrued interest receivable		799		799		—		—		799
Capitalized mortgage servicing rights		519		—		1,100		—		1,100
Financial liabilities:
Deposits	$	207,726	$	—	$	207,894	$	—	$	207,894
Short-term FHLB advances		23,500		23,500		—		—		23,500
Long-term FHLB advances		27,100		—		27,255		—		27,255
Mortgagors’ escrow accounts		1,386		1,386		—		—		1,386
Accrued interest payable		59		59		—		—		59

17.LIQUIDATION ACCOUNT RELATED TO REORGANIZATION

On November 28, 2011, the Boards of Directors of the Company, Georgetown Bancorp, MHC and the Bank each unanimously adopted a Plan of Conversion or Reorganization of Georgetown Bancorp, MHC (the “Plan”) pursuant to which Georgetown Bancorp, MHC undertook a “second-step” conversion and ceased to exist.  Georgetown Bancorp, MHC reorganized from a two-tier mutual holding company structure to a fully public stock holding company structure effective July 11, 2012.

In accordance with Board of Governors of the Federal Reserve System regulations, at the time of the reorganization, the Company substantially restricted retained earnings by establishing a liquidation account.  The liquidation account is maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion.  The Bank has established a parallel liquidation account to support the Company’s liquidation account in the event the Company does not have sufficient assets to fund its obligations under its liquidation account.  The liquidation accounts are 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 accounts.  In the event of a complete liquidation of the Bank or the Company, each account holder will be entitled to receive a distribution 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.

18.AGREEMENT AND PLAN OF MERGER

On October 5, 2016, Salem Five Bancorp, a Massachusetts mutual holding company, Bright Star, Inc., a Maryland corporation and wholly-owned subsidiary of Salem Five Bancorp, and the Company entered into the Merger Agreement, pursuant to which Bright Star, Inc. will merge with and into the Company.  Immediately following this, the Bank will merge with and into Salem Five Bancorp’s wholly-owned subsidiary, Salem Five Bank.  Immediately following the merger of the two banks, the Company shall dissolve and liquidate into Salem Five Bancorp.

Under the terms of the Merger Agreement, Salem Five Bancorp will acquire all of the Company’s outstanding common stock at a price of $26.00 per share in cash. In addition, each outstanding option to acquire shares of the Company’s common stock will be canceled in exchange for a cash payment equal to the difference, if any, between $26.00 and the exercise price of the option.

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Consummation of the merger is subject to certain conditions, including, among others, approval of the merger by the Company’s stockholders, the receipt of all required regulatory approvals and expiration of applicable waiting periods, accuracy of specified representations and warranties of each party, the performance in all material respects by each party of its obligations under the Merger Agreement, and the absence of any injunctions or other legal restraints.  The stockholders of the Company approved the merger on February 13, 2017.  The merger is expected to close in the second quarter of 2017.

The Merger Agreement provides that upon termination of the Merger Agreement under certain circumstances, the Company will be obligated to pay Salem Five Bancorp a termination fee of $2.0 million.

19.CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS

The condensed balance sheets of the parent company only are as follows:

BALANCE SHEETS

	At December 31,
	2016		2015
	(In thousands)
ASSETS
Non-interest bearing deposit in the Bank	$	604	$	1,472
Loan to the Bank for ESOP		874		947
Investment in subsidiary		30,531		29,340
Other assets		266		191
Total assets	$	32,275	$	31,950
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities	$	119	$	42
Stockholders’ equity		32,156		31,908
Total liabilities and stockholders’ equity	$	32,275	$	31,950

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The condensed statements of net income of the parent company only are as follows:

STATEMENTS OF INCOME

	Years Ended
	December 31,
	2016		2015
	(In thousands)
Interest income on ESOP loan	$	31	$	33
Non-interest expense		627		119
Loss before income taxes and equity in undistributed net income of the Bank		(596)		(86)
Applicable income tax benefit		48		34
Loss before equity in undistributed net income of subsidiary		(548)		(52)
Equity in undistributed net income of subsidiary		742		1,570
Net income	$	194	$	1,518

The condensed statements of cash flows of the parent company only are as follows:

	Years Ended
	December 31,
	2016		2015
	(In thousands)
Cash flows from operating activities:
Net income	$	194	$	1,518
Adjustments to reconcile net income to net cash used by operating activities:
Equity in undistributed net income of subsidiary		(742)		(1,570)
Other, net		28		(9)
Net cash used by operating activities		(520)		(61)
Cash flows from investing activities:
Repayment of ESOP loan		73		71
Net cash provided by investing activities		73		71
Cash flows from financing activities:
Repurchase of common stock		(74)		(369)
Cash dividends paid on common stock		(347)		(323)
Exercise of stock options		—		11
Net cash used by financing activities		(421)		(681)
Net change in cash and cash equivalents		(868)		(671)
Cash and cash equivalents at beginning of period		1,472		2,143
Cash and cash equivalents at end of period	$	604	$	1,472

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20.QUARTERLY DATA (UNAUDITED)

A summary of consolidated operating results on a quarterly basis is as follows:

	Years Ended December 31,
	2016								2015
	Fourth		Third		Second		First		Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter
	(In thousands, except per share data)
Interest and dividend income	$	3,277	$	3,176	$	3,194	$	3,163	$	3,150	$	2,989	$	2,881	$	2,856
Interest expense		662		628		604		574		489		431		408		398
Net interest and dividend income		2,615		2,548		2,590		2,589		2,661		2,558		2,473		2,458
Provision for loan losses		53		67		—		74		62		111		—		27
Net interest and dividend income, after provision for loan losses		2,562		2,481		2,590		2,515		2,599		2,447		2,473		2,431
Non-interest income		264		244		255		242		350		374		243		222
Non-interest expenses		2,718		2,586		2,601		2,637		2,167		2,127		2,142		2,254
Income before income taxes		108		139		244		120		782		694		574		399
Income tax provision		181		104		92		40		302		269		211		149
Net (loss) income	$	(73)	$	35	$	152	$	80	$	480	$	425	$	363	$	250
(Loss) income per share:
Basic	$	(0.04)	$	0.02	$	0.09	$	0.05	$	0.27	$	0.24	$	0.21	$	0.14
Diluted	$	(0.04)	$	0.02	$	0.09	$	0.05	$	0.27	$	0.24	$	0.21	$	0.14

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ITEM 9.Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, utilizing the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2016 is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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

ITEM 9B.Other Information

None.

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PART III

ITEM 10.Directors, Executive Officers and Corporate Governance

The Company has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics may be accessed on the Bank’s website at www.georgetownbank.com.

The Company’s Board of Directors currently consists of 10 members. The Company’s bylaws provide that approximately one-third of the directors are to be elected annually. Directors of the Company are generally elected to serve for a three-year period and until their respective successors have been elected.

The table below sets forth certain information as of March 23, 2017 regarding the composition of the Company’s Board of Directors and regarding the Company’s executive officers who are not a director, including the terms of office of members of the Board of Directors. 

					Shares of
				Current	Common Stock
			Director	Term to	Beneficially		Percent of Class
Name (1)	Age (2)	Positions Held	Since (3)	Expire	Owned (4)		(5)
DIRECTORS
Robert E. Balletto	60	Director, President and Chief Executive Officer	2004	2017	74,318	(6)	4.01%
Stephen L. Flynn	61	Director	2001	2017	10,985	(7)	*
Thomas L. Hamelin	60	Director	2000	2017	13,765	(8)	*
J. Richard Murphy	72	Director	2008	2017	17,199	(9)	*
Marybeth McInnis	54	Director	2007	2018	15,321	(10)	*
Mary L. Williams	64	Director	2005	2018	10,865	(11)	*
Keith N. Congdon	55	Director	2007	2019	18,180	(12)	*
Kathleen R. Sachs	65	Director	2007	2019	8,676	(13)	*
David A. Splaine	57	Director	2007	2019	41,636	(14)	2.26%
Robert T. Wyman	52	Director	2007	2019	7,657	(15)	*
EXECUTIVE OFFICERS WHO ARE NOT A DIRECTOR
Frederick H. Weismann	68	Executive Vice President and Chief Operating Officer	N/A	N/A	17,174	(16)	*
Joseph W. Kennedy	57	Senior Vice President, Chief Financial Officer and Treasurer	N/A	N/A	39,257	(17)	2.13%
All directors and executive officers as a group (12 persons)					275,033		14.49%

*      Less than one percent.

(1) The mailing address for each person listed is 2 East Main Street, Georgetown, Massachusetts 01833. 

(2) Information as of December 31, 2016.

(3) With regard to Mr. Balletto, Mr. Flynn and Mr. Hamelin reflects initial appointment to the Board of Trustees of the mutual predecessor to Georgetown Bank (the “Bank”).

(4) See definition of “beneficial ownership” in the table “Security Ownership of Certain Beneficial Owners.”

(5) Based on 1,836,250 shares of common stock outstanding on March 23, 2017.

(6) Includes 17,657 exercisable stock options, 4,610 shares of restricted stock over which Mr. Balletto has voting power, 894 shares owned by Mr. Balletto’s spouse, 27,860 shares owned through Georgetown Bank’s 401(k) plan and 10,320 shares held by the Georgetown Bank Employee Stock Ownership Plan.

63

(7) Includes 3,032 exercisable stock options, 491 shares of restricted stock over which Mr. Flynn has voting power and 3,688 shares owned through an individual retirement account.

(8) Includes 3,032 exercisable stock options, 491 shares of restricted stock over which Mr. Hamelin has voting power and 7,769 shares owned through an individual retirement account.

(9) Includes 3,845 exercisable stock options, 714 shares of restricted stock over which Mr. Murphy has voting power, 1,635 shares owned through an individual retirement account and 2,000 shares owned by his spouse.

(10) Includes 3,032 exercisable stock options and 491 shares of restricted stock over which Ms. McInnis has voting power.

(11) Includes 3,222 exercisable stock options, 612 shares of restricted stock over which Ms. Williams has voting power and 1,260 shares owned through an individual retirement account.

(12) Includes 3,032 exercisable stock options, 491 shares of restricted stock over which Mr. Congdon has voting power and 8,971 shares owned through an individual retirement account.

(13) Includes 1,834 exercisable stock options, 491 shares of restricted stock over which Ms. Sachs has voting power and 1,700 shares owned through an individual retirement account.

(14) Includes 3,032 exercisable stock options, 491 shares of restricted stock over which Mr. Splaine has voting power, 4,000 shares owned by his children, 5,000 shares owned by his spouse and 27,042 shares owned through an individual retirement account.

(15) Includes 2,482 exercisable stock options and 491 shares of restricted stock over which Mr. Wyman has voting power.

(16) Includes 6,414 exercisable stock options, 4,228 shares of restricted stock over which Mr. Weismann has voting power, 1,303 shares owned through Georgetown Bank’s 401(k) plan and 1,362 shares held by the Georgetown Bank Employee Stock Ownership Plan.

(17) Includes 11,047 exercisable stock options, 3,085 shares of restricted stock over which Mr. Kennedy has voting power, 924 shares owned by Mr. Kennedy’s spouse, 602 shares owned through an individual retirement account, 5,686 shares owned through Georgetown Bank’s 401(k) plan and 7,052 shares held by the Georgetown Bank Employee Stock Ownership Plan.

The biographies of each of the nominees, continuing board members and executive officers are set forth below. With respect to directors, the biographies also contain information regarding the person’s business experience and the experiences, qualifications, attributes or skills that caused the Nominating/Governance Committee and the Board of Directors to determine that the person should serve as a director. Each director is also a director of Georgetown Bank, and each executive officer also is an executive officer of Georgetown Bank.

All of the directors are residents of the communities served by the Company and Georgetown Bank and many of such individuals have operated, or currently operate, businesses located in such communities. As a result, each director has significant knowledge of the businesses that operate in the Company’s market area, an understanding of the general real estate market, values and trends in such communities and an understanding of the overall demographics of such communities. Additionally, as residents of such communities, each director has direct knowledge of the trends and developments occurring in such communities. As the holding company for a community banking institution, the Company believes that the local knowledge and experience of its directors assists the Company in assessing the credit and banking needs of its customers, developing products and services to better serve its customers and assessing the risks inherent in its lending operations, and provides the Company with greater business development opportunities. As local residents, our directors are also exposed to the advertising, product offerings and community development efforts of competing institutions which, in turn, assists the Company in structuring its marketing efforts and community outreach programs.

Directors

Robert E. Balletto  has been employed with Georgetown Bank since 1982 and has served as Chief Executive Officer since 1988. In July 2004, Mr. Balletto was elected to the Board of Directors of Georgetown Bank and was also appointed President. Mr. Balletto has over 37 years experience in the banking industry. As Chief Executive Officer, Mr. Balletto’s experience in leading the Company and the Bank and his responsibilities for the strategic direction and management of the Company’s day-to-day operations, bring broad industry and specific institutional knowledge and experience to the Board of Directors.

Keith N. Congdon is the President and owner of Ambrosi Donahue Congdon & Co., P.C., a certified public accounting firm based in Newburyport, Massachusetts. Prior to joining Ambrosi Donahue Congdon, Mr. Congdon began his career with Coopers & Lybrand (now PricewaterhouseCoopers) as an auditor of publicly traded companies. He later joined The Stackpole Corporation in Boston, Massachusetts as a corporate officer and was actively involved in the initial public offering on the Toronto Stock Exchange of Stackpole Limited, a wholly-owned subsidiary, as well as the divestiture of a number of U.S. subsidiaries. With over 30 years of extensive experience in both private industry and public accounting, Mr. Congdon provides tax, accounting and auditing services for closely-held businesses and their stockholders, primarily in manufacturing, technology and service industries.  As a certified public accountant (“CPA”) and Chairman of the Board’s Audit Committee, Mr. Congdon brings to the Board of Directors his valuable experience in dealing with accounting principles, internal controls and financial reporting rules and regulations.

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Stephen L. Flynn is the President and owner of Nunan Florist and Greenhouse, Inc., located in Georgetown, Massachusetts. Mr. Flynn’s 30 years of experience as owner and manager of his own company bring valuable business and leadership skills and financial acumen to the Board in furtherance of the Board’s objective of maintaining a membership of experienced and dedicated individuals with diverse backgrounds, perspectives, skills, and other qualities that are beneficial to the Company.

Thomas L. Hamelin has been a mechanical engineer for Varian Semiconductor, a subsidiary of Applied Materials, a semi-conductor equipment manufacturing firm, located in Gloucester, Massachusetts, since October 2010. Prior to that, Mr. Hamelin was a mechanical engineer for Tokyo Electron, a semi-conductor manufacturing firm, located in Beverly and Billerica, Massachusetts, since March 1998. Mr. Hamelin’s 37 years of experience in the engineering field with large manufacturing firms, combined with his leadership skills, bring a unique perspective to the Board in furtherance of the Board’s objective of maintaining a membership of experienced and dedicated individuals with diverse backgrounds, perspectives, skills, and other qualities that are beneficial to the Company.

Marybeth McInnis, Esquire owns McInnis Law Offices, a boutique law firm located in North Andover, Massachusetts, that has provided full-service estate planning services to the Merrimack Valley for more than 45 years. The firm specializes in counseling individuals and families at all asset and income levels with estate, business, tax, charitable and long-term care planning. Ms. McInnis is actively involved with many local charitable organizations and has served on the Board of Trustees of Merrimack College since July of 2008 and the Board of Trustees of the James W. O’Brien Foundation, Inc., since June of 2000. As an experienced attorney, Ms. McInnis brings to the Board valuable perspective on legal and legal-related issues that may arise in the operations and management of the Company and the Bank.

J. Richard Murphy is the President and Managing Director of Grey Rock Partners, LLC located in Boston, Massachusetts. Grey Rock Partners, LLC offers Corporate Advisory Services to mid-sized privately held companies and their owners. Grey Rock's services include mergers and acquisitions (both sell-side and buy-side representations), the placement of senior and mezzanine debt, corporate divestiture, and strategic consulting centered on maximizing stockholder value. With his extensive financial experience in mergers and acquisitions and other transactions centered on maximizing stockholder value and more than 26 years of prior banking experience, including three years as a Chief Executive Officer of a $1.4 billion, 22 branch commercial bank, Mr. Murphy provides the Board with valuable insight on these and others matters that are beneficial to the Company in evaluating potential strategic transactions, in furtherance of the Board’s objective of maintaining a membership of experienced and dedicated individuals with diverse backgrounds, perspectives, skills, and other qualities that are beneficial to the Company.

Kathleen R. Sachs, CFP is the founder and a principal of Sachs Financial Planning, a financial planning firm in Georgetown, Massachusetts. Ms. Sachs is the Assistant Corporate Secretary for the Company and Georgetown Bank. Ms. Sachs has been in financial services since 1986. With her extensive financial experience in insurance, investments and risk management, Ms. Sachs provides the Board with valuable insight on these and others matters that are central to the operations of the Bank in furtherance of the Board’s objective of maintaining a membership of experienced and dedicated individuals with diverse backgrounds, perspectives, skills, and other qualities that are beneficial to the Company.

David A. Splaine is President of Spinnaker Associates, a Portsmouth, New Hampshire based consulting company, which focuses on financial institutions (banks and insurance), sports teams and arenas.  In addition, he is President of Linwood Cemetery, Haverhill, Massachusetts, and serves on the Executive Advisory Board for the Wells Fargo Bank Corporate banking group and several non-profit organizations including the Governor’s Academy, Wentworth Home, and Chase Home for Children. From 2001 to 2006 he served as Senior Vice President of Sales for the TD Garden and Boston Bruins.  Prior experience includes lending positions at Fleet Bank (now Bank of America).  He also served as a director of the Boston Celtics Limited Partnership (NYSE), and is currently a director of several private companies. Mr. Splaine’s extensive business experience in a range of industries and disciplines, combined with his leadership skills, knowledge of our market, and sensitivity to the economy, brings valuable insight and individual qualities to our Board in furtherance of the Board’s objective of maintaining a membership of experienced and dedicated individuals with diverse backgrounds, perspectives, skills, and other qualities that are beneficial to the Company.

Mary L. Williams was employed from 2002 at North Shore Community College, providing budget management for institutional federal grants, until her retirement in 2015. She also served as the Director of EdLink and coordinated development of a five-year strategic plan for the College. Prior to that, she was Vice President of Administration and Finance for Massachusetts College of Art. Ms. Williams’ extensive experience in higher education and management, combined with her leadership skills, knowledge of our market, and financial management experience, brings valuable insight and individual qualities to our Board in furtherance of the Board’s objective of maintaining a membership of experienced and dedicated individuals with diverse backgrounds, perspectives, skills, and other qualities that are beneficial to the Company.

Robert T. Wyman, Esquire is an attorney and partner at the law firm Wyman & Barton, LLC, of Chelmsford, Massachusetts, representing clients in the areas of civil and criminal litigation, real estate litigation and real estate conveyance.

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Mr. Wyman also serves as corporate counsel for Harte-Hanks, Inc., a domestic and international marketing company that services several Fortune 500 companies. In addition to his service on Georgetown’s Board, Mr. Wyman previously served on the Lowell Boys Club Board of Directors for ten years, and has served on several other local, non-profit Boards. As an experienced attorney, Mr. Wyman brings to the Board valuable perspective on legal and legal-related issues that may arise in the operations and management of the Company and the Bank.

Executive Officers of the Company who are not Directors

Frederick H. Weismannbegan employment with Georgetown Bank in August 2011 as Vice President and Senior Commercial Lending Officer.  Mr. Weismann was promoted to Senior Vice President and Senior Commercial Lending Officer in April 2013 and promoted to Executive Vice President and Chief Operating Officer in September 2014.  Mr. Weismann served as Senior Vice President and New Hampshire Market Manager with Pentucket Bank, based in Haverhill, Massachusetts from 2007 to 2011.  Prior to that, he served in various Chief Credit Officer and Credit Administration roles in community and regional banks in New England and upstate New York.

Joseph W. Kennedy began employment with Georgetown Bank in 1999 as Vice President and Chief Financial Officer. Mr. Kennedy has served as Senior Vice President and Chief Financial Officer since January 2004 and Treasurer since April 2003. In October 2006, Mr. Kennedy was elected as Corporate Secretary for the Company and Georgetown Bank. Prior to joining Georgetown Bank, Mr. Kennedy served as Chief Financial Officer for National Grand Bank of Marblehead, Massachusetts for four years and Ipswich Bank, Ipswich Massachusetts for eight years. Both companies were stock institutions. 

Section 16(a) Beneficial Ownership Reporting Compliance

The common stock of the Company is registered with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The officers and directors of the Company and beneficial owners of greater than 10% of the Company’s common stock (“10% beneficial owners”) are required to file reports on Forms 3, 4 and 5 with the SEC disclosing beneficial ownership and changes in beneficial ownership of the common stock. SEC rules require disclosure in the Company’s Proxy Statement or Annual Report on Form 10-K of the failure of an officer, director or 10% beneficial owner of the Company’s common stock to file a Form 3, 4, or 5 on a timely basis. Based on the Company’s review of such ownership reports, the Company believes that no executive officer or director of the Company failed to timely file such ownership reports for the year ended December 31, 2016.    

Code of Ethics

The Company has adopted a Code of Ethics that is applicable to the Company’s officers, directors and employees, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics is available on the Company’s website at www.georgetownbank.com. Amendments to and waivers from the Code of Ethics will also be disclosed on the Company’s website. 

The Audit Committee

The Audit Committee consists of directors Keith N. Congdon (Chairman), Marybeth McInnis and Kathleen R. Sachs. Each member of the Audit Committee is considered “independent” as defined in the NASDAQ corporate governance listing standards and under SEC Rule 10A-3. The Board of Directors has determined that Director Congdon qualifies as an “audit committee financial expert” as that term is defined by the rules and regulations of the SEC.

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ITEM 11.Executive Compensation

The following table sets forth for the years ended December 31, 2016 and December 31, 2015 certain information as to the total remuneration paid by the Company to Mr. Balletto, who serves as President and Chief Executive Officer, Mr. Weismann, the Company’s Executive Vice President and Chief Operating Officer and Mr. Kennedy, the Company’s Senior Vice President and Chief Financial Officer and Treasurer (“Named Executive Officers”).

SUMMARY COMPENSATION TABLE

							Nonqualified
						Non-equity	deferred
				Stock	Option	incentive plan	compensation	All other
Name and principal		Salary	Bonus	awards	awards	compensation	earnings	compensation	Total
position	Year	($)	($)	($) (1)	($) (1)	($)	($)	($) (2)	($)
Robert E. Balletto,	2016	210,000	—	16,199	36,377	—	—	84,985	347,561
President and Chief Executive Officer	2015	200,000	—	54,756	9,015	20,400	—	76,385	360,556
Frederick H. Weismann,	2016	184,000	—	32,786	31,119	—	—	30,439	278,344
Executive Vice President and Chief	2015	175,000	—	46,332	23,800	19,593	—	21,836	286,561
Operating Officer
Joseph W. Kennedy,	2016	146,100	—	19,400	24,600	—	—	56,922	247,022
Senior Vice President and Chief Financial	2015	140,100	—	30,186	15,506	9,247	—	52,414	247,453
Officer and Treasurer

(1) Reflects the aggregate grant date fair value of restricted stock or option awards granted during the applicable year. The value is the amount recognized for financial statement reporting purposes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. The assumptions used in the valuation of these awards are included in Notes 2 and 12 to our audited financial statements for the years ended December 31, 2016 and 2015 as included in “Item 8. Financial Statements and Supplementary Data.”

(2) Consists of the following payments:

				Imputed Value of
				Term Life				Dividends
				Insurance From		Executive		Received On
			Employee Stock	Endorsement	Executive Owned	Disability	Club Membership	Unvested
		401(k) Plan	Ownership Plan	Agreement	Life Insurance	Insurance	Dues	Restricted Shares
Officer	Year	($)	($)(3)	($)	($)	($)	($)	($)
Robert E. Balletto	2016	13,191	21,290	13,020	31,350	1,076	3,500	1,558
	2015	12,000	14,536	12,120	31,350	1,076	3,500	1,803
Frederick H. Weismann	2016	12,197	17,041	—	—	—	—	1,201
	2015	11,730	9,069	—	—	—	—	1,037
Joseph W. Kennedy	2016	9,308	14,379	5,200	26,338	689	—	1,008
	2015	9,421	10,185	4,680	26,338	689	—	1,101

(3) Employee Stock Ownership Plan distribution is an estimated amount.

Benefit Plans

Incentive Compensation Plan. Georgetown Bank maintains an incentive compensation plan to provide incentives and awards to employees in order to support Georgetown Bank’s organizational objectives and financial goals. Full-time and part-time employees employed for a minimum of six continuous months during the plan year are eligible to participate in the incentive compensation plan. Eligible participants who have been employed by Georgetown Bank for less than one year may receive a prorated incentive award. The award is calculated based on the achievement of Company-wide, department and individual goals, the mix and weighting of which will vary from year to year and which are approved annually by the Board of Directors. Distribution of the incentive award is generally made within 30 days of the end of the plan year. Employees whose performance level does not meet expectations may not be eligible for an incentive payout.

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For the year ended December 31, 2016, Mr. Balletto’s plan provides for a target payment of $37,800, or 18% of current annual salary with the following performance categories: (1) achievement of return on assets (ROA) targets; (2) achievement of efficiency ratio targets; (3) achievement of performance standards within the Bank’s compliance program. The target payment can be increased on a sliding scale for improvement in performance categories (1) and (2).  Mr. Weismann’s plan provides for a target payment of $25,760, or 14% of current annual salary with the following performance categories: (1) achievement of ROA targets; (2) achievement of commercial and retail checking account deposit growth targets; (3) achievement of commercial loan growth targets; (4) achievement of fee income targets associated with Small Business Association (SBA) loans. Mr. Kennedy’s plan provides for a target payment of $16,071, or 11% of current annual salary with the following performance categories: (1) achievement of ROA targets; (2) achievement of efficiency ratio targets; (3) achievement of net interest margin percentage targets. The target payment can be increased on a sliding scale for improvement in all of the performance categories.

Supplemental Disability Benefit Plan for Senior Executives. In connection with the restatement of Georgetown Bank employment agreements in April 2012, the Bank entered into a supplemental disability benefit plan for the benefit of Messrs. Balletto and Kennedy. A similar benefit had previously been provided under the executives’ prior employment agreements but was removed in the 2012 employment agreements and incorporated into a separate plan document. Under this plan, in the event the executive suffers a disability covered under the plan, the executive will be entitled to 66% of the sum of their base salary and average bonus paid over the last 36 months, reduced by (x) the maximum disability benefit paid or expected to be paid to the executive under the group disability benefit program sponsored by Georgetown Bank and (y) any disability benefit paid or expected to be paid under any disability insurance plan purchased by the executive with a payment from Georgetown Bank.  In the event that the disability policy identified in “(x)” or “(y)” fails to pay a disability benefit to the executive that would be expected to be paid under said policy or program, Georgetown Bank generally will not be liable to pay such benefit under this plan but will only be liable for payment of the disability benefit as determined under the formula set forth above. The compensation committee of Georgetown Bank will be the administrator of the plan. The compensation committee shall determine, with objective medical input, whether an executive is disabled. For these purposes, disability (or disabled) means that the executive has suffered a disability as defined in the Georgetown Bank’s group disability policy.

Supplemental Retirement Plan. Georgetown Bank previously adopted an Executive Supplemental Retirement Agreement for Messrs. Balletto and Kennedy. Effective June 30, 2008, Georgetown Bank restructured the individual Executive Supplemental Retirement Agreements by establishing a Supplemental Retirement Plan. Like its predecessor, the Supplemental Retirement Plan is a non-tax-qualified, deferred compensation plan. The Supplemental Retirement Plan has been written to comply with Section 409A of the Internal Revenue Code. Messrs. Balletto and Kennedy are the only participants in the Supplemental Retirement Plan. Each participant is required to enter into a participation agreement evidencing his participation in the plan.

Each executive will receive the normal retirement benefit under the Supplemental Retirement Plan if he remains employed with Georgetown Bank until he attains age 65 or has a separation from service within two years of a change in control. The normal retirement benefit is a lump sum amount that is the actuarial equivalent of an annual lifetime benefit of 45% of the executive’s final average compensation, multiplied by a fraction, the numerator of which is the executive’s years of employment with the Bank and the denominator of which is 23. The executive’s final average compensation is based on the three fiscal years of the last five fiscal years of employment with Georgetown Bank in which the executive’s base salary and bonus was the highest. If the executive has a separation from service prior to age 65 (other than due to death, disability or cause), the executive is entitled to his accrued annuity benefit calculated in the manner set forth above, and if applicable multiplied by the executive’s vesting rate set forth in his participation agreement. If the executive is less than age 62 at the time of commencement of the supplemental benefit, his benefit will be further reduced by 5% per year for each year prior to age 62 that the benefit payment commences.

If the executive dies prior to attaining age 65, while employed by Georgetown Bank, the executive’s beneficiary will be entitled to a death benefit equal to the present value of executive’s accrued annuity benefit as of executive’s date of death, without any pre-retirement reductions. In the event of the executive’s disability while employed at Georgetown Bank, the executive will be entitled to a disability benefit, payable commencing at age 65 (unless an alternative commencement time is elected by the executive) as if executive had continued to work until age 65 and assuming that executive’s base salary increased 5% per year for each year until age 65. Each executive entered into an election to have the disability benefit paid at the time of disability determination.

In the event of a change in control of Georgetown Bancorp, Inc. and/or Georgetown Bank followed within two years by executive’s involuntary termination of employment or voluntary termination for good reason, the executive will be entitled to a supplemental benefit calculated as if the executive had attained age 65 and his base salary had increased 5% per year until such time; provided, however, the benefit will be reduced, if necessary, to avoid an excess parachute payment under Section 280G of the Internal Revenue Code.  

The Company accrued $182,000 and $139,000 in compensation expense for the years ended December 31, 2016 and December 31, 2015, respectively, towards the benefit applicable to these agreements for Messrs. Balletto and Kennedy.

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Endorsement Split Dollar Death Benefits. In January 2002, in conjunction with the adoption of the Executive Supplemental Retirement Agreement, Georgetown Bank adopted collateral assignment Split Dollar Plan Agreements with the two executives covered by the Executive Supplemental Retirement Plan. As the result of both the Sarbanes-Oxley Act of 2002 and tax law changes, including the enactment of Section 409A of the Internal Revenue Code, Georgetown Bank determined that it was in the best interest of the Bank to unwind the collateral assignment equity split dollar agreements by having the executives transfer the life insurance policies in their name to Georgetown Bank. In consideration for the termination of this agreement and policy transfer, effective June 30, 2008, the Bank entered into endorsement split dollar life insurance agreements with each of Messrs. Balletto and Kennedy providing additional death benefits during employment and in limited circumstances thereafter, and also agreed to compensate the executives for their purchase of individually-owned life insurance policies that are intended to survive termination of employment (more fully discussed above under “Employment Agreements”).  Under the endorsement split dollar agreements, each executive (or his designated beneficiary) is entitled to share in the proceeds under a life insurance policy owned by Georgetown Bank in the event of his death prior to termination of employment (or, in the event of a change in control, in the event of his death within 36 months of the change in control). In addition, in the event of the executive’s involuntary termination of employment by Georgetown Bank or executive’s resignation for “good reason” (as defined in each executive’s employment agreement) executive shall continue to be covered by the endorsement split dollar agreement for 36 months following such termination of employment. Under the endorsement split dollar life insurance agreements, the death benefit for Mr. Balletto is $2.0 million and for Mr. Kennedy is $1.0 million. 

Stock Benefit Plans

Equity Incentive Plan. The Board of Directors adopted, and in October 2009 stockholders approved, the Georgetown Bancorp, Inc. 2009 Equity Incentive Plan (the “2009 Equity Incentive Plan”) and in May 2014 stockholders approved the Georgetown Bancorp, Inc. 2014 Equity Incentive Plan (the “2014 Equity Incentive Plan”) to provide officers, employees and directors of the Company and Georgetown Bank with additional incentives to promote the growth and performance of the Company. The Equity Incentive Plans give us the flexibility we need to continue to attract and retain highly qualified officers and directors by offering a competitive compensation program that is linked to the performance of our common stock.

Subject to permitted adjustments for certain corporate transactions, the 2009 Equity Incentive Plan authorizes the issuance or delivery to participants of up to 180,035 shares of Company common stock (split-adjusted) pursuant to grants of restricted stock awards, incentive stock options, non-qualified stock options and stock appreciation rights; provided, however, that shares of stock used to fund stock options greater than 98,000 shares (split-adjusted) must be obtained through stock repurchases and shares of stock used to fund restricted stock awards greater than 39,200 shares (split-adjusted) must be obtained through stock repurchases. The 2014 Equity Incentive Plan authorizes the issuance or delivery to participants of up to 44,000 shares of Company common stock pursuant to grants of restricted stock awards and no more than 110,000 shares pursuant to the exercise of incentive stock options, non-qualified stock options and stock appreciation rights.

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Outstanding Equity Awards at Year End. The following table sets forth information with respect to outstanding equity awards as of December 31, 2016 for the Named Executive Officers.

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2016

	Option awards					Stock awards
	Number of	Number of				Number of
	securities	securities				shares or		Market value
	underlying	underlying				units of		of shares or
	unexercised	unexercised		Option		stock that		units of stock
	options	options		exercise	Option	have not		that have not
	exercisable	unexercisable		price	expiration	vested		vested
Name	(#)	(#)		($)	date	(#)		($)(1)
Robert E. Balletto	3,600	—	(2)	9.33	2/22/2020	—	(2)	—
	3,420	—	(3)	9.55	2/22/2021	—	(3)	—
	2,016	504	(4)	9.58	2/22/2022	504	(4)	13,039
	2,250	1,500	(5)	14.00	2/22/2023	1,500	(5)	38,775
	1,320	1,980	(6)	14.98	2/22/2024	1,980	(6)	51,183
	976	3,904	(7)	17.55	2/22/2025	2,496	(7)	64,522
	—	5,915	(8)	19.40	2/22/2026	835	(8)	21,585
Frederick H. Weismann	504	126	(4)	9.58	2/22/2022	126	(4)	3,260
	1,500	1,000	(5)	14.00	2/22/2023	1,000	(5)	25,850
	792	1,188	(6)	14.98	2/22/2024	1,188	(6)	30,710
	792	3,168	(7)	17.55	2/22/2025	2,112	(7)	54,595
	—	5,060	(8)	19.40	2/22/2026	1,690	(8)	43,687
Joseph W. Kennedy	2,160	—	(2)	9.33	2/22/2020	—	(2)	—
	2,160	—	(3)	9.55	2/22/2021	—	(3)	—
	1,308	330	(4)	9.58	2/22/2022	330	(4)	8,539
	1,650	1,100	(5)	14.00	2/22/2023	1,100	(5)	28,435
	704	1,056	(6)	14.98	2/22/2024	1,056	(6)	27,298
	516	2,064	(7)	17.55	2/22/2025	1,376	(7)	35,570
	—	4,000	(8)	19.40	2/22/2026	1,000	(8)	25,850

(1) Based upon the $25.85 closing price per share of our common stock on December 31, 2016.

(2) Represents option awards and stock awards granted February 22, 2010 that vest 20% per year over five years beginning February 22, 2011.

(3) Represents option awards and stock awards granted February 22, 2011 that vest 20% per year over five years beginning February 22, 2012.

(4) Represents option awards and stock awards granted February 22, 2012 that vest 20% per year over five years beginning February 22, 2013.

(5) Represents option awards and stock awards granted February 22, 2013 that vest 20% per year over five years beginning February 22, 2014.

(6) Represents option awards and stock awards granted February 22, 2014 that vest 20% per year over five years beginning February 22, 2015.

(7) Represents option awards and stock awards granted February 22, 2015 that vest 20% per year over five years beginning February 22, 2016.

(8) Represents option awards and stock awards granted February 22, 2016 that vest 20% per year over five years beginning February 22, 2017.

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Directors’ Compensation

The following table sets forth for the year ended December 31, 2016 certain information as to the total remuneration paid to directors other than Mr. Balletto, who receives no compensation for being a director.

DIRECTOR COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 2016

Name	Fees earned or paid in cash  ($)	Stock Awards ($)(1)	Option Awards ($)(1)	All Other Compensation ($)(2)	Total ($)
Keith N. Congdon	15,200	8,226	5,028	208	28,662
Stephen L. Flynn	18,700	8,226	5,028	208	32,162
Thomas L. Hamelin	9,600	8,226	5,028	208	23,062
Marybeth McInnis	14,350	8,226	5,028	208	27,812
J. Richard Murphy	19,000	12,028	7,358	298	38,684
Kathleen R. Sachs	20,400	8,226	5,028	208	33,862
David A. Splaine	18,500	8,226	5,028	208	31,962
Mary L. Williams	15,500	10,418	6,354	253	32,525
Robert T. Wyman	13,450	8,226	5,028	208	26,912

(1) Reflects the aggregate grant date fair value of 424 shares of restricted stock and 861 stock option awards granted to each director on February 22, 2016, except for J. Richard Murphy who received 620 shares of restricted stock and 1,260 stock option awards and Mary L. Williams who received 537 shares of restricted stock and 1,088 stock option awards. The value is the amount recognized for financial statement reporting purposes in accordance with FASB ASC Topic 718. The assumptions used in the valuation of these awards are included in Notes 2 and 12 to our audited financial statements for the year ended December 31, 2016 as included in “Item 8. Financial Statements and Supplementary Data.” At December 31, 2016, each director had 2,242 vested but unexercised stock options, 1,674 unvested stock options and 1,031 unvested shares of restricted stock, except for J. Richard Murphy who had 2,716 vested but unexercised stock options, 2,419 unvested stock options and 1,479 unvested shares of restricted stock, Mary L. Williams who had 2,262 vested but unexercised stock options, 2,066 unvested stock options and 1,262 unvested shares of restricted stock, Kathleen R. Sachs who had 1,044 vested but unexercised stock options, 1,674 unvested stock options and 1,031 unvested shares of restricted stock and Robert T. Wyman who had 1,692 vested but unexercised stock options, 1,674 unvested stock options and 1,031 unvested shares of restricted stock.

(2) Reflects dividends received on unvested restricted shares.

Directors’ Compensation

Each of the individuals who serves as a director of the Company also serves as a director of Georgetown Bank and earns director fees in that capacity, with the exception of Mr. Balletto, who receives no compensation for being a director. The Chairman of the Board receives a $10,000 annual retainer, paid quarterly and $500 per meeting attended. The Vice Chairman of the Board receives a $5,000 annual retainer, paid quarterly and $500 per meeting attended. All other directors of Georgetown Bank receive a $3,200 annual retainer, paid quarterly and $400 per meeting attended. Each director serving on a Board of Directors’ committee is paid a fee of $250 per meeting attended, except for the Audit Committee for which the fee is $500 per meeting attended. The Chairman of each committee receives an additional $100 per meeting attended. The Assistant Secretary receives an additional $300 per Board of Directors’ meeting for recording of minutes. For the year ended December 31, 2016, Georgetown Bank paid a total of $144,700 in director fees.

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ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Persons and groups who beneficially own in excess of 5% of the common stock are required to file certain reports with the Securities and Exchange Commission (the “SEC”) regarding such ownership. The following table sets forth, as of March 23, 2017, the shares of common stock beneficially owned by each person who was the beneficial owner of more than 5% of the Company’s outstanding shares of common stock, and all directors and executive officers of the Company as a group. Information with respect to stock ownership of individual directors and executive officers can be found in “Item 10. Directors, Executive Officers and Corporate Governance.”

	Amount of Shares
	Owned and Nature	Percent of Shares
Name and Address of	of Beneficial	of Common Stock
Beneficial Owners	Ownership(1)	Outstanding (1)
All Directors and Executive Officers
as a group (12 persons)	275,033	14.5%
2 East Main Street
Georgetown, Massachusetts 01833
Georgetown Bank Employee Stock Ownership Plan	143,444	7.8%
2 East Main Street
Georgetown, Massachusetts 01833
Gardner Lewis Asset Management, L.P. (2)	170,016	9.3%
Gardner Lewis Asset Management, Inc.
Gardner Lewis Merger Arbitrage Fund, L.P.
Gardner Lewis Partners, LLC
285 Wilmington – West Chester Pike
Chadds Ford, PA 19317
Context BH Capital Management, LP (3)	121,259	6.6%
401 City Avenue, Suite 800 Bala Cynwyd, PA 19004

(1) For purposes of this table, a person is deemed to be the beneficial owner of shares of common stock if he or she has shared voting or investment power with respect to such security, or has a right to acquire beneficial ownership at any time within 60 days from March 23, 2017. As used herein, “voting power” is the power to vote or direct the voting of shares, and “investment power” is the power to dispose of or direct the disposition of shares. The table includes all shares held directly as well as by spouses and minor children, in trust and other indirect ownership, over which shares the named individuals effectively exercise sole or shared voting and investment power. 

(2) As disclosed in Schedule 13G, as filed with the SEC on February 14, 2017.

(3) As disclosed in Schedule 13G, as filed with the SEC on March 8, 2017.

Information with respect to equity plans can be found in “Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Securities.”

ITEM 13.Certain Relationships and Related Transactions and Director Independence

Transactions with Certain Related Persons

All transactions between the Company and its executive officers, directors, holders of 10% or more of the shares of its common stock and affiliates thereof, are on terms no less favorable to the Company than could have been obtained by it in arm’s-length negotiations with unaffiliated persons. Such transactions must be approved by the Audit Committee of the Company following a review for potential conflicts of interest. In the ordinary course of business, Georgetown Bank makes loans available to its directors, officers and employees. These loans are made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to Georgetown Bank. These loans neither involve more than the normal risk of collectibility nor present other unfavorable features.

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Section 402 of the Sarbanes-Oxley Act of 2002 generally prohibits an issuer from: (1) extending or maintaining credit; (2) arranging for the extension of credit; or (3) renewing an extension of credit in the form of a personal loan for an officer or director. There are several exceptions to this general prohibition, one of which is applicable to the Company. Section 402 of the Sarbanes-Oxley Act of 2002 does not apply to loans made by a depository institution that is insured by the FDIC and is subject to the insider lending restrictions of the Federal Reserve Act. All loans to Georgetown Bank’s directors and officers are made in conformity with the Federal Reserve Act and applicable regulations.

Board Independence

The Board of Directors has determined that, except for Mr. Balletto, each member of the Board of Directors is an “independent director” within the meaning of Rule 5605 of the NASDAQ corporate governance listing standards. Mr. Balletto is not considered independent because he serves as an executive officer of the Company. In determining the independence of the independent directors, the Board of Directors reviewed the following transactions, which are not required to be reported under “―Transactions With Certain Related Persons,” below:

Loans made in the normal course of business with Georgetown Bank

Director	Total Potential/ Outstanding Loan Balances as of December 31, 2016
Stephen L. Flynn	$	1,862,061
Thomas L. Hamelin		382,500
Total	$	2,244,561

Sales of merchandise to Georgetown Bank

Director	Sales for the year ended December 31, 2016
Stephen L. Flynn	$	19,487

ITEM 14.Principal Accounting Fees and Services

Audit Fees

The following sets forth information with respect to the fees paid by the Company for the years ended December 31, 2016 and 2015 to Baker Newman & Noyes, P.A., LLC.

Audit Fees. During the year ended December 31, 2016, the fees billed for professional services rendered by Baker Newman & Noyes, P.A., LLC for the audit of the Company’s annual financial statements and for the review of the consolidated financial statements included in the Company’s quarterly reports on Forms 10-Q were $92,300. During the year ended December 31, 2015, the fees billed for professional services rendered by Shatswell, MacLeod & Company, P.C. for the review of the consolidated financial statements included in the Company’s quarterly reports on Forms 10-Q were $7,400. During the year ended December 31, 2015, the fees billed for professional services rendered by Baker Newman & Noyes, P.A., LLC for the audit of the Company’s annual financial statements and for the review of the consolidated financial statements included in the Company’s quarterly reports on Forms 10-Q were $82,210.

Audit-Related Fees. During the years ended December 31, 2016 and 2015, there were aggregate fees of $2,400 and $2,300, respectively, billed for professional services by Baker Newman & Noyes, P.A., LLC that were reasonably related to the performance of the audits.

Tax Fees. During the year ended December 31, 2016 the fees billed for professional services by Baker Newman & Noyes, P.A., LLC for such tax services were $11,200. During the year ended December 31, 2015 the fees billed for professional services by Baker Newman & Noyes, P.A., LLC for such tax services were $10,800.

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All Other Fees. During the year ended December 31, 2016 the fees billed for professional services rendered by Baker Newman & Noyes, P.A., LLC for assistance with the accounting for Small Business Administration loan sales were $2,450. During the year ended December 31, 2015, there were no non-audit fees billed by Baker Newman & Noyes, P.A., LLC.

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm

The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The independent registered public accounting firm and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. All audit and non-audit services for the past two years were pre-approved by the Audit Committee.

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PART IV

ITEM 15.Exhibits and Financial Statement Schedules

(a)Financial Statements

The financial statements filed as a part of this Form 10-K are as follows:

(A)	Report of Independent Registered Public Accounting Firm (page F-2)
(B)	Consolidated Balance Sheets (page F-3)
(C)	Consolidated Statements of Income (page F-4)
(D)	Consolidated Statements of Comprehensive Income (page F-5)
(E)	Consolidated Statements of Changes In Stockholders’ Equity (page F-6)
(F)	Consolidated Statements of Cash Flows (page F-7 to page F-8)
(G)	Notes to Consolidated Financial Statements (page F-9 to page F-50)

(b)Financial Statement Schedules

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

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(c)Exhibits

3.1	Articles of Incorporation of Georgetown Bancorp, Inc. (1)
3.2	Bylaws of Georgetown Bancorp, Inc. (1)
4	Form of Common Stock Certificate of Georgetown Bancorp, Inc. (1)
10.1	SBERA Defined Contribution Plan and Non-standardized Adoption Agreement (2)
10.2	Georgetown Savings Bank 2010 Incentive Compensation Plan (3)
10.3	[Omitted]
10.4	[Omitted]
10.5	Supplemental Retirement Plan for Senior Executives, dated June 23, 2008 (6)
10.6	Endorsement Split-Dollar Life Insurance Agreement by and between Georgetown Savings Bank and Robert E. Balletto, dated June 23, 2008 (7)
10.7	Endorsement Split-Dollar Life Insurance Agreement by and between Georgetown Savings Bank and Joseph W. Kennedy, dated June 23, 2008 (8)
10.8	Employment Agreement between Georgetown Bank and Robert E. Balletto, dated March 23, 2015 (9)
10.9	Employment Agreement between Georgetown Bank and Joseph W. Kennedy, dated March 23, 2015 (10)
10.10	Georgetown Savings Bank Supplemental Disability Benefit Plan for Senior Officers dated April 11, 2012 (11)
10.11	Employment Agreement between Georgetown Bancorp, Inc. and Robert E. Balletto, dated March 23, 2015 (12)
10.12	Employment Agreement between Georgetown Bancorp, Inc. and Joseph W. Kennedy, dated March 23, 2015 (13)
10.13	[Omitted]
10.14	Incentive Compensation Plan 2016 Goals for Frederick H. Weismann (14)
10.15	Incentive Compensation Plan 2016 Goals for Robert E. Balletto (15)
10.16	Incentive Compensation Plan 2016 Goals for Joseph W. Kennedy (16)
10.17	Incentive Compensation Plan 2015 Goals for Robert E. Balletto (17)
10.18	Incentive Compensation Plan 2015 Goals for Joseph W. Kennedy (18)
10.19	Incentive Compensation Plan 2015 Goals for Frederick H. Weismann (19)
10.20	Employment Agreement between Salem Five Cents Savings Bank and Robert E. Balletto, dated October 5 2016 (20)
10.21	Employment Agreement between Salem Five Cents Savings Bank and Joseph W. Kennedy, dated October 5, 2016 (21)
10.22	Change in Control Agreement between Georgetown Bank and Frederick H. Weismann, dated October 23, 2014 (22)
14	Code of Ethics (23)
21	Subsidiaries of Registrant (1)
23	Consent of Independent Registered Public Accounting Firm–Baker, Newman & Noyes, LLC
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following financial statements of Georgetown Bancorp, Inc. formatted in XBRL: (1) Consolidated Balance Sheets at December 31, 2016 and 2015, (2) Consolidated Statements of Income for the years ended December 31, 2016 and 2015, (3) Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015, (4) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016 and 2015, (5) Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015, (6) and the Notes to the Consolidated Financial Statements.

(1) Incorporated by reference to the Registration Statement on Form S-1 of Georgetown Bancorp, Inc. (file no. 333-180018), originally filed with the Securities and Exchange Commission on March 9, 2012.

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(2) Incorporated by reference to the Registration Statement on Form SB-2 of Georgetown Bancorp, Inc., a federal corporation (“Georgetown-Federal”) (Commission File No. 333-119007), originally filed with the Securities and Exchange Commission on September 15, 2004.

(3) Incorporated by reference to Exhibit 10.4 to the Form 10-K of Georgetown-Federal, filed with the Securities and Exchange Commission on March 31, 2011.

(4) [Omitted]

(5) [Omitted]

(6) Incorporated by reference to Exhibit 10.3 to the Form 8-K of Georgetown-Federal, filed with the Securities and Exchange Commission on June 27, 2008.

(7) Incorporated by reference to Exhibit 10.4 to the Form 8-K of Georgetown-Federal, filed with the Securities and Exchange Commission on June 27, 2008.

(8) Incorporated by reference to Exhibit 10.5 to the Form 8-K of Georgetown-Federal, filed with the Securities and Exchange Commission on June 27, 2008.

(9) Incorporated by reference to Exhibit 10.2 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595), filed with the Securities and Exchange Commission on March 26, 2015.

(10) Incorporated by reference to Exhibit 10.4 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595), filed with the Securities and Exchange Commission on March 26, 2015.

(11) Incorporated by reference to Exhibit 10.3 to the Form 8-K of Georgetown-Federal, filed with the Securities and Exchange Commission on April 17, 2012.

(12) Incorporated by reference to Exhibit 10.1 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595), filed with the Securities and Exchange Commission on March 26, 2015.

(13) Incorporated by reference to Exhibit 10.3 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595), filed with the Securities and Exchange Commission on March 26, 2015.

(14) Incorporated by reference to Exhibit 10.2 to the Form 8-K of Georgetown Bancorp, Inc. filed with the Securities and Exchange Commission on April 27, 2016.

(15) Incorporated by reference to Exhibit 10.1 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595, filed with the Securities and Exchange Commission on April 27, 2016.

(16) Incorporated by reference to Exhibit 10.3 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595, filed with the Securities and Exchange Commission on April 27, 2016.

(17) Incorporated by reference to Exhibit 10.1 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595, filed with the Securities and Exchange Commission on January 29, 2015.

(18) Incorporated by reference to Exhibit 10.3 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595, filed with the Securities and Exchange Commission on January 29, 2015.

(19) Incorporated by reference to Exhibit 10.2 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595, filed with the Securities and Exchange Commission on January 29, 2015.

(20) Incorporated by reference to Exhibit 10.2 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595, filed with the Securities and Exchange Commission on October 11, 2016.

(21) Incorporated by reference to Exhibit 10.3 to the Form 8-K of Georgetown Bancorp, Inc. (file no. 001-35595, filed with the Securities and Exchange Commission on October 11, 2016.

(22) Incorporated by reference to Exhibit 10.13 to the Form 10-K of Georgetown Bancorp, Inc. (file no. 001-35595, filed with the Securities and Exchange Commission on March 29, 2016.

(23)Incorporated by reference to the Form 10-KSB of Georgetown Federal filed with the Securities and Exchange Commission on September 28, 2006.

ITEM 16.Form 10-K Summary

Not applicable.

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SIGNATURES

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

		GEORGETOWN BANCORP, INC.
Date: March 27, 2017	By:	/s/ Robert E. Balletto
		Robert E. Balletto
		President, Chief Executive Officer and Director (Duly Authorized Representative)

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

Signatures	Title	Date
/s/ Robert E. Balletto	President, Chief Executive Officer and Director (Principal Executive Officer)	March 27, 2017
Robert E. Balletto
/s/ Joseph W. Kennedy	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	March 27, 2017
Joseph W. Kennedy
/s/ J. Richard Murphy	Chairman of the Board	March 23, 2017
J. Richard Murphy
	Vice Chairman of the Board
Mary L. Williams
/s/ Keith N. Congdon	Director	March 27, 2017
Keith N. Congdon
/s/ Stephen L. Flynn	Director	March 27, 2017
Stephen L. Flynn
/s/ Thomas L. Hamelin	Director	March 27, 2017
Thomas L. Hamelin
/s/ Marybeth McInnis	Director	March 27, 2017
Marybeth McInnis
/s/ Kathleen R. Sachs	Director	March 27, 2017
Kathleen R. Sachs
/s/ David A. Splaine	Director	March 27, 2017
David A. Splaine
/s/ Robert T. Wyman	Director	March 27, 2017
Robert T. Wyman

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