Heritage NOLA Bancorp 10Q 2017 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

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

For the transition period from _______________ to _______________

Commission File No. 000-55817

Heritage NOLA Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

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

(985) 892-4565

(Registrant’s telephone number)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES¨ NOx

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¨ NOx

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

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

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

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

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

Heritage NOLA Bancorp, Inc.

Form 10-Q

Index

		Page

Item 1.	Consolidated Financial Statements

	Consolidated Statements of Financial Condition as of September 30, 2017, (unaudited) and December 31, 2016	1

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

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

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

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

	Notes to Consolidated Financial Statements (unaudited)	6

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults upon Senior Securities	29

Item 4.	Mine Safety Disclosures	29

Item 5.	Other Information	29

Item 6.	Exhibits	30

	Signature Pages	31

Item 1.

Consolidated Financial Statements

Heritage NOLA Bancorp, Inc.

Consolidated Statements of Financial Condition

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

(In Thousands)

	September 30,			December 31,
	2017			2016
ASSETS
Cash and Due from Banks	$	563		$	530
Interest Earning Deposits in Banks		7,967			7,484
Total Cash and Cash Equivalents		8,530			8,014

Securities Available for Sale, at Fair Value		5,975			7,175
Securities Held to Maturity		690			832
Federal Home Loan Bank Stock		780			495
Other Investments		178			178
Mortgage Loans Held for Sale		111			-
Loans Receivable, Net of Allowance for Loan Losses of $757 at September 30, 2017 and $692 at December 31, 2016		86,475			74,659
Premises and Equipment		3,678			3,716
Bank Owned Life Insurance		2,038			2,001
Foreclosed Real Estate		84			93
Mortgage Servicing Rights		340			325
Accrued Interest Receivable		357			318
Prepaid Expenses and Other Assets		217			209
Total Assets	$	109,453		$	98,015

LIABILITIES AND EQUITY
Interest Bearing Deposits	$	68,220		$	69,901
Noninterest Bearing Deposits		3,122			4,350
Total Deposits		71,342			74,251

Borrowed Funds		12,567			13,274
Advances from Borrowers for Taxes and Insurance		565			275
Accrued Expenses and Other Liabilities		1,025			755
Total Liabilities		85,499			88,555

Shareholders' Equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued		-			-
Common stock, $0.01 par value, 9,000,000 shares authorized, 1,653,125 shares issued and outstanding		17			-
Additional paid-in capital		15,430			-
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP)		(1,323	)		-
Recognition and Retention Plan (RRP)		-			-
Retained Earnings		9,803			9,429
Accumulated Other Comprehensive Income		27			31
Total Shareholders' Equity		23,954			9,460
Total Liabilities and Shareholders' Equity	$	109,453		$	98,015

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

Heritage NOLA Bancorp, Inc.

Consolidated Statements of Income

For the Three and Nine Months Ended September 30, 2017 and 2016, (Unaudited)

(In Thousands, except for Earnings Per Share)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016

Interest Income
First Mortgage Loans	$	1,009	$	924	$	3,001	$	2,833
HELOC's		31		23		86		70
Securities		33		35		106		107
Second Mortgages		7		9		25		22
Commercial Loans		14		-		29		-
Consumer Loans (Secured by Deposits)		3		3		9		7
Other Interest Earning Assets		52		24		111		69
Total Interest Income		1,149		1,018		3,367		3,108

Interest Expense
Deposits		202		213		614		626
Borrowed Funds		47		38		156		121
Total Interest Expense		249		251		770		747

Net Interest Income		900		767		2,597		2,361

Provision for Loan Losses		15		15		65		70
Net Interest Income after Provision for Loan Losses		885		752		2,532		2,291

Noninterest Income
Gain on Sale of Loans Originated for Sale		22		27		49		68
Loan Servicing Income		36		48		119		143
Gain (Loss) on Sale of Foreclosed Real Estate		-		-		1		(51	)
Other Income		22		23		67		69
Total Noninterest Income		80		98		236		229

Noninterest Expense
Salaries and Employee Benefits		433		392		1,278		1,183
Data Processing		49		47		154		142
Occupancy and Equipment - Other		50		49		120		140
Occupancy and Equipment - Depreciation		43		46		130		139
FDIC Insurance and Examination Fees		27		32		79		96
Director Compensation		17		20		53		60
Expense on Foreclosed Real Estate		2		7		3		32
Write-down of Foreclosed Real Estate		-		-		-		71
Advertising		23		19		72		63
Other		105		117		304		291
Total Noninterest Expense		749		729		2,193		2,217

Income Before Income Tax Expense		216		121		575		303
Income Tax Expense		76		37		201		67
Net Income	$	140	$	84	$	374	$	236

Earnings per share: Basic and Diluted	$	0.09		N/A	$	0.25		N/A

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

Heritage NOLA Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2017 and 2016, (Unaudited)

(In Thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Net Income	$	140		$	84		$	374		$	236

Other Comprehensive Income (Loss):
Unrealized Holding Gains (Losses) on Securities Available for Sale		(3	)		(13	)		(7	)		34
Income Tax Effect		1			4			3			(12	)

Total Other Comprehensive Income (Loss)		(2	)		(9	)		(4	)		22

Comprehensive Income	$	138		$	75		$	370		$	258

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

Heritage NOLA Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the Nine Months Ended September 30, 2017 and 2016, (Unaudited)

(In Thousands)

										Accumulated
			Additional		Unallocated					Other
	Common		Paid In		ESOP			Retained		Comprehensive
	Stock		Capital		Shares			Earnings		Income (Loss)			Total


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

Net Income		-		-		-			236		-			236

Other Comprehensive Income		-		-		-			-		22			22

Balance at September 30, 2016	$	-	$	-	$	-		$	9,507	$	77		$	9,584

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

Proceeds from issuance of common stock		17		15,430		(1,323	)		-		-			14,124

Net Income		-		-		-			374		-			374

Other Comprehensive Loss		-		-		-			-		(4	)		(4	)

Balance at September 30, 2017	$	17	$	15,430	$	(1,323	)	$	9,803	$	27		$	23,954

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

Heritage NOLA Bancorp, Inc.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2017 and 2016, (Unaudited)

(In Thousands)

	Nine Months Ended September 30,
	2017			2016

Cash Flows from Operating Activities
Net Income	$	374		$	236
Adjustments to reconcile net income (loss) to net cash from operating activities
Provision for Loan Losses		65			70
Writedowns of Foreclosed Real Estate		-			71
Provision for Depreciation		130			139
Deferred Income Tax Expense (Benefit)		(41	)		-
Change in Mortgage Servicing Rights		(15	)		(32	)
(Accretion) Amortization of Premiums and Discounts on Securities		35			34
(Accretion) Amortization of Deferred Loan Origination Fees		6			(31	)
Gain on Sale of Loans Originated for Sale		(49	)		(68	)
Originations of Loans Held for Sale		(111	)		-
Gain on Sale of Foreclosed Real Estate		(1	)		-
Loss on Sale of Foreclosed Real Estate		-			51
(Increase) Decrease in Accrued Interest Receivable		(39	)		18
(Increase) Decrease in Bank Owned Life Insurance		(37	)		(40	)
(Increase) Decrease in Prepaid Expenses and Other Assets		36			(34	)
Increase (Decrease) in Accrued Expenses and Other Liabilities		270			199

Net Cash provided by Operating Activities		623			613

Cash Flows from Investing Activities
Purchases of Securities Available For Sale					(1,059	)
Principal Collected on Securities Available for Sale		1,164			1,324
Principal Collected on Securities Held to Maturity		136			214
Purchase of Federal Home Loan Bank Stock		(285	)		(33	)
Purchase of Other Investments		-			(178	)
Net (Increase) Decrease in Loans		(11,838	)		35
Purchases of Premises and Equipment		(92	)		(8	)
Proceeds from Sales of Foreclosed Real Estate		10			522

Net Cash provided by (used in) Investing Activities		(10,905	)		817

Cash Flows from Financing Activities
Net Increase (Decrease) in Deposits		(2,909	)		509
Proceeds from Stock Offering		15,447			-
Loan to ESOP for Purchase of Stock		(1,323	)		-
Advances from Borrowers for Taxes and Insurance		290			255
Funds Borrowed		9,550			5,150
Repayments of Borrowed Funds		(10,257	)		(5,681	)

Net Cash provided by Financing Activities		10,798			233

Net Change in Cash and Cash Equivalents		516			1,663

Cash and Cash Equivalents - Beginning of Period		8,014			8,572

Cash and Cash Equivalents - End of Period	$	8,530		$	10,235

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest Paid on Deposits and Borrowed Funds	$	770		$	747

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

Heritage NOLA Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note A – Basis of Presentation

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

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

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

Note B – Recent Accounting Pronouncements

Emerging Growth Company Status

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

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

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

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

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

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

Note C – Earnings Per Share

Basic earnings per share (“EPS”) represents income available to common shareholders divided by the weighted average number of common shares outstanding; no dilution for any potentially convertible shares is included in the calculation. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The potential common shares that may be issued by the Company relate to outstanding stock options.

Earnings per common share were computed based on the following:

	Nine Months Ended
	September 30,
(in thousands, except per share data)	2017
Numerator:
Net income available to common shareholders	$	374

Denominator:
Common shares outstanding (Total issued, less unallocated ESOP shares)		1,521
Dilutive stock options		-
		1,521

Basic (and Diluted) earnings per common share	$	0.25

Note D – Investment Securities

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

	September 30, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(in thousands)	Cost		Gains		(Losses)			Value
Available for Sale:
Mortgage-Backed Securities	$	5,933	$	72	$	(30	)	$	5,975

Held to Maturity:
Mortgage-Backed Securities	$	690	$	1	$	(7	)	$	684

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

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

There were no securities sold in 2017 or 2016.

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

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

	Amortized		Fair
(in thousands)	Cost		Value
Available for Sale:
Less than One Year	$	2	$	2
After One Year Through Five Years		5		5
After Five Years Through Ten Years		1,400		1,403
After Ten Years		4,526		4,565
	$	5,933	$	5,975

Held to Maturity:
After Five Years Through Ten Years	$	378	$	379
After Ten Years		312		305
	$	690	$	684

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

	September 30, 2017
	Less Than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Available for Sale:
Mortgage-Backed Securities	$	2,487	$	11	$	1,018	$	19	$	3,505	$	30

Held to Maturity:
Mortgage-Backed Securities	$	-	$	-	$	292	$	7	$	292	$	7

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

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

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

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

Note E - Credit Quality and Allowance for Loan Losses

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

Loans Receivable

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

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

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

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

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

Allowance for Loan Losses

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

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

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

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

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

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

Real Estate:
Secured by one-to four family residential properties
Owner-occupied	$	50,543		$	46,353
Non-owner-occupied		12,019			11,237
Home Equity Lines of Credit		2,478			2,246
Commercial (Nonresidential) Properties		16,355			7,234
Land		2,773			2,907
Construction		1,542			3,475
Multi-family		1,682			2,629
Commercial		1,055			295
Consumer Loans		368			285
Total Loans		88,815			76,661

Less: Net Deferred Loan Fees		(453	)		(459	)
Loans in Process		(1,130	)		(851	)
Allowance for Loan Losses		(757	)		(692	)
Net Loans	$	86,475		$	74,659

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

Allowance for Credit Losses and Recorded Investment in Loans Receivable

For the Nine Months Ended September 30, 2017

(in thousands)

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

Allowance for Credit Losses:
Beginning Balance	$	43	$	101		$	528	$	8		$	3		$	-	$	9	$	692
Charge-offs		-		-			-		-			-			-		-		-
Recoveries		-		-			-		-			-			-		-		-
Provision		25		(48	)		77		(4	)		(2	)		-		17		65
Ending Balance	$	68	$	53		$	605	$	4		$	1		$	-	$	26	$	757

Ending Balance:
Individually Evaluatedfor Impairment	$	14	$	2		$	23	$	-		$	-		$	-	$	-	$	39

Ending Balance:
Collectively Evaluatedfor Impairment	$	54	$	51		$	582	$	4		$	1		$	-	$	26	$	718

Loans Receivable:
Ending Balance	$	16,355	$	2,773		$	65,040	$	1,542		$	1,682		$	368	$	1,055	$	88,815

Ending Balance:
Individually Evaluated for Impairment	$	145	$	14		$	218	$	-		$	-		$	-	$	-	$	377

Ending Balance:
Collectively Evaluated for Impairment	$	16,210	$	2,759		$	64,822	$	1,542		$	1,682		$	368	$	1,055	$	88,438

Allowance for Credit Losses and Recorded Investment in Loans Receivable

For the Year Ended December 31, 2016

(in thousands)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Credit Risk Profile by Internally Assigned Grade

(in thousands)

September 30, 2017

	Real Estate
	Commercial RE		Land		One-to-Four Family		Construction		Multi-Family		Consumer		Commercial		Total
Pass	$	16,039	$	2,727	$	64,549	$	1,542	$	1,682	$	368	$	1,055	$	87,962
Special Mention		-		-		-		-		-		-		-		-
Substandard		316		46		491		-		-		-		-		853
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
	$	16,355	$	2,773	$	65,040	$	1,542	$	1,682	$	368	$	1,055	$	88,815

December 31, 2016

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

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

Aged Analysis of Past Due Loans Receivable

(in thousands)

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

Real Estate:
Commercial	$	117	$	-	$	117	$	144	$	16,094	$	16,355
Land		49		-		49		15	$	2,709		2,773
Residential		1,576		-		1,576		218	$	63,246		65,040
Construction		-		-		-		-	$	1,542		1,542
Multi-family		-		-		-		-	$	1,682		1,682
Consumer		-		-		-		-	$	368		368
Commercial		-		-		-		-	$	1,055		1,055
	$	1,742	$	-	$	1,742	$	377	$	86,696	$	88,815

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

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

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

Loans with an allowance recorded:
Real estate
Commercial	$	145	$	143	$	14		143	$	-
Land		14		19		2		14		-
1-4 family residential		218		211		23		259		-
Multi-Family		-		-		-		-		-
Construction		-		-		-		-		-
Consumer and Commercial		-		-		-		-		-

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

Totals	$	377	$	373	$	39	$	416	$	-

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

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

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

Totals	$	518	$	706	$	38	$	556	$	-

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

Troubled Debt Restructuring

(in thousands)

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Modifications as of September 30, 2017:

Residential - modified amortization		0	$	-	$	-

Modifications as of December 31, 2016:

Residential - modified amortization		4	$	441	$	290

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

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

Note F - Fair Value of Financial Statements

Fair Value Disclosures

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

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

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

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

Recurring Basis

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

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

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

September 30, 2017

Mortgage-Backed Securities	$	5,975	$	-	$	5,975	$	-

December 31, 2016

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

Nonrecurring Basis

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

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

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

September 30, 2017

Assets
Impaired Loans	$	338	$	-	$	338	$	-
Repossessed Assets		84		-		84		-
Total	$	422	$	-	$	422	$	-

December 31, 2016

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

Fair values of financial instruments

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

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

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

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

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

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

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

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

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

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

September 30, 2017
Financial Assets:
Cash, Short-Term Investments and Federal Funds Sold	$	8,530	$	8,530	$	8,530	$	-	$	-
Securities-Available for Sale		5,975		5,975		-		5,975		-
Securities-Held to Maturity		690		684		-		684		-
Other Equity Securities		958		954		-		-		954
Cash Value of Life Insurance		2,038		2,038		-		2,038		-
Loans Held for Sale		111		111		-		311		-
Loans-Net		86,475		86,556		-		-		86,556
	$	104,777	$	104,848	$	8,530	$	9,008	$	87,510

Financial Liabilities:
Deposits	$	71,342	$	72,069	$	-	$	-	$	72,069
Borrowed Funds		12,567		12,482		-		12,482		-
	$	83,909	$	84,551	$	-	$	12,482	$	72,069

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

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

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

NOTE G – Change in Corporate Form

On July 12, 2017, Heritage Bank of St Tammany (“the Bank”) converted to a federal stock savings and loan association and established a stock holding company, Heritage NOLA Bancorp, Inc, as parent of the Bank.

The Bank converted to the stock form of ownership, followed by the issuance of all of the Bank’s outstanding stock to Heritage NOLA Bancorp, Inc. The Bank became the wholly owned subsidiary of the Company, and the Company issued and sold shares of its capital stock pursuant to an independent valuation appraisal of the Bank and the Company. The stock was priced at $10.00 per share. In addition, the Bank’s board of directors adopted an employee stock ownership plan (ESOP) which subscribed for 8% of the common stock sold in the offering. The Conversion was completed on July 12, 2017 and resulted in the issuance of 1,653,125 common shares by the Company. The cost of the Conversion and issuing the capital stock totaled $1.1 million and was deducted from the proceeds of the offering.

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

The Conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

NOTE H – Employee Stock Ownership Plan

As part of the Company’s stock conversion, shares were purchased by the ESOP with a loan from Heritage NOLA Bancorp, Inc. All employees of the Bank meeting certain tenure requirements are entitled to participate in the ESOP. Compensation expense related to the ESOP was $40,000 for the three month period ended September 30, 2017.

NOTE I – Subsequent Events

On October 31, 2017, the Bank purchased from the FDIC a closed banking facility in Madisonville, Louisiana for $525,000. An application to establish a branch facility at this location has been filed by the Bank with the Office of the Comptroller of the Currency, and the Bank expects to receive approval of this application by January 2018. We anticipate there will be additional costs of preparing and/or renovating this facility to serve as a full-service branch location.

Item 2.

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

General

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

statements of our goals, intentions and expectations;

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

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

estimates of our risks and future costs and benefits.

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

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

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

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

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

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

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

competition among depository and other financial institutions;

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

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

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

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

fluctuations in the demand for loans;

changes in consumer spending, borrowing and savings habits;

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

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

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

changes in the level of government support of housing finance;

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

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

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

Total Assets.Total assets were $109.5 million at September 30, 2017, an increase of $11.5 million, or 11.7%, compared to $98.0 million at December 31, 2016. The increase was due primarily to an increase of $11.8 million in net loans receivable resulting primarily from purchases of participations in loans secured by various commercial and residential properties in our market area.

Loans, net and Loans Held for Sale.Loans, net increased $11.8 million, or 15.8%, to $86.5 million at September 30, 2017 from $74.7 million at December 31, 2016. Owner-occupied one- to four-family residential real estate loans increased $4.2 million, or 9.0%, to $50.5 million at September 30, 2017 from $46.3 million at December 31, 2016, non-owner-occupied, one- to four-family residential real estate loans increased $782,000, or 7.0%, and commercial real estate loans increased $9.1 million, or 126.1%, to $16.4 million at September 30, 2017. The increase in our owner-occupied residential real estate portfolio resulted in part from a loan participation purchase of $984,000 on a single-family home in St. Tammany Parish. The increase in commercial real estate loans resulted primarily from purchases of $8.3 million, including the repurchase of a portion of a grocery store loan and participation purchases of a commercial office building loan, a big box store loan, two restaurant loans, a boat storage facility loan and one commercial retail facility loan in our market area. These increases were offset, in part, by a decrease in construction loans which decreased $1.9 million, or 55.6%, to $1.5 million at September 30, 2017, due to these loans moving to permanent status, and a decrease in multi-family loans, which decreased $947,000, or 36.0%, to $1.7 million at September 30, 2017 due to a single payoff of a $1.4 million loan. Commercial loans increased $760,000, or 257.6%, for the nine months ended September 30, 2017, due to purchases of $857,000 in loans from Bankers Healthcare Group, a nationally recognized lender to healthcare professionals. Loans held for sale increased to $111,000 at September 30, 2017 from $0 at December 31, 2016, representing a single loan whose sale had not concluded at September 30, 2017.

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

Securities.Securities were $6.7 million at September 30, 2017, a decrease of $1.3 million, or 16.3%, from $8.0 million at December 31, 2016. This decrease reflects normal repayments and maturities of the mortgage backed securities.

Federal Home Loan Bank Stock.Stock in the FHLB - Dallas increased $285,000, or 57.6%, to $780,000 at September 30, 2017 from $495,000 at December 31, 2016. This increase was due to stock purchases in conjunction with advances taken earlier in the year to fund the growth in our loan portfolio.

Deposits.Deposits decreased $2.9 million, or 3.9%, to $71.3 million at September 30, 2017 from $74.2 million at December 31, 2016. Our demand deposit accounts decreased $1.2 million, or 28.3%, due to the funds customers used to purchase stock and the accounts closed following the Conversion. This also was the primary cause of certificates of deposit decreasing by $1.1 million, or 2.2%, to $49.9 million at September 30, 2017 from $51.0 million at December 31, 2016.

Borrowings.Borrowings, consisting of Federal Home Loan Bank advances, totaled $12.6 million at September 30, 2017 compared to $13.3 million at December 31, 2016, a decrease of 5.3%.

Total Shareholders’ Equity.TotalShareholders’ equity increased $14.5 million, or 153.2%, to $24.0 million at September 30, 2017 from $9.5 million at December 31, 2016. The increase resulted primarily from the $14.3 million net proceeds from the issuance of common stock and net income of $374,000 year to date through September 30, 2017.

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

General. Net income for the three months ended September 30, 2017 was $140,000, compared to $84,000 for the three months ended September 30, 2016, an increase of $56,000. The increase in net income was primarily due to a $133,000 increase in net interest income, offset by a decrease in noninterest income of $18,000, an increase in noninterest expense of $20,000 and an increase in provision for income taxes of $39,000 for the three months ended September 30, 2017 compared to the quarter ended September 30, 2016.

Interest Income. Interest income increased $131,000, or 12.9%, to $1.1 million for the three months ended September 30, 2017 from $1.0 million for the three months ended September 30, 2016. The increase was primarily attributable to a $105,000 increase in interest on loans receivable, and a $28,000 increase in interest on other interest-earning assets. The average balance of loans during the three months ended September 30, 2017 increased $11.8 million, or 16.3%, to $84.2 million from $72.4 million for the three months ended September 30, 2016, while the average yield on loans decreased 24 basis points to 5.06% for the three months ended September 30, 2017 from 5.30% for the three months ended September 30, 2016, reflecting loans being originated and participations being purchased in the ongoing low interest rate environment. The average balance of investment securities and other interest-earning deposits, increased $3.6 million to $21.1 million for the three months ended September 30, 2017 from $17.5 million for the three months ended September 30, 2016, while the average yield increased 26 basis points to 1.61% for the three months ended September 30, 2017 from 1.35% for the three months ended September 30, 2016.

Interest Expense. Total interest expense decreased $2,000, or 0.8%, to $249,000 for the three months ended September 30, 2017 from $251,000 for the three months ended September 30, 2016. Interest expense on deposit accounts decreased $11,000, or 5.2%, to $202,000 for the three months ended September 30, 2017 from $213,000 for the three months ended September 30, 2016. Interest expense on borrowings increased $9,000 to $47,000 for the three months ended September 30, 2017 from $38,000 for the three months ended September 30, 2016. The average balance of FHLB advances increased $2.5 million to $14.3 million for the three months ended September 30, 2017 compared to $11.8 million for the three months ended September 30, 2016, while the average cost of these advances increased two basis points to 1.31% from 1.29%. As noted above, management elected to increase outstanding advances as a source of funding for the increase in the loan portfolio.

Net Interest Income. Net interest income increased $133,000, or 17.3%, to $900,000 for the three months ended September 30, 2017 compared to $767,000 for the three months ended September 30, 2016. The increase reflected a higher percentage of assets in higher-yielding loans period to period.

Our net interest margin increased slightly to 3.42% for the three months ended September 30, 2017 from 3.41% for the three months ended September 30, 2016 reflecting the shift in our interest-earning assets. Net interest rate spread decreased to 3.17% for the 2017 quarter compared to 3.32% for the 2016 quarter reflecting the increase in loans receivable at lower interest rates.

Provision for Loan Losses. The provision for loan losses for the three months ended September 30, 2017 of $15,000 was the same as the provision recorded for the three months ended September 30, 2016. The allowance for loan losses increased to $757,000, or 0.85% of total loans, at September 30, 2017, compared to $692,000, or 0.90% of total loans, at December 31, 2016, and $582,000, or 0.79% of total loans, at September 30, 2016. Total nonperforming loans were $377,000 at September 30, 2017, compared to $518,000 at December 31, 2016 and $692,000 at September 30, 2016. Classified (substandard, doubtful and loss) loans were $853,000 at September 30, 2017, $892,000 at December 31, 2016 and $1.1 million at September 30, 2016. There were no charge-offs or recoveries in the three months ending September 30, 2017. As a percentage of nonperforming loans, the allowance for loan losses was 200.8% at September 30, 2017, compared to 133.59% at December 31, 2016 and 52.91% at September 30, 2016.

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

Noninterest Income.Noninterest income decreased $18,000, or 18.4%, to $80,000 for the three months ended September 30, 2017 from $98,000 for the three months ended September 30, 2016. The decrease was primarily due to a decrease of $5,000 in gain on sale of loans and a decrease in loan servicing income of $12,000 for the three months ended September 30, 2017, compared to the same three month period in 2016. These decreases were due to decreased activity in the secondary mortgage market.

Noninterest Expense. Noninterest expense increased $20,000, or 2.7%, to $749,000 for the three months ended September 30, 2017 compared to $729,000 for the three months ended September 30, 2016. The increase was due primarily to a $41,000 increase in salaries and employee benefits. This increase is due to the expense recognized for the ESOP accrual. We expect our noninterest expense to increase in future periods because of the anticipated costs associated with operating as a public company as well as increased compensation expense related to possible implementation following the conversion of one or more stock-based benefit plans, if approved by our stockholders.

Income Tax Expense.We recorded an income tax expense of $76,000 for the three months ended September 30, 2017 compared to $37,000 for the three months ended September 30, 2016. The increase was due to increased income period to period. The effective tax rate was 35.0% for the quarter ended September 30, 2017 compared to 30.4% for the same quarter in 2016.

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

General. Net income for the nine months ended September 30, 2017 was $374,000, compared to $236,000 for the nine months ended September 30, 2016, an increase of $138,000. The increase in net income was primarily due to a $236,000 increase in net interest income, an increase in noninterest income of $7,000, a decrease in noninterest expense of $24,000 and a decrease in provision for loan loss of $5,000, offset by an increase in income tax expense of $134,000 for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

Interest Income. Interest income increased $259,000, or 8.3%, to $3.4 million for the nine months ended September 30, 2017 from $3.1 million for the nine months ended September 30, 2016. The increase was primarily attributable to a $218,000 increase in interest on loans receivable, and a $42,000 increase in interest on other interest-earning assets. The average balance of loans during the nine months ended September 30, 2017 increased $9.1 million, or 12.6%, to $81.9 million from $72.8 million for the nine months ended September 30, 2016, while the average yield on loans decreased 24 basis points to 5.13% for the nine months ended September 30, 2017 from 5.37% for the nine months ended September 30, 2016, reflecting payoffs of higher-yielding mature loans being replaced by lower-yielding loans in the ongoing low interest rate environment. The average balance of investment securities and other interest-earning deposits, including certificates of deposit in other banks, increased $1.4 million to $18.3 million for the nine months ended September 30, 2017 from $16.9 million for the nine months ended September 30, 2016, while the average yield increased by 19 basis points to 1.58% for the nine months ended September 30, 2017 from 1.39% for the nine months ended September 30, 2016.

Interest Expense. Total interest expense increased $23,000, or 3.1%, to $770,000 for the nine months ended September 30, 2017 from $747,000 for the nine months ended September 30, 2016. Interest expense on deposit accounts decreased $12,000, or 1.9%, to $614,000 for the nine months ended September 30, 2017 from $626,000 for the nine months ended September 30, 2016. Interest expense on borrowings increased $35,000 to $156,000 for the nine months ended September 30, 2017 from $121,000 for the nine months ended September 30, 2016. The average balance of FHLB advances increased $5.8 million to $18.2 million for the nine months ended September 30, 2017 compared to $12.4 million for the nine months ended September 30, 2016, while the average cost of these advances decreased fifteen basis points to 1.15% from 1.30%. As noted above, management elected to increase outstanding advances as a source of funding for the increase in the loan portfolio.

Net Interest Income.Net interest income increased $236,000, or 10.0%, to $2.6 million for the nine months ended September 30, 2017 compared to $2.4 million for the nine months ended September 30, 2016. The increase reflected a higher percentage of assets in higher-yielding loans period to period.

Our net interest rate spread decreased to 3.31% for the nine months ended September 30, 2017 from 3.44% for the nine months ended September 30, 2016 reflecting the decline in the yield on loans receivable. Our net interest margin decreased by six basis points to 3.45% for the nine months ending September 30, 2017 compared to 3.51% for the same period in 2016 reflecting the increase in interest earning assets.

Provision for Loan Losses. The provision for loan losses for the nine months ended September 30, 2017 was $65,000, or $5,000 less than the provision recorded for the nine months ended September 30, 2016. The allowance for loan losses increased to $757,000, or 0.85% of total loans, at September 30, 2017, compared to $692,000, or 0.90% of total loans, at December 31, 2016, and $582,000, or 0.79% of total loans, at September 30, 2016. Total nonperforming loans were $377,000 at September 30, 2017, compared to $518,000 at December 31, 2016 and $692,000 at September 30, 2016. Classified (substandard, doubtful and loss) loans were $853,000 at September 30, 2017, $892,000 at December 31, 2016 and $1.1 million at September 30, 2016. There were no charge-offs or recoveries in the nine months ending September 30, 2017. As a percentage of nonperforming loans, the allowance for loan losses was 200.8% at September 30, 2017, compared to 133.59% at December 31, 2016 and 52.91% at September 30, 2016.

Noninterest Income.Noninterest income increased $7,000, or 3.1%, to $236,000 for the nine months ended September 30, 2017 from $229,000 for the nine months ended September 30, 2016. The increase was primarily due to a loss on the sale of a foreclosed real estate property of $51,000 in the nine months ended September 30, 2016. There was a decrease of $19,000 in gain on sale of loans and a decrease in loan servicing income of $24,000 for the nine months ended September 30, 2017, compared to the same nine month period in 2016. These decreases were due to decreased activity in the secondary mortgage market.

Noninterest Expense. Noninterest expense was unchanged at $2.2 million for the nine months ended September 30, 2017 compared to the same period in 2016. The biggest changes were in salaries and employee benefits which increased by $95,000, or 8.0%, and a decrease of $71,000 in write-downs of foreclosed real estate, a $29,000 decrease in expense on foreclosed real estate, and a decrease in occupancy expenses of $29,000. The increase in salaries and employee benefits was due to normal salary increases of $31,000, the ESOP accural of $40,000, and other employee benefits increased by $24,000. The decrease in occupancy expenses is primarily due to an increase in rental income of $26,000. The decrease in expense on foreclosed real estate was due to the sale of most of our OREO properties. The OREO average balance for the nine months ending September 30, 2017 was $85,000 compared to an average of $427,000 for the nine months ended September 30, 2016.

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

Income Tax Expense.We recorded an income tax expense of $201,000 for the nine months ended September 30, 2017 compared to $67,000 for the nine months ended September 30, 2016. The increase was due to increased income period to period and an increase in the effective tax rate. The effective tax rate was 35.0% for the nine months ended September 30, 2017 compared to 22.1% for the nine months ended September 30, 2016.

Liquidity and Capital Resources.Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB-Dallas. At September 30, 2017, we had $12.6 million outstanding in advances from the FHLB-Dallas, and had the capacity to borrow approximately an additional $23.7 million from the FHLB-Dallas and an additional $3.0 million on a line of credit with First National Bankers’ Bank, Baton Rouge, Louisiana at this date.

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

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was $623,000 and $613,000 for the nine months ended September 30, 2017 and 2016, respectively. Net cash resulting from investing activities, which consists primarily of net change in loans receivable, net change in investment securities and proceeds from the sale of loans, was ($10.9 million) and $817,000 for the nine months ended September 30, 2017 and 2016, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and Federal Home Loan Bank advances, was $10.8 million and $233,000 for the nine months ended September 30, 2017 and 2016, respectively. The 2017 period increase was primarily from the proceeds of the stock offering.

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

At September 30, 2017, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $17.5 million, or 15.50% of adjusted average total assets, which is above the well-capitalized required level of $5.7 million, or 5.0%; and total risk-based capital of $18.3 million, or 29.04% of risk-weighted assets, which is above the well-capitalized required level of $6.3 million, or 10.0%; and common equity Tier 1 capital of $17.5 million or 27.84% of risk weighted assets, which is above the well-capitalized required level of $4.1 million, or 6.5% of risk weighted assets. Accordingly, Heritage Bank of St. Tammany was categorized as well capitalized at September 30, 2017. Management is not aware of any conditions or events since the most recent notification that would change our category.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.

Controls and Procedures

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

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

Part II – Other Information

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

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

(b)

Not applicable.

(c)

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

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

31.1

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

31.2

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

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

	101.INS	XBRL Instance Document

	101.SCH	XBRL Taxonomy Extension Schema Document

	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

	101.LAB	XBRL Taxonomy Extension Labels Linkbase Document

	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

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

		HERITAGE NOLA BANCORP, INC.

Date: November 13, 2017		/s/W. David Crumhorn
		W. David Crumhorn
		President and Chief Executive Officer

Date: November 13, 2017		/s/Lisa B. Hughes
		Lisa B. Hughes
		Chief Financial Officer

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Heritage NOLA Bancorp (HRGG) 10-Q2017 Q3 Quarterly report

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