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EX-32 - EXHIBIT 32 - Pilgrim Bancshares, Inc.v444402_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Pilgrim Bancshares, Inc.v444402_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Pilgrim Bancshares, Inc.v444402_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 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: 000-55290

 

PILGRIM BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Maryland 46-5110553
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

 

40 South Main Street, Cohasset, Massachusetts 02025
(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number, including area code: (781) 383-0541

 

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

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value

 

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

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES x 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 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  x
(Do not check if a smaller reporting company)  

 

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

 

As of August 1, 2016, there were issued and outstanding 2,260,439 shares of the Registrant’s Common Stock with a par value of $0.01 per share.

 

 

 

  

Pilgrim Bancshares, Inc.

Form 10-Q

 

Index

 

        Page
Part I. Financial Information
         
Item 1.   Consolidated Financial Statements    
         
    Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015   3
         
    Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and June 30, 2015 (unaudited)   4
         
    Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and June 30, 2015 (unaudited)   5
         
    Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2016 and June 30, 2015 (unaudited)   6
         
    Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and June 30, 2015 (unaudited)   7
         
    Notes to Consolidated Financial Statements (unaudited)   8
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   26
         
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   37
         
Item 4.   Controls and Procedures   37
         
Part II. Other Information
         
Item 1.   Legal Proceedings   37
         
Item 1A.   Risk Factors   37
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   37
         
Item 3.   Defaults upon Senior Securities   38
         
Item 4.   Mine Safety Disclosures   38
         
Item 5.   Other Information   38
         
Item 6.   Exhibits   38
         
    Signature Page   39

 

 2 

 

  

Part I. – Financial Information

 

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

 

(In Thousands, except share data)

 

   June 30,   December 31, 
   2016   2015 
   (unaudited)     
ASSETS          
Cash and due from banks  $1,662   $2,351 
Interest-bearing demand deposits with other banks   6,474    8,319 
Total cash and cash equivalents   8,136    10,670 
Interest-bearing time deposits with other banks   1,087    1,087 
Investments in available-for-sale securities (at fair value)   17,040    16,556 
Investments in held-to-maturity securities (fair value of $140 at June 30, 2016, and $155 at December 31, 2015)   110    120 
Federal Home Loan Bank stock, at cost   1,152    971 
Investment in The Co-operative Central Reserve Fund, at cost   384    384 
Loans, net of allowance for loan losses of  $951 at June 30, 2016, and $886 at December 31, 2015   191,629    170,427 
Premises and equipment, net   5,035    5,177 
Investment in real estate, net   1,556    1,578 
Accrued interest receivable   543    508 
Deferred income tax asset, net   403    496 
Bank-owned life insurance   2,297    2,276 
Other assets   325    257 
Total assets  $229,697   $210,507 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Deposits:          
Noninterest-bearing  $17,482   $15,290 
Interest-bearing   165,116    154,082 
Total deposits   182,598    169,372 
Federal Home Loan Bank advances   14,500    8,500 
Other liabilities   524    666 
Total liabilities   197,622    178,538 
Stockholders' equity:          
Common stock $.01 par value per share: 10,000,000 shares authorized, 2,260,439 shares issued at June 30, 2016 and 2,224,489 shares issued at December 31, 2015   23    22 
Additional paid-in capital   20,936    20,466 
Retained earnings   13,594    13,253 
Unearned compensation - ESOP (164,822 shares unallocated at June 30, 2016 and 167,819 shares unallocated at December 31, 2015)   (1,648)   (1,679)
Unearned compensation - Restricted Stock (70,950 shares non-vested at June 30, 2016)   (897)   - 
Accumulated other comprehensive income (loss)   67    (93)
Total stockholders' equity   32,075    31,969 
Total liabilities and stockholders' equity  $229,697   $210,507 

 

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

 

 3 

 

  

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF INCOME

 

(In Thousands, except share and per share data)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
   (unaudited)   (unaudited) 
Interest and dividend income:                    
Interest and fees on loans  $1,838   $1,609   $3,610   $3,143 
Interest on debt securities:                    
Taxable   54    45    106    86 
Tax-exempt   13    17    27    34 
Other interest and dividends   23    11    51    25 
Total interest and dividend income   1,928    1,682    3,794    3,288 
Interest expense:                    
Interest on deposits   347    238    675    479 
Interest on Federal Home Loan Bank advances   27    15    51    28 
Total interest expense   374    253    726    507 
Net interest and dividend income   1,554    1,429    3,068    2,781 
Provision for loan losses   36    38    72    60 
Net interest and dividend income after provision for loan losses   1,518    1,391    2,996    2,721 
Noninterest income:                    
Service charges on deposit accounts   28    32    54    60 
Gain on sales/calls of securities, net   3    -    3    - 
Gain on sales of loans, net   17    3    34    37 
Rental income   67    64    134    131 
Other income   31    34    68    64 
Total noninterest income   146    133    293    292 
Noninterest expense:                    
Salaries and employee benefits   815    739    1,620    1,510 
Occupancy expense   125    135    260    298 
Equipment expense   47    45    94    93 
Data processing expense   101    89    197    177 
Professional fees   101    103    199    196 
Federal Deposit Insurance Corporation assessment   38    34    74    71 
Communications expense   22    30    64    60 
Advertising and public relations expense   29    40    63    56 
Insurance expense   15    20    30    40 
Supplies expense   13    17    29    32 
Other expense   59    61    113    124 
Total noninterest expense   1,365    1,313    2,743    2,657 
Income before income taxes   299    211    546    356 
Income tax expense   114    77    205    121 
Net income  $185   $134   $341   $235 
                     
Weighted-average number of common shares outstanding:                    
Basic   2,023,918    2,076,024    2,027,338    2,075,274 
Diluted   2,023,990    2,076,024    2,027,400    2,075,274 
                     
Earnings per share:                    
Basic  $0.09   $0.06   $0.17   $0.11 
Diluted  $0.09   $0.06   $0.17   $0.11 

 

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

 

 4 

 

  

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In Thousands)

 

   Three Months Ended June 30,   Six Months Ended June  30, 
   2016   2015   2016   2015 
   (unaudited)   (unaudited) 
Net income  $185   $134   $341   $235 
Other comprehensive income (loss), net of tax:                    
Net unrealized holding gain (loss) on available-for-sale securities   89    (110)   256    (46)
Reclassification adjustment for net realized gains in net income (1)   (3)   -    (3)   - 
Other comprehensive income (loss) before income tax effect   86    (110)   253    (46)
Income tax (expense) benefit   (32)   41    (93)   17 
Other comprehensive income (loss), net of tax   54    (69)   160    (29)
Comprehensive income  $239   $65   $501   $206 

 

(1) Reclassification adjustments are comprised of realized security gains. The gains have been reclassified out of accumulated other comprehensive income and have affected certain lines in the consolidated statements of income as follows: the pre-tax amount is included in gain on sales/calls of securities, net; the tax expense amount, which was immaterial for the three and six months ended June 30, 2016, is included in income tax expense, and the after tax amount is included in net income.

 

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

 

 5 

 

  

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

For the Six Months Ended June 30, 2016 and 2015 (unaudited)

 

(In Thousands, except share data)

 

                       Accumulated     
   Common   Additional       Unearned   Unearned   Other     
   Stock   Paid-in   Retained   Compensation-   Compensation-   Comprehensive     
   Shares   Amount   Capital   Earnings   ESOP   Restricted Stock   (Loss) Income   Total 
Balance, December 31, 2014   2,247,589   $22   $20,770   $12,599   $(1,738)  $-   $(51)  $31,602 
Net income   -    -    -    235    -    -    -    235 
Common stock held by ESOP committed to be allocated (2,997 shares)   -    -    5    -    30    -    -    35 
Other comprehensive loss, net of tax effect   -    -    -    -    -    -    (29)   (29)
Issuance costs related to initial public offering   -    -    (16)   -    -    -    -    (16)
Balance, June 30, 2015   2,247,589   $22   $20,759   $12,834   $(1,708)  $-   $(80)  $31,827 
                                         
Balance, December 31, 2015   2,224,489   $22   $20,466   $13,253   $(1,679)  $-   $(93)  $31,969 
Net income   -    -    -    341    -    -    -    341 
Common stock held by ESOP committed to be allocated (2,997 shares)   -    -    8    -    31    -    -    39 
Restricted stock granted in connection with equity incentive plan   70,950    1    911    -    -    (912)   -    - 
Share based compensation-restricted stock   -    -    -    -    -    15    -    15 
Share based compensation-options   -    -    10    -    -    -    -    10 
Shares purchased and retired   (35,000)   -    (459)   -    -    -    -    (459)
Other comprehensive income, net of tax effect   -    -    -    -    -    -    160    160 
Balance, June 30, 2016   2,260,439   $23   $20,936   $13,594   $(1,648)  $(897)  $67   $32,075 

 

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

 

 6 

 

  

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In Thousands)

 

   Six Months Ended June 30, 
   2016   2015 
     
Cash flows from operating activities:          
Net income  $341   $235 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   72    60 
Capitalized - interest-interest-bearing deposits   -    (5)
Amortization of securities, net   40    43 
Gain on sales/call  of securities, net   (3)   - 
Loans originated for sale   (1,788)   (1,260)
Proceeds from sales of loans originated for sale   1,822    1,297 
Gain on sales of loans   (34)   (37)
Change in deferred origination fees, costs and discounts   (145)   (2)
Depreciation and amortization   167    171 
Stock based compensation expense   64    35 
Increase in accrued interest receivable   (35)   (8)
Increase in bank-owned life insurance   (21)   (24)
Decrease in other assets   (68)   31 
Decrease in other liabilities   (142)   (19)
           
Net cash provided by operating activities   270    517 
           
Cash flows from investing activities:          
Proceeds from redemption and maturities of interest-bearing time deposits   -    1,500 
Purchase of Federal Home Loan Bank stock   (260)   (137)
Redemption of Federal Home Loan Bank stock   79    - 
Purchases of available-for-sale securities   (3,440)   (2,787)
Proceeds from maturities/calls/pay downs of available-for-sale securities   3,167    986 
Proceeds from maturities of held-to-maturity securities   15    19 
Loan principal originations and collections, net   (6,389)   (9,725)
Loans purchased   (19,775)   (8,055)
Loan participations sold   5,035    1,650 
Capital expenditures   (3)   (43)
           
Net cash used in investing activities   (21,571)   (16,592)
           
Cash flows from financing activities:          
Net increase in demand deposits, NOW and savings accounts   3,199    2,021 
Net increase (decrease) in time deposits   10,027    (1,328)
Payments on Federal Home Loan Bank long-term advances   -    (500)
Proceeds from Federal Home Loan Bank long-term advances   6,000    5,500 
Net change in short-term Federal Home Loan Bank advances   -    (1,000)
Issuance costs related to initial public offering   -    (16)
Purchase and retirement of common stock   (459)   - 
           
Net cash provided by financing activities   18,767    4,677 
           
Net decrease in cash and cash equivalents   (2,534)   (11,398)
Cash and cash equivalents at beginning of period   10,670    18,295 
Cash and cash equivalents at end of period  $8,136   $6,897 
           
Supplemental disclosures:          
Interest paid  $725   $504 
Income taxes paid   416    83 

 

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

 

 7 

 

  

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1 - NATURE OF OPERATIONS

 

Pilgrim Bancshares, Inc. (the “Company”), was incorporated in February 2014 under the laws of the State of Maryland. The Company owns all of the outstanding shares of common stock of Pilgrim Bank (the “Bank”). The Bank is a Massachusetts chartered stock bank which was incorporated in 1916 and is headquartered in Cohasset, Massachusetts. The Bank operates its business from three banking offices located in Massachusetts. The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and commercial real estate loans, and in commercial, consumer and small business loans. The Bank is subject to the regulations of, and periodic examination by, the Massachusetts Division of Banks (“DOB”) and the Federal Deposit Insurance Corporation (“the FDIC”).

 

NOTE 2 - BASIS OF PRESENTATION

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, 48 South Main Street Corporation, which was formed to hold securities for its own account; 40 South Main Street Realty Trust, which was formed to hold our main office; and 800 CJC Realty Corporation, which was formed to invest in and develop residential and commercial property. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. Information included herein as of June 30, 2016 and for the interim periods ended June 30, 2016 and 2015 is unaudited; however, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and were of a normal recurring nature. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the entire year or any other interim period.

 

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of securities and the valuation of deferred tax assets.

 

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

 

As an “emerging growth company,” as defined in Title 1 of the Jumpstart Our Business Startups (JOBS) Act, the Company has elected to use the extended transition period to delay adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, the consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of June 30, 2016, there is no significant difference in the comparability of the financial statements as a result of this extended transition period. In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and makes targeted improvements to GAAP as follows:

 

 8 

 

  

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 manner.
2.Simplify the impairment assessment of equity investments without determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.
3.Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
4.Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
5.Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
6.Require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
7.Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

 

Under the extended transition period for an emerging growth company, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of item 5 above is permitted as of beginning of the fiscal years or interim periods for which financial statements have not been issued. Early adoption of all other amendments in this ASU is not permitted. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU was issued to increase transparency and comparability among organizations by requiring reporting entities to recognize all leases, including operating, as lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Under the extended transition period for an emerging growth company, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting.” The ASU simplifies several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. Under the extended transition period for an emerging growth company, the amendments in this ASU are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

 9 

 

  

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).”  The amendments in this ASU affect entities holding financial assets and net investments in leases that are not accounted for at fair value through net income.  The main objective of this ASU is 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 a reporting entity at each reporting date.  To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  This ASU also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a reporting entity’s portfolio.  Additionally, this ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  Under the extended transition period for an emerging growth company, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.  All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  An entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).  The Company is currently reviewing the amendments in this ASU to determine the impact on its consolidated financial statements.

 

NOTE 4 - EARNINGS PER SHARE (EPS)

 

The Company has adopted the EPS guidance included in Accounting Standards Codification (“ASC”) 260-10. As presented below, basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For purposes of computing diluted EPS, the treasury stock method is used.

 

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

 

EPS for the three and six months ended June 30, 2016 and 2015 (unaudited) have been computed based on the following:

 

   Three Months Ended June 30,   Six Months Ended June  30, 
   2016   2015   2016   2015 
Net income (In thousands)  $185   $134   $341   $235 
                     
Basic and diluted common shares:                    
Weighted average common shares outstanding   2,189,489    2,247,589    2,193,659    2,247,589 
Weighted average unallocated ESOP shares   (165,571)   (171,565)   (166,321)   (172,315)
Basic weighted average shares outstanding   2,023,918    2,076,024    2,027,338    2,075,274 
                     
Dilutive potential common shares-options   -    -    -    - 
Dilutive effect of unearned restricted stock   72    -    62    - 
Diluted weighted average shares outstanding   2,023,990    2,076,024    2,027,400    2,075,274 
                     
Basic earnings per share  $0.09   $0.06   $0.17   $0.11 
Diluted earnings per share  $0.09   $0.06   $0.17   $0.11 

 

 10 

 

  

NOTE 5 - INVESTMENTS IN SECURITIES

 

Investments in securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost basis of securities and their approximate fair values are as follows:

 

   Amortized   Gross   Gross     
   Cost   Unrealized   Unrealized   Fair 
   Basis   Gains   Losses   Value 
   (In Thousands) 
Available-for-sale securities:                    
June 30, 2016 (unaudited):                    
Debt securities issued by U.S. government corporations and agencies  $7,490   $51   $-   $7,541 
Debt securities issued by states of the United States and political subdivisions of the states   2,401    43    15    2,429 
Mortgage-backed securities   7,043    64    37    7,070 
   $16,934   $158   $52   $17,040 
                     
December 31, 2015:                    
Debt securities issued by U.S. government corporations and agencies  $6,339   $6   $34   $6,311 
Debt securities issued by states of the United States and political subdivisions of the states   2,456    7    19    2,444 
Mortgage-backed securities   7,908    6    113    7,801 
   $16,703   $19   $166   $16,556 

 

   Amortized   Gross   Gross     
   Cost   Unrealized   Unrealized   Fair 
   Basis   Gains   Losses   Value 
   (In Thousands) 
Held-to-maturity securities:                    
June 30, 2016 (unaudited):                    
Mortgage-backed securities  $110   $30   $-   $140 
   $110   $30   $-   $140 
                     
December 31, 2015:                    
Mortgage-backed securities  $120   $35   $-   $155 
   $120   $35   $-   $155 

 

The scheduled maturities of debt securities were as follows as of June 30, 2016 (unaudited):

 

   Available-For-Sale   Held-To-Maturity 
       Amortized     
   Fair   Cost   Fair 
   Value   Basis   Value 
   (In Thousands) 
Due within one year  $-   $-   $- 
Due after one year through five years   8,374    -    - 
Due after five years through ten years   1,325    -    - 
Due after ten years   271    -    - 
Mortgage-backed securities   7,070    110    140 
   $17,040   $110   $140 

 

No available-for-sale securities were sold during the six months ended June 30, 2016 and 2015 (unaudited).

 

As of June 30, 2016 (unaudited) and December 31, 2015, there were no securities of issuers whose aggregate carrying amount exceeded 10% of stockholders’ equity.

 

 11 

 

 

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other-than-temporarily impaired, are as follows:

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
   (In Thousands) 
June 30, 2016 (unaudited):                              
Debt securities issued by U.S. government corporations and agencies  $400   $-   $-   $-   $400   $- 
Debt securities issued by states of the United States and political subdivisions of the states   340    10    100    5    440    15 
Mortgage-backed securities   252    2    2,419    35    2,671    37 
Total temporarily impaired securities  $992   $12   $2,519   $40   $3,511   $52 
                               
December 31, 2015:                              
Debt securities issued by U.S. government corporations and agencies  $5,320   $21   $487   $13   $5,807   $34 
Debt securities issued by states of the United States and political subdivisions of the states   -    -    912    19    912    19 
Mortgage-backed securities   4,302    46    2,101    67    6,403    113 
Total temporarily impaired securities  $9,622   $67   $3,500   $99   $13,122   $166 

 

As of June 30, 2016 (unaudited), investment securities with unrealized losses consist of one debt security issued by U.S. government agencies and government-sponsored enterprises, two debt securities issued by states of the United States and political subdivisions of the states and thirteen mortgage-backed securities. The Company reviews investments for other-than-temporary impairment using a number of factors including the length of time and the extent to which the market value has been less than cost and by examining any credit deterioration or ratings downgrades. The unrealized losses in the above tables are primarily attributable to changes in market interest rates. As Company management has the intent and ability to hold impaired debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

 

For those debt securities for which the fair value of the security is less than its amortized cost and the Company does not intend to sell such security and it is more likely than not that it will not be required to sell such security prior to the recovery of its amortized cost basis less any credit losses, ASC 320-10, “Investments - Debt and Equity Securities,” requires that the credit component of the other-than-temporary impairment losses be recognized in earnings while the noncredit component is recognized in other comprehensive income, net of related taxes. The Company did not record any other-than-temporary impairment losses of securities during the three and six months ended June 30, 2016 and 2015.

 

 12 

 

  

NOTE 6 - LOANS

 

Loans consisted of the following:

 

   June 30,   December 31, 
   2016   2015 
   (unaudited)     
       (In Thousands) 
Real estate loans:          
One-to four- family residential  $123,383   $104,861 
Commercial   22,698    21,848 
Multi-family   16,408    16,559 
Home equity loans and lines of credit   2,215    2,093 
Construction   21,842    18,755 
Commercial and industrial loans   3,277    3,964 
Consumer loans:          
Consumer lines of credit   21    20 
Other consumer loans   2,438    3,060 
    192,282    171,160 
Net deferred loan origination fees, costs and discounts   298    153 
Allowance for loan losses   (951)   (886)
Net loans  $191,629   $170,427 

 

The following tables set forth information regarding the allowance for loan losses for the six months ended June 30, 2016 and 2015 (unaudited) and at June 30, 2016 (unaudited) and December 31, 2015:

 

   Real Estate:       Consumer         
   One- to four-family           Home Equity Loans       Commercial and   Consumer             
   Residential   Commercial   Multi-family   and Lines of Credit   Construction   Industrial Loans   Line of Credit   Other Consumer   Unallocated   Total 
   (In Thousands) 
Six months ended June 30, 2016 (unaudited):                                                  
Allowance for loan losses:                                                  
Beginning balance  $373   $146   $62   $14   $216   $13   $1   $29   $32   $886 
Charge-offs   -    -    -    -    -    -    -    (7)   -    (7)
Recoveries   -    -    -    -    -    -    -    -    -    - 
Provision (benefit)   77    (18)   -    (2)   14    (2)   -    1    2    72 
Ending balance  $450   $128   $62   $12   $230   $11   $1   $23   $34   $951 
                                                   
Six months ended June 30, 2015 (unaudited):                                                  
Allowance for loan losses:                                                  
Beginning balance  $362   $134   $36   $27   $121   $8   $1   $20   $34   $743 
Charge-offs   -    -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    -    - 
(Benefit) provision   (15)   1    5    (5)   81    11    -    14    (32)   60 
Ending balance  $347   $135   $41   $22   $202   $19   $1   $34   $2   $803 
                                                   
At June 30, 2016 (unaudited):                                                  
Allowance for loan losses:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $21   $-   $-   $-   $-   $-   $-   $-   $-   $21 
Ending balance:                                                  
Collectively evaluated for impairment   429    128    62    12    230    11    1    23    34    930 
Total allowance for loan losses ending balance  $450   $128   $62   $12   $230   $11   $1   $23   $34   $951 
                                                   
Loans:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $5,260   $669   $-   $59   $-   $-   $-   $-   $-   $5,988 
Ending balance:                                                  
Collectively evaluated for impairment   118,123    22,029    16,408    2,156    21,842    3,277    21    2,438    -    186,294 
Total loans ending balance  $123,383   $22,698   $16,408   $2,215   $21,842   $3,277   $21   $2,438   $-   $192,282 

 

 13 

 

  

   Real Estate:       Consumer         
   One- to four-family           Home Equity Loans       Commercial and   Consumer             
   Residential   Commercial   Multi-family   and Lines of Credit   Construction   Industrial Loans   Lines of Credit   Other Consumer   Unallocated   Total 
   (In Thousands) 
December 31, 2015:                                                  
Allowance for loan losses:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $21   $-   $-   $-   $-   $-   $-   $-   $-   $21 
Ending balance:                                                  
Collectively evaluated for impairment   352    146    62    14    216    13    1    29    32    865 
Total allowance for loan losses ending balance  $373   $146   $62   $14   $216   $13   $1   $29   $32   $886 
                                                   
Loans:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $5,665   $679   $-   $59   $-   $-   $-   $-   $-   $6,403 
Ending balance:                                                  
Collectively evaluated for impairment   99,196    21,169    16,559    2,034    18,755    3,964    20    3,060    -    164,757 
Total loans ending balance  $104,861   $21,848   $16,559   $2,093   $18,755   $3,964   $20   $3,060   $-   $171,160 

 

 

The following tables set forth information regarding nonaccrual loans and past-due loans at June 30, 2016 (unaudited) and December 31, 2015:

 

                           90 Days     
           90 Days               or More     
           or More   Total   Total       Past Due   Nonaccrual 
   30-59 Days   60-89 Days   Past Due   Past Due   Current   Total   and Accruing   Loans 
   (In Thousands) 
June 30, 2016 (unaudited):                                        
Real estate loans:                                        
One- to four-family residential  $1,089   $-   $-   $1,089   $122,294   $123,383   $-   $13 
Commercial   669    -    -    669    22,029    22,698    -    - 
Multi-family   -    -    -    -    16,408    16,408    -    - 
Home equity loans and lines of credit   -    59    -    59    2,156    2,215    -    - 
Construction   -    -    -    -    21,842    21,842    -    - 
Commercial and industrial loans   -    -    -    -    3,277    3,277    -    - 
Consumer loans:                                        
Consumer lines of credit   -    -    -    -    21    21    -    - 
Other consumer   6    -    -    6    2,432    2,438    -    - 
Total  $1,764   $59   $-   $1,823   $190,459   $192,282   $-   $13 
                                         
December 31, 2015:                                        
Real estate loans:                                        
One- to four-family residential  $1,088   $18   $1,393   $2,499   $102,362   $104,861   $-   $1,410 
Commercial   -    -    -    -    21,848    21,848    -    - 
Multi-family   -    -    -    -    16,559    16,559    -    - 
Home equity loans and lines of credit   -    59    -    59    2,034    2,093    -    - 
Construction   -    -    -    -    18,755    18,755    -    - 
Commercial and industrial loans   -    -    -    -    3,964    3,964    -    - 
Consumer loans:                                        
Consumer lines of credit   -    -    -    -    20    20    -    - 
Other consumer   16    -    -    16    3,044    3,060    -    - 
Total  $1,104   $77   $1,393   $2,574   $168,586   $171,160   $-   $1,410 

 

 14 

 

  

Information about loans that meet the definition of an impaired loan in ASC 310-10-35, “Receivables – Overall – Subsequent Measurement,” is as follows at June 30, 2016 (unaudited) and December 31, 2015 and the six months and year then ended, respectively.

 

       Unpaid       Average   Interest 
   Recorded   Principal   Related   Recorded   Income 
   Investment   Balance   Allowance   Investment   Recognized 
   (In Thousands) 
June 30, 2016 (unaudited):                         
With no related allowance recorded:                         
Real estate loans:                         
One- to four-family residential  $4,693   $4,693   $-   $3,850   $85 
Commercial   669    669    -    674    15 
Home equity loans and lines of credit   59    141    -    59    2 
Total impaired with no related allowance  $5,421   $5,503   $-   $4,583   $102 
                          
With an allowance recorded:                         
Real estate loans:                         
One- to four-family residential  $567   $567   $21   $567   $10 
Commercial   -    -    -    -    - 
Home equity loans and lines of credit   -    -    -    -    - 
Total impaired with an allowance recorded  $567   $567   $21   $567   $10 
                          
Total                         
Real estate loans:                         
One- to four-family residential  $5,260   $5,260   $21   $4,417   $95 
Commercial   669    669    -    674    15 
Home equity loans and lines of credit   59    141    -    59    2 
Total impaired loans  $5,988   $6,070   $21   $5,150   $112 
                          
December 31, 2015:                         
With no related allowance recorded:                         
Real estate loans:                         
One- to four-family residential  $5,098   $5,098   $-   $5,657   $183 
Commercial   679    679    -    689    44 
Home equity loans and lines of credit   59    141    -    54    4 
Total impaired with no related allowance  $5,836   $5,918   $-   $6,400   $231 
                          
With an allowance recorded:                         
Real estate loans:                         
One- to four-family residential  $567   $567   $21   $571   $19 
Commercial   -    -    -    -    - 
Home equity loans and lines of credit   -    -    -    -    - 
Total impaired with an allowance recorded  $567   $567   $21   $571   $19 
                          
Total                         
Real estate loans:                         
One- to four-family residential  $5,665   $5,665   $21   $6,228   $202 
Commercial   679    679    -    689    44 
Home equity loans and lines of credit   59    141    -    54    4 
Total impaired loans  $6,403   $6,485   $21   $6,971   $250 

 

 15 

 

 

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

 

   Real Estate:       Consumer     
   One- to four-family           Home Equity Loans       Commercial and   Consumer         
   Residential   Commercial   Multi-family   and Lines of Credit   Construction   Industrial Loans   Lines of Credit   Other Consumer   Total 
   (In Thousands) 
June 30, 2016 (unaudited):                                             
Grade:                                             
Pass  $-   $22,029   $16,408   $-   $21,842   $3,277   $-   $-   $63,556 
Special mention   2,347    669    -    53    -    -    -    -    3,069 
Substandard   567    -    -    6    -    -    -    -    573 
Loans not formally rated   120,469    -    -    2,156    -    -    21    2,438    125,084 
Total  $123,383   $22,698   $16,408   $2,215   $21,842   $3,277   $21   $2,438   $192,282 
                                              
December 31, 2015:                                             
Grade:                                             
Pass  $-   $21,169   $16,559   $-   $18,755   $3,964   $-   $-   $60,447 
Special mention   539    -    -    53    -    -    -    -    592 
Substandard   3,796    679    -    6    -    -    -    -    4,481 
Loans not formally rated   100,526    -    -    2,034    -    -    20    3,060    105,640 
Total  $104,861   $21,848   $16,559   $2,093   $18,755   $3,964   $20   $3,060   $171,160 

 

At June 30, 2016 (unaudited) and December 31, 2015, there were no loans rated “doubtful” or “loss.”

 

Credit Quality Information

 

The Company utilizes a seven grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

 

Loans rated 1 - 3: Loans in these categories are considered “pass” rated loans with low to average risk.

 

Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

 

Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

 

Loans rated 6: 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 7: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

 

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and subsequently monitors these loans based on the borrower’s payment activity.

 

The Company classifies loans modified as troubled debt restructurings (TDRs) as impaired loans with an allowance established as part of the allocated component of the allowance for loan losses when the discounted cash flows or value of the underlying collateral of the impaired loan is lower than its carrying value.

 

 16 

 

 

During the six months ended June 30, 2016 (unaudited), five loans were modified as TDRs. The following table sets forth information regarding loans modified as TDRs during the six months ended June 30, 2016.

 

       Pre-Modification   Post-Modification 
   Number of   Outstanding Recorded   Outstanding Recorded 
   Contracts   Investment   Investment 
   (Dollars In Thousands) 
June 30, 2016:               
Troubled Debt Restructurings:               
Real estate loans:               
One- to four- family residential   3   $2,121   $2,121 
Home equity loans and lines of credit   2    59    59 
    5   $2,180   $2,180 

 

At June 30, 2016 there were no loans modified as TDRs that subsequently defaulted.

 

As of June 30, 2016 (unaudited), there were no commitments to lend additional funds to borrowers whose loans were modified as troubled debt restructurings.

 

The following table provides information on how loans were modified as TDRs:

 

   Rate   Interest Only   Rate Reduction and 
   Reduction   Period   Interest Only Period 
   (In Thousands) 
             
June 30, 2016               
Real estate loans:               
One- to four- family residential  $-   $2,121   $- 
Home equity loans and lines of credit   -    59    - 
Total  $-   $2,180   $- 

 

An analysis of the loans modified as TDRs was performed as of June 30, 2016. An allowance of $21,000 was assigned to 1 one-to-four family residential loan. All loans were accruing.

 

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $27.4 million and $21.8 million at June 30, 2016 (unaudited) and December 31, 2015, respectively.

 

On March 25, 2106, the Company entered into an agreement to purchase $20.0 million of residential mortgages, with 50% of the purchase being fixed rate loans and 50% being adjustable rate mortgages of varying maturities. The purchase premium is fixed at 1%. As of June 30, 2016, the Company had purchased $8.5 million of loans under this agreement.

 

NOTE 7 – DEPOSITS

 

The aggregate amount of time deposits in denominations that meet or exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 at June 30, 2016 (unaudited) and December 31, 2015 was $24.4 million and $20.9 million, respectively. The totals at June 30, 2016 and December 31, 2015 exclude $5.0 million of brokered time deposits which were bifurcated into amounts below the FDIC insurance limit.

 

 17 

 

 

For time deposits as of June 30, 2016 (unaudited), the scheduled maturities for each of the following five years ended June 30 are:

 

   (In Thousands) 
2017  $57,366 
2018   21,701 
2019   4,137 
2020   1,694 
2021   8,379 
Total  $93,277 

 

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

 

Maturities of advances from the Federal Home Loan Bank of Boston (“FHLB”) for the years ending after June 30, 2016 (unaudited) are summarized as follows:

 

   (In Thousands) 
2017  $2,500 
2018   3,000 
2019   - 
2020   - 
2021   - 
Thereafter   9,000 
   $14,500 

 

Interest rates range from 0.49% to 1.36% with a weighted-average interest rate of 0.88% at June 30, 2016 (unaudited).

 

Borrowings from the FHLB are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one-to-four family properties, certain unencumbered investment securities and other qualified assets.

 

NOTE 9 - FAIR VALUE MEASUREMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value as of June 30, 2016 (unaudited) and December 31, 2015. The Company did not have any significant transfers between level 1 and level 2 of the fair value hierarchy during the six months ended June 30, 2016 (unaudited) and the year ended December 31, 2015.

 

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

 

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

 

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

 

 19 

 

 

The following summarizes assets measured at fair value as of June 30, 2016 (unaudited) and December 31, 2015.

 

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

 

   Fair Value Measurements at Reporting Date Using: 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
   Total   Level 1   Level 2   Level 3 
   (In Thousands) 
June 30, 2016 (unaudited) :                    
Debt securities issued by U.S. government corporations and agencies  $7,541   $-   $7,541   $- 
Debt securities issued by states of the United States and political subdivisions of the states   2,429    -    2,429    - 
Mortgage-backed securities   7,070    -    7,070    - 
Totals  $17,040   $-   $17,040   $- 
                     
December 31, 2015 :                    
Debt securities issued by U.S. government corporations and agencies  $6,311   $-   $6,311   $- 
Debt securities issued by states of the United States and political subdivisions of the states   2,444    -    2,444    - 
Mortgage-backed securities   7,801    -    7,801    - 
Totals  $16,556   $-   $16,556   $- 

 

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

 

Under certain circumstances we make adjustments to fair value for certain assets and liabilities although they are not measured at fair value on an ongoing basis. The following table presents assets carried on the consolidated balance sheets by caption and by level in the fair value hierarchy at June 30, 2016 (unaudited) and December 31, 2015, for which a nonrecurring change in fair value has been recorded:

 

   Fair Value Measurements at Reporting Date Using: 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
   Total   Level 1   Level 2   Level 3 
   (In Thousands) 
June 30, 2016 (unaudited):                    
Impaired loans  $546   $-   $-   $546 
Totals  $546   $-   $-   $546 
                     
December 31, 2015:                    
Impaired loans  $546   $-   $-   $546 
Totals  $546   $-   $-   $546 

 

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

 

   June 30, 2016 (unaudited) 
   Carrying   Fair Value 
   Amount   Level 1   Level 2   Level 3   Total 
   (In Thousands) 
Financial assets:                         
Cash and cash equivalents  $8,136   $8,136   $-   $-   $8,136 
Interest-bearing time deposits with other banks   1,087    -    1,087    -    1,087 
Available-for-sale securities   17,040    -    17,040    -    17,040 
Held-to-maturity securities   110    -    140    -    140 
Federal Home Loan Bank stock   1,152    1,152    -    -    1,152 
Investment in The Co-operative Central Reserve Fund   384    384    -    -    384 
Loans, net   191,629    -    -    193,613    193,613 
Accrued interest receivable   543    543    -    -    543 
                          
Financial liabilities:                         
Deposits   182,598    -    183,198    -    183,198 
FHLB advances   14,500    -    14,512    -    14,512 

 

   December 31, 2015 
   Carrying   Fair Value 
   Amount   Level 1   Level 2   Level 3   Total 
   (In Thousands) 
Financial assets:                         
Cash and cash equivalents  $10,670   $10,670   $-   $-   $10,670 
Interest-bearing time deposits with other banks   1,087    -    1,086    -    1,086 
Available-for-sale securities   16,556    -    16,556    -    16,556 
Held-to-maturity securities   120    -    155    -    155 
Federal Home Loan Bank stock   971    971    -    -    971 
Investment in The Co-operative Central Reserve Fund   384    384    -    -    384 
Loans, net   170,427    -    -    171,150    171,150 
Accrued interest receivable   508    508    -    -    508 
                          
Financial liabilities:                         
Deposits   169,372    -    170,134    -    170,134 
FHLB advances   8,500    -    8,458    -    8,458 

 

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets as of June 30, 2016 (unaudited) and December 31, 2015 under the indicated captions. Accounting policies related to financial instruments are described below.

 

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

 

Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate those assets' fair values.

 

Interest-bearing time deposits with other banks: The fair value of interest-bearing time deposits with other banks was determined by discounting the cash flows associated with these instruments using current market rates for deposits with similar characteristics.

 

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

 

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

 

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

 

Deposit liabilities: The fair values disclosed for demand deposits, regular savings, NOW accounts, and money market accounts are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

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

 

Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portion of loans, fair value also considers the difference between current levels of interest rates and the committed rates.

 

NOTE 10 – REGULATORY CAPITAL

 

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 new 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 new regulations require a new common equity Tier 1 (“CET1”) capital ratio of 4.5%, increase the minimum Tier 1 capital to risk-weighted assets ratio to 6.0% from 4.0%, require a minimum total capital to risk-weighted assets ratio of 8.0% and require 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% (new) and a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk based capital ratio of 10.0% (unchanged) and a Tier 1 leverage ratio of 5.0% (unchanged). 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. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses.

 

The new regulations changed what constitutes regulatory capital. Certain instruments will no longer constitute qualifying capital, subject to phase-out periods. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 will be deducted from capital.

 

 22 

 

 

The new regulations also changed the risk weights of certain assets, including an increase in the risk weight of certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or on non-accrual status to 150% from 100%, a credit conversion factor for the unused portion of commitments with maturities of less than one year that are not cancellable to 20% from 0%, an increase in the risk weight for mortgage servicing rights and deferred tax assets that are not deducted from capital to 250% from 100%, and an increase in the risk weight for equity exposures to 600% from 100%.

 

Management believes, as of June 30, 2016, that the Bank meets all capital adequacy requirements to which it is subject.

 

As of June 30, 2016 (unaudited), the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

 

The Bank’s actual capital amounts and ratios are presented in the table below.

 

                   To Be Well 
                   Capitalized Under 
           For Capital   Prompt Corrective 
   Actual   Adequacy Purposes   Action Provisions 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars In Thousands) 
As of June 30, 2016 (unaudited) :                              
Total Capital (to Risk Weighted Assets)  $23,560    14.7%  $12,858    8.0%  $16,073    10.0%
Tier 1 Capital (to Risk Weighted Assets)   22,598    14.1    9,644    6.0    12,858    8.0 
Common Equity Tier 1  Capital (to Risk Weighted Assets)   22,598    14.1    7,233    4.5    10,447    6.5 
Tier 1 Capital (to Average Assets)   22,598    10.1    8,959    4.0    11,199    5.0 
                               
As of December 31, 2015:                              
Total Capital (to Risk Weighted Assets)  $23,066    16.2%  $11,408    8.0%  $14,260    10.0%
Tier 1 Capital (to Risk Weighted Assets)   22,171    15.6    8,556    6.0    11,408    8.0 
Common Equity Tier 1  Capital (to Risk Weighted Assets)   22,171    15.6    6,417    4.5    9,269    6.5 
Tier 1 Capital (to Average Assets)   22,171    10.9    8,169    4.0    10,211    5.0 

 

NOTE 11 – COMMON STOCK REPURCHASES

 

On November 24, 2015, the Board of Directors of the Company authorized a stock repurchase program pursuant to which the Company may purchase up to 89,903 shares of the Company’s common stock, equal to 4.0% of the Company’s outstanding common stock at the time. The program allows the Company to repurchase common stock at various prices in the open market or through private transactions. The actual amount and timing of future repurchases, if any, will depend on market conditions, applicable SEC rules and various other factors.

 

In 2015, the Company repurchased 23,100 shares of common stock, at an average cost of $12.89.

 

During the six month period ending June 30, 2016 (unaudited), a total of 35,000 shares of common stock were repurchased at an average cost of $13.12.

 

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NOTE 12 – EQUITY INCENTIVE PLANS

 

On November 24, 2015, stockholders of the Company approved the 2015 Equity Incentive Plan (“2015 EIP”). The 2015 EIP provides for the award of up to 314,661 shares of common stock pursuant to grants of restricted stock awards and stock options. Pursuant to the terms of the 2015 EIP, on June 1, 2016, the Board of Directors granted 70,950 shares of restricted stock and 169,500 stock options to employees and directors. Of the 70,950 shares of restricted stock granted, 47,600 shares vest evenly over a five year period and 23,350 shares vest over a four year period. Of the 169,500 stock options granted, 122,500 options vest evenly over a five year period and 47,000 options vest over a four year period. The maximum term of each option is ten years. At June 30, 2016, there were 18,953 restricted stock awards and 55,258 stock options available for future grants.

 

The fair value of each option awarded for the 2015 EIP is estimated on the date of the grant using the Black-Scholes Option-Pricing Model. The expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term and the vesting period. The expected volatility is based on peer group volatility because the Company does not have sufficient trading history. The dividend yield is based on the Company’s expectation of no dividend payouts. The risk-free rate was based on the U.S. Treasury yield curve in effect at the date of the grant for a period equivalent to the expected life of the option.

 

The weighted average assumptions used and fair value for options granted during the six months ended June 30, 2016 are as follows:

 

   Stock Option 
   Assumptions 
Expected life (years)   6.40 years 
Expected dividend yield   0%
Expected volatility   20.24%
Expected forfeiture rate   0%
Risk free rate   1.67%
Fair value per option  $3.17 

 

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A summary of activity for the 2015 Equity Incentive Plan as of and for the six months ended June 30, 2016 is as follows:

 

   Stock Options 
   2016 
   Number of 
   Shares 
     
Outstanding at beginning of period   - 
Granted   169,500 
Outstanding at end of period   169,500 
      
Exercisable at end of period   - 
      
Weighted average fair value of options granted during the period  $3.17 
Weighted average contractual life remaining   9.9 years 
Weighted average exercise price  $12.85 

 

   Non-vested 
   Restricted
Stock
 
   2016 
   Number of 
   Shares 
     
Outstanding at beginning of period   - 
Granted   70,950 
Outstanding at end of period   70,950 
Weighted average grant date fair value  $12.85 

 

As of June 30, 2016, unrecognized share-based compensation expense related to non-vested options amounted to $527,000 and the unrecognized share-based compensation expense related to non-vested restricted stock amounted to $897,000. The unrecognized expense related to the non-vested options and non-vested restricted stock will be recognized over a weighted average period of 4.7 years.

 

For the three and six months ended June 30, 2016, the Company recognized compensation expense for stock options of $10,000, and the recognized tax benefit related to this expense was $1,000. For the three and six months ended June 30, 2016, the Company recognized compensation expense for restricted stock awards of $15,000, and the recognized tax benefit related to this expense was $6,000.

 

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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 six months ended June 30, 2016 and 2015 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 in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

This Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

·statements of our goals, intentions and expectations;

 

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

 

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

 

·estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Report.

 

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

 

·our ability to manage our operations under the current adverse economic conditions nationally and 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;

 

·competition among depository and other financial institutions;

 

·our success in implementing our business strategy, particularly increasing our commercial real estate, multi-family, non-owner occupied residential and construction lending;

 

·our success in introducing new financial products;

 

·our ability to attract and maintain deposits;

 

·our ability to continue to improve our asset quality even as we increase our non-residential and non-owner occupied residential lending;

 

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·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, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;

 

·changes in consumer spending, borrowing and saving 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 reserve 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 (particularly the new capital regulations), regulatory fees and compliance costs 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 organization, 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 described elsewhere in this Report.

 

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.

 

 27 

 

 

During the six months ended June 30, 2016, there were no material changes to the critical accounting policies disclosed in Pilgrim Bancshares, Inc.’s 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on March 28, 2016.

 

Comparison of Financial Condition at June 30, 2016 (unaudited) and December 31, 2015

 

Total assets increased $19.2 million, or 9.1%, to $229.7 million at June 30, 2016 from $210.5 million at December 31, 2015. The increase was primarily due to an increase in loans.

 

Total cash and cash equivalents decreased $2.5 million, or 23.7%, to $8.1 million at June 30, 2016 from $10.7 million at December 31, 2015. The decrease in cash resulted from the timing of normal cash flows.

 

Net loans increased $21.2 million, or 12.4%, to $191.6 million at June 30, 2016 from $170.4 million at December 31, 2015. The Company originated $43.2 million and purchased $19.8 million of new loans during the six months ended June 30, 2016. Partially offsetting the loan originations and purchases were $25.1 million of loan payoffs and amortization, $6.8 million of loan and loan participations sold and $9.9 million of unadvanced funds on loans originated during the six months ended June 30, 2016. Investment securities classified as available-for-sale increased $484,000, or 2.9%, to $17.0 million at June 30, 2016 from $16.6 million at December 31, 2015, due to the purchase of U.S. government and agency securities. Investment securities classified as held-to-maturity decreased $10,000, or 8.3%, to $110,000 at June 30, 2016, from $120,000 at December 31, 2015 due to payments in the ordinary course of business and a payoff of one security.

 

Bank-owned life insurance at June 30, 2016 increased $21,000, or 0.9%, compared to December 31, 2015 due to normal increases in cash surrender value.

 

Deposits increased $13.2 million, or 7.8%, to $182.6 million at June 30, 2016 from $169.4 million at December 31, 2015, primarily due to a $10.0 million increase in certificates of deposit, a $2.2 million increase in noninterest-bearing demand accounts, a $745,000 increase in savings accounts, a $141,000 increase in Money Market accounts, and a $123,000 increase in NOW accounts. Our core deposits, which we consider to be our noninterest-bearing demand accounts, NOW accounts, savings accounts and money market accounts, collectively increased $3.2 million, or 3.7%, to $89.3 million at June 30, 2016 from $86.1 million at December 31, 2015.

 

FHLB advances increased $6.0 million, or 70.6%, to $14.5 million at June 30, 2016 from $8.5 million at December 31, 2015, to fund loan growth. FHLB advances as of June 30, 2016 were long term borrowings.

 

Stockholders’ equity increased $106,000, or 0.3%, to $32.1 million at June 30, 2016 from $32.0 million at December 31, 2015. The increase was driven by $341,000 of net income for the six months ended June 30, 2016 and $160,000 in other comprehensive income, due to an increase in the net unrealized gain position of our available-for-sale investment securities portfolio. Partially offsetting the increase was the purchase and retirement of 35,000 shares of the Company’s common stock at a cost of $459,000.

 

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Delinquent Loans. The following table sets forth our loan delinquencies by type and amount at the dates indicated.

 

   At June 30, 2016   At December 31, 2015 
   (unaudited)             
   30-59
Days
Past Due
   60-89
Days
Past Due
   90 Days or  
More
Past Due
   30-59
Days
Past Due
   60-89
Days
Past Due
   90 Days or
More
Past Due
 
   (In Thousands) 
Real estate loans:                              
One- to four-family residential(1)  $1,089   $-   $-   $1,088   $18   $1,393 
Commercial   669    -    -    -    -    - 
Multi-family   -    -    -    -    -    - 
Home equity loans and lines of credit   -    59    -    -    59    - 
Construction   -    -    -    -    -    - 
Total real estate   1,758    59    -    1,088    77    1,393 
Commercial and industrial loans   -    -    -    -    -    - 
Consumer loans   6    -    -    16    -    - 
Total loans  $1,764   $59   $-   $1,104   $77   $1,393 

 

(1)There were no delinquent non-owner occupied residential real estate loans at June 30, 2016 or December 31, 2015.

 

The decrease in total delinquent loans 90 days or more past due from December 31, 2015 to June 30, 2016 was the result of the payoff of one loan in the amount of $1.4 million.

 

Classified Assets. The following table sets forth our amounts of classified assets and assets designated as special mention as of June 30, 2016 and December 31, 2015.

 

   At June 30,   At December 31, 
   2016   2015 
   (In Thousands) 
   (unaudited)     
Classified assets:          
Substandard:          
Loans(1)  $573   $4,481 
Securities   108    115 
Other real estate owned   -    - 
Total substandard   681    4,596 
Doubtful   -    - 
Loss   -    - 
Other real estate owned   -    - 
Total classified assets  $681   $4,596 
Special mention  $3,069   $592 

 

(1) Includes $1.4 million of non-accruing loans that were more than 90 days past due at December 31, 2015.

 

The decrease in classified assets from December 31, 2015 to June 30, 2016 was the result of the payoff of one non-accruing loan in the amount of $1.4 million, the upgrade of two loans totaling $2.5 million from “substandard” to “special mention,” and normal amortization.

 

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Non-Performing Assets. The following table sets forth information regarding our non-performing assets and troubled debt restructurings at the dates indicated. The information reflects net charge-offs but not specific reserves. Troubled debt restructurings include loans where the borrower is experiencing financial difficulty and for which either a portion of interest or principal has been forgiven or an extension of term granted, or for which the loans were modified at interest rates materially less than current market rates.

 

   At June 30,   At December 31, 
   2016   2015 
   (Dollars In Thousands) 
   (unaudited)     
Non-accrual loans:          
Real estate loans:          
One- to four-family residential(1)  $13   $1,410 
Commercial   -    - 
Multi-family   -    - 
Home equity loans and lines of credit   -    - 
Construction   -    - 
Total real estate   13    1,410 
Commercial and industrial loans   -    - 
Consumer loans   -    - 
Total non-accrual loans   13    1,410 
           
Total accruing loans past due 90 days or more   -    - 
Total of nonaccrual loans and accruing loans 90 days or more past due   13    1,410 
           
Other non-performing assets   -    - 
Total non-performing assets   13    1,410 
           
Performing troubled debt restructurings:          
Real estate loans:          
One- to four-family residential(2)   5,260    4,272 
Commercial   669    679 
Multi-family   -    - 
Home equity loans and lines of credit   59    59 
Total real estate   5,988    5,010 
Commercial and industrial loans   -    - 
Consumer loans   -    - 
Total troubled debt restructurings   5,988    5,010 
           
Total non-performing loans and troubled debt restructurings  $6,001   $6,420 
           
Non-performing loans to total loans   0.01%   0.82%
Non-performing assets to total assets   0.01%   0.67%
Non-performing assets and troubled debt restructurings to total assets   2.61%   3.05%

 

(1)There were no non-performing non-owner occupied residential real estate loans at June 30, 2016 or December 31, 2015.
(2)There were no troubled debt restructurings related to non-owner occupied residential real estate loans at June 30, 2016 or December 31, 2015.

 

The decrease in non-performing assets from December 31, 2015 to June 30, 2016 was the result of the payoff of a non-accruing loan totaling $1.4 million.

 

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Non-performing loans totaled $13,000 at June 30, 2016, and consisted of one owner occupied one- to four- family residential loan. We had no non-performing commercial real estate and multi-family loans at June 30, 2016. We had no foreclosed real estate at June 30, 2016.

 

Interest income that would have been recorded for the six months ended June 30, 2016, had the one non-accruing loan been current according to its original terms, amounted to less than $1,000.

 

Other Loans of Concern. There were no other loans at June 30, 2016 that are not already disclosed where there is information about possible credit problems of borrowers that caused management to have serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.

 

Comparison of Operating Results for the Three Months Ended June 30, 2016 and June 30, 2015

 

General. Net income for the three months ended June 30, 2016 was $185,000, compared to net income of $134,000 for the three months ended June 30, 2015. The increase of $51,000, or 38.1%, in net income was due to an increase in net interest income and noninterest income, partially offset by an increase in noninterest expense.

 

Interest and Dividend Income. Total interest and dividend income for the three months ended June 30, 2016 increased $246,000, or 14.6%, to $1.9 million compared to $1.7 million for the three months ended June 30, 2015. The increase in interest and dividend income was the result of higher average loans in the three months ended June 30, 2016. The average balance of loans during the three months ended June 30, 2016 increased $27.2 million to $183.5 million from $156.3 million for the three months ended June 30, 2015, while the average yield on loans decreased 11 basis points to 4.01% for the three months ended June 30, 2016 from 4.12% for the three months ended June 30, 2015. The average balance of investment securities increased $3.8 million to $17.3 million for the three months ended June 30, 2016 from $13.5 million for the three months ended June 30, 2015, and the yield on investment securities (on a tax-equivalent basis) decreased 36 basis points to 1.72% for the three months ended June 30, 2016 from 2.08% for the three months ended June 30, 2015.

 

Interest Expense. Total interest expense increased $121,000, or 47.8%, to $374,000 for the three months ended June 30, 2016 from $253,000 for the three months ended June 30, 2015. Interest expense on interest-bearing deposit accounts increased $109,000, or 45.8%, to $347,000 for the three months ended June 30, 2016 from $238,000 for the three months ended June 30, 2015. The increase was primarily due to higher average deposit balances and overall changes in the deposit mix.

 

Interest expense on FHLB advances increased $12,000, or 80.0%, to $27,000 for the three months ended June 30, 2016 from $15,000 for the three months ended June 30, 2015. The average balance of advances increased $2.4 million, or 29.6%, to $10.6 million for the three months ended June 30, 2016 from $8.2 million for the three months ended June 30, 2015. The cost of funds on FHLB advances increased 26 basis points to 0.99% for the three months ended June 30, 2016 from 0.73% for the three months ended June 30, 2015.

 

Net Interest and Dividend Income. Net interest and dividend income increased $125,000, or 8.7%, to $1.6 million for the three months ended June 30, 2016 from $1.4 million for the three months ended June 30, 2015. On a tax-equivalent basis, net interest and dividend income increased $124,000, or 8.6%, to $1.6 million for the three months ended June 30, 2016 from $1.4 million for the three months ended June 30, 2015. The tax-equivalent basis increase resulted from a $245,000 increase in interest income, partially offset by a $121,000 increase in interest expense. Our average interest-earning assets increased $34.3 million to $213.0 million for the three months ended June 30, 2016 from $178.7 million for the three months ended June 30, 2015. Our net interest rate spread decreased 31 basis points to 2.77% for the three months ended June 30, 2016 from 3.08% for the three months ended June 30, 2015, and our net interest margin decreased 29 basis points to 2.93% for the three months ended June 30, 2016 from 3.22% for the three months ended June 30, 2015. The decrease in our interest rate spread and net interest margin reflected a reduction in the average yield on loans and higher average balances of certificates of deposit, and related cost of funds.

 

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Provision for Loan Losses. We recorded a provision for loan losses for the three months ended June 30, 2016 of $36,000, compared to a provision of $38,000 for the three months ended June 30, 2015. We maintain the allowance for loan losses at levels we believe are adequate to cover our estimate of probable credit losses as of the end of the reporting period. There was a charge-off of $7,000 related to a consumer loan, for the three months ended June 30, 2016. No charge-offs were recognized for the three months ended June 30, 2015. The allowance for loan losses was $951,000, or 0.49% of total loans at June 30, 2016, compared to $803,000, or 0.50% of total loans at June 30, 2015.

 

Noninterest Income. Noninterest income increased $13,000, or 9.8%, to $146,000 for the three months ended June 30, 2016 from $133,000 for the three months ended June 30, 2015. The increase was primarily due to net gains on sales of loans of $17,000 for the three months ended June 30, 2016 compared to $3,000 for the three months ended June 30, 2015.

 

Noninterest Expense. Noninterest expense increased $52,000, or 4.0%, to $1.4 million for the three months ended June 30, 2016 compared to $1.3 million for the three months ended June 30, 2015. The increase was primarily driven by an increase of $76,000 in salaries and benefits expense, due to staff merit increases and equity incentive compensation. Data processing expense increased $12,000, advertising and public relations expense decreased $11,000, occupancy expense decreased $10,000, and all other expenses decreased $15,000, spread across various categories.

 

Income Taxes. Income before income taxes of $299,000 resulted in income tax expense of $114,000 for the three months ended June 30, 2016, compared to income before income taxes of $211,000 resulting in an income tax expense of $77,000 for the three months ended June 30, 2015. The effective income tax rate was 38.1% for the three months ended June 30, 2016 compared to 36.5% for the three months ended June 30, 2015.

 

Comparison of Operating Results for the Six Months Ended June 30, 2016 and June 30, 2015

 

General. Net income for the six months ended June 30, 2016 was $341,000, compared to net income of $235,000 for the six months ended June 30, 2015. The increase of $106,000, or 45.1%, in net income, was due to an increase in net interest income and noninterest income, partially offset by an increase in provision for loan losses, and an increase in noninterest expense.

 

Interest and Dividend Income. Total interest and dividend income for the six months ended June 30, 2016 increased $506,000, or 15.4%, to $3.8 million compared to $3.3 million for the six months ended June 30, 2015. The increase in interest and dividend income was the result of higher average loans in the six months ended June 30, 2016. The average balance of loans during the six months ended June 30, 2016 increased $23.9 million to $176.4 million from $152.5 million for the six months ended June 30, 2015, while the average yield on loans decreased three basis points to 4.09% for the six months ended June 30, 2016 from 4.12% for the six months ended June 30, 2015. The average balance of investment securities increased $4.4 million to $17.1 million for the six months ended June 30, 2016 from $12.8 million for the six months ended June 30, 2015, and the yield on investment securities (on a tax-equivalent basis) decreased 45 basis points to 1.71% for the six months ended June 30, 2016 from 2.16% for the six months ended June 30, 2015.

 

Interest Expense. Total interest expense increased $219,000, or 43.2%, to $726,000 for the six months ended June 30, 2016 from $507,000 for the six months ended June 30, 2015. Interest expense on interest-bearing deposit accounts increased $196,000, or 40.9%, to $675,000 for the six months ended June 30, 2016 from $479,000 for the six months ended June 30, 2015. The increase was primarily due to higher average deposit balances and overall changes in the deposit mix.

 

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Interest expense on FHLB advances increased $23,000, or 82.1%, to $51,000 for the six months ended June 30, 2016 from $28,000 for the six months ended June 30, 2015. The average balance of advances increased $2.1 million, or 29.7%, to $9.6 million for the six months ended June 30, 2016 from $7.4 million for the six months ended June 30, 2015. The cost of funds on FHLB advances increased 29 basis points to 1.04% for the six months ended June 30, 2016 from 0.75% for the six months ended June 30, 2015.

 

Net Interest and Dividend Income. Net interest and dividend income increased $287,000, or 10.3%, to $3.1 million for the six months ended June 30, 2016 from $2.8 million for the six months ended June 30, 2015. On a tax-equivalent basis, net interest and dividend income increased $283,000, or 10.1%, to $3.1 million for the six months ended June 30, 2016 from $2.8 million for the six months ended June 30, 2015. The tax-equivalent basis increase resulted from a $502,000 increase in interest income, partially offset by a $219,000 increase in interest expense. Our average interest-earning assets increased $29.4 million to $207.7 million for the six months ended June 30, 2016 from $178.2 million for the six months ended June 30, 2015. Our net interest rate spread decreased 18 basis points to 2.82% for the six months ended June 30, 2016 from 3.00% for the six months ended June 30, 2015, and our net interest margin decreased 17 basis points to 2.97% for the six months ended June 30, 2016 from 3.14% for the six months ended June 30, 2015. The decrease in our interest rate spread and net interest margin reflected higher average balances of certificates of deposit, and related cost of funds.

 

Provision for Loan Losses. We recorded a provision for loan losses for the six months ended June 30, 2016 of $72,000, compared to a provision of $60,000 for the six months ended June 30, 2015. We maintain the allowance for loan losses at levels we believe are adequate to cover our estimate of probable credit losses as of the end of the reporting period. There was a charge-off of $7,000 related to a consumer loan for the six months ended June 30, 2016. No charge-offs were recognized for the six months ended June 30, 2015. The allowance for loan losses was $951,000, or 0.49% of total loans at June 30, 2016, compared to $803,000, or 0.50% of total loans at June 30, 2015.

 

Noninterest Income. Noninterest income increased $1,000, or 0.3%, to $293,000 for the six months ended June 30, 2016 from $292,000 for the six months ended June 30, 2015. The increase was spread across various categories.

 

Noninterest Expense. Noninterest expense increased $86,000, or 3.2%, to $2.7 million for the six months ended June 30, 2016 compared to $2.7 million for the six months ended June 30, 2015. The increase was primarily driven by an increase of $110,000 in salaries and benefits expense, due to staff merit increases and equity incentive compensation. Data processing expense increased $20,000, occupancy expense decreased $38,000, and all other expenses increased $6,000, spread across various categories.

 

Income Taxes. Income before income taxes of $546,000 resulted in income tax expense of $205,000 for the six months ended June 30, 2016, compared to income before income taxes of $356,000 resulting in an income tax expense of $121,000 for the six months ended June 30, 2015. The effective income tax rate was 37.5% for the six months ended June 30, 2016 compared to 34.0% for the six months ended June 30, 2015.

 

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Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Tax-equivalent yield adjustments have been made because we had tax-exempt interest-earning assets during the periods. All average balances are daily average balances based upon amortized costs. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

 

   For the Three Months Ended June 30, 
   2016   2015 
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate(1)
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate(1)
 
     
   (In Thousands) 
Interest-earning assets:                              
Loans  $183,463   $1,838    4.01%  $156,254   $1,609    4.12%
Interest-earning deposits   10,871    14    0.50%   7,720    7    0.37%
Investment securities(2)   17,327    74    1.72%   13,544    70    2.08%
Federal Home Loan Bank stock and                              
The Co- operative Central Reserve Fund   1,366    9    2.68%   1,193    4    1.34%
Total interest-earning assets   213,027    1,935    3.63%   178,711    1,690    3.78%
Noninterest-earning assets   10,991              11,394           
Total assets  $224,018             $190,105           
                               
Interest-bearing liabilities:                              
Savings accounts  $20,581    7    0.15%  $18,866    9    0.20%
NOW accounts   22,329    3    0.05%   19,647    5    0.10%
Money market accounts   28,643    26    0.36%   31,797    30    0.37%
Certificates of deposit   92,066    311    1.35%   64,665    194    1.20%
Total interest-bearing deposits   163,619    347    0.85%   134,975    238    0.70%
Federal Home Loan Bank advances   10,618    27    0.99%   8,192    15    0.73%
Total interest-bearing liabilities   174,237    374    0.86%   143,167    253    0.71%
Noninterest-bearing liabilities:                              
Noninterest-bearing deposits   17,290              13,724           
Other noninterest-bearing liabilities   509              1,342           
Total noninterest-bearing liabilities   17,799              15,066           
Total liabilities   192,036              158,233           
Total stockholders' equity   31,982              31,872           
Total liabilities and total stockholders' equity  $224,018             $190,105           
Net interest income       $1,561             $1,437      
Net interest rate spread(3)             2.77%             3.07%
Net interest-earning assets(4)  $38,790             $35,544           
Net interest margin(5)             2.93%             3.22%
Average interest-earning assets to interest-bearing liabilities   122.26%             124.63%          

 

(1)Yields and rates are annualized.
(2)Includes securities available-for-sale and held-to-maturity. A tax equivalent adjustment of $7,000 and $8,000 was applied to tax-exempt income for the three months ended June 30, 2016 and June 30, 2015, respectively.
(3)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(4)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5)Net interest margin represents net interest income divided by average total interest-earning assets.

 

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   For the Six Months Ended June 30, 
   2016   2015 
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate(1)
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate(1)
 
     
   (In Thousands) 
Interest-earning assets:                              
Loans  $176,382   $3,610    4.09%  $152,461   $3,143    4.12%
Interest-earning deposits   12,782    34    0.53%   11,822    18    0.31%
Investment securities(2)   17,144    147    1.71%   12,761    138    2.16%
Federal Home Loan Bank stock and                              
The Co- operative Central Reserve Fund   1,348    17    2.56%   1,164    7    1.21%
Total interest-earning assets   207,656    3,808    3.67%   178,208    3,306    3.71%
Noninterest-earning assets   11,043              11,438           
Total assets  $218,699             $189,646           
                               
Interest-bearing liabilities:                              
Savings accounts  $20,626    15    0.15%  $18,252    18    0.20%
NOW accounts   21,691    5    0.05%   20,008    10    0.10%
Money market accounts   28,495    53    0.37%   32,302    60    0.37%
Certificates of deposit   89,621    602    1.34%   65,319    391    1.20%
Total interest-bearing deposits   160,433    675    0.84%   135,881    479    0.70%
Federal Home Loan Bank advances   9,559    51    1.04%   7,412    28    0.75%
Total interest-bearing liabilities   169,992    726    0.85%   143,293    507    0.71%
Noninterest-bearing liabilities:                              
Noninterest-bearing deposits   16,201              13,334           
Other noninterest-bearing liabilities   585              1,206           
Total noninterest-bearing liabilities   16,786              14,540           
Total liabilities   186,778              157,833           
Total stockholders' equity   31,921              31,813           
Total liabilities and total stockholders' equity  $218,699             $189,646           
Net interest income       $3,082             $2,799      
Net interest rate spread(3)             2.82%             3.00%
Net interest-earning assets(4)  $37,664             $34,915           
Net interest margin(5)             2.97%             3.14%
Average interest-earning assets to interest-bearing liabilities   122.16%             124.18%          

 

(1)Yields and rates are annualized.
(2)Includes securities available-for-sale and held-to-maturity. A tax equivalent adjustment of $14,000 and $18,000 was applied to tax-exempt income for the six months ended June 30, 2016 and June 30, 2015, respectively.
(3)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(4)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5)Net interest margin represents net interest income divided by average total interest-earning assets

 

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Liquidity and Capital Resources

 

Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, proceeds from maturities and calls of securities, maturities of certificate of deposit investments and FHLB advances. 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. 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 operating activities was $270,000 and $517,000 for the six months ended June 30, 2016 and June 30, 2015, respectively. For the six months ended June 30, 2016 and 2015, net cash used in investing activities consists primarily of disbursements for the purchase of loans, the origination of loans, and the purchase of available-for-sale securities, offset by principal collections on loans, proceeds from loan sales, proceeds from maturing securities and pay downs on mortgage-backed securities. Net cash used in investing activities was $21.6 million, and $16.6 million for the six months ended June 30, 2016 and June 30, 2015, respectively. During the six months ended June 30, 2016, we purchased $3.4 million of securities held as available-for-sale securities, and during the six months ended June 30, 2015, we purchased $2.8 million of securities held as available-for-sale. We sold no securities during the six months ended June 30, 2016 and 2015. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $18.8 million and $4.7 million for the six months ended June 30, 2016 and June 30, 2015, respectively.

 

At June 30, 2016, we exceeded all “well capitalized” regulatory capital requirements with a CET1 capital level of $22.6 million or 14.1% of risk-weighted assets, which is above the required level of $10.4 million, or 6.5% of risk-weighted assets; a tier 1 capital level of $22.6 million, or 14.1% of risk-weighted assets, which is above the required level of $12.9 million, or 8.0% of risk-weighted assets; a tier 1 leverage capital level of $22.6 million, or 10.1% of average assets, which is above the required level of $11.2 million, or 5.0% of average assets; and total risk-based capital of $23.6 million, or 14.7% of risk-weighted assets, which is above the required level of $16.1 million, or 10.0% of risk-weighted assets. At December 31, 2015, we exceeded all of our regulatory capital requirements with a CET1 capital level of $22.2 million, or 15.6% of risk-weighted assets, which was the above the required level of $9.3 million, or 6.5% of risk-weighted assets; a tier 1 capital level of $22.2 million, or 15.6% of risk-weighted assets which is above the required level of $11.4 million, or 8.0% of risk-weighted assets; a tier 1 leverage capital level of $22.2 million, or 10.9% of average assets, which is above the required level of $10.2 million, or 5.0% of average assets; and a total risk-based capital of $23.1 million, or 16.2% of risk-weighted assets, which is above the required level of $14.3 million, or 10.0% of risk-weighted assets. Accordingly, Pilgrim Bank was categorized as well capitalized at June 30, 2016 and December 31, 2015. Management is not aware of any conditions or events since the most recent notification that would change our category.

 

At June 30, 2016, we had outstanding commitments to originate loans of $8.1 million, commitments to purchase loans of $11.5 million, and unadvanced funds on loans of $22.9 million. We anticipate that we will have sufficient funds available to meet our current loan origination, loan purchase and securities purchase commitments. Certificates of deposit that are scheduled to mature in less than one year from June 30, 2016 totaled $57.4 million. Management expects, based on historical experience, that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

 

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. Generally Accepted Accounting Principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and standby letters of credit. These arrangements are not expected to have a material impact on the Company’s financial condition or results of operations.

 

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

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Quantitative and qualitative disclosures about market risk are not required by smaller reporting companies, such as the 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) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended June 30, 2016, 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

 

The Bank is 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

 

Disclosure of risk factors is not required by smaller reporting companies, such as the 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)          The following table presents a summary of the Company’s share repurchases during the six months ended June 30, 2016.

 

           Total Number of Shares   Maximum Number of 
           Purchased as Part of   Shares That May Yet be 
   Total Number of   Average Price Paid   Publicly Announced   Purchased Under the 
Period  Shares Purchased   Per Share   Program (1)   Program (1) 
January 1 through January 31, 2016   32,000   $13.13    55,100    34,803 
February 1 through February 29, 2016   3,000   $13.03    58,100    31,803 
March 1 through March 31, 2016   0   $0.00    58,100    31,803 
April 1 through April 30, 2016   0   $0.00    58,100    31,803 
May 1 through May 31, 2016   0   $0.00    58,100    31,803 
June 1 through June 30, 2016   0   $0.00    58,100    31,803 

 

(1) On November 24, 2015, the Board of Directors of the Company authorized a stock repurchase program pursuant to which the Company may purchase up to 89,903 shares of the Company’s common stock equal to 4.0% of the Company’s outstanding common stock.

 

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Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

Item 6.Exhibits

 

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the signatures.

 

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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.

 

    Pilgrim Bancshares, Inc.
     
     
Date:  August 1, 2016   /s/ Francis E. Campbell
    Francis E. Campbell
    President and Chief Executive Officer
     
     
Date:  August 1, 2016   /s/ Christopher G. McCourt
   

Christopher G. McCourt

Senior Vice President, Chief Financial Officer and Treasurer

 

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INDEX TO EXHIBITS

 

3.1         Articles of Incorporation of Pilgrim Bancshares, Inc.*

3.2         Bylaws of Pilgrim Bancshares, Inc.*

31.1       Certification of Francis E. Campbell, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)

31.2       Certification of Christopher G. McCourt, Senior Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)

32          Certification of Francis E. Campbell, President and Chief Executive Officer, and Christopher G. McCourt, Senior Vice President 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 materials from the Company’s Quarterly Report on Form 10Q for the quarter ended June 30, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii)  Consolidated Statements of Comprehensive Income; (iv)  Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements

 

 

*            Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-194485).

 

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