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EX-32 - EXHIBIT 32 - Pilgrim Bancshares, Inc.v465793_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Pilgrim Bancshares, Inc.v465793_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Pilgrim Bancshares, Inc.v465793_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2017.

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

 

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

 

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

 

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

 

As of May 10, 2017, there were issued and outstanding 2,253,439 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 (unaudited)    
         
    Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016   3
         
    Consolidated Statements of Income for the Three Months Ended March 31, 2017 and March 31, 2016   4
         
    Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and March 31, 2016   5
         
    Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2017 and March 31, 2016   6
         
    Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and March 31, 2016   7
         
    Notes to Unaudited Consolidated Financial Statements   8
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   28
         
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   37
         
Item 4.   Mine Safety Disclosures   37
         
Item 5.   Other Information   37
         
Item 6.   Exhibits   38
         
    Signature Page   39

 

 2 

 

 

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

 

(In Thousands, except share data)

 

   March 31,   December 31, 
(unaudited)  2017   2016 
         
ASSETS          
Cash and due from banks  $1,768   $2,036 
Interest-bearing demand deposits with other banks   17,405    9,152 
Total cash and cash equivalents   19,173    11,188 
Interest-bearing time deposits with other banks   1,098    1,092 
Investments in available-for-sale securities (at fair value)   17,075    17,041 
Investments in held-to-maturity securities (fair value of $132 at March 31, 2017, and $135 at December 31, 2016)   100    104 
Federal Home Loan Bank stock, at cost   2,322    2,299 
Investment in The Co-operative Central Reserve Fund, at cost   384    384 
Loans, net of allowance for loan losses of  $1,094 at March 31, 2017, and $1,049 at December 31, 2016   207,649    210,486 
Premises and equipment, net   4,853    4,919 
Investment in real estate, net   1,528    1,534 
Accrued interest receivable   634    599 
Deferred income tax asset, net   728    740 
Bank-owned life insurance   2,324    2,314 
Other assets   249    233 
Total assets  $258,117   $252,933 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Deposits:          
Noninterest-bearing  $19,272   $18,791 
Interest-bearing   165,413    163,295 
Total deposits   184,685    182,086 
Federal Home Loan Bank advances   39,512    37,329 
Other liabilities   886    871 
Total liabilities   225,083    220,286 
Stockholders' equity:          
Common stock $.01 par value per share: 10,000,000 shares authorized, 2,253,439 shares issued at March 31, 2017 and December 31, 2016   23    23 
Additional paid-in capital   20,944    20,910 
Retained earnings   14,531    14,260 
Unearned compensation - ESOP (160,328 shares unallocated at March 31, 2017 and 161,826 shares unallocated at December 31, 2016)   (1,604)   (1,619)
Unearned compensation  - Restricted stock   (760)   (806)
Accumulated other comprehensive loss   (100)   (121)
Total stockholders' equity   33,034    32,647 
Total liabilities and stockholders' equity  $258,117   $252,933 

 

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 March 31, 
(unaudited)  2017   2016 
     
Interest and dividend income:          
Interest and fees on loans  $2,193   $1,772 
Interest on debt securities:          
Taxable   52    52 
Tax-exempt   10    13 
Other interest and dividends   51    29 
Total interest and dividend income   2,306    1,866 
Interest expense:          
Interest on deposits   348    328 
Interest on Federal Home Loan Bank advances   100    24 
Total interest expense   448    352 
Net interest and dividend income   1,858    1,514 
Provision for loan losses   45    36 
Net interest and dividend income after provision for loan losses   1,813    1,478 
Noninterest income:          
Service charges on deposit accounts   26    26 
Gain on sales/calls of securities, net   1    1 
Gain on sales of loans, net   -    17 
Rental income   58    68 
Other income   29    35 
Total noninterest income   114    147 
Noninterest expense:          
Salaries and employee benefits   918    804 
Occupancy expense   121    135 
Equipment expense   44    47 
Data processing expense   104    96 
Professional fees   91    99 
Federal Deposit Insurance Corporation assessment   42    37 
Communications expense   27    42 
Advertising and public relations expense   31    33 
Insurance expense   15    15 
Supplies expense   13    15 
Other expense   65    55 
Total noninterest expense   1,471    1,378 
Income before income taxes   456    247 
Income tax expense   185    91 
Net income  $271   $156 
           
Weighted-average number of common shares outstanding:          
Basic   2,031,429    2,030,760 
Diluted   2,040,800    2,030,760 
           
Earnings per share:          
Basic  $0.13   $0.08 
Diluted  $0.13   $0.08 

 

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 March 31, 
(unaudited)  2017   2016 
     
Net income  $271   $156 
Other comprehensive income, net of tax:          
Net unrealized holding gain on available-for-sale securities   34    168 
Reclassification adjustment for net realized gains in net income   (1)   (1)
Other comprehensive income before income tax effect   33    167 
Income tax expense   (12)   (61)
Other comprehensive income, net of tax   21    106 
Comprehensive income  $292   $262 

 

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 Three Months Ended March 31, 2017 and 2016

 

(In Thousands, except share data)

 

 

 

 

                        Accumulated     
   Common   Additional       Unearned   Unearned   Other     
(unaudited)  Stock   Paid-in   Retained   Compensation-   Compensation-   Comprehensive     
   Shares   Amount   Capital   Earnings   ESOP   Restricted Stock   (Loss) Income   Total 
Balance, December 31, 2015   2,224,489   $22   $20,466   $13,253   $(1,679)  $-   $(93)  $31,969 
Net income   -    -    -    156    -    -    -    156 
Shares purchased and retired   (35,000)   -    (459)   -    -    -    -    (459)
Common stock held by ESOP committed to be allocated (1,498 shares)   -    -    4    -    15    -    -    19 
Other comprehensive income, net of tax effect   -    -    -    -    -    -    106    106 
Balance, March 31, 2016   2,189,489   $22   $20,011   $13,409   $(1,664)  $-   $13   $31,791 
                                         
Balance, December 31, 2016   2,253,439   $23   $20,910   $14,260   $(1,619)  $(806)  $(121)  $32,647 
Net income   -    -    -    271    -    -    -    271 
Common stock held by ESOP committed to be allocated (1,498 shares)   -    -    8    -    15    -    -    23 
Share based compensation-restricted stock   -    -    -    -    -    46    -    46 
Share based compensation-options   -    -    26    -    -    -    -    26 
Other comprehensive income, net of tax effect   -    -    -    -    -    -    21    21 
Balance, March 31, 2017   2,253,439   $23   $20,944   $14,531   $(1,604)  $(760)  $(100)  $33,034 

 

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)

 

   Three Months Ended March 31, 
(unaudited)  2017   2016 
     
Cash flows from operating activities:          
Net income  $271   $156 
Adjustments to reconcile net income to net cash provided by operating activities:          
Capitalized interest on interest-bearing time deposits   (6)   - 
Amortization of securities, net   19    22 
Gain on sales/calls of securities, net   (1)   (1)
Loans originated for sale   -    (790)
Proceeds from sales of loans originated for sale   -    807 
Gain on sales of loans, net   -    (17)
Change in net deferred origination fees, costs, premiums and discounts   (25)   (2)
Provision for loan losses   45    36 
Depreciation and amortization   81    83 
Stock based compensation expense   95    19 
Increase in accrued interest receivable   (35)   (18)
Increase in bank-owned life insurance   (10)   (10)
Increase in other assets   (16)   - 
Increase (decrease) in other liabilities   15    (123)
Net cash provided by operating activities   433    162 
           
Cash flows from investing activities:          
Purchase of Federal Home Loan Bank stock   (23)   - 
Redemption of Federal Home Loan Bank stock   -    79 
Purchases of available-for-sale securities   (322)   (1,398)
Proceeds from maturities/calls/pay downs of available-for-sale securities   301    904 
Proceeds from maturities of held-to-maturity securities   6    4 
Loan principal originations and collections, net   2,817    2,111 
Loans purchased   -    (11,191)
Capital expenditures   (9)   (3)
Net cash provided by (used in) investing activities   2,770    (9,494)
           
Cash flows from financing activities:          
Net (decrease) increase in demand deposits, NOW and savings accounts   (1,279)   1,820 
Net increase in time deposits   3,878    7,715 
Payments on Federal Home Loan Bank long-term advances   (1,317)   - 
Proceeds from Federal Home Loan Bank long-term advances   3,500    - 
Purchase and retirement of common stock   -    (459)
Net cash provided by financing activities   4,782    9,076 
           
Net increase (decrease) in cash and cash equivalents   7,985    (256)
Cash and cash equivalents at beginning of period   11,188    10,670 
Cash and cash equivalents at end of period  $19,173   $10,414 
           
Supplemental disclosures:          
Interest paid  $447   $352 
Income taxes paid   108    215 

 

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

 

 7 

 

 

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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. Financial information as of March 31, 2017 and for the interim periods ended March 31, 2017 and 2016 is unaudited; however, in the opinion of management, reflects all adjustments considered necessary for a fair presentation of such information. Such adjustments were of a normal recurring nature. The results of operations for the three months ended March 31, 2017 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, 2016. 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, and the valuation of deferred tax assets.

 

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

 

As an “emerging growth company,” as defined in Title 1 of Jumpstart Our Business Startups (JOBS) Act, the Company has elected to use the extended transition period to delay adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, the consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of March 31, 2017, there is no significant difference in the comparability of the consolidated financial statements as a result of this extended transition period.

 

 8 

 

 

In May 2014 and August 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of this ASU is to clarify principles for recognizing revenue and to develop a common revenue standard for Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards. The guidance in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under the extended transition period for an emerging growth company, the amendments in ASU 2015-14 defer the effective date of ASU 2014-09 to annual reporting periods beginning after December 31, 2017, and interim periods within that period. Earlier application is permitted only as of an annual reporting period beginning after December 31, 2016, including interim reporting periods within that reporting period. The adoption of ASU 2014-09 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820) - Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” The objective of this update is to address the diversity in practice related to how certain investments measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. Under the extended transition period for an emerging growth company, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

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

 

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

 

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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 fiscal years beginning after December 15, 2019. Early application of item 5 above is permitted for fiscal years, or interim periods for which financial statements have not yet been issued. Early application 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.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgement to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Under the extended transition period for an emerging growth company, this update will be effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted in interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the amendments of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. Under the extended transition period for an emerging growth company, the amendments in ASU 2016-15 are effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU 2016-15 is not expected to have a material impact on the Company’s consolidated financial statements.

 

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In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows – Restricted Cash (Topic 230).” The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update do not provide a definition of restricted cash or restricted cash equivalents. Under the extended transition period for an emerging growth company, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. As this guidance only affects the classification within the statement of cash flows, ASU 2016-18 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20).”  The amendments in this update require shortening the amortization period for certain callable debt securities held at a premium.  Specifically, the amendments require the premium to be amortized to the earliest call date.  The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  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 beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  ASU 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

 

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NOTE 4 - EARNINGS PER SHARE (EPS)

 

The Company has adopted the EPS guidance included in 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 and unearned shares of restricted stock are not deemed outstanding for earnings per share calculations.

 

EPS for the three months ended March 31, 2017 and 2016 have been computed based on the following:

 

   Three Months Ended March 31, 
   2017   2016 
Net income (In thousands)  $271   $156 
           
Basic and diluted common shares:          
Weighted average common shares outstanding   2,253,439    2,197,830 
Weighted average unearned shares-restricted stock   (60,923)   - 
Weighted average unallocated ESOP shares   (161,087)   (167,070)
Basic weighted average shares outstanding   2,031,429    2,030,760 
           
Dilutive effect of unearned restricted stock   9,371    - 
Diluted weighted average shares outstanding   2,040,800    2,030,760 
           
Basic earnings per share  $0.13   $0.08 
Diluted earnings per share (1)  $0.13   $0.08 

 

(1) Options to purchase 169,500 shares, representing all outstanding options, were not included in the computation of diluted earnings per share for the three months ended March 31, 2017 because the effect is anti-dilutive. There were no options to purchase shares for the three months ended March 31, 2016.

 

 12 

 

 

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 as of March 31, 2017 and December 31, 2016:

 

   Amortized   Gross   Gross     
   Cost   Unrealized   Unrealized   Fair 
   Basis   Gains   Losses   Value 
   (In Thousands) 
Available-for-sale securities:                    
March 31, 2017:                    
Debt securities issued by U.S. government corporations and agencies  $8,981   $5   $48   $8,938 
Debt securities issued by states of the United States and political subdivisions of the states   3,007    1    33    2,975 
Mortgage-backed securities   5,246    4    88    5,162 
   $17,234   $10   $169   $17,075 
                     
December 31, 2016:                    
Debt securities issued by U.S. government corporations and agencies  $8,980   $7   $53   $8,934 
Debt securities issued by states of the United States and political subdivisions of the states   2,696    -    50    2,646 
Mortgage-backed securities   5,557    5    101    5,461 
   $17,233   $12   $204   $17,041 

 

   Amortized   Gross   Gross     
   Cost   Unrealized   Unrealized   Fair 
   Basis   Gains   Losses   Value 
   (In Thousands) 
Held-to-maturity securities:                    
March 31, 2017:                    
Mortgage-backed securities  $100   $32   $-   $132 
   $100   $32   $-   $132 
                     
December 31, 2016:                    
Mortgage-backed securities  $104   $31   $-   $135 
   $104   $31   $-   $135 

 

The scheduled maturities of debt securities were as follows as of March 31, 2017:

 

   Available-For-Sale   Held-To-Maturity 
       Amortized     
   Fair   Cost   Fair 
   Value   Basis   Value 
   (In Thousands) 
Due within one year  $499   $-   $- 
Due after one year through five years   9,563    -    - 
Due after five years through ten years   1,274    -    - 
Due after ten years   577    -    - 
Mortgage-backed securities   5,162    100    132 
   $17,075   $100   $132 

 

 13 

 

 

No available-for-sale securities were sold during the three months ended March 31, 2017 and 2016.

 

As of March 31, 2017 and December 31, 2016, there were no securities of issuers whose aggregate carrying amount exceeded 10% of stockholders’ equity.

 

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) 
March 31, 2017:                              
Debt securities issued by U.S. government corporations and agencies  $7,934   $48   $-   $-   $7,934   $48 
Debt securities issued by states of the United States and political subdivisions of the states   2,014    23    430    10    2,444    33 
Mortgage-backed securities   2,890    38    1,678    50    4,568    88 
Total temporarily impaired securities  $12,838   $109   $2,108   $60   $14,946   $169 
                               
December 31, 2016:                              
Debt securities issued by U.S. government corporations and agencies  $7,430   $53   $-   $-   $7,430   $53 
Debt securities issued by states of the United States and political subdivisions of the states   2,215    35    431    15    2,646    50 
Mortgage-backed securities   3,342    52    1,660    49    5,002    101 
Total temporarily impaired securities  $12,987   $140   $2,091   $64   $15,078   $204 

 

As of March 31, 2017, investment securities with unrealized losses consist of 18 debt securities issued by U.S. government corporations and government-sponsored agencies, 11 debt securities issued by states of the United States and political subdivisions of the states and mortgage-backed securities consisting of 27 government agencies and government sponsored enterprises and 1 private label. 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.

 

No other-than-temporary impairment losses were recognized for the three months ended March 31, 2017 and 2016.

 

 14 

 

 

NOTE 6 - LOANS

 

Loans consisted of the following:

 

   March 31,   December 31, 
   2017   2016 
   (In Thousands) 
Real estate loans:          
One-to four- family residential  $133,379   $133,997 
Commercial   23,424    23,368 
Multi-family   19,448    19,503 
Home equity loans and lines of credit   2,105    2,294 
Construction   25,485    27,185 
Commercial and industrial loans   2,867    2,885 
Consumer loans:          
Consumer lines of credit   12    22 
Other consumer loans   1,627    1,910 
    208,347    211,164 
Net deferred loan origination fees, costs, premiums and discounts   396    371 
Allowance for loan losses   (1,094)   (1,049)
Net loans  $207,649   $210,486 

 

 15 

 

 

The following tables set forth information regarding the allowance for loan losses as of and for the three months ended March 31, 2017 and 2016 and at March 31, 2017 and December 31, 2016:

 

   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) 
Three months ended March 31, 2017 :                                                  
Allowance for loan losses:                                                  
Beginning balance  $449   $134   $74   $12   $340   $10   $1   $15   $14   $1,049 
Charge-offs   -    -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    -    - 
Provision (benefit)   51    4    (2)   (1)   (9)   (1)   -    (2)   5    45 
Ending balance  $500   $138   $72   $11   $331   $9   $1   $13   $19   $1,094 
                                                   
Three months ended March 31, 2016 :                                                  
Allowance for loan losses:                                                  
Beginning balance  $373   $146   $62   $14   $216   $13   $1   $29   $32   $886 
Charge-offs   -    -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    -    - 
Provision (benefit)   81    (7)   (3)   (2)   (8)   (1)   -    (4)   (20)   36 
Ending balance  $454   $139   $59   $12   $208   $12   $1   $25   $12   $922 
                                                   
At March 31, 2017:                                                  
Allowance for loan losses:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $21   $-   $-   $-   $-   $-   $-   $-   $-   $21 
Ending balance:                                                  
Collectively evaluated for impairment   479    138    72    11    331    9    1    13    19    1,073 
Total allowance for loan losses ending balance  $500   $138   $72   $11   $331   $9   $1   $13   $19   $1,094 
                                                   
Loans:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $3,390   $650   $-   $6   $-   $-   $-   $-   $-   $4,046 
Ending balance:                                                  
Collectively evaluated for impairment   129,989    22,774    19,448    2,099    25,485    2,867    12    1,627    -    204,301 
Total loans ending balance  $133,379   $23,424   $19,448   $2,105   $25,485   $2,867   $12   $1,627   $-   $208,347 

 

   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 
At December 31, 2016 :                                                  
Allowance for loan losses:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $21   $-   $-   $-   $-   $-   $-   $-   $-   $21 
Ending balance:                                                  
Collectively evaluated for impairment   428    134    74    12    340    10    1    15    14    1,028 
Total allowance for loan losses ending balance  $449   $134   $74   $12   $340   $10   $1   $15   $14   $1,049 
                                                   
Loans:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $3,406   $650   $-   $6   $-   $-   $-   $-   $-   $4,062 
Ending balance:                                                  
Collectively evaluated for impairment   130,591    22,718    19,503    2,288    27,185    2,885    22    1,910    -    207,102 
Total loans ending balance  $133,997   $23,368   $19,503   $2,294   $27,185   $2,885   $22   $1,910   $-   $211,164 

 

 16 

 

 

The following tables set forth information regarding nonaccrual loans and past-due loans as of March 31, 2017 and December 31, 2016:

 

                           90 Days     
           90 Days               or More     
   30-59 Days   60-89 Days   or More   Total   Total       Past Due   Nonaccrual 
   Past Due   Past Due   Past Due   Past Due   Current   Total   and Accruing   Loans 
   (In Thousands) 
March 31, 2017:                                        
Real estate loans:                                        
One- to four-family residential  $2,730   $-   $-   $2,730   $130,649   $133,379   $-   $- 
Commercial   -    650    -    650    22,774    23,424    -    - 
Multi-family   -    -    -    -    19,448    19,448    -    - 
Home equity loans and lines of credit   -    -    -    -    2,105    2,105    -    - 
Construction   -    -    -    -    25,485    25,485    -    - 
Commercial and industrial loans   -    -    -    -    2,867    2,867    -    - 
Consumer loans:                                        
Consumer lines of credit   -    -    -    -    12    12    -    - 
Other consumer   -    -    -    -    1,627    1,627    -    - 
Total  $2,730   $650   $-   $3,380   $204,967   $208,347   $-   $- 
                                         
December 31, 2016:                                        
Real estate loans:                                        
One- to four-family residential  $118   $-   $-   $118   $133,879   $133,997   $-   $- 
Commercial   -    -    -    -    23,368    23,368    -    - 
Multi-family   -    -    -    -    19,503    19,503    -    - 
Home equity loans and lines of credit   -    -    -    -    2,294    2,294    -    - 
Construction   -    -    -    -    27,185    27,185    -    - 
Commercial and industrial loans   -    -    -    -    2,885    2,885    -    - 
Consumer loans:                                        
Consumer lines of credit   -    -    -    -    22    22    -    - 
Other consumer   -    -    -    -    1,910    1,910    -    - 
Total  $118   $-   $-   $118   $211,046   $211,164   $-   $- 

 

 17 

 

 

Information about loans that meet the definition of an impaired loan in ASC 310-10-35, “Receivables – Overall Subsequent Measurement,” is as follows at March 31, 2017 and December 31, 2016.

 

       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
   (In Thousands) 
             
March 31, 2017:               
With no related allowance recorded:               
Real estate loans:               
One- to four-family residential  $2,823   $2,823   $- 
Commercial   650    650    - 
Home equity loans and lines of credit   6    88    - 
Total impaired with no related allowance  $3,479   $3,561   $- 
                
With an allowance recorded:               
Real estate loans:               
One- to four-family residential  $567   $567   $21 
Commercial   -    -    - 
Home equity loans and lines of credit   -    -    - 
Total impaired with an allowance recorded  $567   $567   $21 
                
Total               
Real estate loans:               
One- to four-family residential  $3,390   $3,390   $21 
Commercial   650    650    - 
Home equity loans and lines of credit   6    88    - 
Total impaired loans  $4,046   $4,128   $21 
                
December 31, 2016:               
With no related allowance recorded:               
Real estate loans:               
One- to four-family residential  $2,839   $2,839   $- 
Commercial   650    650    - 
Home equity loans and lines of credit   6    88    - 
Total impaired with no related allowance  $3,495   $3,577   $- 
                
With an allowance recorded:               
Real estate loans:               
One- to four-family residential  $567   $567   $21 
Commercial   -    -    - 
Home equity loans and lines of credit   -    -    - 
Total impaired with an allowance recorded  $567   $567   $21 
                
Total               
Real estate loans:               
One- to four-family residential  $3,406   $3,406   $21 
Commercial   650    650    - 
Home equity loans and lines of credit   6    88    - 
Total impaired loans  $4,062   $4,144   $21 

 

 18 

 

 

The following presents, by class, information related to average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2017 and March 31, 2016.

 

  

Three Months Ended
March 31, 2017

   Three Months Ended
March 31, 2016
 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
       (In Thousands)     
         
With no related allowance recorded:                    
Real estate loans:                    
One- to four-family residential  $2,830   $21   $3,688   $44 
Commercial   650    -    676    7 
Home equity loans and lines of credit   6    1    59    1 
Total impaired with no related allowance  $3,486   $22   $4,423   $52 
                     
With an allowance recorded:                    
Real estate loans:                    
One- to four-family residential  $567   $6   $567   $5 
Commercial   -    -    -    - 
Home equity loans and lines of credit   -    -    -    - 
Total impaired with an allowance recorded  $567   $6   $567   $5 
                     
Total                    
Real estate loans:                    
One- to four-family residential  $3,397   $27   $4,255   $49 
Commercial   650    -    676    7 
Home equity loans and lines of credit   6    1    59    1 
Total impaired loans  $4,053   $28   $4,990   $57 

 

 19 

 

 

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) 
March 31, 2017:                                             
Grade:                                             
Pass  $-   $22,774   $19,448   $-   $21,774   $2,527   $-   $-   $66,523 
Special mention   225    -    -    -    3,711    340    -    -    4,276 
Substandard   2,348    650    -    6    -    -    -    -    3,004 
Loans not formally rated   130,806    -    -    2,099    -    -    12    1,627    134,544 
Total  $133,379   $23,424   $19,448   $2,105   $25,485   $2,867   $12   $1,627   $208,347 
                                              
                                              
December 31, 2016:                                             
Grade:                                             
Pass  $-   $22,718   $19,503   $-   $27,185   $2,885   $-   $-   $72,291 
Special mention   2,016    650    -    -    -    -    -    -    2,666 
Substandard   567    -    -    6    -    -    -    -    573 
Loans not formally rated   131,414    -    -    2,288    -    -    22    1,910    135,634 
Total  $133,997   $23,368   $19,503   $2,294   $27,185   $2,885   $22   $1,910   $211,164 

 

At March 31, 2017 and December 31, 2016, there were no loans rated “doubtful” or “loss.”

 

Credit Quality Information

 

The Company utilizes a seven grade internal loan rating system for commercial and multi-family 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 and multi-family real estate, construction and commercial loans. For residential real estate, home equity loans and lines of credit 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 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.

 

 20 

 

 

As of March 31, 2017, there were no consumer mortgage loans collateralized by residential real estate in the process of foreclosure.

 

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of mortgage and other loans serviced for others were $23.5 million and $24.3 million at March 31, 2017 and December 31, 2016, respectively.

 

NOTE 7 – DEPOSITS

 

The aggregate amount of time deposit accounts in denominations that meet or exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit (currently $250,000) at March 31, 2017 and December 31, 2016 was $23.4 million and $22.3 million, respectively. The totals exclude $5.0 million of brokered time deposits which were bifurcated into amounts below the FDIC insurance limit, as of March 31, 2017 and December 31, 2016.

 

For time deposits as of March 31, 2017, the scheduled maturities for each of the following five years ended March 31 are:

 

   (In Thousands) 
2018  $52,023 
2019   22,665 
2020   3,222 
2021   12,567 
2022   2,397 
Total  $92,874 

 

 

There were $7.3 million of brokered certificates of deposit at March 31, 2017 and December 31, 2016.

 

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

 

Maturities of advances from the FHLB for the years ending after March 31, 2017 are summarized as follows:

 

   (In Thousands) 
2018  $9,044 
2019   5,529 
2020   3,092 
2021   1,634 
2022   713 
Thereafter   19,500 
   $39,512 

 

Interest rates ranged from 0.39% to 1.51% with a weighted-average interest rate of 1.01% at March 31, 2017.

 

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.

 

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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. Level 1 also includes U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

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

 

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

 

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

 

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

 

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.

 

 22 

 

 

The following summarizes assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016:

 

   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) 
March 31, 2017 :                    
Debt securities issued by U.S. government corporations and agencies  $8,938   $-   $8,938   $- 
Debt securities issued by states of the United States and political subdivisions of the states   2,975    -    2,975    - 
Mortgage-backed securities   5,162    -    5,162    - 
Totals  $17,075   $-   $17,075   $- 
                     
December 31, 2016 :                    
Debt securities issued by U.S. government corporations and agencies  $8,934   $-   $8,934   $- 
Debt securities issued by states of the United States and political subdivisions of the states   2,646    -    2,646    - 
Mortgage-backed securities   5,461    -    5,461    - 
Totals  $17,041   $-   $17,041   $- 

 

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 sheet by caption and by level in the fair value hierarchy at March 31, 2017 and December 31, 2016 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) 
March 31, 2017:                    
Impaired loans  $552   $-   $-   $552 
Totals  $552   $-   $-   $552 
                     
December 31, 2016:                    
Impaired loans  $552   $-   $-   $552 
Totals  $552   $-   $-   $552 

 

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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:

 

   March 31, 2017 
   Carrying   Fair Value 
   Amount   Level 1   Level 2   Level 3   Total 
   (In Thousands) 
Financial assets:                         
Cash and cash equivalents  $19,173   $19,173   $-   $-   $19,173 
Interest-bearing time deposits with other banks   1,098    -    1,103    -    1,103 
Available-for-sale securities   17,075    -    17,075    -    17,075 
Held-to-maturity securities   100    -    132    -    132 
Federal Home Loan Bank stock   2,322    2,322    -    -    2,322 
Investment in The Co-operative Central                         
Reserve Fund   384    384    -    -    384 
Loans, net   207,649    -    -    209,349    209,349 
Accrued interest receivable   634    634    -    -    634 
                          
Financial liabilities:                         
Deposits   184,685    -    185,263    -    185,263 
FHLB advances   39,512    -    39,660    -    39,660 

 

   December 31, 2016 
   Carrying   Fair Value 
   Amount   Level 1   Level 2   Level 3   Total 
   (In Thousands) 
Financial assets:                         
Cash and cash equivalents  $11,188   $11,188   $-   $-   $11,188 
Interest-bearing time deposits with other banks   1,092    -    1,098    -    1,098 
Available-for-sale securities   17,041    -    17,041    -    17,041 
Held-to-maturity securities   104    -    135    -    135 
Federal Home Loan Bank stock   2,299    2,299    -    -    2,299 
Investment in The Co-operative Central                         
Reserve Fund   384    384    -    -    384 
Loans, net   210,486    -    -    211,328    211,328 
Accrued interest receivable   599    599    -    -    599 
                          
Financial liabilities:                         
Deposits   182,086    -    182,676    -    182,676 
FHLB advances   37,329    -    37,089    -    37,089 

 

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets as of March 31, 2017 and December 31, 2016 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.

 

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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.

 

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 capital regulations adopted by the Board of Governors of the Federal Reserve System (“FRB”) and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The regulations require a common equity Tier 1 (“CET 1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that phases in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. 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. At March 31, 2017, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer.

 

Management believes, as of March 31, 2017, that the Bank meets all capital adequacy requirements to which it is subject.

 

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As of March 31, 2017, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum Common Equity Tier 1, total risk-based, Tier 1 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 also presented in the table as of March 31, 2017 and December 31, 2016.

 

                   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 March 31, 2017:                              
Total Capital (to Risk Weighted Assets)  $24,853    15.09%  $13,176    8.0%  $16,470    10.0%
Tier 1 Capital (to Risk Weighted Assets)   23,750    14.42    9,882    6.0    13,176    8.0 
Common Equity Tier 1  Capital (to Risk Weighted Assets)   23,750    14.42    7,412    4.5    10,706    6.5 
Tier 1 Capital (to Average Assets)   23,750    9.30    10,217    4.0    12,772    5.0 
                               
As of December 31, 2016:                              
Total Capital (to Risk Weighted Assets)  $24,440    14.56%  $13,424    8.0%  $16,781    10.0%
Tier 1 Capital (to Risk Weighted Assets)   23,380    13.93    10,068    6.0    13,424    8.0 
Common Equity Tier 1  Capital (to Risk Weighted Assets)   23,380    13.93    7,551    4.5    10,907    6.5 
Tier 1 Capital (to Average Assets)   23,380    9.38    9,970    4.0    12,463    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.

 

During the three month period ending March 31, 2017, the Company did not repurchase any shares of common stock. During the three month period ending March 31, 2016, a total of 35,000 shares of common stock were repurchased at an average cost of $13.12.

 

NOTE 12 - EQUITY INCENTIVE PLAN

 

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 March 31, 2017, 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.

 

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The weighted average assumptions and fair value used for options granted are as follows:

 

   Stock Option 
   Assumptions 
Expected life        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 

 

A summary of activity for the 2015 Equity Incentive Plan as of and for the three months ended March 31, 2017 is as follows:

 

   Stock Options 
   2017 
   Number of 
   Shares 
     
Outstanding at beginning of period   169,500 
Granted   0 
Outstanding at end of period   169,500 
      
Exercisable at end of period   - 
      
Weighted average fair value of options granted  $3.17 
Weighted average contractual life remaining   9.2 years 
Weighted average exercise price  $12.85 
Aggregate intrinsic value  $364,000 

 

 

   Non-vested 
   Restricted Stock 
   2017 
   Number of 
   Shares 
     
Outstanding at beginning of period   70,950 
Granted   0 
Outstanding at end of period   70,950 
Weighted average grant date fair value  $12.85 

 

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As of March 31, 2017, unrecognized share-based compensation expense related to non-vested options amounted to $448,000 and the unrecognized share-based compensation expense related to non-vested restricted stock amounted to $760,000. The unrecognized expense related to the non-vested options and non-vested restricted stock will be recognized over a weighted average period of 4.2 years.

 

For the three months ended March 31, 2017, the Company recognized stock option related compensation expense of $26,000, and the recognized tax benefit related to this expense was $3,000. For the three months ended March 31, 2017, the Company recognized restricted stock related compensation expense of $46,000, and the recognized tax benefit related to this expense was $18,000.

 

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 months ended March 31, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing 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;

 

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·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;

 

·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;

 

·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;

 

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·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. During the three months ended March 31, 2017, there were no material changes to the critical accounting policies disclosed in Pilgrim Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 22, 2017.

 

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

 

Total assets increased $5.2 million, or 2.0%, to $258.1 million at March 31, 2017 from $252.9 million at December 31, 2016. The increase was primarily due to an increase in cash and cash equivalents.

 

Total cash and cash equivalents increased $8.0 million, or 71.4%, to $19.2 million at March 31, 2017 from $11.2 million at December 31, 2016. The increase in cash and cash equivalents resulted from an increase in deposits and funds borrowed from the Federal Home Loan Bank coupled with a decrease in loans.

 

Net loans decreased $2.8 million, or 1.3%, to $207.6 million at March 31, 2017 from $210.5 million at December 31, 2016. The decrease was primarily driven by $6.4 million of loan payoffs and amortization, offset by $4.0 million of new loan originations during the three months ended March 31, 2017. Partially offsetting the loan originations was $5,000 of loan amortization and $438,000 of unadvanced funds on loans originated during the three months ended March 31, 2017.

 

Investment securities classified as available-for-sale increased $34,000, or 0.2%, to $17.1 million at March 31, 2017 from $17.0 million at December 31, 2016. Investment securities classified as held-to-maturity decreased $4,000, or 3.8%, to $100,000 at March 31, 2017, from $104,000 at December 31, 2016 due to payments in the ordinary course of business.

 

Bank-owned life insurance at March 31, 2017 increased $10,000, or 0.4%, compared to December 31, 2016 due to normal increases in cash surrender value.

 

Deposits increased $2.6 million, or 1.4%, to $184.7 million at March 31, 2017 from $182.1 million at December 31, 2016, primarily due to a $3.9 million increase in certificates of deposit, a $481,000 increase in noninterest-bearing demand accounts and a $1.1 million increase in Money Market accounts, partially offset by a $1.9 million decrease in NOW accounts and a $968,000 decrease in savings accounts. Our core deposits, which we consider to be our noninterest-bearing demand accounts, NOW accounts, savings accounts and money market accounts, collectively decreased $1.3 million, or 1.4%, to $91.8 million at March 31, 2017 from $93.1 million at December 31, 2016.

 

FHLB advances increased $2.2 million, or 5.8%, to $39.5 million at March 31, 2017 from $37.3 million at December 31, 2016. FHLB advances as of March 31, 2017 consisted of long term bullet and amortizing borrowings.

 

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Stockholders’ equity increased $387,000, or 1.2%, to $33.0 million at March 31, 2017 from $32.6 million at December 31, 2016. The increase was driven by $271,000 of net income and $95,000 of stock based compensation for the three months ended March 31, 2017.

 

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

 

   At March 31, 2017   At December 31, 2016 
                 
   30-59   60-89   90 Days or   30-59   60-89   90 Days or 
   Days   Days   More   Days   Days   More 
   Past Due   Past Due   Past Due   Past Due   Past Due   Past Due 
   (In Thousands) 
Real estate loans:                              
One- to four-family residential (1)  $2,730   $-   $-   $118   $-   $- 
Commercial   -    650    -    -    -    - 
Multi-family   -    -    -    -    -    - 
Home equity loans and lines of credit   -    -    -    -    -    - 
Construction   -    -    -    -    -    - 
Total real estate   2,730    650    -    118    -    - 
Commercial and industrial loans   -    -    -    -    -    - 
Consumer loans   -    -    -    -    -    - 
Total loans  $2,730   $650   $-   $118   $-   $- 

 

(1)There were no delinquent non-owner occupied residential real estate loans at March 31, 2017 or December 31, 2016.

 

Classified Assets. The following table sets forth our amounts of classified assets and assets designated as special mention as of March 31, 2017 and December 31, 2016.

 

   At March 31,   At December 31, 
   2017   2016 
   (In Thousands)
Classified assets:          
Substandard:          
Loans  $3,004   $573 
Securities   100    103 
Other real estate owned   -    - 
Total substandard   3,104    676 
Doubtful   -    - 
Loss   -    - 
Other real estate owned   -    - 
Total classified assets  $3,104   $676 
Special mention  $4,276   $2,666 

 

The increase in classified assets from December 31, 2016 to March 31, 2017 was due to the downgrade of two loans totaling $2.4 million from “special mention” to “substandard”.

 

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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 March 31,   At December 31, 
   2017   2016 
   (Dollars In Thousands) 
         
Non-accrual loans:          
Real estate loans:          
One- to four-family residential(1)  $-   $- 
Commercial   -    - 
Multi-family   -    - 
Home equity loans and lines of credit   -    - 
Construction   -    - 
Total real estate   -    - 
Commercial and industrial loans   -    - 
Consumer loans   -    - 
Total non-accrual loans   -    - 
           
Total accruing loans past due 90 days or more   -    - 
Total of nonaccrual loans and accruing loans          
90 days or more past due   -    - 
           
Other non-performing assets   -    - 
Total non-performing assets   -    - 
           
Performing troubled debt restructurings:          
Real estate loans:          
One- to four-family residential(2)   3,390    3,406 
Commercial   650    650 
Multi-family   -    - 
Home equity loans and lines of credit   6    6 
Total real estate   4,046    4,062 
Commercial and industrial loans   -    - 
Consumer loans   -    - 
Total troubled debt restructurings   4,046    4,062 
           
Total non-performing loans and troubled debt restructurings  $4,046   $4,062 
           
Non-performing loans to total loans   0.00%   0.00%
Non-performing assets to total assets   0.00%   0.00%
Non-performing assets and troubled debt restructurings  to total assets   1.57%   1.61%

 

(1)There were no non-performing non-owner occupied residential real estate loans at March 31, 2017 or December 31, 2016.
(2)There were no troubled debt restructurings related to non-owner occupied residential real estate loans at March 31, 2017 or December 31, 2016.

 

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We had no non-performing loans and no foreclosed real estate at March 31, 2017.

 

Other Loans of Concern. There were no other loans at March 31, 2017 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 March 31, 2017 and March 31, 2016

 

General. Net income for the three months ended March 31, 2017 was $271,000, compared to net income of $156,000 for the three months ended March 31, 2016. The increase of $115,000, or 73.7%, in net income was due to an increase in net interest income, partially offset by a decrease in noninterest income and an increase in noninterest expense.

 

Interest and Dividend Income. Total interest and dividend income for the three months ended March 31, 2017 increased $440,000, or 23.6%, to $2.3 million compared to $1.9 million for the three months ended March 31, 2016. The increase in interest and dividend income was the result of higher average loans in the three months ended March 31, 2017. The average balance of loans during the three months ended March 31, 2017 increased $41.7 million to $211.0 million from $169.3 million for the three months ended March 31, 2016, while the average yield on loans decreased three basis points to 4.16% for the three months ended March 31, 2017 from 4.19% for the three months ended March 31, 2016. The average balance of investment securities increased $279,000 to $17.2 million for the three months ended March 31, 2017 from $17.0 million for the three months ended March 31, 2016, and the yield on investment securities (on a tax-equivalent basis) decreased 15 basis points to 1.55% for the three months ended March 31, 2017 from 1.70% for the three months ended March 31, 2016.

 

Interest Expense. Total interest expense increased $96,000, or 27.3%, to $448,000 for the three months ended March 31, 2017 from $352,000 for the three months ended March 31, 2016. Interest expense on interest-bearing deposit accounts increased $20,000, or 6.1%, to $348,000 for the three months ended March 31, 2017 from $328,000 for the three months ended March 31, 2016. The increase was primarily due to higher average deposit balances and overall changes in the deposit mix.

 

Interest expense on FHLB advances increased $76,000, or 316.7%, to $100,000 for the three months ended March 31, 2017 from $24,000 for the three months ended March 31, 2016. The average balance of advances increased $31.1 million, or 365.3%, to $39.6 million for the three months ended March 31, 2017 from $8.5 million for the three months ended March 31, 2016. The cost of funds on FHLB advances decreased 10 basis points to 1.02% for the three months ended March 31, 2017 from 1.12% for the three months ended March 31, 2016.

 

Net Interest and Dividend Income. Net interest and dividend income increased $344,000, or 22.7%, to $1.9 million for the three months ended March 31, 2017 from $1.5 million for the three months ended March 31, 2016. On a tax-equivalent basis, net interest and dividend income increased $341,000, or 22.4%, to $1.9 million for the three months ended March 31, 2017 from $1.5 million for the three months ended March 31, 2016. The tax-equivalent basis increase resulted from a $437,000 increase in interest income, partially offset by a $96,000 increase in interest expense. Our average interest-earning assets increased $42.0 million to $244.2 million for the three months ended March 31, 2017 from $202.3 million for the three months ended March 31, 2016. Our net interest rate spread increased four basis points to 2.89% for the three months ended March 31, 2017 from 2.85% for the three months ended March 31, 2016, and our net interest margin increased four basis points to 3.05% for the three months ended March 31, 2017 from 3.01% for the three months ended March 31, 2016. The increase in our interest rate spread and net interest margin reflected an increase in average loans and increased fees on loans.

 

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Provision for Loan Losses. We recorded a provision for loan losses for the three months ended March 31, 2017 of $45,000, compared to a provision of $36,000 for the three months ended March 31, 2016. 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 were no charge-offs recognized for the three months ended March 31, 2017 and 2016, respectively. The allowance for loan losses was $1.1 million, or 0.52% of total loans at March 31, 2017, compared to $922,000, or 0.51% of total loans at March 31, 2016.

 

Noninterest Income. Noninterest income decreased $33,000, or 22.4%, to $114,000 for the three months ended March 31, 2017 from $147,000 for the three months ended March 31, 2016. The decrease was driven by the absence of gains on sales of loans during the three months ended March 31, 2017.

 

Noninterest Expense. Noninterest expense increased $93,000, or 6.7%, to $1.5 million for the three months ended March 31, 2017 compared to $1.4 million for the three months ended March 31, 2016. The increase was primarily driven by an increase of $114,000 in salaries and benefits expense, due to equity compensation and staff merit increases. Occupancy expense decreased $14,000, communications expense decreased $15,000 and all other noninterest expenses increased $8,000, spread across various categories.

 

Income Taxes. Income before income taxes of $456,000 resulted in income tax expense of $185,000 for the three months ended March 31, 2017, compared to income before income taxes of $247,000 resulting in an income tax expense of $91,000 for the three months ended March 31, 2016. The effective income tax rate was 40.6% for the three months ended March 31, 2017 compared to 36.8% for the three months ended March 31, 2016.

 

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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 March 31, 
   2017   2016 
   Average  
Outstanding
 Balance
   Interest   Average
 Yield/Rate(1)
   Average
 Outstanding
 Balance
   Interest   Average
 Yield/Rate(1)
 
   (In Thousands) 
Interest-earning assets:                              
Loans  $210,964   $2,193    4.16%  $169,301   $1,773    4.19%
Interest-earning deposits   13,338    28    0.85%   14,693    20    0.55%
Investment securities (2)   17,240    67    1.55%   16,961    72    1.70%
Federal Home Loan Bank stock and                              
The Co- operative Central Reserve Fund   2,703    22    3.30%   1,330    8    2.44%
Total interest-earning assets   244,245    2,310    3.78%   202,285    1,873    3.70%
Noninterest-earning assets   11,113              11,094           
Total assets  $255,358             $213,379           
                               
Interest-bearing liabilities:                              
Savings accounts  $20,500    8    0.15%  $20,672    8    0.15%
NOW accounts   18,962    2    0.05%   21,054    2    0.05%
Money market accounts   32,316    32    0.39%   28,346    27    0.38%
Certificates of deposit   91,227    306    1.34%   87,176    291    1.34%
Total interest-bearing deposits   163,005    348    0.85%   157,248    328    0.83%
Federal Home Loan Bank advances   39,554    100    1.02%   8,500    24    1.12%
Total interest-bearing liabilities   202,559    448    0.89%   165,748    352    0.85%
Noninterest-bearing liabilities:                              
Noninterest-bearing deposits   18,946              15,113           
Other noninterest-bearing liabilities   901              659           
Total noninterest-bearing liabilities   19,847              15,772           
Total liabilities   222,406              181,520           
Total stockholders' equity   32,952              31,859           
Total liabilities and total stockholders' equity  $255,358            $213,379          
Net interest income       $1,862             $1,521      
Net interest rate spread (3)             2.89%             2.85%
Net interest-earning assets (4)  $41,686             $36,537           
Net interest margin (5)             3.05%             3.01%
Average interest-earning assets to interest-bearing liabilities   120.58%             122.04%          

 

(1)Yields and rates are annualized.
(2)Includes securities available-for-sale and held-to-maturity. A tax equivalent adjustment of $4,000 and $7,000 was applied to tax-exempt income for the three months ended March 31, 2017 and March 31, 2016, 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 $433,000 and $162,000 for the three months ended March 31, 2017 and March 31, 2016, respectively. Net cash provided by (used in) investing activities was $2.8 million and $(9.5) million for the three months ended March 31, 2017 and March 31, 2016, respectively. For the three months ended March 31, 2017, net cash provided by investing activities consisted primarily of $2.8 million of loan payments and principal collections on loans. For the three months ended March 31, 2016, net cash used in investing activities consisted primarily of $11.2 million of disbursements for the purchase of loans and the purchase of $1.4 million of available-for-sale securities, partially offset by $2.1 million of principal collections on loans. Net cash provided by financing activities was $4.8 million and $9.1 million for the three months ended March 31, 2017 and March 31, 2016, respectively. Activity was primarily in the deposit accounts and FHLB advances for the three months ended March 31, 2017. Activity was primarily centered in the deposit accounts for the three months ended March 31, 2016.

 

At March 31, 2017, we exceeded all “well capitalized” regulatory capital requirements with a CET1 capital level of $23.8 million or 14.4% of risk-weighted assets, which is above the required level of $10.7 million, or 6.5% of risk-weighted assets; a tier 1 capital level of $23.8 million, or 14.4% of risk-weighted assets, which is above the required level of $13.2 million, or 8.0% of risk-weighted assets; a tier 1 leverage capital level of $23.8 million, or 9.3% of average assets, which is above the required level of $12.8 million, or 5.0% of average assets; and total risk-based capital of $24.9 million, or 15.1% of risk-weighted assets, which is above the required level of $16.5 million, or 10.0% of risk-weighted assets. At December 31, 2016, we exceeded all of our regulatory capital requirements with a CET1 capital level of $23.4 million, or 13.9% of risk-weighted assets, which was the above the required level of $10.9 million, or 6.5% of risk-weighted assets; a tier 1 capital level of $ 23.4 million, or 13.9% of risk-weighted assets which is above the required level of $13.4 million, or 8.0% of risk-weighted assets; a tier 1 leverage capital level of $23.4 million, or 9.4% of average assets, which is above the required level of $12.5 million, or 5.0% of average assets; and a total risk-based capital of $24.4 million, or 14.6% of risk-weighted assets, which is above the required level of $16.8 million, or 10.0% of risk-weighted assets. Accordingly, Pilgrim Bank was categorized as well capitalized at March 31, 2017 and December 31, 2016. Management is not aware of any conditions or events since the most recent notification that would change our category.

 

At March 31, 2017, we had outstanding commitments to originate loans of $6.0 million and unadvanced funds on loans of $17.2 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2017 totaled $52.0 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.

 

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

 

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 March 31, 2017. 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 March 31, 2017, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1.          Legal Proceedings

 

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

 

Item 3.          Defaults Upon Senior Securities

 

None.

 

Item 4.          Mine Safety Disclosures

 

Not applicable.

 

Item 5.          Other Information

 

None.

 

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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:  May 12, 2017   /s/ Francis E. Campbell
    Francis E. Campbell
    President and Chief Executive Officer
     
Date:  May 12, 2017   /s/ Christopher G. McCourt
   

Christopher G. McCourt

Executive Vice President and Chief Financial Officer

 

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INDEX TO EXHIBITS

 

3.1Articles of Incorporation of Pilgrim Bancshares, Inc.*
3.2Bylaws of Pilgrim Bancshares, Inc.*
31.1Certification of Francis E. Campbell, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
31.2Certification of Christopher G. McCourt, Executive Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
32Certification 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
101The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, 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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