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EX-2 - EXHIBIT 2 - Pilgrim Bancshares, Inc.d687131dex2.htm
EX-8.1 - EXHIBIT 8.1 - Pilgrim Bancshares, Inc.d687131dex81.htm
EX-8.2 - EXHIBIT 8.2 - Pilgrim Bancshares, Inc.d687131dex82.htm
EX-99.4 - EXHIBIT 99.4 - Pilgrim Bancshares, Inc.d687131dex994.htm
EX-23.3 - EXHIBIT 23.3 - Pilgrim Bancshares, Inc.d687131dex233.htm
EX-99.5 - EXHIBIT 99.5 - Pilgrim Bancshares, Inc.d687131dex995.htm
Table of Contents

As filed with the Securities and Exchange Commission on July 23, 2014

Registration No. 333-194485

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

PRE-EFFECTIVE AMENDMENT NO. 2

TO THE

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Pilgrim Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland   6712   46-5110553
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

40 South Main Street

Cohasset, Massachusetts 02025

(781) 383-0541

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Mr. Francis E. Campbell

President and Chief Executive Officer

40 South Main Street

Cohasset, Massachusetts 02025

(781) 383-0541

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

Kent M. Krudys, Esq.

Adam P. Wheeler, Esq.

Luse Gorman Pomerenk & Schick, P.C.

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

(202) 274-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:   x

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of

securities to be registered

 

Amount

to be
registered

  Proposed
maximum
offering price
per share
 

Proposed
maximum
aggregate

offering price

 

Amount of

registration fee

Common Stock, $0.01 par value per share

  2,247,589 shares   $10.00   $22,475,890(1)   $2,895(2)

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Previously paid.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

PROSPECTUS

 

LOGO

(Proposed Holding Company for Pilgrim Bank)

Up to 1,897,500 Shares of Common Stock

Pilgrim Bancshares, Inc., a Maryland corporation, is offering shares of common stock for sale in connection with the conversion of Conahasset Bancshares, MHC from the mutual to the stock form of organization. All shares of common stock are being offered for sale at a price of $10.00 per share. We expect that our common stock will be quoted on the OTC Pink Marketplace operated by OTC Markets Group, Inc. upon conclusion of the offering. There is currently no public market for the shares of our common stock. We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

We are offering up to 1,897,500 shares of common stock for sale on a best efforts basis. We may sell up to 2,182,125 shares of common stock because of demand for the shares or changes in market conditions without resoliciting subscribers. We must sell a minimum of 1,402,500 shares in order to complete the offering.

We are offering the shares of common stock in a “subscription offering.” Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a “community offering.” We also may offer for sale shares of common stock not purchased in the subscription offering or community offering through a “syndicated community offering” to be managed by Keefe, Bruyette & Woods, Inc. In addition to the shares that we will sell in the offering, we will also contribute a total of $725,000 to a charitable foundation that we are establishing, such contribution to consist of a number of shares of our common stock equal to 3.0% of the shares sold in the offering (42,075 shares or $420,750 in stock at the minimum offering and 56,925 shares or $569,250 in stock at the maximum offering, or up to 65,464 shares or $654,640 in stock at the adjusted maximum offering) and the remainder in cash ($304,250 at the minimum offering and $155,750 at the maximum offering, or $70,360 at the adjusted maximum).

The minimum number of shares of common stock you may order is 25 shares. The maximum number of shares of common stock that an individual can order by himself in the subscription offering is 20,000 shares, and the maximum number of shares of common stock that an individual with an associate or group of persons acting in concert in all categories of the offering can order is 30,000 shares. Stock orders must be received by us before 2:00 p.m., Eastern Time, on [expiration date]. Orders received after 2:00 p.m., Eastern Time, on [expiration date] will be rejected unless we extend this expiration date. We may extend this expiration date without notice to you until [extension date], or such later date as the Federal Reserve Board may approve, to the extent such approval is required, which may not be beyond February 25, 2016. Once submitted, orders are irrevocable. However, if the offering is extended beyond [extension date], or the number of shares of common stock to be sold is increased to more than 2,182,125 shares or decreased to fewer than 1,402,500 shares, we will resolicit subscribers, giving them an opportunity to confirm, change or cancel their orders. Funds received during the offering will be held in a segregated account at Pilgrim Bank, and will earn interest at 0.20% per annum, which is our current statement savings rate.

Keefe, Bruyette & Woods will assist us in selling our shares of common stock on a best efforts basis. Keefe, Bruyette & Woods is not required to purchase any shares of the common stock that are being offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering. Keefe, Bruyette & Woods has advised us that it intends to make a market in the common stock, but is under no obligation to do so.

Upon completion of the conversion, Pilgrim Bancshares, Inc. will be a bank holding company registered with the Federal Reserve Board, and will be subject to regulations, inspections, supervision and reporting requirements of the Federal Reserve Board. See “Supervision and Regulation” for more information.

This investment involves a degree of risk, including the possible loss of your investment.

Please read “Risk Factors” beginning on page 22.

 

 

 

OFFERING SUMMARY

Price: $10.00 per Share

 

    Minimum     Midpoint     Maximum     Adjusted
Maximum
 

Number of shares

    1,402,500        1,650,000        1,897,500        2,182,125   

Gross offering proceeds

  $ 14,025,000      $ 16,500,000      $ 18,975,000      $ 21,821,250   

Estimated offering expenses (excluding selling agent fees)

  $ 1,065,000      $ 1,065,000      $ 1,065,000      $ 1,065,000   

Estimated selling agent fees(1) (2)

  $ 335,000      $ 335,000      $ 335,000      $ 335,000   

Estimated net proceeds

  $ 12,625,000      $ 15,100,000      $ 17,575,000      $ 20,421,250   

Estimated net proceeds per share

  $ 9.00      $ 9.15      $ 9.26      $ 9.36   

 

(1) See “The Conversion and Plan of Distribution—Marketing and Distribution; Compensation” for a discussion of Keefe, Bruyette & Woods’ compensation for the offering.
(2) Selling agent commissions shown assume that all shares are sold in the subscription offering. The amounts shown include (i) fees and selling commissions payable by us to Keefe, Bruyette & Woods in connection with the subscription offering equal to 1.0% of the aggregate purchase price of shares sold in the subscription offering (excluding shares purchased by officers, directors, employees, and our employee stock ownership plan, for which no selling agent commissions would be paid), subject to a minimum fee of $225,000; and (ii) other expenses of the offering payable to Keefe, Bruyette & Woods equal to $110,000. If all shares of common stock are sold in the syndicated community offering, selling agent commissions would be 6.0% of the aggregate purchase price of shares sold in the offering (excluding shares purchased by directors, officers, employees and our employee stock ownership plan), and the maximum selling agent commissions and expenses would be $830,440 at the minimum, $966,704 at the midpoint, $1,102,968 at the maximum and $1,259,671 at the maximum, as adjusted. See “The Conversion and Plan of Distribution—Marketing and Distribution; Compensation” for a discussion of fees to be paid to Keefe, Bruyette & Woods and other FINRA member firms in the event that all shares are sold in a syndicated community offering.

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation, the Share Insurance Fund, or any other government agency.

Neither the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

For assistance, please call the Stock Information Center, toll free, at [•].

 

 

KEEFE, BRUYETTE & WOODS

                             A Stifel Company

 

 

The date of this prospectus is [], 2014.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

SUMMARY

     2   

RISK FACTORS

     22   

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     42   

RECENT DEVELOPMENTS

     44   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     53   

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

     55   

OUR POLICY REGARDING DIVIDENDS

     56   

MARKET FOR THE COMMON STOCK

     57   

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

     58   

CAPITALIZATION

     59   

PRO FORMA DATA

     61   

COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE CHARITABLE FOUNDATION

     67   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     68   

BUSINESS OF PILGRIM BANCSHARES, INC.

     90   

BUSINESS OF PILGRIM BANK

     91   

SUPERVISION AND REGULATION

     120   

TAXATION

     135   

MANAGEMENT OF PILGRIM BANCSHARES, INC.

     136   

SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

     153   

THE CONVERSION AND PLAN OF DISTRIBUTION

     154   

PILGRIM BANK FOUNDATION

     179   

RESTRICTIONS ON ACQUISITION OF PILGRIM BANCSHARES, INC.

     183   

DESCRIPTION OF CAPITAL STOCK

     189   

TRANSFER AGENT

     191   

EXPERTS

     191   

LEGAL AND TAX MATTERS

     191   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     192   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF CONAHASSET BANCSHARES, MHC

     F-1   


Table of Contents

SUMMARY

The following summary explains the significant aspects of the mutual-to-stock conversion of Conahasset Bancshares, MHC and the related offering of Pilgrim Bancshares, Inc. common stock. It may not contain all of the information that is important to you. For additional information before making an investment decision, you should read this entire document carefully, including the financial statements and the notes to the financial statements, and the section entitled “Risk Factors.”

In this prospectus, the terms “we, “our,” and “us” refer to Pilgrim Bancshares, Inc., Pilgrim Bank, Conahasset Bancshares, MHC and Conahasset Bancshares, Inc., unless the context indicates another meaning.

Pilgrim Bancshares, Inc.

The shares being offered will be issued by Pilgrim Bancshares, Inc., a newly formed Maryland corporation that will own all of the outstanding shares of common stock of Pilgrim Bank upon completion of the mutual-to-stock conversion. Pilgrim Bancshares, Inc. was incorporated on February 27, 2014 and has not engaged in any business to date. Upon completion of the conversion, Pilgrim Bancshares, Inc. will register as a bank holding company and will be subject to comprehensive regulation and examination by the Federal Reserve Board.

Pilgrim Bancshares, Inc.’s executive and administrative office is located at 40 South Main Street, Cohasset, Massachusetts 02025, and its telephone number at this address is (781) 383-0541.

Pilgrim Bank

Pilgrim Bank is a Massachusetts stock co-operative bank that was originally organized in 1916 under the name Pilgrim Co-Operative Bank as a Massachusetts mutual co-operative bank. In 2005, the Bank changed its name to Pilgrim Bank. The Bank opened its first branch in Cohasset in 2002 and a second branch in Marion in 2008. As a result of growth in recent years, in 2011 the Bank purchased the most prominent building in the Cohasset Village, a vacant hardware store, renovated it, and in 2012 opened its new headquarters on that site.

We reorganized into the mutual holding company structure in 2010 by forming Conahasset Bancshares, MHC, our Massachusetts chartered mutual holding company, and Conahasset Bancshares, Inc., our Maryland chartered mid-tier holding company, and converting Pilgrim Bank to a Massachusetts chartered stock co-operative bank. Conahasset Bancshares, MHC owns 100% of the outstanding shares of common stock of Conahasset Bancshares, Inc., which in turn owns 100% of the outstanding shares of common stock of Pilgrim Bank.

Pilgrim Bank is subject to comprehensive regulation and examination by the Massachusetts Commissioner of Banks, as well as its primary federal regulator, the Federal Deposit Insurance Corporation (the “FDIC”). In addition, Conahasset Bancshares, MHC and Conahasset Bancshares, Inc. are subject to regulation and examination as bank holding companies by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

Our executive and administrative office is located at 40 South Main Street, Cohasset, Massachusetts 02025, and our telephone number at this address is (781) 383-0541. Our website address is www.bankpilgrim.com. Information on our website is not incorporated into this prospectus and should not be considered part of this prospectus.

 

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Table of Contents

Our Business Operations

We conduct our operations from our main office and an adjacent operations center in Cohasset, Massachusetts and our two additional full-service banking offices located in Cohasset and Marion, Massachusetts. Our primary market area is the South Shore and South Coast areas of Massachusetts, which includes portions of Plymouth, Norfolk and Bristol counties. We serve customers located in a number of small towns in these areas, including Cohasset, Scituate, Hull, Hingham, Norwell, Marshfield, Marion, Mattapoisett, Plymouth, Rochester and Wareham. Although our current operations are not focused in Boston, we are affected by economic conditions in Boston because our loan portfolio includes a significant number of loans that are secured by real estate or that have borrowers located in Boston. In addition, a number of our customers who reside in our market area are employed in Boston and a number of our non-owner occupied residential and multi-family loan customers have properties in Boston as well as in our market area. We intend to continue to make loans, particularly commercial real estate, multi-family, non-owner occupied residential and construction loans, in Boston, so we will continue to be affected by economic conditions in Boston.

Our offices are located in towns with prestigious, recognizable names. The population of our market area tends to be older, affluent and financially stable. The population is also financially sophisticated and desirous of wealth management and other services provided by a trusted community financial institution. The employer base in our market area consists primarily of retail trade, professional and technical services, construction, healthcare and finance and insurance, together with food service and accommodation. The market area is a mature market, and is projected to have minimal population growth. However, we believe that the characteristics of the population in our market area, particularly the market for “jumbo” and non-conforming residential loans, non-owner occupied residential loans and construction and renovation loans, presents potential for significant growth in both loans and retail deposits. In addition, we opened our Marion office in 2008, just prior to the economic downturn, and we believe that the area surrounding this office presents opportunities for growth that we have not yet been able to pursue.

Our business consists primarily of attracting deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate, commercial real estate, multi-family and construction loans, and, to a lesser extent, commercial and industrial and consumer loans. We have historically conducted our lending operations with a view towards the specific needs of customers in the communities that we serve, measuring our success by customer satisfaction and the extent of our customer relationships, rather than on volume based loan origination. Accordingly because of the demographics of our market area, we have focused, and expect to continue to focus, on loans in excess of amounts approved for sale to Fannie Mae and Freddie Mac (currently $417,000), which are commonly referred to as “jumbo” loans. At March 31, 2014, $40.5 million, or 54.7% of our owner occupied one- to four-family residential loans and 30.4% of our total loans, were jumbo loans, of which $24.4 million were originated by Pilgrim Bank and $16.1 million were purchased loans.

We also invest in securities, which consist primarily of U.S. government agency obligations and U.S. government agency mortgage-backed securities and to a lesser extent, state and municipal securities and U.S. government agency collateralized mortgage obligations. We historically have relied heavily on certificates of deposit for funding, but we offer a variety of deposit accounts, including checking accounts, NOW accounts, savings accounts, money market accounts and certificate of deposit accounts, including IRAs. We utilize advances from the Federal Home Loan Bank of Boston (“FHLB-Boston”) for asset/liability management purposes, to leverage loan purchases, and, to a much lesser extent, for additional funding for our operations.

 

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Strategic Shift

As a traditional thrift, our focus has been, and will continue to be, one- to four-family residential mortgage lending, particularly “jumbo” mortgage loans and construction loans for owner occupied properties, in our market area. In 2005, we determined that we would be more competitive and profitable if we transitioned a portion of our operations to a commercial bank model. Accordingly, we made a decision to diversify our lending portfolio by expanding commercial real estate and construction lending in order to increase revenues and manage our interest rate and concentration risk. Because we realized that endeavoring to expand commercial real estate and construction lending placed us in a highly competitive space in our market area, we hired additional experienced commercial lenders who had previously worked in the South Shore and Boston markets to support our expanding commercial real estate and construction activities.

Rehabilitation-to-Permanent and Construction Lending

While we were successful in expanding our commercial real estate and construction lending, these lenders also brought knowledge of and experience with a niche of select customers engaged in investing in and renovating residential properties. To satisfy the demands of and enhance our banking relationships with these borrowers, we developed a loan product that consist of a construction loan for the rehabilitation of existing non-owner occupied properties that automatically converts to a fully-amortizing residential mortgage loan following the construction period. We approve the construction / rehabilitation and the permanent portions of the loan at the time the borrower submits an application, which fixes the interest rate for the borrower at the initial extension of credit, and eliminates the need or reapplication for permanent financing and a second closing.

The result of these efforts was an expansion in our non-owner occupied residential portfolio and our portfolio of construction and renovation loans related to non-owner occupied residential properties. The business cycles of these customers naturally led them to engage in larger projects, and we responded by developing multi-family loan products, and related construction and renovation loan products, to offer to these customers. Accordingly, a significant portion of our portfolio consists of high-quality non-owner occupied residential loans and construction loans and, although we have experienced a slight decline in multi-family loans due to payoffs in recent periods, we also have a moderate portfolio of multi-family loans. We historically have had a significant construction lending portfolio, although balances have decreased recently due to payoffs and the transition of construction loans to permanent loans. However, we intend to increase originations of construction loans, particularly non-owner occupied rehabilitation-to-permanent loans.

Entry into Commercial and Industrial Lending

In addition, as we continued to develop relationships with both our residential mortgage customers and our commercial, multi-family and non-owner occupied real estate loan customers, we recognized that, although certain towns within our market area are primarily residential, other towns are home to a diverse variety of small businesses providing services to the residents of our market area, and that there was an opportunity to for us to offer customized business banking products to those small businesses. We determined that we could further diversify our portfolio by increasing our commercial and industrial lending activities, and in 2013 we hired a lender with significant experience in commercial and industrial and Small Business Administration (“SBA”) lending.

Recent Performance and Credit Risk Management

During the nationwide economic downturn that began in 2008, our market area and the Boston area where we had begun expanding our commercial real estate and construction lending activities experienced increased levels of unemployment and decreasing real estate values. In addition, a number of

 

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industries in our market area and in Boston, where a significant number of our customers are employed and where a number of our customers conduct business, experienced reduced sales revenues or were forced to significantly reduce operations. As a result, we experienced an increase in delinquent, classified and non-performing loans, with the highest levels of delinquent loans reaching $8.3 million, or 7.5% of total loans in April 2011, classified loans reaching $9.5 million, or 8.4% of total loans in December 2012, and non-performing loans reaching $4.6 million, or 4.2% of total loans in September 2012. The significant majority of our classified and non-performing loans during this period consisted of one- to four-family residential mortgage loans.

As our classified, non-performing and delinquent loans increased, we began to focus on managing and improving our asset quality, and on continuing to diversify our loan portfolio. We have implemented enhanced underwriting guidelines, revised our lending policies to impose lending limitations intended to manage our credit risk, developed enhanced internal controls, and implemented enhancements to our credit risk management systems and credit administration procedures. In addition, because the economic downturn had a significant impact on the ability of construction lending borrowers in our market area to repay loans, particularly with respect to land and development loans and speculative construction loans, we identified areas of high risk in our construction portfolio and began to reduce our exposure to credit risk by decreasing originations of land and development and speculative construction loans and letting existing balances in those types of loans run off, while continuing originations of owner occupied and non-owner occupied residential and multi-family construction and renovation loans.

We believe that this strategy allowed us to avoid significant losses and other costs related to asset quality in our construction loan portfolio. At March 31, 2014, we had reduced delinquent loans to $1.6 million, or 1.2% of total loans, classified loans to $5.7 million, or 4.3% of total loans, and non-performing loans to $1.7 million, or 1.3% of total loans, with the majority of delinquent loans being the remaining non-performing loans. The reduction in delinquent loans, classified loans and non-performing loans as a percentage of total assets occurred while we were also maintaining a stable asset level to improve capital ratios. In addition to the classified loans and other real estate owned, we have a portfolio of mortgage-backed securities, obtained as a result of a distribution in kind by a mutual fund in which we had invested, that are classified assets. We have categorized the securities as held-to-maturity, and the remaining classified balance in these securities was $175,000 at March 31, 2014.

Since 2011, we have operated profitably, despite the economic downturn and despite incurring approximately $689,000 in loan charge-offs, $129,000 in write downs of mortgage-backed securities, $221,000 in expenses related to other real estate owned, and $164,000 in collection and other expenses related to problem loans in fiscal years 2011, 2012 and 2013 as we focused on reducing classified and non-performing loans. During that same period, we reduced our other real estate owned to $0, with net gains of $150,000 on the sale of other real estate owned offsetting the expenses we incurred. In addition, during the years ended December 31, 2012 and 2013, we incurred significant increases in expenses related to the construction of our signature main office in Cohasset Village, and recognized a $218,000 loss as a result of the termination of a mutual fund investment managed by Shay Financial.

Business Strategy

Our principal objective is to distinguish ourselves as a strong independent bank in our market are by improving our offering of diverse products and superior customer service to customers, maintaining our commitment to community involvement, develop market niches and explore new lines of business and growth opportunities while adhering to a sound financial plan that provides for strong capital position and profits and asset growth sufficient to allow us to provide for the financial needs of our customers. We believe that our primary competitive advantage is and will continue to be our motivation to create relationships rather than “one product” customers, and that the first step in beginning a banking relationship is exhibiting the flexibility to customize products and services, particularly loan products, to meet the specific needs of the customer. We believe that, in our market area, this can be accomplished by

 

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working with customers to extend credit, within prudent and conservative guidelines, in situations where characteristics of non-conforming loans may be present, with particular focus on “jumbo” loans. We strive to provide friendly, knowledgeable, courteous and professional services as we invite current and potential customers to “Discover the Pilgrim Difference.”

As we attempted to grow and diversify our loan portfolio in recent years, our lending operations became restricted by legal lending limits, and we found ourselves referring quality customers to other banks or selling participations in loans extended to quality customers. We recognize that, although we have managed to operate profitably throughout a challenging economic period, modest organic growth in our market area and expansion into the customer base in contiguous areas is essential to our continued profitability. Highlights of our current business strategy following the completion of the offering include, subject to regulatory approval where applicable and market conditions:

 

    prudently and opportunistically growing our earnings base, particularly the size of our loan portfolio, in order to increase profitability, by leveraging the expertise and contacts of our current lending staff and by hiring additional lending personnel with extensive experience in our market area and in the Boston area;

 

    increasing our focus on commercial real estate, multi-family and owner-occupied residential construction loans, and continuing to expand our niche in non-owner occupied residential and construction lending, both in our market area and in the Boston area, in order to diversify our loan portfolio, reduce concentration risk and increase earnings;

 

    continuing to expand our traditional originations of conforming one- to four-family residential loans, customize non-conforming and jumbo mortgage loans to suit the needs of our customer base, foster multiple-loan relationships, and market our niche non-owner occupied rehabilitation-to-permanent loan product;

 

    increasing our focus on generating low-cost core deposits by actively marketing our deposit products, particularly as a business convenience to our expanding commercial real estate and non-owner occupied residential loan customer base, in order to decrease our dependence on certificates of deposit and reduce our interest rate sensitivity;

 

    continuing to improve our risk profile by managing our credit risk to maintain a low level of non-performing assets and enhancing our policies and procedures as needed; and

 

    developing a commercial and industrial origination platform, including an SBA loan program, in order to provide additional products and services to, and deepen the banking relationships with, our existing and future commercial customers and their owners and employees.

These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated by future market conditions, regulatory restrictions and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy” for a further discussion of our business strategy. We have adopted a strategic plan to leverage the capital raised in the offering to increase our earnings base, especially the size of our loan portfolio, and therefore our profitability. However, the conversion will have a short-term adverse impact on our operating results, due to additional costs related to becoming a public company, increased compensation expenses associated with our employee stock ownership plan and the possible implementation of one or more stock-based benefit plans after the completion of the conversion. In addition, growth of earning assets is essential to our future profitability, and we expect to incur expenses related to the implementation of our growth plan, including hiring initiatives, deposit generation campaigns and the potential opening of loan production offices.

 

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Description of the Conversion

Pilgrim Bank is a Massachusetts stock co-operative bank. Conahasset Bancshares, Inc., a Maryland corporation, owns 100% of the outstanding capital stock of Pilgrim Bank and 100% of the outstanding capital stock of Pilgrim Bancshares, Inc., a Maryland corporation formed to be the holding company for Pilgrim Bank following the conversion. Conahasset Bancshares, MHC is a Massachusetts chartered mutual holding company that owns 100% of the outstanding stock of Conahasset Bancshares, Inc. Conahasset Bancshares, MHC has no stockholders. Pursuant to the terms of Conahasset Bancshares, MHC’s Plan of Conversion:

 

    Conahasset Bancshares, MHC will merge with and into Conahasset Bancshares, Inc., with Conahasset Bancshares, Inc. surviving. All shares of Conahasset Bancshares, Inc. common stock held by Conahasset Bancshares, MHC will be canceled and the members of Conahasset Bancshares, MHC (depositors of Pilgrim Bank) will receive liquidation interests in Conahasset Bancshare, Inc.

 

    Conahasset Bancshares, Inc. will merge with Pilgrim Bancshares, Inc., with Pilgrim Bancshares, Inc. surviving. All shares of Pilgrim Bancshares, Inc. common stock held by Conahasset Bancshares, Inc. will be canceled, and the liquidation interests in Conahasset Bancshares, Inc. will be exchanged for interest in a liquidation account established by Pilgrim Bancshares, Inc. for the benefit of the eligible account holders and supplemental eligible account holders.

As part of the conversion, we are offering for sale in a subscription offering, a community offering and potentially a syndicated community offering, shares of common stock of Pilgrim Bancshares, Inc. Upon completion of the conversion and offering, Pilgrim Bank will be a wholly-owned subsidiary of Pilgrim Bancshares, Inc.

 

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The following diagram depicts our corporate structure prior to the conversion and offering:

 

LOGO

The following diagram depicts our corporate structure after the conversion and offering are completed:

 

LOGO

 

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Reasons for the Conversion

Our primary reasons for converting and raising additional capital through the offering are:

 

    to improve our capital position during a period of economic, regulatory and political uncertainty for the financial services industry and to assure compliance with regulatory capital requirements;

 

    to support organic loan and core deposit growth beyond levels possible utilizing retained earnings;

 

    to improve profitability and earnings through reinvesting and leveraging the proceeds, primarily through traditional funding and lending activities;

 

    to invest in new technologies that will enable the expansion and enhancement of products and services we offer to our customers;

 

    to have greater flexibility to access the debt and equity capital markets;

 

    to attract, retain and incentivize qualified personnel by establishing stock-based benefit plans for management and employees;

 

    to establish a charitable foundation to support charitable organizations operating in our communities now and in the future and fund the foundation with cash and shares of our common stock;

 

    to provide customers and members of our community with the opportunity to acquire an ownership interest in Pilgrim Bank; and

 

    to have greater flexibility to structure and finance opportunities for expansion into new markets, including through de novo branching, branch acquisitions or acquisitions of other financial institutions, although we have no current arrangements or agreements with respect to any such transactions.

As of March 31, 2014 and December 31, 2013, Pilgrim Bank was considered “well capitalized” for regulatory purposes. The proceeds from the offering will further improve our capital position during a period of significant economic, regulatory and political uncertainty.

Terms of the Conversion and the Offering

We are offering between 1,402,500 and 1,897,500 shares of common stock to eligible depositors of Pilgrim Bank, to our employee benefit plans and, to the extent shares remain available, to the general public. The number of shares of common stock to be sold may be increased to up to 2,182,125 as a result of demand for the shares or changes in the market for financial institution stocks. Unless the number of shares of common stock to be offered is increased to more than 2,182,125 or decreased to less than 1,402,500, or the offering is extended beyond [extension date], subscribers will not have the opportunity to confirm, change or cancel their stock orders.

The purchase price of each share of common stock to be issued in the offering (other than shares we are contributing to our charitable foundation) is $10.00. Investors will not be charged a commission to purchase shares of common stock in the offering.

 

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Persons Who May Order Shares of Common Stock in the Offering

We are offering the shares of common stock in a “subscription offering” in the following descending order of priority:

 

    First, to depositors of Pilgrim Bank with aggregate account balances of at least $50 as of the close of business on December 31, 2012.

 

    Second, to depositors of Pilgrim Bank with aggregate account balances of at least $50 as of the close of business on March 5, 2014.

 

    Third, to Pilgrim Bank’s tax-qualified employee benefit plans (including the employee stock ownership plan we are establishing in connection with the conversion), which will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock issued in the offering (including shares contributed to our charitable foundation). We expect our employee stock ownership plan to purchase 8% of the shares of common stock issued in the conversion (including shares contributed to our charitable foundation).

Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a “community offering,” with a preference given to natural persons (including trusts of natural persons) residing in the Massachusetts towns of Cohasset, Scituate, Hingham, Norwell, Hull, Weymouth, Quincy, Marshfield, Pembroke, Marion, Rochester, Mattapoisett, West Wareham, Wareham and Fairhaven.

If we receive orders for more shares than we are offering, we may not be able to fill subscribers’ orders fully or at all. Shares will be allocated first in the order of priority to subscribers in the subscription offering. For a detailed description of the offering, including share allocation procedures, please see “The Conversion and Plan of Distribution.”

How We Determined the Offering Range

The amount of common stock that we are offering is based on an independent appraisal of the estimated market value of Pilgrim Bancshares, Inc. assuming the conversion and the offering are completed. RP Financial, LC, our independent appraiser, has estimated that, as of February 14, 2014, this market value (including the shares to be contributed to the charitable foundation) ranged from $14.4 million to $19.5 million, with a midpoint of $17.0 million. Based on this valuation and a $10.00 per share price, the number of shares of common stock being offered for sale by us will range from 1,402,500 shares to 1,897,500 shares. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.

RP Financial, LC also considered that we intend to contribute a total of $725,000 to a charitable foundation that we are establishing, such contribution to consist of a number of shares of our common stock equal to 3.0% of the shares sold in the offering (42,075 shares or $420,750 in stock at the minimum offering and 56,925 shares or $569,250 in stock at the maximum offering, or up to 65,464 shares or $654,640 in stock at the adjusted maximum offering) and the remainder in cash ($304,250 at the minimum offering and $155,750 at the maximum offering, or $70,360 at the adjusted maximum). The intended contribution of cash and shares of common stock to the charitable foundation has the effect of reducing our estimated pro forma valuation. See “Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation.”

The appraisal is based in part on an analysis of a peer group of ten publicly traded savings institutions that RP Financial, LC considered comparable to us. The peer group consists of the following 10 companies with assets between $268 million and $785 million as of March 31, 2014 (the latest date for which complete financial data is publicly available).

 

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Company Name and Ticker Symbol

  

Headquarters

   Total Assets  
          (in millions)  

Oneida Financial Corp. ONFC

   Oneida, NY    $ 785   

Hampden Bancorp, Inc. HBNK

   Springfield, MA      718   

Peoples Federal Bancshares, Inc. PEOP

   Brighton, MA      601   

Chicopee Bancorp, Inc. CBNK

   Chicopee, MA      600   

Wellesley Bancorp WEBK

   Wellesley, MA      476   

Alliance Bancorp of Penn ALLB

   Broomall, PA      431   

OBA Financial Services, Inc. OBAF(1)

   Germantown, MD      402   

FedFirst Financial Corp. FFCO(1)

   Monessen, PA      323   

WVS Financial Corp. WVFC

   Pittsburgh, PA      317   

Georgetown Bancorp, Inc. GTWN

   Georgetown, MA      268   

 

(1) Selected as a peer group company in the original appraisal, dated February 14, 2014, but eliminated from the peer group for the updated appraisal, dated May 23, 2014, due to an announced transaction for the sale of a controlling interest.

RP Financial, LC sought to provide meaningful comparative data to limit the need to perform subjective valuation adjustments with respect to institutions that did not share common characteristics with Pilgrim Bank. As a result, a comparable institution’s dissimilar asset size may be outweighed by similarities with respect to other characteristics that are more exemplary of an institution’s value than asset size.

The peer group selection process was limited to publicly traded thrifts pursuant to the regulatory conversion guidelines, which limit the number of potential comparable companies for inclusion in the peer group to approximately 106 full stock publicly traded companies. As noted in the original appraisal report, the selection process for the peer group involved two geographic screens to the universe of all public thrifts that were eligible for inclusion in the peer group.

 

    New England Institutions. Given the impact of the regional market on investors’ perception of a financial institution’s value, RP Financial, LC first looked to the New England regional market and applied the following selection criteria to publicly-traded full-stock savings institutions: (i) assets less than $750 million, (ii) tangible equity-to-assets ratios greater than 8%, and (iii) positive core earnings. Six companies met the selection criteria and five were included in the peer group. The one company that was not included in the peer group was excluded on the basis that it had recently completed a mutual-to-stock conversion and, therefore, did not have a seasoned trading history as a publicly-traded institution.

 

    Mid-Atlantic Institutions. Given the limited number of comparable publicly-traded full stock savings institutions based in New England, RP Financial, LC next looked to the Mid-Atlantic regional market and applied the following selection criteria to publicly-traded full-stock savings institutions: (i) assets less than $750 million, (ii) tangible equity-to-assets ratios greater than 8%, and (iii) positive core earnings. Eight companies met the selection criteria and five were included in the peer group. The three companies not included in the peer group were excluded for the following reasons: (i) one company was excluded as a result of maintaining a very low level of common stock equity that resulted in a not meaningful price-to-book ratio, (ii) one company was excluded as the result of being the target of an announced acquisition, and (iii) one company was excluded because it had recently completed a mutual-to-stock conversion and, therefore, did not have a seasoned trading history as a publicly-traded institution.

The following table presents a summary of selected pricing ratios for Pilgrim Bancshares, Inc. and the peer group companies identified by RP Financial, LC (other than the two companies noted above that were eliminated from the peer group for the updated appraisal). Ratios are based on financial data for

 

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the twelve months ended March 31, 2014 for Pilgrim Bancshares, Inc. and the peer group (or the last twelve months for which data is available) and stock price information as of May 23, 2014. Compared to the median pricing of the peer group (other than the two companies noted above that were eliminated from the peer group for the updated appraisal), our pro forma pricing ratios at the maximum of the offering range indicated a discount of 28.1% on a price-to-book value basis, a discount of 29.9% on a price-to-tangible book value basis and a premium of 84.1% on a price-to-earnings basis.

 

     Price-to-earnings
multiple (1)
    Price-to-book
value ratio
    Price-to-tangible
book value ratio
 

Pilgrim Bancshares, Inc. (pro forma)

      

Maximum, as adjusted

     45.45     73.26     73.26

Maximum

     38.76     69.59     69.59

Minimum

     27.72     61.20     61.20

Valuation of peer group companies using stock prices as of May 23, 2014

      

Averages

     23.58     96.19     100.94

Medians

     21.05     96.81     99.29

 

(1) Price-to-earnings multiples calculated by RP Financial, LC in the independent appraisal are based on an estimate of “core” or recurring earnings on a trailing 12 month basis for the 12 months ended March 31, 2014 for Pilgrim Bancshares, Inc. and the peer group companies. Price-to-earnings multiples are based on an estimate of “core” or recurring earnings as calculated by RP Financial, LC in the independent appraisal and are different from those presented in “Pro Forma Data,” which are based on reported earnings for the year ended December 31, 2013 and the three months ended March 31, 2014.

Compared to the average pricing ratios of the peer group (other than the two companies noted above that were eliminated from the peer group for the updated appraisal), our pro forma pricing ratios at the maximum of the offering range indicated a discount of 27.7% on a price-to-book basis, a discount of 31.1% on a price-to-tangible book basis and a premium of 64.4% on a price-to-earnings basis. This means that, at the maximum of the offering range, a share of our common stock would be less expensive than the peer group on a price-to-book value and price-to-tangible book value basis and more expense on a price-to-earnings basis.

The independent appraisal does not indicate per share market value. Do not assume or expect that the valuation of Pilgrim Bancshares, Inc. as indicated above means that, after the conversion and the offering, the shares of common stock will trade at or above the $10.00 offering price. Furthermore, the pricing ratios presented above were utilized by RP Financial, LC to estimate our market value and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Plan of Distribution—Determination of Share Price and Number of Shares to be Issued.”

Limits on How Much Common Stock You May Purchase

The minimum number of shares of common stock that may be purchased is 25. Generally, no individual, or individuals exercising subscription rights through a single qualifying account held jointly, may purchase more than 20,000 shares ($200,000) of common stock. Additionally, if any of the following persons purchase shares of common stock, their purchases, in all categories of the offering, will be combined with your purchases and may not exceed 30,000 shares ($300,000):

 

    your spouse or relatives of you or your spouse living in your house;

 

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    most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior management position; or

 

    other persons who may be your associates or persons acting in concert with you.

See the detailed descriptions of “acting in concert” and “associate” in “The Conversion and Plan of Distribution—Limitations on Common Stock Purchases.”

Subject to the approval of the Federal Reserve Board and the Massachusetts Division of Banks, we may increase or decrease the purchase limitations at any time. Please see “The Conversion and Plan of Distribution—Limitations on Common Stock Purchases.”

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

Payment for all shares of common stock will be required to accompany all completed order forms for the purchase to be valid. Payment for shares may be made by:

 

  (1) personal check, bank check or money order, payable to Pilgrim Bancshares, Inc.; or

 

  (2) authorization of withdrawal from Pilgrim Bank deposit accounts designated on the order form.

Regulations prohibit Pilgrim Bank from knowingly lending funds or extending credit to any persons to purchase shares of common stock in the offering. You may not use cash, wires or a check drawn on a Pilgrim Bank line of credit, and we will not accept third-party checks (a check written by someone other than you) payable to you and endorsed over to Pilgrim Bancshares, Inc. If you request that we place a hold on your checking account for the subscription amount, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account. Once we receive your executed order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by the expiration date, in which event purchasers may be given the opportunity to increase, decrease or rescind their orders for a specified period of time. You may not authorize direct withdrawal from a Pilgrim Bank retirement account. See “—Using Retirement Account Funds to Purchase Shares of Common Stock.”

In order to purchase shares of common stock in the subscription offering and community offering, you must submit a completed order form, together with full payment payable to Pilgrim Bancshares, Inc. or authorization to withdraw funds from one or more of your Pilgrim Bank deposit accounts. We will not be required to accept incomplete order forms, unsigned order forms, or orders submitted on photocopied or facsimiled order forms. We must receive all order forms before 2:00 p.m., Eastern Time, on [expiration date]. Orders received after 2:00 p.m., Eastern Time, on [expiration date], 2014 will be rejected unless we extend this expiration date. We are not required to accept order forms that are not received by that time, are executed defectively or are received without full payment or without appropriate withdrawal instructions. A postmark prior to [expiration date], 2014 will not entitle you to purchase shares of common stock unless we receive the envelope by [expiration date], 2014. You may submit your order form and payment by overnight delivery to the indicated address on the order form, by mail using the return envelope provided, or by hand delivery to Pilgrim Bank’s main office located at 800 Chief Justice Cushing Way (Route 3A), Cohasset, Massachusetts 02025. Hand delivered stock order forms will only be accepted at this location of Pilgrim Bank. Due to recent reductions in U.S. Postal Service 1st Class Mail delivery standards, we encourage subscribers to consider in-person or overnight delivery to enhance the likelihood that your order is received before the deadline.

 

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Please see “The Conversion and Plan of Distribution—Procedure for Purchasing Shares—Payment for Shares” for a complete description of how to purchase shares in the offering.

Using Retirement Account Funds to Purchase Shares of Common Stock

You may be able to subscribe for shares of common stock using funds in your individual retirement account (“IRA”). If you wish to use funds that are currently in your IRA or other retirement account held at Pilgrim Bank, the funds you wish to use for the purchase of common stock will have to be transferred to a brokerage account with a broker who is willing and able to facilitate your purchase in the offering. It may take several weeks to transfer the funds in your Pilgrim Bank IRA to an independent trustee, so please allow yourself sufficient time to take this action. Depositors interested in using funds in an individual retirement account or any other retirement account to purchase shares of common stock should contact our Stock Information Center as soon as possible, preferably at least two weeks prior to the end of the offering period, because processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds.

Please see “The Conversion and Plan of Distribution—Procedure for Purchasing Shares—Payment for Shares” and “—Using Retirement Account Funds” for a complete description of how to use IRA funds to purchase shares in the offering.

How We Intend to Use the Proceeds From the Offering

Assuming we sell 2,182,125 shares of common stock in the offering (the adjusted maximum of the offering range), and we have net proceeds of $20.4 million, we intend to distribute the net proceeds as follows:

 

    $10.2 million (50.0% of the net proceeds) will be invested in Pilgrim Bank;

 

    $1.8 million (8.8% of the net proceeds) will be loaned to our employee stock ownership plan to fund its purchase of our shares of common stock;

 

    $70,000 (0.3% of the net proceeds) will be contributed our charitable foundation; and

 

    $8.3 million (40.9% of the net proceeds) will be retained by Pilgrim Bancshares, Inc.

Pilgrim Bancshares, Inc. may use the funds that it receives for investments, to pay cash dividends, to repurchase shares of common stock and for other general corporate purposes, subject to regulatory approval as applicable. Pilgrim Bank may use the proceeds it receives from Pilgrim Bancshares, Inc. to support increased lending, to increase deposits, to offer other products and services and to increase its capital position. The net proceeds retained by Pilgrim Bancshares, Inc. and Pilgrim Bank also may be used for future business expansion through acquisitions of banks, thrifts and other financial services companies, and opening or acquiring branch offices or loan production offices. We have no current arrangements or agreements with respect to any such acquisitions or branch offices. Initially, a substantial portion of the net proceeds will be invested in short-term investments and other securities consistent with our investment policy.

We do not anticipate the number of shares we sell in the offering will result in significant changes in the respective use of proceeds by Pilgrim Bank and Pilgrim Bancshares, Inc. Please see the section of this prospectus entitled “How We Intend to Use the Proceeds From the Offering” for more information on the proposed use of the proceeds from the offering, including a table showing the distribution of net proceeds at different points in the offering range.

 

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Our Issuance of Cash and Shares of Our Common Stock to Pilgrim Bank Foundation

To further our commitment to our local community, we intend to establish a charitable foundation as part of the conversion and offering. Assuming we receive approval from our members to fund the charitable foundation with shares of our common stock and cash, we intend to contribute a total of $725,000 to a charitable foundation that we are establishing, such contribution to consist of a number of shares of our common stock equal to 3.0% of the shares sold in the offering (42,075 shares or $420,750 in stock at the minimum offering and 56,925 shares or $569,250 in stock at the maximum offering, or up to 65,464 shares or $654,640 in stock at the adjusted maximum offering) and the remainder in cash ($304,250 at the minimum offering and $155,750 at the maximum offering, or $70,360 at the adjusted maximum). As a result of the issuance of shares of common stock and the contribution of cash to the charitable foundation, we will record an after-tax expense of approximately $435,000 during the quarter in which the offering is completed.

The charitable foundation will be dedicated exclusively to supporting charitable causes and community development activities in the communities in which we currently operate or may operate in the future. The charitable foundation will be required to distribute annually in grants or donations a minimum of 5% of the average fair market value of its net investment assets, and is expected to make contributions totaling approximately $36,000 in its first year of operation, assuming we complete the offering at the maximum level.

Issuing shares of common stock and contributing cash to the charitable foundation will:

 

    dilute the voting interests of purchasers of shares of our common stock in the offering; and

 

    result in an expense, and a reduction in earnings, during the quarter in which the contribution is made, equal to the full amount of the contribution to the charitable foundation, offset in part by a corresponding tax benefit.

The establishment and funding of the charitable foundation has been approved by the Board of Trustees of Conahasset Bancshares, MHC and is subject to approval by the members of Conahasset Bancshares, MHC (depositors of Pilgrim Bank). If the members (depositors) do not approve the funding of the charitable foundation with shares of our common stock and cash, we may, in our discretion, complete the conversion and offering without the inclusion of the charitable foundation and without resoliciting subscribers. We may also determine, in our discretion, not to complete the conversion and offering if the members (depositors) do not approve the charitable foundation.

The amount of common stock that we would offer for sale would be greater if the offering were to be completed without the formation and funding of the Pilgrim Bank Foundation. For a further discussion of the financial impact of the charitable foundation, including its effect on those who purchase shares in the offering, see “Risk Factors—Risks Related to the Offering—The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in the year we complete the offering,” “Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation” and “Pilgrim Bank Foundation.”

You May Not Sell or Transfer Your Subscription Rights

Applicable regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the shares of common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or state regulatory agencies, against anyone who we believe has sold or given away his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights.

 

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Deadline for Orders of Common Stock

If you wish to purchase shares of common stock in the offering, we must receive a properly completed original stock order form, together with full payment for the shares of common stock, no later than 2:00 p.m., Eastern Time, on [expiration date], 2014. You may submit your order form and payment by overnight delivery to the indicated address on the order form, by mail using the return envelope provided, or by hand delivery to Pilgrim Bank’s main office located at 800 Chief Justice Cushing Way (Route 3A), Cohasset, Massachusetts 02025. Hand delivered stock order forms will only be accepted at this location of Pilgrim Bank.

Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares

If we do not receive orders for at least 1,402,500 shares of common stock (not counting shares to be contributed to our charitable foundation), we may take steps to issue the minimum number of shares of common stock in the offering range. Specifically, we may:

 

    increase the purchase limitations; and/or

 

    seek the approval, to the extent required, of the Federal Reserve Board and the Massachusetts Commissioner of Banking, to extend the offering beyond [extension date], 2014, so long as we resolicit subscriptions that we have previously received in the offering.

If we extend the offering beyond [extension date], 2014, all subscribers will be notified of the extension and given an opportunity to confirm, change or cancel their order within a specified period of time. If a subscriber does not respond, we will cancel his or her stock order and return his or her subscription funds, with interest, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be, and, in our sole discretion, some other large subscribers may be, given the opportunity to increase their subscriptions up to the then-applicable limit.

Possible Change in the Offering Range

RP Financial, LC will update its appraisal before we complete the offering. If, as a result of demand for the shares, or changes in market conditions, RP Financial, LC determines that our pro forma market value has increased, we may sell up to 2,182,125 shares in the offering without further notice to you. If our pro forma market value at that time is either below $14.4 million or above $22.5 million, then, after consulting with the Federal Reserve Board and the Massachusetts Commissioner of Banks, we may:

 

    terminate the offering and promptly return all funds;

 

    set a new offering range and give all subscribers the opportunity to confirm, modify or rescind their purchase orders for shares of Pilgrim Bancshares, Inc.’s common stock; or

 

    take such other actions as may be permitted, to the extent such permission is required, by the Federal Reserve Board, the Massachusetts Commissioner of Banks and the Securities and Exchange Commission.

 

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Possible Termination of the Offering

We may terminate the offering at any time prior to the special meeting of members of Conahasset Bancshares, MHC (depositors of Pilgrim Bank) that is being called to vote upon the conversion and to approve the establishment and funding of the charitable foundation, and at any time after member (depositor) and corporator approval, with the approval, to the extent such approval is required, of the Federal Reserve Board or the Massachusetts Commissioner of Banks.

We must sell a minimum of 1,402,500 shares to complete the offering. If we terminate the offering because we fail to sell the minimum number of shares (not counting shares that we will contribute to the charitable foundation) or for any other reason, we will promptly return your funds with interest at our statement savings rate, currently 0.20% per annum, and we will cancel deposit account withdrawal authorizations.

Restrictions on Transfer

Purchases of the common stock by our directors, trustees, corporators and executive officers are for investment purposes for these individuals and not with a view towards resale. Pursuant to applicable conversion regulations, our directors, trustees, corporators and executive officers generally will not be permitted to sell any shares of the common stock that they purchase in the offering for a period of at least one year from the closing of the conversion and offering.

Purchases by Executive Officers and Directors

We expect our directors and executive officers, together with their associates, to subscribe for 86,200 shares of common stock in the offering, or 6.15% of the shares to be sold at the minimum of the offering range (excluding shares issued to our charitable foundation). Our directors and executive officers will pay the same $10.00 per share price for the common stock as all other subscribers in the offering. See “Subscriptions by Directors and Executive Officers.”

Benefits to Management and Potential Dilution to Stockholders Following the Conversion

We expect our tax-qualified employee stock ownership plan to purchase 8% of the total number of shares of common stock that we issue in the conversion (including shares contributed to our charitable foundation), or 156,354 shares of common stock, assuming we sell the maximum of the shares proposed to be sold.

We also intend to implement one or more stock-based benefit plans. Stockholder approval of these plans will be required, and the stock-based benefit plans cannot be implemented until at least six months after the completion of the conversion pursuant to applicable regulations. We have not yet determined whether we will present these plans for stockholder approval within 12 months following the completion of the conversion or more than 12 months after the completion of the conversion. If presented more than 12 months after the completion of the conversion, these plans would require the approval of our stockholders by a majority of votes cast; otherwise, they would require the approval of our stockholders by a majority of votes eligible to be cast. Further, there are a number of restrictions that would apply to these plans if adopted within one year of the conversion, including limits on awards to non-employee directors and officers and vesting. See “Management of Pilgrim Bancshares, Inc.—Benefits to be Considered Following Completion of the Offering.” For example, if adopted within 12 months following the completion of the conversion, the stock-based benefit plans will reserve a number of shares of common stock equal to not more than 4% of the shares issued in the conversion (including shares contributed to our charitable foundation) for restricted stock awards to key employees and directors, at no cost to the recipients, and will also reserve a number of stock options equal to not more than 10% of the shares of common stock issued in the conversion (including shares contributed to our charitable foundation) for key employees and directors.

 

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If 4% of the shares of common stock issued in the conversion (including shares contributed to our charitable foundation) are awarded under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of up to approximately 3.9% in their ownership interest in Pilgrim Bancshares, Inc. If 10% of the shares of common stock issued in the conversion (including shares contributed to our charitable foundation) are issued upon the exercise of options granted under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of approximately 9.1% in their ownership interest in Pilgrim Bancshares, Inc.

In connection with the conversion, we expect to enter into an employment agreement and change in control agreements with certain of our officers, subject to regulatory approval of these agreements. See “Management of Pilgrim Bancshares, Inc.—Executive Compensation” and “Risk Factors—Risks Related to the Offering—We intend to enter into an employment agreement and change in control agreements with certain of our officers, which may increase our compensation costs upon the occurrence of certain events or increase the costs of acquiring us” for a further discussion of these agreements, including their terms and potential costs, as well as a description of other benefits arrangements.

The following table summarizes the number of shares of common stock and aggregate dollar value of grants (valuing each share granted at the offering price of $10.00) that will be available under our employee stock ownership plan and one or more stock-based benefit plans if such plans are adopted within one year following the completion of the conversion and the offering. The table shows the dilution to stockholders if all these shares are issued from authorized but unissued shares, instead of shares purchased in the open market. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all employees. A portion of the stock award and stock option grants shown in the table below may be made to non-management employees.

 

     Number of Shares to be Granted or
Purchased(3)
    Dilution
Resulting
From
Issuance of
Shares for
Stock Benefit
Plans
    Value of Grants (1)  
   At
Minimum
of Offering
Range
     At
Adjusted
Maximum
of Offering
Range
     As a
Percentage
of Common
Stock to be
Issued (2)
      At
Minimum

Offering
Range
     At
Adjusted
Maximum

Offering
Range
 
                               (Dollars in thousands)  

Employee stock ownership plan

     115,566         179,807         8.00     —        $ 1,156       $ 1,798   

Stock awards

     57,783         89,904         4.00        3.85     578         899   

Stock options

     144,458         224,759         10.00        9.09     485         755   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

 

Total

     317,807         494,470         22.00     12.28   $ 2,219       $ 3,452   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

 

 

(1) The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $3.36 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 0.00%; an expected option life of 10 years; a risk-free interest rate of 2.73%; and a volatility rate of 17.71% based on an index of publicly traded thrift institutions. The actual expense of stock options granted under a stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted, which may or may not be the Black-Scholes model.
(2) The stock-based benefit plans may award a greater number of options and shares, respectively, if the plans are adopted more than 12 months after the completion of the conversion.
(3) For plans adopted within 12 months of the completion of the conversion, applicable regulations permit stock awards to encompass up to 4.0% and the ESOP and stock awards to encompass in the aggregate up to 12.0% of the shares issued, provided Pilgrim Bank has tangible capital of 10.0% or more following the conversion.

The actual value of restricted stock awards will be determined based on their fair value (the closing market price of shares of common stock of Pilgrim Bancshares, Inc.) as of the date grants are made. The following table presents the total value of all shares to be available for awards of restricted stock under the stock-based benefit plan, assuming the shares for the plan are purchased or issued in a range of market prices from $8.00 per share to $14.00 per share at the time of the grant.

 

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Share Price

     57,783 Shares Awarded
at Minimum of Offering
Range
     67,980 Shares Awarded
at Midpoint of Offering
Range
     78,177 Shares Awarded
at Maximum of Offering
Range
     89,904 Shares Awarded
at Maximum of Offering
Range, As Adjusted
 
(In thousands, except share price information)  
$ 8.00       $ 462,264       $ 543,840       $ 625,416       $ 719,232   
  10.00         577,830         679,800         781,770         899,040   
  12.00         693,396         815,760         938,124         1,078,848   
  14.00         808,962         951,720         1,094,478         1,258,656   

The grant-date fair value of the stock options granted under the stock-based benefit plans will be based, in part, on the closing price of shares of common stock of Pilgrim Bancshares, Inc. on the date the options are granted. The fair value will also depend on the various assumptions utilized in the option-pricing model ultimately adopted. The following table presents the total estimated value of the stock options to be available for grant under the stock-based benefit plans, assuming the range of market prices for the shares are $8.00 per share to $14.00 per share at the time of the grant.

 

Exercise Price

     Grant-Date Fair
Value Per Option
     144,458 Options at
Minimum of Range
     169,950 Options at
Midpoint of Range
     195,443 Options at
Maximum of Range
     224,759 Options at
Maximum of
Range, As Adjusted
 
(In thousands, except share price information)  
$ 8.00       $ 2.69       $ 388,591       $ 457,166       $ 525,740       $ 604,602   
  10.00         3.36         485,377         571,032         656,687         755,190   
  12.00         4.03         582,164         684,899         787,633         905,779   
  14.00         4.70         678,950         798,765         918,580         1,056,367   

Market for Common Stock

We anticipate that the common stock sold in the offering will be quoted on the OTC Pink Marketplace operated by OTC Markets Group, Inc. following the completion of the offering. See “Market for the Common Stock.”

Our Policy Regarding Dividends

Our Board of Directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. We do not intend to pay dividends until such time as we generate sufficient net income to support our planned growth and the payment of such dividends. Growth of earning assets is essential to our future profitability, and we expect to incur expenses related to the implementation of our growth plan. The payment and amount of any dividend payments will depend upon a number of factors, including the following: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of our shares; tax considerations; statutory and regulatory limitations; and general economic conditions. See “Our Policy Regarding Dividends” for additional information regarding our dividend policy. In addition, beginning in 2016, Pilgrim Bank’s ability to pay dividends will be limited if Pilgrim Bank does not have the capital conservation buffer required by the new capital rules, which may limit our ability to pay dividends to stockholders. See “Supervision and Regulation—Federal Banking Regulation—New Capital Rule.”

Conditions to Completion of the Conversion and the Offering

We cannot complete the conversion and the offering unless:

 

    the plan of conversion is approved by a majority of the members of Conahasset Bancshares, MHC (depositors of Pilgrim Bank). A special meeting of members (depositors) to consider and vote upon the plan of conversion and the establishment and funding of the charitable foundation has been set for July 23, 2014;

 

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    the merger of Conahasset Bancshares, MHC with Conahasset Bancshares, Inc. is approved by two-thirds of the corporators of Conahasset Bancshares, MHC in office and entitled to vote. The merger was approved at a special meeting of corporators held on July 14, 2014;

 

    we have received orders to purchase at least the minimum number of shares of common stock offered; and

 

    we receive all required final approvals of the Federal Reserve Board and the Massachusetts Commissioner of Banks to complete the conversion and the offering and receive the approval of the Federal Reserve Board and the Massachusetts Commissioner of Banks on the holding company application.

Material Income Tax Consequences

We will receive an opinion of counsel or tax advisor with regard to federal and state income tax consequences of the conversion to the effect that the conversion will not be a taxable transaction to Pilgrim Bancshares, Inc., Conahasset Bancshares, Inc., Pilgrim Bank, Conahasset Bancshares, MHC, Eligible Account Holders and Supplemental Eligible Account Holders. See “The Conversion and Plan of Distribution—Material Income Tax Consequences” for a complete discussion of the income tax consequences of the transaction.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act (the “JOBS Act”), which was signed into law on April 5, 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” We qualify as an “emerging growth company” and believe that we will continue to qualify as an “emerging growth company” for five years from the completion of the offering.

As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

Additionally, we are in the process of evaluating the benefits of relying on the reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Act, (iii) hold non-binding stockholder votes regarding annual executive compensation or executive compensation payable in connection with a merger or similar corporate transaction, (iv) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (v) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

 

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We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

How You Can Obtain Additional Information

Our branch office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, please call our Stock Information Center toll-free at []. Representatives are available by telephone Monday through Friday from 10:00 a.m. to 4:00 p.m., Eastern Time. The Stock Information Center is closed on bank holidays.

TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION DATE OF [EXPIRATION DATE], 2014 IN ACCORDANCE WITH FEDERAL LAW, NO PROSPECTUS WILL BE MAILED OR HAND-DELIVERED ANY LATER THAN FIVE DAYS OR TWO DAYS, RESPECTIVELY, PRIOR TO [EXPIRATION DATE], 2014.

 

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RISK FACTORS

 

You should consider carefully the following risk factors in evaluating an investment in our

shares of common stock.

Risks Related to Our Business

A significant portion of our loans are commercial real estate, multi-family, non-owner occupied residential, and construction loans, which carry greater credit risk than loans secured by owner occupied one- to four-family real estate, and we intend to increase our focus on these types of loans.

At March 31, 2014, $51.4 million, or 38.6% of our loan portfolio, consisted of commercial real estate, multi-family, non-owner occupied residential and construction loans. Given their larger balances, the complexity of the underlying collateral, the reliance of the borrower on continued payment by tenants and risks that a completed property will not be occupied or sold, commercial real estate, multi-family, non-owner occupied residential and construction loans generally expose a lender to greater credit risk than loans secured by owner occupied one- to four-family real estate. These loans also have greater credit risk than residential real estate for the following reasons:

 

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

 

    multi-family – repayment is dependent on income being generated in amounts sufficient to cover property maintenance and debt service.

 

    non-owner occupied residential loans – repayment is generally dependent upon the continuing ability of the tenants to pay rent.

 

    construction loans – repayment is dependent upon completion, the ability of the owner to make payments during the construction process, and the subsequent ability of the owner to either sell the completed project or obtain permanent financing on the completed project.

If loans that are collateralized by real estate or other business assets become troubled and the value of the collateral has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition. In particular, the physical condition of property securing multi-family and non-owner occupied residential loans is often below that of commercial and owner-occupied real estate due to lax property maintenance standards and lower demands of tenants, which has an adverse effect on the value of the properties, and the value of a partially completed construction project is frequently lower than the balance of the credit on the property.

The majority of our commercial real estate and multi-family loans and all of our non-owner occupied residential loans are secured by non-owner-occupied properties. These loans expose us to greater risk of non-payment and loss than loans secured by owner-occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. Furthermore, some of our non-owner-occupied borrowers have more than one loan outstanding with us, which may expose us to a greater risk of loss

 

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compared to residential and commercial borrowers with only one loan. Construction lending exposes us to additional risks related to cost overruns, general contractor credit risk and environmental and other hazard risks, as well as risks related to the affordability of completed projects, availability of permanent financing to purchasers or owners, and supply of similar projects in the market.

Furthermore, a key component of our strategy is to continue to increase our origination of commercial real estate, multi-family, non-owner occupied residential and construction loans to diversify our loan portfolio and increase our yields. The proposed increase in these types of loans significantly increases our exposure to the risks inherent in these types of loans. Finally, we may purchase additional indirect automobile loans, which have a greater risk of loss or default than one- to four-family residential mortgage loans, are secured by collateral that may not provide an adequate source of repayment due to the rapid depreciation of automobiles and which may be subject to various federal and state laws, including bankruptcy and insolvency laws, that may limit our ability to recover on such loans.

We may not be able to increase our profitability by implementing our business strategies.

Our growth is essential to our future profitability, and we expect to incur expenses related to the implementation of our growth plan, including hiring initiatives and the development and marketing of new products and services. In recent years we have begun to focus, and plan to increase our focus on, certain types of lending that may expose us to additional risks, including the risk that we may experience increases in write downs, provisions for loan losses, expenses related to the management and sale of other real estate owned. See “—A significant portion of our loans are commercial real estate, multi-family, non-owner occupied residential, and construction loans, which carry greater credit risk than loans secured by owner occupied one- to four-family real estate, and we intend to increase our focus on these types of loans.” In addition, the conversion will have a short-term adverse impact on our operating results, due to additional costs related to becoming a public company, increased compensation expenses associated with our employee stock ownership plan and the possible implementation of one or more stock-based benefit plans after the completion of the conversion. We may not be able to successfully implement our strategic plan, and therefore may not continue to operate at a profit or increase profitability in the timeframe that we expect or at all.

Our ability to operate profitability depends upon a number of factors, including our ability to manage expenses related to non-performing and classified assets, general economic conditions, competition with other financial institutions, changes to the interest rate environment that may reduce our profit margins or impair our business strategy, adverse changes in the securities markets, changes in laws or government regulations, changes in consumer spending, borrowing, or saving, and changes in accounting policies, as well as other risks and uncertainties described in this “Risk Factors” section. Continued decline in net income, or periods in which we experience net losses, after the completion of our mutual-to-stock conversion could adversely affect our capital levels. If we fail to maintain capital levels in compliance with applicable regulatory requirements, our regulators could subject us to a formal written agreement or cease and desist order, restrict Pilgrim Bank’s or Pilgrim Bancshares, Inc.’s ability to pay dividends, restrict Pilgrim Bank’s or Pilgrim Bancshares, Inc.’s growth or ability to engage in certain types of lending, require Pilgrim Bank or Pilgrim Bancshares, Inc. to take remedial actions with respect to any capital deficiency, require Pilgrim Bank or Pilgrim Bancshares, Inc. to submit a capital plan for approval, or take other adverse regulatory actions, any one of which would negatively impact our stock price.

The successful implementation of our strategic plan will require, among other things, that we increase our market share by attracting new customers that currently bank at other financial institutions in our market area. In addition, our ability to successfully grow will depend on several factors, including continued favorable market conditions, the competitive responses from other financial institutions in our

 

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market area, and our ability to maintain high asset quality as we increase our commercial real estate, multi-family, non-owner occupied residential and construction loans. While we believe we have the management resources and internal systems in place to successfully manage our future growth, growth opportunities may not be available and we may not be successful in implementing our business strategy. Further, it will take time to implement our business strategy, especially for our lenders to originate enough loans and for our branches to attract enough favorably priced deposits to generate the revenue needed to offset the associated expenses. Our strategic plan, even if successfully implemented, may not ultimately produce positive results.

Our business may be adversely affected by credit risk associated with residential property.

At March 31, 2014, $91.7 million, or 68.9% of our total loan portfolio, was secured by one-to-four family real estate, including $17.7 million, or 13.3% of our total loan portfolio, in non-owner occupied residential real estate loans. One- to four-family residential mortgage lending, whether owner occupied or non-owner occupied, is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in the Massachusetts housing market has reduced the value of the real estate collateral securing these types of loans and increased the risk that we would incur losses if borrowers default on their loans reflected in our recent charge-off experience on these loans. Fluctuations in value and levels of bank-owned sales may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose loan portfolios are more diversified.

Residential loans with combined higher loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, they may be unable to repay their loans in full from the sale proceeds. Further, a significant amount of our home equity loans and lines of credit consist of second mortgage loans. For those home equity loans and lines of credit secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property. For these reasons, we may experience higher rates of delinquencies, default and losses on our residential loans. In addition, because we focus on “jumbo” loans and frequently extend credit in situations where certain characteristics of non-conforming loans, such as high loan-to-value or debt-to-income ratios, are present, we may be exposed to additional credit risks. Because such loans are generally not readily saleable in the secondary market, we are likely to maintain such loans in our portfolio, and, accordingly, expect to be exposed to the credit risk for longer periods of time, including in some cases for the entire term of the loan.

If our allowance for loan losses is not sufficient to cover actual loan losses, we may be required to make additional provisions for loan losses, which would cause our earnings to decrease.

We recorded provisions for loan losses of $0, $0, $156,000, and $200,000, respectively, for the three months ended March 31, 2014 and the years ended December 31, 2013, 2012 and 2011, respectively, that were charged against income for those periods, and incurred net charge-offs of $0, $46,000, $230,000 and $408,000, respectively, during the same periods. As a result, our allowance for loan losses has decreased to $742,000 at March 31, 2014 and December 31, 2013 from $788,000 at December 31, 2012 and $869,000 at December 31, 2011. While our allowance for loan losses was 44.75% of non-performing loans and 0.56% of total loans at March 31, 2014, we may be required to make additional material additions to our allowance for loan losses that would materially decrease our net income. See “—A significant portion of our loans are commercial real estate, multi-family, non-owner occupied residential, and construction loans, which carry greater credit risk than loans secured by owner occupied one- to four-family real estate, and we intend to increase our focus on these types of loans.

 

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We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers, our borrowers’ cash flow and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additional provisions charged against income to increase our allowance. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.

Lending money is a substantial part of our business and each loan carries a certain risk that it may not be repaid in accordance with its terms, or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things, cash flow of the borrower and/or the project being financed, the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan, the duration of the loan, the character and creditworthiness of a particular borrower, and changes in economic and industry conditions.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. Our strategy to increase loan originations generally, and to focus on higher-risk commercial real estate, multi-family, non-owner occupied residential and construction lending will increase our credit risk, and will likely require us to increase our provisions in future periods. In addition, if charge-offs in future periods exceed the allowance for loan losses we will need additional provisions to replenish the allowance for loan losses. Any additional provisions will result in a decrease in net income and possibly capital, and may have a material adverse effect on our financial condition and results of operations.

If our foreclosed real estate is not properly valued or if our reserves are insufficient, our earnings could be reduced.

We obtain appraisals when a loan has been foreclosed and the property taken in as foreclosed real estate, and write down the foreclosed real estate to the amount of the appraisal. We also obtain appraisals at certain other times during the holding period of the asset. Our net book value (“NBV”) in the loan at the time of foreclosure and thereafter is compared to the updated fair value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s NBV over its fair value less estimated selling costs. If our valuation process is incorrect, or if property values decline, the fair value of our foreclosed real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional charge-offs. Significant charge-offs to our foreclosed real estate could have a material adverse effect on our financial condition and results of operations. In addition, bank regulators periodically review our foreclosed real estate and may require us to recognize further charge-offs. Any increase in our charge-offs may have a material adverse effect on our financial condition and results of operations.

 

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If our non-performing assets increase, our earnings will be adversely affected.

At March 31, 2014, our non-performing assets, which consist of non-accruing loans and other real estate owned, were $1.7 million, or 1.0% of total assets. Our non-performing assets adversely affect our net income in various ways:

 

    we record interest income only on a cash basis for non-accrual loans and any non-performing securities and we do not record interest income for real estate owned;

 

    we must provide for probable loan losses through a current period provision for loan losses which is a charge to income;

 

    noninterest expense increases when we write down the value of properties in our real estate owned portfolio to reflect changing market values or recognize other-than-temporary impairment on non-performing securities;

 

    there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees related to our real estate owned; and

 

    the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.

If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our non-performing assets, our net income could decrease or we could experience losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by our regulators to maintain adequate levels of capital to support our operations. We believe the net proceeds of the offering will be sufficient to permit Pilgrim Bank to maintain regulatory capital compliance for the foreseeable future. Nonetheless, we may at some point need to raise additional capital to support continued growth.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by the Massachusetts Commissioner of Banks or the Federal Reserve Board, we may be subject to adverse regulatory action. See “Supervision and Regulation.”

Future changes in interest rates could reduce our profits and asset values.

Future changes in interest rates could impact our financial condition and results of operations.

Net income is the amount by which net interest income and noninterest income exceeds noninterest expense and the provision for loan losses. Net interest income makes up a majority of our income and is based on the difference between:

 

    interest income earned on interest-earning assets, such as loans and securities; and

 

    interest expense paid on interest-bearing liabilities, such as deposits and borrowings.

 

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We are vulnerable to changes in interest rates including the shape of the yield curve because of a mismatch between the terms to repricing of our assets and liabilities. Historically, our assets repriced more quickly than our liabilities, which made us vulnerable to decreases in interest rates. However, on a 12 month horizon, we are currently more vulnerable to increases in interest rates. For the three months ended March 31, 2104 and 2013, our net interest margin was 3.32% and 2.80%, respectively. For the years ended December 31, 2013 and 2012, our net interest margin was 3.05% and 3.07%, respectively. Our asset/liability management committee utilizes a computer simulation model to provide an analysis of estimated changes in net interest income in various interest rate scenarios. At December 31, 2013, in the event of an immediate 100 basis point decrease in interest rates, our model projects a decrease in our net interest income of 1.43%, and in the event of an immediate 100 basis point increase in interest rates, our model projects a decrease in our net interest income of 2.51%.

Changes in interest rates also affect the current market value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At March 31, 2014, the fair value of our securities classified as available-for-sale totaled $12.6 million. Unrealized net losses on available-for-sale securities totaled $189,000 at March 31, 2014, and are reported, net of tax, as a separate component of equity. A rise in interest rates could cause a decrease in the fair value of securities available for sale in future periods which would have an adverse effect on shareholders’ equity. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans. Conversely, a reduction in interest rates can result in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities.

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

In recent years it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, market rates on the loans we have originated and the yields on securities we have purchased have been at lower levels than available prior to 2008. As a general matter, our interest-bearing assets reprice or mature slightly more quickly than our interest-earning liabilities, which has resulted in decreases in net interest income as interest rates decreased. However, our ability to lower our interest expense is limited at these interest rate levels while the average yield on our interest-earning assets may continue to decrease. The Federal Reserve Board has indicated its intention to maintain low interest rates until it believes appropriate progress has been made towards its objectives of maximum employment and price stability. Accordingly, our net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may continue to decrease, which will have an adverse effect on our profitability.

Impairment of our deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.

Deferred tax assets are only recognized to the extent it is more likely than not they will be realized. Should our management determine it is not more likely than not that the deferred tax assets will be realized, a valuation allowance with a charge to earnings would be reflected in the period. At March 31, 2014, December 31, 2013 and December 31, 2012, our net deferred tax asset was $300,000, $365,000 and $156,000, respectively, which included a valuation allowance of $14,000, $1,000 and $381,000,

 

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respectively, and all of which was disallowed for regulatory capital purposes. Based on the levels of taxable income in prior years and management’s expectation of profitability in the current year and future years, management has determined that no additional valuation allowance was required at March 31, 2014, December 31, 2013 or December 31, 2012. If we are required in the future to take an additional valuation allowance with respect to our deferred tax asset, our financial condition and results of operations would be negatively affected.

Government responses to economic conditions may adversely affect our operations, financial condition and earnings.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has changed the bank regulatory framework. For example, it has created an independent Consumer Financial Protection Bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, established more stringent capital standards for banks and bank holding companies and gives the Federal Reserve Board exclusive authority to regulate bank holding companies. The legislation has also resulted in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Pilgrim Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. Banks and savings institutions with $10.0 billion or less in assets will continue to be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws. The Dodd-Frank Act also requires the federal banking agencies to promulgate rules requiring mortgage lenders to retain a portion of the credit risk related to loans that are securitized and sold to investors. We expect that such rules would make it more difficult for us to sell loans into the secondary market. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and in the domestic and international credit markets, and the effect of new legislation and regulatory actions in response to these conditions, may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans.

The full impact of the Dodd-Frank Act on our business will not be known until all of the regulations implementing the statute are adopted and implemented. As a result, we cannot at this time predict the extent to which the Dodd-Frank Act will impact our business, operations or financial condition. However, compliance with these new laws and regulations may require us to make changes to our business and operations and will likely result in additional costs and divert management’s time from other business activities, any of which may adversely impact our results of operations, liquidity or financial condition.

Furthermore, the Federal Reserve Board, in an attempt to help the overall economy, has, among other things, adopted a low interest rate policy through its targeted federal funds rate and the purchase of mortgage-backed securities. If the Federal Reserve Board increases the federal funds rate, market interest rates would likely rise, which may negatively affect the housing markets and the U.S. economic recovery.

Proposed and final regulations could restrict our ability to originate and sell loans.

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

 

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

 

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    interest-only payments;

 

    negative-amortization; and

 

    terms longer than 30 years.

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

In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain not less than 5% of the credit risk for any asset that is not a “qualified residential mortgage.” The regulatory agencies have issued a proposed rule to implement this requirement. The Dodd-Frank Act provides that the definition of “qualified residential mortgage” can be no broader than the definition of “qualified mortgage” issued by the Consumer Financial Protection Bureau for purposes of its regulations (as described above). Although the final rule with respect to the retention of credit risk has not yet been issued, the final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans.

The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.

On July 9, 2013, the federal bank regulatory agencies issued a final rule that will revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for Pilgrim Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

 

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Under the new capital standards, in order to be well-capitalized, Pilgrim Bank would be required to have a common equity to tier 1 capital ratio of 6.5% and a tier 1 risk-based capital ratio of 8.0%. We have conducted a pro forma analysis of the application of these new capital requirements as of March 31, 2014 and have determined that Pilgrim Bank meets all of these new requirements, except for the full 2.5% capital conservation buffer, as if these new requirements had been in effect on that date.

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

Strong competition within our market areas may limit our growth and profitability, and our small size makes it difficult to compete.

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis. Our profitability depends upon our continued ability to successfully compete in our market area. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected. For additional information see “Business of Pilgrim Bank—Market Area and Competition.”

Our small asset size makes it more difficult to compete with other financial institutions which are generally larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base makes it difficult to generate meaningful noninterest income from such activities as securities and insurance brokerage or to charge deposit fees. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it

 

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possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

We are a community bank and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and nearby Boston. As a community bank, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or by events beyond our control, our business and operating results may be adversely affected.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and advances from the FHLB-Boston to fund our operations. At March 31, 2014, we had $7.0 million of FHLB advances outstanding with an additional $33.2 million of available borrowing capacity. In addition, at March 31, 2014, we had $35.1 million in certificates of deposit that are scheduled to mature in less than one year from March 31, 2014. We may not be able to retain these funds as core deposits or permanent customer relationships when the certificates of deposit mature. Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB, or market conditions change. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets where our loans are concentrated, or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Although we consider our sources of funds adequate for our liquidity needs, we may seek additional debt in the future to achieve our long-term business objectives. Additional borrowings, if sought, may not be available to us or, if available, may not be available on reasonable terms. If additional financing sources are unavailable, or are not available on reasonable terms, our financial condition, results of operations, growth and future prospects could be materially adversely affected. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

 

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

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur and may not be adequately addressed if they do occur. In addition any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security. In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel. The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business, subject us to additional regulatory scrutiny or expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.

We are dependent upon the services of the members of our senior management team who direct our strategy and operations. We have benefited from consistency within our senior management team, with our top five executives averaging over seven years of service with Pilgrim Bank and over a combined 150 years of financial institution experience. Members of our senior management team, or commercial lending specialists who possess expertise in our markets and key business relationships, could be difficult to replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete in our markets. See “Management of Pilgrim Bancshares, Inc.”

The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

As a result of the completion of the offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission (“SEC”). Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our core operations.

 

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We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision, and examination by the Massachusetts Commissioner of Banks, the Federal Reserve Board, and the FDIC. Such regulators govern the activities in which we may engage, primarily for the protection of depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a financial institution, the classification of assets by a financial institution, and the adequacy of a financial institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on us and our operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. Laws, rules and regulations may be adopted in the future that could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. See “Supervision and Regulation” for a discussion of the regulations to which we are subject.

Increased FDIC or Central Co-Operative Bank insurance assessments could significantly increase our expenses.

The Dodd-Frank Act eliminated the maximum Deposit Insurance Fund ratio of 1.5% of estimated deposits, and the FDIC has established a long-term ratio of 2.0%. The FDIC has the authority to increase assessments in order to maintain the Deposit Insurance Fund ratio at particular levels. In addition, if our regulators issue downgraded ratings of Pilgrim Bank in connection with their examinations, the FDIC could impose significant additional fees and assessments on us. All Massachusetts-chartered co-operative banks are required to be members of the Co-Operative Central Bank, which maintains the Share Insurance Fund that insures co-operative bank deposits in excess of federal deposit insurance coverage. The Co-Operative Central Bank is authorized to charge co-operative banks an annual assessment fee on deposit balances in excess of amounts insured by the FDIC. Increases in assessments by either the FDIC or the Co-Operative Central Bank could significantly increase our expenses.

Changes in accounting standards could affect reported earnings.

The various bodies responsible for establishing accounting standard, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

Future legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers.

There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. If proposals such as these, or other proposals limiting our rights as a creditor, are implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.

 

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Risks Related to the Offering

The future price of our common stock may be less than the purchase price in the offering.

If you purchase shares of common stock in the offering, you may not be able to sell them at or above the purchase price in the offering. The purchase price in the offering is based upon an independent third-party appraisal of the pro forma market value of Pilgrim Bank, pursuant to banking regulations and subject to review and approval by the Federal Reserve Board and the Massachusetts Commissioner of Banks. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of our common stock. Our aggregate pro forma market value as reflected in the final independent appraisal may exceed the market price of our shares of common stock after the completion of the offering, which may result in our stock trading below the initial offering price of $10.00 per share.

After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions. Publicly traded stocks, including stocks of financial institutions, often experience substantial market price volatility. These market fluctuations might not be related to the operating performance of particular companies whose shares are traded.

The capital we raise in the offering will reduce our return on equity. This could negatively affect the trading price of our shares of common stock.

Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. For the three months ended March 31, 2014, we had a return on average equity of 3.99%, compared to an average return on equity of 4.47% based on trailing 12-month earnings for all publicly traded, full converted savings institutions as of March 31, 2014 or the most recent date for which information is available. Following the offering, we expect our consolidated equity to increase from $12.7 million at March 31, 2014 to between $23.6 million at the minimum of the offering range and $30.7 million at the adjusted maximum of the offering range. Based upon our earnings for the three months ended March 31, 2014, and these pro forma equity levels, our projected annualized return on equity will be 2.14% and 1.64% at the minimum and adjusted maximum of the offering range, respectively. We expect our return on equity to remain relatively low until we are able to leverage the additional capital we receive from the offering. Although we anticipate increasing net interest income using proceeds of the offering, our return on equity will be reduced by the capital raised in the offering, higher expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan and the stock-based benefit plans we intend to adopt. Until we can increase our net interest income and noninterest income, our return on equity may reduce the value of our shares of common stock. See “Pro Forma Data” for an illustration of the financial impact of the offering.

You may not receive dividends on our common stock.

Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments, and we do not expect to pay dividends until our operations are sufficiently profitable to support the payment of dividends. See “—Risks Related to Our Business—We may not be able to increase our profitability by implementing our business strategies.” The declaration and payment of future cash dividends will be subject to, among other things, our then current and projected consolidated operating results, financial condition, tax

 

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considerations, future growth plans, general economic conditions, and other factors our Board of Directors deems relevant. We may also be limited in the payment of dividends under statutory and regulatory provisions. See “—Risks Related to Our Business—The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain”; “Supervision and Regulation—Federal Banking Regulation—Capital Requirements”; “—New Capital Rule”; “—Capital Distributions”; “—Massachusetts Banking Laws and Supervision—Dividends”; and “—Holding Company Regulation—Dividends.”

The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in the year we complete the offering.

We intend to establish and fund a charitable foundation in connection with the conversion and offering. We intend to contribute a total of $725,000 to a charitable foundation that we are establishing, such contribution to consist of a number of shares of our common stock equal to 3.0% of the shares sold in the offering (42,075 shares or $420,750 in stock at the minimum offering and 56,925 shares or $569,250 in stock at the maximum offering, or up to 65,464 shares or $654,640 in stock at the adjusted maximum offering) and the remainder in cash ($304,250 at the minimum offering and $155,750 at the maximum offering, or $70,360 at the adjusted maximum). The amount of our contribution will not be dependent upon the amount of the net proceeds raised in the offering.

The contribution will have an adverse effect on our net income for the quarter and year in which we make the issuance and contribution to the charitable foundation. The after-tax expense of the contribution will reduce net income in the year in which we complete the offering by approximately $435,000. Persons purchasing shares in the offering will have their ownership and voting interests in Pilgrim Bancshares, Inc. diluted by 2.9% due to the issuance of shares of common stock to the charitable foundation.

Our contribution to the charitable foundation may not be tax deductible, which could reduce our profits.

We believe that the contribution to the charitable foundation will be deductible for federal income tax purposes. However, the Internal Revenue Service may disagree with our determination and not grant tax-exempt status to the charitable foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. It is expected that the value of the contribution of cash and shares will be $725,000, which would result in after-tax expense of approximately $435,000. In the event that the Internal Revenue Service does not grant tax-exempt status to the charitable foundation or the contribution to the charitable foundation is otherwise not tax deductible, we would recognize as after-tax expense the full value of the entire contribution.

In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to use the deduction fully. Pursuant to the Internal Revenue Code, an entity is permitted to deduct charitable contributions up to 10% of its taxable income prior to the charitable contribution deduction in any one year. Any contribution in excess of the 10% limit may be deducted for federal and state income tax purposes over each of the five years following the year in which the charitable contribution is made. Accordingly, a charitable contribution could, if necessary, be deducted over a six-year period. Our pre-tax income over this period may not be sufficient to fully use this deduction. With certain exceptions, Massachusetts tax law follows the federal income tax laws and taxable income is recomputed using state taxable income on a combined reporting basis. This would typically result in a lower annual utilization of the charitable contribution for state purposes as income from certain entities (security corporations) would not be included in the combined state return. If Pilgrim Bancshares, Inc. was the deemed contributor to the charitable foundation and elected security corporation status, the charitable contributions would not be available for state tax purposes at all.

 

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Our stock-based benefit plans will increase our costs, which will reduce our income.

We anticipate that our employee stock ownership plan will purchase 8% of the total shares of common stock issued in the conversion (including shares contributed to the charitable foundation) with funds borrowed from Pilgrim Bancshares, Inc. We will record annual employee stock ownership plan expense in an amount equal to the fair value of shares of common stock committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.

We also intend to adopt a stock-based benefit plan after the offering that would award participants restricted shares of our common stock (at no cost to them) and/or options to purchase shares of our common stock. The number of shares of restricted stock or stock options reserved for issuance under any initial stock-based benefit plan may not exceed 4% and 10% (including shares issued to the charitable foundation), respectively, of our total outstanding shares, if these plans are adopted within 12 months after the completion of the conversion. We may grant shares of common stock and stock options in excess of these amounts provided the stock-based benefit plan is adopted more than one year following the offering. The estimated grant-date fair value of the options utilizing a Black-Scholes option pricing analysis is $3.36 per option granted. Assuming this value is amortized over a five-year vesting period, the corresponding annual pre-tax expense associated with the stock options would be $150,000 at the adjusted maximum. In addition, assuming that all shares of restricted stock are awarded at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with restricted stock awarded under the stock-based benefit plan would be $180,000 at the adjusted maximum. However, if we grant shares of common stock or options in excess of these amounts, such grants would increase our costs further.

The shares of restricted stock granted under the stock-based benefit plan will be expensed by us over their vesting period at the fair market value of the shares on the date they are awarded. If the shares of restricted stock to be granted under the plan are repurchased in the open market (rather than issued directly from authorized but unissued shares by Pilgrim Bancshares, Inc.) and cost the same as the purchase price in the offering, the reduction to stockholders’ equity due to the plan would be between $578,000 at the minimum of the offering range and $899,000 at the adjusted maximum of the offering range. To the extent we repurchase shares of common stock in the open market to fund the grants of shares under the plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to stockholders’ equity would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders’ equity would be less than the range described above.

The implementation of stock-based benefit plans will dilute your ownership interest.

We intend to adopt one or more stock-based benefit plans, which will allow participants to be awarded shares of common stock (at no cost to them) and/or options to purchase shares of our common stock, following the offering. If these stock-based benefit plans are funded from the issuance of authorized but unissued shares of common stock, stockholders would experience a reduction in ownership interest totaling 12.3%. Although the implementation of the stock-based benefit plan will be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by financial institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

 

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We have not determined whether we will adopt stock-based benefit plans more than one year following the offering. Stock-based benefit plans adopted more than one year following the offering may exceed regulatory restrictions on the size of stock-based benefit plans adopted within one year, which would increase our costs and the dilution to other shareholders.

If we adopt stock-based benefit plans within one year following the completion of the offering, then we may grant shares of common stock or stock options under our stock-based benefit plans for up to 4% and 10%, respectively, of our total outstanding shares including shares held by the charitable foundation. The amount of stock awards and stock options available for grant under the stock-based benefit plans may exceed these amounts, provided the stock-based benefit plans are adopted more than one year following the offering. Although the implementation of the stock-based benefit plan will be subject to stockholder approval, the determination as to the timing of the implementation of such a plan will be at the discretion of our Board of Directors. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our stock-based benefit plans will increase our costs, which will reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “—The implementation of stock-based benefit plans will dilute your ownership interest.”

We intend to enter into an employment agreement and change in control agreements with certain of our officers, which may increase our compensation costs upon the occurrence of certain events or increase the cost of acquiring us.

Following the conversion and subject to the receipt of necessary regulatory approvals, we intend to enter into an employment agreement with our President and Chief Executive Officer and change in control agreements with our Chief Financial Officer and Senior Vice President of Operations. In the event of termination of employment other than for cause, or in the event of certain types of termination following a change in control, as set forth in the employment agreement and change in control agreement, and assuming the agreements were in effect, the agreements will provide for cash severance benefits that would cost us up to $1.2 million in the aggregate based on information as of December 31, 2013. These amounts may be reduced, if necessary, to an amount that would not qualify the payments to be deemed an “excess parachute payment” under Section 280G of the Internal Revenue Code. For additional information see “Management of Pilgrim Bancshares, Inc.—Executive Compensation.”

We have broad discretion in using the proceeds of the offering. Our failure to effectively deploy the net proceeds of the offering may have an adverse effect on our financial performance and the value of our common stock.

We intend to invest between $6.3 million and $8.8 million of the net proceeds of the offering (or $10.2 million at the adjusted maximum of the offering range) in Pilgrim Bank. We may use the remaining net proceeds to invest in short-term investments, repurchase shares of common stock, pay dividends, finance the acquisition of financial institutions, or for other general corporate purposes. We also expect to use a portion of the net proceeds we retain to fund a loan for the purchase of shares of common stock in the offering by the employee stock ownership plan and to repay principal and interest outstanding on two short-term notes. Pilgrim Bank may use the net proceeds it receives to fund new loans, enhance existing products and services, invest in securities, expand its banking franchise by opening de novo branches or loan production offices or acquiring new branches or by acquiring other financial institutions or other financial services companies, or for other general corporate purposes. However, with the exception of the loan to the employee stock ownership plan and contributions to our charitable foundation, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and the timing of such applications. Also, certain of these uses, such as opening new

 

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branches or acquiring other financial institutions, paying dividends and repurchasing common stock, may require the approval of the Massachusetts Commissioner of Banks or the Federal Reserve Board. We have not established a timetable for investing the net proceeds, and, accordingly, we may not invest the net proceeds at the time that is most beneficial to Pilgrim Bancshares, Inc., Pilgrim Bank or the shareholders. For additional information see “How We Intend To Use The Proceeds From The Offering.”

Certain provisions of our articles of incorporation and bylaws, and state and federal law could discourage hostile acquisitions of control of Pilgrim Bancshares, Inc., which could negatively affect our stock value.

Certain provisions in our articles of incorporation and bylaws may discourage attempts to acquire Pilgrim Bancshares, Inc., pursue a proxy contest for control of Pilgrim Bancshares, Inc., assume control of Pilgrim Bancshares, Inc. by a holder of a large block of common stock, and remove Pilgrim Bancshares, Inc.’s management, all of which shareholders might think are in their best interests. These provisions include:

 

    restrictive requirements regarding eligibility for service on the Board of Directors, including age restrictions, residency requirements, a prohibition on service by persons who are or have been the subject of certain legal or regulatory proceedings, a prohibition on service by persons who are party to agreements that may affect their voting discretion, and a prohibition on service by nominees or representatives (as defined in applicable Federal Reserve Board regulations) of another person who would not be eligible for service or of an entity the partners or controlling persons of which would not be eligible for service;

 

    the election of directors to staggered terms of three years;

 

    provisions requiring advance notice of shareholder proposals and director nominations;

 

    a limitation on the right to vote more than 10% of the outstanding shares of common stock;

 

    a prohibition on cumulative voting;

 

    a requirement that the calling of a special meeting by shareholders requires the request of a majority of all votes entitled to be cast at the special meeting;

 

    a requirement that directors may only be removed for cause and by 80% of the votes entitled to be cast;

 

    the board of directors’ ability to cause Pilgrim Bancshares, Inc. to issue preferred stock; and

 

    the requirement of the vote of 80% of the votes entitled to be case in order to amend certain provisions of the articles of incorporation, including certain of the provisions set forth above.

For further information, see “Restrictions on Acquisition of Pilgrim Bancshares, Inc.—Pilgrim Bancshares, Inc.’s Articles of Incorporation and Bylaws.”

 

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Applicable regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the offer to acquire or the acquisition of more than 10% of any class of equity security of Pilgrim Bank or Pilgrim Bancshares, Inc. without the prior approval of the Federal Reserve Board. In addition, the business corporation law of Maryland, the state where Pilgrim Bancshares, Inc. is incorporated, provides for certain restrictions on acquisition of Pilgrim Bancshares, Inc. See “Restrictions on Acquisitions of Pilgrim Bancshares, Inc.—Maryland Corporate Law,” “—Pilgrim Bank’s Charter,” “—Change in Control Regulations” and “—Massachusetts Banking Law.”

A significant percentage of our common stock will be held or controlled by our directors and executive officers and benefit plans.

Our board of directors and executive officers intend to purchase in the aggregate approximately 6.15% and 4.54% of our common stock (excluding shares issued to our charitable foundation) at the minimum and maximum of the offering range, respectively. These purchases, together with the purchase by the employee stock ownership plan of 8.0% of the aggregate shares sold in the offering, as well as the potential acquisition of common stock through the proposed equity incentive plan will result in ownership by insiders of Pilgrim Bancshares, Inc. and Pilgrim Bank of approximately 16.9% of the total shares issued in the offering at the maximum and approximately 18.5% of the total shares issued in the offering at the minimum of the offering range. The ownership by executive officers, directors and our stock plans could result in actions being taken that are not in accordance with other shareholders’ wishes, and could prevent any action requiring a supermajority vote under our articles of incorporation and bylaws (including the amendment of certain protective provisions of our articles and bylaws discussed immediately above).

There may be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower the market price of the stock.

We have never issued capital stock and there is no established market for our common stock. We expect that our common stock will be quoted on the OTC Pink Marketplace operated by OTC Markets Group, Inc., subject to completion of the offering and compliance with certain conditions. Keefe Bruyette & Woods has advised us that it intends to make a market in our common stock following the offering, but it is under no obligation to do so or to continue to do so once it begins. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. If you purchase shares of common stock, you may not be able to sell them at or above $10.00 per share. Purchasers of common stock in the offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the offering and may have an adverse impact on the price at which the common stock can be sold.

 

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You may not be able to sell your shares of common stock until you have received certificates, which will affect your ability to take advantage of changes in the stock price immediately following the offering.

Certificates for the shares of common stock purchased in the offering may not be delivered for several days after the completion of the offering and the commencement of trading in the common stock. Your ability to sell the shares of common stock before receiving your stock certificate will depend on arrangements you may make with a brokerage firm, and you may not be able to sell your shares of common stock until you have received certificates. As a result, you may not be able to take advantage of fluctuations in the price of the common stock immediately following the offering.

We are an “emerging growth company” within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933 (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 ( the “JOBS Act”). We are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a non-binding advisory vote on executive compensation. In addition, we will not be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”), including the additional level of review of our internal control over financial reporting as may occur when outside auditors attest as to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important.

We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. Taking advantage of any of these exemptions may adversely affect the value and trading price of our common stock.

We have elected to delay the adoption of new and revised accounting pronouncements, which means that our financial statements may not be comparable to those of other public companies.

As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We believe the net proceeds of the offering will be sufficient to permit Pilgrim Bank and Pilgrim Bancshares, Inc. to maintain regulatory capital compliance for the foreseeable future. Nonetheless, we may at some point need to raise additional capital to support continued growth.

 

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Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by the Federal Reserve Board or the Massachusetts Commissioner of Banks, we may be subject to adverse regulatory action. See “Supervision and Regulation.”

We may take other actions to meet the minimum required sales of shares if we cannot find enough purchasers in the community.

If we are not able to reach the minimum of the offering range, we may do any of the following: increase the maximum purchase limitations and allow all maximum purchase subscribers to increase their orders to the new maximum purchase limitations; terminate the offering and promptly return all funds; set a new offering range, notifying all subscribers of the opportunity to confirm, cancel or change their orders; or take such other actions as may be permitted, to the extent such permission is required, by the Federal Reserve Board and the Massachusetts Commissioner of Banks.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth selected consolidated historical financial and other data of Conahasset Bancshares, MHC and subsidiary for the periods and at the dates indicated. The information at and for the years ended December 31, 2013 and 2012 is derived in part from, and should be read together with, the audited financial statements and notes thereto of Conahasset Bancshares, MHC and subsidiary beginning at page F-1 of this prospectus. The information at and for the year ended December 31, 2011 is derived in part from audited financial statements that are not included in this prospectus. The information at March 31, 2014 and for the three months ended March 31, 2014 and 2013 is unaudited and reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial condition and results of operations for the interim periods presented. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2014 or any other period. The following information is only a summary, and should be read in conjunction with our financial statements and notes thereto beginning on page F-1 of this prospectus.

 

     At March 31,      At December 31,  
     2014      2013      2012      2011  
     (In thousands)  

Selected Financial Condition Data:

           

Total assets

   $ 169,371       $ 171,556       $ 172,541       $ 170,321   

Cash and cash equivalents

     8,602         8,991         21,141         19,869   

Time deposits with other banks

     3,765         4,511         10,730         7,690   

Investment securities (1)

     12,800         13,750         16,114         21,402   

Federal Home Loan Bank stock

     675         667         757         872   

Loans receivable, net

     132,455         132,923         112,618         108,753   

Investment in real estate

     1,656         1,662         1,707         1,756   

Other real estate owned

     —           —           245         1,463   

Bank-owned life insurance

     2,193         2,181         2,129         2,072   

Total liabilities

     156,645         159,052         160,167         158,656   

Deposits

     149,379         153,732         156,653         154,863   

Federal Home Loan Bank advances

     7,000         5,000         3,307         3,641   

Total equity

     12,726         12,504         12,374         11,665   

 

     For the Three Months Ended
March 31,
     For the Years Ended
December 31,
 
     2014      2013      2013      2012      2011  
     (In thousands)  

Selected Operating Data:

              

Interest and dividend income

   $ 1,543       $ 1,414       $ 5,963       $ 6,045       $ 6,415   

Interest expense

     262         312         1,175         1,314         1,649   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and dividend income

     1,281         1,102         4,788         4,731         4,766   

Provision for loan losses

     —           36         —           156         200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and dividend income after provision for loan losses

     1,281         1,066         4,788         4,575         4,566   

Service charges on deposit accounts

     30         33         138         148         147   

Gain on sales of mortgages, net

     15         —           —           379         61   

Other noninterest income

     94         154         213         450         216   

Noninterest expense

     1,209         1,193         4,611         4,423         4,184   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     211         60         528         1,129         806   

Income tax expense

     85         12         160         387         270   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 126       $ 48       $ 368       $ 742       $ 536   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(footnotes appear on following page)

 

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     At or For the Three Months
Ended March 31,
    At or For the Years Ended
December 31,
 
     2014(2)     2013(2)     2013     2012     2011  

Performance Ratios:

          

Return on average assets

     0.30     0.11     0.21     0.44     0.32

Return on average equity

     3.99     1.56     2.98     6.16     4.77

Interest rate spread (3)

     3.26     2.75     2.99     3.03     3.02

Net interest margin (4)

     3.32     2.80     3.05     3.07     3.05

Noninterest expense to average assets

     2.87     2.77     2.69     2.62     2.47

Efficiency ratio (5)

     85.14     92.55     89.73     77.49     80.62

Average interest-earning assets to average interest-bearing liabilities

     108.82     105.71     107.73     105.55     103.67

Loans to deposits

     89.17     74.98     86.89     72.53     70.90

Average equity to average assets

     7.51     7.16     7.21     7.13     6.62

Capital Ratios:

          

Equity to total assets at end of period

     7.51     7.16     7.29     7.17     6.85

Total capital to risk weighted assets

     13.67     13.86     13.49     14.02     13.42

Tier 1 capital to risk weighted assets

     12.91     13.02     12.74     13.16     12.47

Tier 1 capital to average assets

     7.61     7.10     7.49     7.21     6.77

Asset Quality Ratios:

          

Allowance for loan losses as a percentage of total loans

     0.56     0.66     0.56     0.69     0.79

Allowance for loan losses as a percentage of non-performing loans

     44.75     21.03     31.55     16.89     40.14

Net (charge-offs) recoveries to average outstanding loans during the period

     —       0.04     0.04     0.21     0.37

Non-performing loans as a percentage of total loans

     1.24     3.16     1.76     4.11     1.97

Non-performing assets as a percentage of total assets

     0.98     2.15     1.37     2.85     2.13

Total non-performing assets and troubled debt restructurings as a percentage of total assets

     4.04     5.00     4.06     5.36     5.70

Other:

          

Number of full service banking offices

     3        3        3        3        3   

Full-time equivalent employees

     32        32        32        33        32   

 

(1) Includes securities available-for-sale and held-to-maturity.
(2) Ratios for the three months ended March 31, 2014 and March 31, 2013 have been annualized, where appropriate.
(3) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning assets.
(5) Represents noninterest expense divided by the sum of net interest income and noninterest income.

 

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RECENT DEVELOPMENTS

The following tables set forth selected consolidated historical financial and other data of Conahasset Bancshares, MHC and subsidiary for the periods and at the dates indicated. The information at and for the three months and six months ended June 30, 2014 and 2013 is derived in part from, and should be read together with, the audited financial statements and notes thereto of Conahasset Bancshares, MHC and subsidiary beginning at page F-1 of this prospectus. The information at June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 is unaudited and reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2014 or any other period.

 

     At June 30,
2014

(unaudited)
     At December 31,
2013
 
     (In thousands)  

Selected Financial Condition Data:

     

Total assets

   $ 166,320       $ 171,556   

Cash and cash equivalents

     11,288         8,991   

Time deposits with other banks

     3,266         4,511   

Investment securities (1)

     11,590         13,750   

Federal Home Loan Bank stock

     732         667   

Loans receivable, net

     128,031         132,923   

Investment in real estate

     1,645         1,662   

Other real estate owned

     —           —     

Bank-owned life insurance

     2,205         2,181   

Total liabilities

     153,376         159,052   

Deposits

     151,604         153,732   

Federal Home Loan Bank advances

     1,500         5,000   

Total equity

     12,944         12,504   

 

     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2014      2013      2014      2013  
     (In thousands)  

Selected Operating Data:

           

Interest and dividend income

   $ 1,470       $ 1,521       $ 3,014       $ 2,934   

Interest expense

     272         301         534         612   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and dividend income

     1,198         1,220         2,480         2,322   

Provision for loan losses

     —           93         —           129   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and dividend income after provision for loan losses

     1,198         1,127         2,480         2,193   

Service charges on deposit accounts

     31         35         61         68   

Gain on sales of mortgages, net

     33         —           48         —     

Other noninterest income

     153         134         246         287   

Noninterest expense

     1,147         1,146         2,356         2,338   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     268         150         479         210   

Income tax expense

     93         46         178         58   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 175       $ 104       $ 301       $ 152   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(footnotes appear on following page)

 

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Table of Contents
     At or For the Three Months Ended
June 30,
(2)
    At or For the Six Months Ended
June 30, (2)
 
     2014     2013     2014     2013  

Performance Ratios:

        

Return on average assets

     0.42     0.24     0.36     0.18

Return on average equity

     5.43     3.32     4.71     2.46

Interest rate spread (3)

     3.03     3.01     3.14     2.88

Net interest margin (4)

     3.09     3.06     3.20     2.93

Noninterest expense to average assets

     2.73     2.65     2.80     2.71

Efficiency ratio (5)

     80.38     81.66     82.32     86.37

Average interest-earning assets to average interest-bearing liabilities

     108.74     106.96     109.04     106.60

Loans to deposits

     84.94     84.73     84.94     84.73

Average equity to average assets

     7.66     7.19     7.60     7.18

Capital Ratios:

        

Equity to total assets at end of period

     7.78     7.20     7.78     7.20

Total capital to risk weighted assets

     14.18     13.18     14.18     13.18

Tier 1 capital to risk weighted assets

     13.41     12.36     13.41     12.36

Tier 1 capital to average assets

     7.71     7.14     7.71     7.14

Asset Quality Ratios:

        

Allowance for loan losses as a percentage of total loans

     0.58     0.67     0.58     0.67

Allowance for loan losses as a percentage of non-performing loans

     44.86     35.47     44.86     35.47

Net (charge-offs) recoveries to average outstanding loans during the period

     0.00     0.00     0.00     0.04

Non-performing loans as a percentage of total loans

     1.28     1.88     1.28     1.88

Non-performing assets as a percentage of total assets

     0.99     1.45     0.99     1.45

Total non-performing assets and troubled debt restructurings as a percentage of total assets

     4.11     3.06     4.11     3.06

Other:

        

Number of full service banking offices

     3        3        3        3   

Full-time equivalent employees

     32        33        32        33   

 

(1) Includes securities available-for-sale and held-to-maturity.
(2) Ratios have been annualized where appropriate.
(3) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning assets.
(5) Represents noninterest expense divided by the sum of net interest income and noninterest income.

Comparison of Financial Condition at June 30, 2014 and December 31, 2013

Total Assets. Total assets decreased $5.3 million, or 3.1%, to $166.3 million at June 30, 2014 from $171.6 million at December 31, 2013. The decrease was primarily the result of a decrease in deposits of $2.1 million as a result of customer year-end cash management, and pay-downs of short-term borrowings from the Federal Home Loan Bank of Boston of $3.5 million.

Cash and Cash Equivalents and Time Deposits with Other Banks. Total cash and cash equivalents increased $2.3 million or 25.6%, to $11.3 million at June 30, 2014 from $9.0 million at December 31, 2013. The increase in cash resulted from loan payoffs and investment sales, offset by the decrease in deposits and FHLB borrowings. Time deposits with other banks decreased $1.2 million, or 27.6%, to $3.3 million at June 30, 2014 from $4.5 million at December 31, 2013. The decrease in time deposits with other banks reflected their maturation.

Net Loans. Net loans decreased $4.9 million, or 3.7%, to $128.0 million at June 30, 2014 from $132.9 million at December 31, 2013. During the six months ended June 30, 2014, one- to four-family residential real estate loans decreased $4.0 million, or 4.3%, to $88.4 million at June 30, 2014 from $92.4 million at December 31, 2013, commercial real estate loans decreased $1.5 million, or 7.8%, to $17.9 million at

 

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June 30, 2014 from $19.4 million at December 31, 2013, multi-family loans decreased $602,000, or 6.1%, to $9.3 million at June 30, 2014 from $9.9 million at December 31,2013, home equity loans and lines of credit decreased $658,000, or 16.6%, to $3.3 million at June 30, 2014 from $4.0 million at December 31, 2013 and consumer loans decreased $462,000, or 23.8%, to $1.5 million at June 30, 2014 from $1.9 million at December 31, 2013, while construction loans increased $1.9 million, or 53.5%, to $5.4 million at June 30, 2014 from $3.5 million at December 31, 2013 and commercial and industrial loans increased $487,000, or 19.4%, to $3.0 million at June 30, 2014 from $2.5 million at December 31, 2013. Over $10.5 million in new originations were offset by $13.6 million of loan payoffs and amortizations, and the sale of $1.8 million of mortgages to the FHLB.

Investment Securities. Investment securities classified as available-for-sale decreased $2.1 million or 15.7%, to $11.4 million at June 30, 2014 from $13.5 million at December 31, 2013, due to the redemption of a mutual fund position after being notified the fund would be closed, as well as the sale of securities. Investment securities classified as held-to-maturity decreased $38,000 or 15.0%, to $216,000 at June 30, 2014 from $254,000 at December 31, 2013 due to maturities in the ordinary course of business and a write-down of $12,000. At June 30, 2014, investment securities classified as available-for-sale consisted primarily of debt securities issued by the U.S. Treasury and U.S. government corporations and agencies, debt securities issued by states and political subdivisions, and government-sponsored mortgage-backed securities, with a focus on suitable government-sponsored securities to augment risk-based capital.

Bank Owned Life Insurance. Bank-owned life insurance (“BOLI”) at June 30, 2014 increased $24,000, or 1.10%, compared to December 31, 2013 due to normal increases in cash surrender value.

Deposits. Deposits decreased $2.1 million, or 1.4%, to $151.6 million at June 30, 2014 from $153.7 million at December 31, 2013. During the six months ended June 30, 2014, demand deposits decreased $356,000, or 3.0%, to $11.7 million from $12.0 million, NOW account deposits decreased $2.0 million, or 10.3%, to $18.0 million from $20.0 million, savings accounts decreased $510,000, or 3.0%, to $16.8 million from $17.3 million, money market accounts decreased $3.6 million, or 9.1%, to $36.3 million from $39.9 million, while certificates of deposit increased $4.4 million, or 6.9%, to $68.9 million from $64.5 million. Our core deposits, which we consider to be our noninterest demand accounts, NOW accounts, savings accounts and money market accounts, decreased $6.6 million, or 7.4%, to $82.7 million at June 30, 2014 from $89.2 million at December 31, 2013. The decreases in core deposits reflected normal post year end activity, particularly in demand deposits and NOW accounts. The growth in certificates of deposit resulted from a promotional campaign to attract new customers to the bank and grow IRA certificate of deposit balances during tax season.

Other Liabilities. Federal Home Loan Bank advances decreased $3.5 million, or 70.0%, to $1.5 million at June 30, 2014 from $5.0 million at December 31, 2013, which reflects maturation of short-term and long-term borrowings. Other liabilities, which include interest payable, accruals for employee pension and medical plans and normal accruals for expenses, decreased $48,000, or 15.0%, to $272,000 at June 30, 2014 from $320,000 at December 31, 2013.

Total Equity. Total equity increased $440,000, or 3.5%, to $12.9 million at June 30, 2014 from $12.5 million at December 31, 2013. The increase resulted from net income of $301,000 during the six months ended June 30, 2014, and a decrease of $139,000 in accumulated other comprehensive loss due to a decrease in the net unrealized loss position of our available-for-sale investment securities portfolio.

 

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Delinquencies, Classified Assets and Non-Performing Assets

Delinquent Loans. The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.

 

     At June 30, 2014      At December 31, 2013  
     30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days
or More
Past Due
     30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days
or More

Past Due
 
     (In thousands)  

Real estate loans:

                 

One- to four-family residential(1)

   $ 5       $         $ 1,393       $ —         $ 240       $ 2,075   

Commercial

     —           —           —           —           —           —     

Multi-family

     —           —           —           —           —           —     

Home equity loans and lines of credit

     123         —           —           —           —           —     

Construction

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     128            1,393         —           240         2,075   

Commercial and industrial loans

     —           —           —           —           —           —     

Consumer loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 128       $         $ 1,393       $ —         $ 240       $ 2,075   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) There were no delinquent non-owner occupied residential real estate loans at June 30, 2014 or December 31, 2013.

Classified Assets. The following table sets forth our amounts of classified assets and assets designated as special mention as of June 30, 2014 and December 31, 2013. The classified assets total includes $1.7 million and $2.3 million of non-performing loans, respectively. The related specific valuation allowance in the allowance for loan losses for such non-performing loans was $82,000 at each of June 30, 2014 and December 31, 2013.

 

     At June 30, 2014      At December 31, 2013  
     (In thousands)  

Classified assets:

     

Substandard:

     

Loans(1)

   $ 5,126       $ 6,604   

Securities

     153         182   

Other real estate owned

     —           —     
  

 

 

    

 

 

 

Total substandard

     5,279         6,786   

Doubtful

     —           —     

Loss

     —           —     

Other real estate owned

     —           —     
  

 

 

    

 

 

 

Total classified assets

   $ 5,279       $ 6,786   
  

 

 

    

 

 

 

Special mention

   $ 1,075       $ 434   

 

(1) Includes non-accruing loans that are more than 90 days past due.

The decrease in classified assets from December 31, 2013 to June 30, 2014 was the result of loan payoffs, loan and securities amortization from contractual payments, one security write-down, and loan status upgrades based upon sustained performance with original or modified terms. Included in the upgrades are loans that are no longer designated as non-accrual as a result of sustained performance. Payoffs totaled $700,000 and upgrades totaled $800,000 since year end. The reduction in classified substandard loans resulted in the increase in the special mention category.

 

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

 

     At June 30, 2014     At December 31, 2013  
     (Dollars in thousands)  

Non-accrual loans:

    

Real estate loans:

    

One- to four-family residential(1)

   $ 1,654      $ 2,344   

Commercial

     —          —     

Multi-family

     —          —     

Home equity loans and lines of credit

     —          8   

Construction

     —          —     
  

 

 

   

 

 

 

Total real estate

     1,654        2,352   

Commercial and industrial loans

     —          —     

Consumer loans

     —          —     
  

 

 

   

 

 

 

Total non-accrual loans

     1,654        2,352   
  

 

 

   

 

 

 

Accruing loans past due 90 days or more:

    

Real estate loans:

    

One- to four-family residential

     —          —     

Commercial

     —          —     

Multi-family

     —          —     

Home equity loans and lines of credit

     —          —     

Construction

     —          —     
  

 

 

   

 

 

 

Total real estate

     —          —     

Commercial and industrial loans

     —          —     

Consumer loans

     —          —     

Total accruing loans past due 90 days or more

     —          —     
  

 

 

   

 

 

 

Total of nonaccrual loans and accruing loans 90 days or more past due

     1,654        2,352   
  

 

 

   

 

 

 

Other real estate owned:

    

One- to four-family residential

     —          —     

Commercial

     —          —     

Multi-family

     —          —     

Home equity loans and lines of credit

     —          —     

Construction

     —          —     
  

 

 

   

 

 

 

Total other real estate owned

     —          —     
  

 

 

   

 

 

 

Other non-performing assets

     —          —     
  

 

 

   

 

 

 

Total non-performing assets

     1,654        2,352   
  

 

 

   

 

 

 

Performing troubled debt restructurings:

    

Real estate loans:

    

One- to four-family residential(2)

     4,478        3,908   

Commercial

     699        703   

Multi-family

     —          —     

Other

     —          —     
  

 

 

   

 

 

 

Total real estate

     5,177        4,611   

Commercial and industrial loans

     —          —     

Consumer loans

     —          —     
  

 

 

   

 

 

 

Total troubled debt restructurings

     5,177        4,611   
  

 

 

   

 

 

 

Total non-performing loans and troubled debt restructurings

   $ 6,831      $ 6,963   
  

 

 

   

 

 

 

Non-performing loans to total loans

     1.28     1.76

Non-performing assets to total assets

     0.99     1.37

Non-performing assets and troubled debt restructurings to total assets

     4.11     4.06

 

(1) There were no non-performing non-owner occupied residential real estate loans at June 30, 2014 or December 31, 2013.
(2) There were no troubled debt restructurings related to non-owner occupied residential real estate loans at June 30, 2014 or December 31, 2013.

 

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Interest income that would have been recorded for the six months ended June 30, 2014, had non-accruing loans been current according to their original terms amounted to $32,000. Interest of approximately $11,000 related to these loans was included in interest income for the six months ended June 30, 2014.

Non-performing loans totaled $1.7 million at June 30, 2014, and consisted of four loans, all owner occupied one- to four- family residential first and second mortgage loans. Our largest non-performing loan was a $1.4 million one- to four-family residential loan secured by property located in Connecticut that was in foreclosure proceedings at June 30, 2014. We had no non-performing commercial real estate and multi-family loans at June 30, 2014. We had no foreclosed real estate at June 30, 2014.

Other Loans of Concern. There were no other loans at June 30, 2014 that are not already disclosed where there is information about possible credit problems of borrowers that caused management to have serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.

Comparison of Operating Results for the Three Months Ended June 30, 2014 and June 30, 2013

General. Net income for the three months ended June 30, 2014 was $175,000, compared to net income of $104,000 for the three months ended June 30, 2013. The increase in net income was primarily due to a decrease in provision for loan loss of $93,000, and an increase in gain on sale of mortgages of $33,000.

Interest and Dividend Income. On a tax-equivalent basis, total interest and dividend income for the three months ended June 30, 2014 decreased $53,000, or 3.5%, to $1.48 million compared to $1.53 million for the three months ended June 30, 2013. The decrease in interest income was the result of recognition of interest income adjustments on non-accrual loans in the quarter ended June 30, 2013 and decrease in interest on investment securities and interest earning deposits. The average balance of loans during the three months ended June 30, 2014 increased $9.6 million to $131.3 million from $121.7 million for the three months ended June 30, 2013, while the average yield on loans decreased by 45 basis points to 4.25% for the three months ended June 30, 2014 from 4.70% for the three months ended June 30, 2013. The decrease in yield reflected the lower market rates for originated loans in 2014 compared to 2013 as well as the impact on loan interest income on nonaccrual loans in 2013. The average balance of investment securities decreased $500,000 to $12.8 million for the three months ended June 30, 2014 from $13.3 million for the three months ended June 30, 2013, and the yield on investment securities (on a tax-equivalent basis) decreased by 8 basis points to 2.37% for the three months ended June 30, 2014 from 2.45% for the three months ended June 30, 2013.

Interest Expense. Total interest expense decreased $29,000, or 9.6%, to $272,000 for the three months ended June 30, 2014 from $301,000 for the three months ended June 30, 2013. Interest expense on interest-bearing deposit accounts decreased $27,000, or 9.5%, to $258,000 for the three months ended June 30, 2014 from $285,000 for the three months ended June 30, 2013. The decrease was primarily due to the impact of maturing certificates of deposit renewing at lower rates and overall deposit reduction.

Interest expense on Federal Home Loan Bank of Boston advances decreased $2,000, or 12.5%, to $14,000 for the three months ended June 30, 2014 from $16,000 for the three months ended June 30, 2013. The average balance of advances increased by $2.2 million, or 69.2%, to $5.4 million for the three months ended June 30, 2014 from $3.2 million for the three months ended June 30, 2013, as we drew short-term advances and used the cash for funding loan production, deposit withdrawals and operating cash management. The cost of funds decreased 98 basis points to 1.04% for the three months ended June 30, 2014 from 2.02% for the three months ended June 30, 2013.

 

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Net Interest and Dividend Income. On a tax-equivalent basis, net interest and dividend income decreased $24,000, or 1.9%, for the three months ended June 30, 2014 from the three months ended June 30, 2013. The decrease resulted primarily from a $53,000 decrease in interest income offset by a $29,000 decrease in interest expense. Our average interest-earning assets decreased $4.9 million to $156.5 million for the three months ended June 30, 2014 from $161.4 million for the three months ended June 30, 2013, but our net interest rate spread increased 2 basis points to 3.03% for the three months ended June 30, 2014 from 3.01% for the three months ended June 30, 2013. Our net interest margin increased 3 basis points to 3.09% for the three months ended June 30, 2014 from 3.06% for the three months ended June 30, 2013. The improvement in our interest rate spread and net interest margin reflected the shift of earning assets to loans from interest bearing deposits in addition to reduction in deposits combined with the repricing of our interest-bearing liabilities in a decreasing interest rate environment. In addition, we benefited from the re-pricing of long-term certificates of deposit at maturity in the ordinary course.

Provision for Loan Losses. Based on our analysis of the factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies—Allowance for Loan Losses,” we did not record a provision for loan losses for the three months ended June 30, 2014, compared to a provision of $93,000 for the three months ended June 30, 2013. We analyze our allowance for loan losses on a monthly basis and we expect to resume recording provisions for loan losses when consistent with our loan origination and credit risk. The fact that we did not record a provision for loan losses for the three months ended June 30, 2014 reflected net charge-offs of $0 for the three months ended June 30, 2014 compared to net charge-offs of $0 for the three months ended June 30, 2013. The allowance for loan losses was $742,000 or 0.58% of total loans at June 30, 2014 compared to $873,000, or 0.67% of total loans at June 30, 2013. Total non-performing loans were $1.7 million at June 30, 2014 compared to $2.5 million at June 30, 2013. As a percentage of non-performing loans, the allowance for loan losses was 44.86% at June 30, 2014 compared to 35.47% at June 30, 2013. This increase is due primarily to the reduction in non-performing loans at year end. Total classified loans were $5.1 million at June 30, 2014 compared to $7.9 million at June 30, 2013. The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses, which were inherent in the loan portfolio at June 30, 2014 and June 30, 2013.

Noninterest Income. Noninterest income increased $48,000, or 28.4%, to $217,000 for the three months ended June 30, 2014 from $169,000 for the three months ended June 30, 2013. The increase was due to an increase in gains on the sale of securities of $61,000 to $63,000 for the three months ended June 30, 2014 from $2,000 for the three months ended June 30, 2013, an increase in gains on the sale of mortgages of $33,000 to $33,000 for the three months ended June 30, 2014 from $0 for the three months ended June 30, 2013, and an increase in rental income of $16,000 to $67,000 for the three months ended June 30, 2014 from $51,000 for the three months ended June 30, 2013. These increases were offset by a decrease in the gain on OREO property of $57,000 recognized for the three months ended June 30, 2014, compared to the three months ended June 30, 2013.

Noninterest Expense. Noninterest expense was flat at $1.1 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Decreases in FDIC assessments of $35,000, and salaries and employee benefits expense of $18,000, were offset by increases in occupancy and equipment expense of $11,000, advertising and public relations expense of $10,000, data processing expense of $8,000 and an increase in other expenses of $25,000.

Income Taxes. Income tax expense was $93,000 for the three months ended June 30, 2014 compared to $46,000 for the three months ended June 30, 2013. The effective tax rate as a percent of pre-tax income was 34.6% and 30.7% for the three months ended June 30, 2014 and 2013, respectively. The increase in the effective tax rate for the three months ended June 30, 2014 was due to an increase in income before taxes to $268,000 from $150,000. We performed an evaluation of our deferred tax assets at June 30, 2014 and June 30, 2013. In making the determination whether a deferred tax asset is more likely than not to be realized, we seek to evaluate

 

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all available positive and negative evidence including the possibility of future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results. A deferred tax asset valuation allowance is established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the deferred tax asset will not be realized. At each of June 30, 2014 and June 30, 2013, our deferred tax asset valuation allowance was $14,000 and $381,000, respectively, reducing our net deferred tax asset to $281,000 and $323,000, respectively, at those dates. The deferred tax asset valuation allowance relates to uncertainty regarding the utilization of the capital loss carry forwards related to security sales. At June 30, 2014, capital loss carryovers were $230,000, which are due to expire in the years 2016 through 2019.

Comparison of Operating Results for the Six Months Ended June 30, 2014 and June 30, 2013

General. Net income for the six months ended June 30, 2014 was $301,000, compared to net income of $152,000 for the six months ended June 30, 2013. The increase in net income was primarily due to a $158,000 increase in net interest income as a result of increased loans and lower deposit costs and a decrease in provision of $129,000, offset by an increase in expenses of $18,000.

Interest and Dividend Income. On a tax-equivalent basis, total interest and dividend income for the six months ended June 30, 2014 increased $77,000, or 2.6%, to $3.0 million compared to $2.9 million for the six months ended June 30, 2013. The increase in interest income was the result of a $120,000 increase in interest on loans offset by a $43,000 decrease in interest on investment securities and interest earning deposits. The average balance of loans during the six months ended June 30, 2014 increased $14.3 million to $132.6 million from $118.3 million for the six months ended June 30, 2013, while the average yield on loans decreased by 33 basis points to 4.31% for the six months ended June 30, 2014 from 4.64% for the six months ended June 30, 2013. The decrease in yield reflected the lower market rates for originated loans in 2014 compared to 2013. The average balance of investment securities decreased $1.5 million to $12.9 million for the six months ended June 30, 2014 from $14.4 million for the six months ended June 30, 2013, and the yield on investment securities (on a tax-equivalent basis) increased by 3 basis points to 2.43% for the six months ended June 30, 2014 from 2.40% for the six months ended June 30, 2013.

Interest Expense. Total interest expense decreased $78,000, or 12.7%, to $534,000 for the six months ended June 30, 2014 from $612,000 for the six months ended June 30, 2013. Interest expense on interest-bearing deposit accounts decreased $75,000 or 13.0%, to $504,000 for the six months ended June 30, 2014 from $579,000 for the six months ended June 30, 2013. The decrease was primarily due to the impact of maturing certificates of deposit renewing at lower rates and overall deposit reduction.

Interest expense on Federal Home Loan Bank of Boston advances decreased $2,000, or 6.3%, to $30,000 for the six months ended June 30, 2014 from $32,000 for the six months ended June 30, 2013. The average balance of advances increased by $2.8 million to $6.0 million for the six months ended June 30, 2014 from $3.2 million for the six months ended June 30, 2013, as we drew short-term advances and used the cash for funding loan production, deposit withdrawals and operating cash management. The cost of funds decreased 98 basis points to 1.01% for the six months ended June 30, 2014 from 1.99% for the six months ended June 30, 2013.

Net Interest and Dividend Income. On a tax-equivalent basis, net interest and dividend income increased $154,000, or 6.5%, for the six months ended June 30, 2014 from the six months ended June 30, 2013. The increase resulted from a $77,000 increase in interest income and a $77,000 decrease in interest expense. Our average interest-earning assets decreased $4.1 million to $156.7 million for the six months ended June 30, 2014 from $160.8 million for the six months ended June 30, 2013, but our net interest rate spread increased 26 basis points to 3.14% for the six months ended June 30, 2014 from 2.88% for the six months ended June 30, 2013. Our net interest margin increased 27 basis points to 3.20% for the six months ended June 30, 2014 from 2.93% for the six months ended June 30, 2013. The improvement in our interest rate spread and net interest

 

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margin reflected the shift of earning assets to loans from interest bearing deposits in addition to reduction in deposits combined with the re-pricing of our interest-bearing liabilities in a decreasing interest rate environment. In addition, we benefited from the re-pricing of long-term certificates of deposit at maturity in the ordinary course.

Provision for Loan Losses. Based on our analysis of the factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies—Allowance for Loan Losses,” we did not record a provision for loan losses for the six months ended June 30, 2014, compared to a provision of $129,000 for the six months ended June 30, 2013. We analyze our allowance for loan losses on a monthly basis and we expect to resume recording provisions for loan losses when consistent with our loan origination and credit risk. The fact that we did not record a provision for loan losses for the six months ended June 30, 2014 reflected net charge-offs of $0 for the six months ended June 30, 2014 compared to net charge-offs of $43,000 for the six months ended June 30, 2013. The allowance for loan losses was $742,000 or 0.58% of total loans at June 30, 2014 compared to $873,000, or 0.67% of total loans at June 30, 2013. Total non-performing loans were $1.7 million at June 30, 2014 compared to $2.5 million at June 30, 2013. As a percentage of non-performing loans, the allowance for loan losses was 44.86% at June 30, 2014 compared to 35.47% at June 30, 2013. This increase is due primarily to the reduction in non-performing loans at year end. Total classified loans were $5.1 million at June 30, 2014 compared to $7.9 million at June 30, 2013. The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses, which were inherent in the loan portfolio at June 30, 2014 and June 30, 2013.

Noninterest Income. Noninterest income of $355,000 for the six months ended June 30, 2014 was flat compared to the six months ended June 30, 2013. Increases were recognized in gains on the sale of securities of $61,000 to $68,000 for the six months ended June 30, 2014 from $7,000 for the three months ended June 30, 2013, gains on the sale of mortgages of $48,000 to $48,000 for the six months ended June 30, 2014 from $0 for the six months ended June 30, 2013, and in rental income of $24,000 to $126,000 for the six months ended June 30, 2014 from $102,000 for the six months ended June 30, 2013. These increases were offset by a decrease in the gain on OREO property of $121,000 recognized for the six months ended June 30, 2013.

Noninterest Expense. Noninterest expense increased $18,000 to $2.4 million for the six months ended June 30, 2014 from $2.3 million for the six months ended June 30, 2013. Increases in salaries and employee benefits expense of $33,000, occupancy and equipment expense of $20,000 and data processing expense of $21,000 were offset by a decrease in FDIC assessments of $56,000.

Income Taxes. Income tax expense was $178,000 for the six months ended June 30, 2014 compared to $58,000 for the six months ended June 30, 2013. The effective tax rate as a percent of pre-tax income was 37.1% and 27.7% for the six months ended June 30, 2014 and 2013, respectively. The increase in the effective tax rate for the six months ended June 30, 2014 was due to an increase in income before taxes to $479,000 from $210,000. We performed an evaluation of our deferred tax assets at June 30, 2014 and June 30, 2013. In making the determination whether a deferred tax asset is more likely than not to be realized, we seek to evaluate all available positive and negative evidence including the possibility of future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results. A deferred tax asset valuation allowance is established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the deferred tax asset will not be realized. At each of June 30, 2014 and June 30, 2013, our deferred tax asset valuation allowance was $14,000 and $381,000, respectively, reducing our net deferred tax asset to $281,000 and $323,000, respectively, at those dates. The deferred tax asset valuation allowance relates to uncertainty regarding the utilization of the capital loss carry forwards related to security sales. At June 30, 2014, capital loss carryovers were $230,000, which are due to expire in the years 2016 through 2019.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus 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,” “believe,” “contemplate,” “continue,” “intend,” “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 prospectus.

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 local real estate markets (including real estate values);

 

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

 

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

 

    competition among depository and other financial institutions;

 

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

 

    our success in introducing new financial products;

 

    our ability to attract and maintain deposits;

 

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

 

    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;

 

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

 

    changes in consumer spending, borrowing and saving habits;

 

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

 

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

 

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

 

    changes in the level of government support of housing finance;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this prospectus.

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. Please see “Risk Factors” beginning on page 22.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $12.6 million and $17.6 million, or $20.4 million if the offering range is increased by 15%. Please see “Pro Forma Data” for additional information.

We intend to distribute the net proceeds from the offering as follows:

 

     Based Upon the Sale at $10.00 Per Share of  
     1,402,500 Shares     1,650,000 Shares     1,897,500 Shares     2,182,125 Shares (1)  
     Amount     Percent
of Net
Proceeds
    Amount     Percent
of Net
Proceeds
    Amount     Percent
of Net
Proceeds
    Amount     Percent
of Net
Proceeds
 
     (Dollars in thousands)  

Offering proceeds

   $ 14,025        $ 16,500        $ 18,975        $ 21,821     

Less offering expenses

     (1,400       (1,400       (1,400       (1,400  
  

 

 

     

 

 

     

 

 

     

 

 

   

Net offering proceeds

   $ 12,625        100.0   $ 15,100        100.0   $ 17,575        100.0   $ 20,421        100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Use of net proceeds:

                

To Pilgrim Bank

   $ 6,313        50.0   $ 7,550        50.0   $ 8,788        50.0   $ 10,211        50.0

To fund loan to employee stock ownership plan

     1,156        9.2     1,360        9.0     1,564        8.9     1,798        8.8

Proceeds contributed to foundation

     304        2.4     230        1.5     156        0.9     70        0.3
  

 

 

     

 

 

     

 

 

     

 

 

   

Retained by Pilgrim Bancshares, Inc.

   $ 4,852        38.4   $ 5,960        39.5   $ 7,067        40.2   $ 8,342        40.9
  

 

 

     

 

 

     

 

 

     

 

 

   

 

(1) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Pilgrim Bank’s deposits. The net proceeds may vary because the total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering were used to sell shares of common stock not purchased in the subscription and community offerings.

Pilgrim Bancshares, Inc. intends to fund a loan to the employee stock ownership plan to purchase shares of common stock in the offering and contribute cash and shares of common stock to our charitable foundation. Pilgrim Bancshares, Inc. may also use the proceeds it retains from the offering:

 

    to invest in short-term and other securities consistent with our investment policy;

 

    to pay cash dividends to stockholders, subject to regulatory approval;

 

    to repurchase shares of our common stock, subject to regulatory approval; and

 

    for other general corporate purposes.

With the exception of the funding of the loan to the employee stock ownership plan and the contribution to our charitable foundation, Pilgrim Bancshares, Inc. has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Initially, we intend to invest a substantial portion of the net proceeds in short-term investments, investment-grade debt obligations and mortgage-backed securities.

 

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Under currently applicable regulations, we may not repurchase shares of our common stock during the first year following the conversion, except to fund equity benefit plans other than stock options or except when extraordinary circumstances exist and with prior regulatory approval.

Pilgrim Bank will receive a capital contribution equal to at least 50.0% of the net proceeds of the offering. Pilgrim Bank may use the net proceeds it receives from the Offering:

 

    to invest in commercial real estate, multifamily, non-owner occupied and one- to four-family residential and construction loans;

 

    to invest in technological advances to enhance our customer service and the products that we offer;

 

    to invest in short-term and other securities consistent with our investment policy;

 

    to expand its banking franchise by establishing or acquiring new loan production officers or branches, or by acquiring other financial institutions or other financial services companies, although no such transactions are contemplated at this time; and

 

    for other general corporate purposes.

Pilgrim Bank has not quantified its plans for use of the offering proceeds for any of the foregoing purposes. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, our relative position in the financial services industry, the attractiveness of opportunities to expand our operations through establishing or acquiring new branches, our ability to receive regulatory approval for any such expansion activities, and overall market conditions.

OUR POLICY REGARDING DIVIDENDS

Following completion of the offering, our board of directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. Specifically, the Federal Reserve Board has issued a policy statement proving that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with the its capital needs and overall financial condition. We do not intend to pay dividends until such time as we are generating sufficient net income to support our planned growth and the payment of dividends. In determining whether to pay a cash dividend and the amount of such cash dividend, the board of directors is expected to take into account a number of factors, including regulatory capital requirements, our financial condition and results of operations, other uses of funds for the long-term value of stockholders, tax considerations, statutory and regulatory limitations and general economic conditions.

Dividends we can declare and pay will depend, in part, upon receipt of dividends from Pilgrim Bank, because initially we will have no source of income other than dividends from Pilgrim Bank, earnings from the investment of proceeds from the sale of shares of common stock, and interest payments received in connection with the loan to the employee stock ownership plan. Massachusetts banking law and FDIC regulations impose significant limitations on “capital distributions” by depository institutions. See “Supervision and Regulation—Federal Banking Regulation—Capital Distributions” and “—

 

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Massachusetts Banking Laws and Supervision—Dividends.” In addition, beginning in 2016, Pilgrim Bank’s ability to pay dividends will be limited if Pilgrim Bank does not have the capital conservation buffer required by the new capital rules, which may limit our ability to pay dividends to stockholders. See “Supervision and Regulation—Federal Banking Regulation—New Capital Rule.” No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by regulations and policies of the Federal Reserve Board and the Massachusetts Commissioner of Banks, may be paid in addition to, or in lieu of, regular cash dividends.

Any payment of dividends by Pilgrim Bank to us that would be deemed to be drawn out of Pilgrim Bank’s bad debt reserves would require a payment of taxes at the then-current tax rate by Pilgrim Bank on the amount of earnings deemed to be removed from the reserves for such distribution. Pilgrim Bank does not intend to make any distribution to us that would create such a federal tax liability. See “Taxation—Federal Taxation” and “—State Taxation.”

MARKET FOR THE COMMON STOCK

Pilgrim Bancshares, Inc. is a newly formed company and has never issued capital stock, except for 100 shares issued to Conahasset Bancshares, Inc. in connection with its formation. Conahasset Bancshares, MHC, as a mutual institution, has never issued capital stock. Pilgrim Bancshares, Inc. anticipates that its common stock will be quoted on the OTC Pink Marketplace operated by OTC Markets Group, Inc. Keefe, Bruyette & Woods has advised us that it intends to make a market in our common stock following the conversion and offering, but it is under no obligation to do so.

The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan, our directors and executive officers and the charitable foundation, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $10.00 per share. Purchasers of common stock in the offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the offering and may have an adverse impact on the price at which the common stock can be sold.

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

At March 31, 2014, Pilgrim Bank exceeded all of the applicable regulatory capital requirements. The table below sets forth the historical equity capital and regulatory capital of Pilgrim Bank at March 31, 2014, and the pro forma regulatory capital of Pilgrim Bank, after giving effect to the sale of shares of common stock at a $10.00 per share purchase price. The items captioned “Requirement” reflect amounts necessary to be considered “well capitalized” under applicable federal regulations. The table assumes the receipt by Pilgrim Bank of 50.0% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering.”

 

     Pilgrim Bank
Historical

at March 31, 2014
    Pro Forma at March 31, 2014, Based Upon the Sale in the Offering of  
       1,402,500 Shares     1,650,000 Shares     1,897,500 Shares     2,182,125 Shares(1)  
     Amount     Percent of
Assets(2)
    Amount     Percent of
Assets(2)
    Amount     Percent of
Assets(2)
    Amount     Percent of
Assets(2)
    Amount     Percent of
Assets(2)
 
     (Dollars in thousands)  

Equity

   $ 12,658        7.47   $ 17,237        9.81   $ 18,168        10.27   $ 19,100        10.72   $ 20,172        11.23
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Tier 1 leverage capital(3)

   $ 12,789        7.61   $ 17,368        9.97   $ 18,299        10.43   $ 19,231        10.88   $ 20,303        11.40

Requirement(4)

     8,398        5.00        8,714        5.00        8,776        5.00        8,837        5.00        8,909        5.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

   $ 4,391        2.61   $ 8,654        4.97   $ 9,523        5.43   $ 10,394        5.88   $ 11,394        6.40
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 risk-based capital

   $ 12,789        12.91   $ 17,368        16.99   $ 18,299        17.80   $ 19,231        18.59   $ 20,303        19.49

Requirement

     5,943        6.00        6,132        6.00        6,170        6.00        6,207        6.00        6,249        6.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

   $ 6,846        6.91   $ 11,236        10.99   $ 12,129        11.80   $ 13,024        12.59   $ 14,054        13.49
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total risk-based capital(3)

   $ 13,538        13.67   $ 18,117        17.73   $ 19,048        18.52   $ 19,980        19.31   $ 21,052        20.21

Requirement

     9,905        10.00        10,221        10.00        10,283        10.00        10,345        10.00        10,416        10.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

   $ 3,633        3.67   $ 7,896        7.73   $ 8,765        8.52   $ 9,635        9.31   $ 10,636        10.21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation:

                    

Net proceeds infused into Pilgrim Bank:

  

  $ 6,313        $ 7,550        $ 8,788        $ 10,211     

Less: Common stock acquired by employee stock ownership plan

   

    (1,156       (1,360       (1,564       (1,798  

Less: Common stock acquired by stock- based incentive plan

   

    (578       (680       (782       (899  
      

 

 

     

 

 

     

 

 

     

 

 

   

Pro forma increase in Tier 1 and total risk-based capital

   

  $ 4,579        $ 5,510        $ 6,442        $ 7,514     
      

 

 

     

 

 

     

 

 

     

 

 

   

 

(1) As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) Leverage capital ratios are shown as a percentage of total adjusted assets. Risk-based capital ratios are shown as a percentage of risk-weighted assets.
(3) Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 50% risk weighting.

 

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CAPITALIZATION

The following table presents the historical consolidated capitalization of Conahasset Bancshares, MHC at March 31, 2014 and the pro forma consolidated capitalization of Pilgrim Bancshares, Inc., after giving effect to the conversion and the offering, based upon the assumptions set forth in the “Pro Forma Data” section.

 

     Conahasset
Bancshares,
MHC Historical
at March 31,
2014
    Pilgrim Bancshares, Inc. Pro Forma,
Based Upon the Sale in the Offering at $10.00 per Share of
 
     1,402,500
Shares
    1,650,000
Shares
    1,897,500
Shares
    2,182,125
Shares (1)
 
     (Dollars in thousands)  

Deposits (2)

   $ 149,379      $ 149,379      $ 149,379      $ 149,379      $ 149,379   

Borrowings

     7,000        7,000        7,000        7,000        7,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits and borrowed funds

   $ 156,379      $ 156,379      $ 156,379      $ 156,379      $ 156,379   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

          

Preferred stock $0.01 par value, 2,000,000 shares authorized; none issued or outstanding

   $ —        $ —        $ —        $ —        $ —     

Common stock $0.01 par value, 10,000,000 shares authorized; assuming shares outstanding as shown (3)

     —          14        17        20        22   

Additional paid-in capital (4)

     —          13,032        15,578        18,124        21,054   

Retained earnings (5)

     12,844        12,844        12,844        12,844        12,844   

Tax benefit of contribution to foundation

     —          290        290        290        290   

Accumulated other comprehensive loss

     (118     (118     (118     (118     (118

Common stock to be acquired by employee stock ownership plan (6)

     —          (1,156     (1,360     (1,564     (1,798

Common stock to be acquired by stock-based benefit plans (7)

     —          (578     (680     (782     (899

Expense of contribution to charitable foundation

     —          (725     (725     (725     (725
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 12,726      $ 23,603      $ 25,846      $ 28,089      $ 30,670   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity as a percentage of total assets (2)

     7.51     13.09     14.16     15.21     16.37

Tangible equity as a percentage of total assets (2)

     7.51     13.09     14.16     15.21     16.37

 

(1) As adjusted to give effect to an increase in the number of shares of common stock that could occur due to a 15% increase in the offering range to reflect demand for shares or changes in market conditions following the commencement of the subscription and community offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.
(3) No effect has been given to the issuance of additional shares of Pilgrim Bancshares, Inc. common stock pursuant to one or more stock-based benefit plans. If these plans are implemented within 12 months following the completion of the offering, an amount up to 10% and 4% of the shares of Pilgrim Bancshares, Inc. common stock sold in the offering, including shares issued to our charitable foundation, will be reserved for issuance upon the exercise of stock options and for issuance as restricted stock awards, respectively. See “Management of Pilgrim Bancshares, Inc.”
(4) The sum of the par value of the total shares outstanding and additional paid-in capital equals the net offering proceeds at the offering price of $10.00 per share.
(5) The retained earnings of Pilgrim Bank will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion and Plan of Distribution—Liquidation Rights” and “Supervision and Regulation.”

 

 

(footnotes continue on following page)

 

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(continued from previous page)

 

 

 

(6) Assumes that 8% of the shares issued in the conversion (including shares to be contributed to the charitable foundation) will be acquired by the employee stock ownership plan financed by a loan from Pilgrim Bancshares, Inc. The loan will be repaid principally from Pilgrim Bank’s contributions to the employee stock ownership plan. Since Pilgrim Bancshares, Inc. will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no asset or liability will be reflected on Pilgrim Bancshares, Inc.’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.
(7) Assumes a number of shares of common stock equal to 4% of the shares of common stock to be issued in the conversion (including shares to be contributed to the charitable foundation) will be purchased for grant by one or more stock-based benefit plans in open market purchases. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. As Pilgrim Bancshares, Inc. accrues compensation expense to reflect the vesting of shares pursuant to the stock-based benefit plans, the credit to equity will be offset by a charge to noninterest expense. Implementation of the stock stock-based benefit plans will require stockholder approval. Any funds to be used by the stock-based benefit plans to conduct open market purchases will be provided by Pilgrim Bancshares, Inc.

 

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PRO FORMA DATA

The following tables summarize historical data of Conahasset Bancshares, MHC and pro forma data of Pilgrim Bancshares, Inc. at and for the three months ended March 31, 2014 and at and for the year ended December 31, 2013. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.

The net proceeds in the tables are based upon the following assumptions:

 

    all shares of common stock will be sold in the subscription offering;

 

    our employee stock ownership plan will purchase 8% of the shares of common stock issued in the conversion (including shares contributed to the charitable foundation) with a loan from Pilgrim Bancshares, Inc. The loan will be repaid in substantially equal payments of principal and interest over a period of 30 years;

 

    Keefe, Bruyette & Woods will receive a selling agent fee equal to 1.0% of the dollar amount of the shares of common stock sold in the subscription offering, subject to a minimum fee of $225,000. Shares purchased by our employee stock benefit plans or by our officers, directors and employees, and their immediate families and shares contributed to our charitable foundation will not be included in calculating the shares of common stock sold for this purpose; and

 

    expenses of the offering, other than selling agent fees to be paid to Keefe Bruyette & Woods, will be approximately $1.2 million.

We calculated pro forma consolidated net income for the three months ended March 31, 2014 and the year ended December 31, 2013 as if the estimated net proceeds had been invested at an assumed interest rate of 1.73% (1.04% on an after-tax basis) and 1.75% (1.05% on an after-tax basis), respectively. This represents the five-year United States Treasury Note as of March 31, 2014 and December 31, 2013, which, in light of current market interests rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earnings assets and the weighted average rate paid on our deposits.

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. We adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts for each period as if the shares of common stock were outstanding at the beginning of each period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

The pro forma tables give effect to the implementation of stock-based benefit plans. Subject to the receipt of stockholder approval, we have assumed that the stock-based benefit plans will acquire for restricted stock awards a number of shares of common stock equal to 4% of our outstanding shares of common stock at the same price for which they were sold in the offering. We assume that shares of common stock are granted under the plans in awards that vest over a five-year period.

 

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We have also assumed that the stock-based benefit plans will grant options to acquire shares of common stock equal to 10% of our outstanding shares of common stock. In preparing the tables below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $3.36 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 17.71% for the shares of common stock, a dividend yield of 0.00%, an expected option life of 10 years and a risk-free interest rate of 2.73%.

We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the offering. In addition, we may grant options and award shares that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than one year following the offering.

As discussed under “How We Intend to Use the Proceeds from the Offering,” we intend to contribute at least 50.0% of the net proceeds to Pilgrim Bank. We will retain the remainder of the net proceeds from the offering and use a portion of the proceeds we retain for the purpose of making a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.

The pro forma table does not give effect to:

 

    withdrawals from deposit accounts for the purpose of purchasing shares of common stock in the offering;

 

    our results of operations after the offering; or

 

    changes in the market price of the shares of common stock after the offering.

The following pro forma information may not represent the financial effects of the offering at the date on which the offering actually occurs and you should not use the table to indicate future results of operations. Pro forma stockholders’ equity represents the difference between the stated amount of our assets and liabilities, computed in accordance with GAAP. We did not increase or decrease stockholders’ equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Pro forma stockholders’ equity does not give effect to the impact of intangible assets, the liquidation account we will establish in the conversion or tax bad debt reserves in the unlikely event we are liquidated.

 

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     At or For the Three Months Ended March 31, 2014
Based Upon the Sale at $10.00 Per Share of
 
     1,402,500
Shares
    1,650,000
Shares
    1,897,500
Shares
    2,182,125
Shares (1)
 
     (Dollars in thousands, except per share amounts)  

Gross Proceeds of Offering

   $ 14,025      $ 16,500      $ 18,975      $ 21,821   

Plus: market value of shares issued to charitable foundation

     421        495        569        655   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma market capitalization

   $ 14,446      $ 16,995      $ 19,544      $ 22,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Proceeds of Offering

   $ 14,025      $ 16,500      $ 18,975      $ 21,821   

Less: expenses

     1,400        1,400        1,400        1,400   
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net proceeds

     12,625        15,100        17,575        20,421   

Less: Common stock purchased by ESOP (2)

     (1,156     (1,360     (1,564     (1,798

Less: Cash contribution to charitable foundation

     (304     (230     (156     (70

Less: Common stock awarded under stock-based benefit plans (3)

     (578     (680     (782     (899
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net cash proceeds as adjusted

   $ 10,587      $ 12,830      $ 15,073      $ 17,654   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the Three Months Ended March 31, 2014

        

Net Income:

        

Historical

   $ 126      $ 126      $ 126      $ 126   

Pro forma income on net proceeds

     27        33        39        46   

Pro forma ESOP adjustment(2)

     (6     (7     (8     (9

Pro forma stock award adjustment (3)

     (17     (20     (23     (27

Pro forma stock option adjustment (4)

     (22     (26     (30     (34
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income

   $ 108      $ 106      $ 104      $ 102   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share net income:

        

Historical

   $ 0.09      $ 0.08      $ 0.07      $ 0.06   

Pro forma income on net proceeds

     0.02        0.02        0.02        0.02   

Pro forma ESOP adjustment (2)

     —          —          —          —     

Pro forma stock award adjustment (3)

     (0.01     (0.01     (0.01     (0.01

Pro forma stock option adjustment (4)

     (0.02     (0.02     (0.02     (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share (5)

   $ 0.08      $ 0.07      $ 0.06      $ 0.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as a multiple of pro forma net earnings per share

     31.25     35.71     41.67     50.00

Number of shares outstanding for pro forma net income per share calculations (5)

     1,329,972        1,564,673        1,799,374        2,069,280   

At March 31, 2014

        

Stockholders’ equity:

        

Historical

   $ 12,726      $ 12,726      $ 12,726      $ 12,726   

Estimated net proceeds

     12,625        15,100        17,575        20,421   

Plus: market value of shares issued to charitable foundation

     421        495        569        655   

Plus: tax benefit of contribution to charitable foundation

     290        290        290        290   

Less: Common stock acquired by ESOP (2)

     (1,156     (1,360     (1,564     (1,798

Less: Common stock awarded under stock-based benefit plans (3) (4)

     (578     (680     (782     (899

Less: expense of contribution to charitable foundation (6)

     (725     (725     (725     (725
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity

   $ 23,603      $ 25,846      $ 28,089      $ 30,670   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity per share:

        

Historical

   $ 8.81      $ 7.50      $ 6.51      $ 5.66   

Estimated net proceeds

     8.74        8.88        8.99        9.09   

Plus: market value of shares issued to charitable foundation

     0.29        0.29        0.29        0.29   

Plus: tax benefit of contribution to charitable foundation

     0.20        0.17        0.15        0.13   

Less: Common stock acquired by ESOP (2)

     (0.80     (0.80     (0.80     (0.80

Less: Common stock awarded under stock-based benefit plans (3) (4)

     (0.40     (0.40     (0.40     (0.40

Less: expense of contribution to charitable foundation

     (0.50     (0.43     (0.37     (0.32
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share (7)

   $ 16.34      $ 15.21      $ 14.37      $ 13.65   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as percentage of pro forma stockholders’ equity per share

     61.20     65.75     69.59     73.26

Number of shares outstanding for pro forma book value per share calculations

     1,444,575        1,699,500        1,954,425        2,247,589   

 

(footnotes begin on page 56)

 

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     At or For the Year Ended December 31, 2013
Based Upon the Sale at $10.00 Per Share of
 
     1,402,500
Shares
    1,650,000
Shares
    1,897,500
Shares
    2,182,125
Shares (1)
 
     (Dollars in thousands, except per share amounts)  

Gross Proceeds of Offering

   $ 14,025      $ 16,500      $ 18,975      $ 21,821   

Plus: market value of shares issued to charitable foundation

     421        495        569        655   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma market capitalization

   $ 14,446      $ 16,995      $ 19,544      $ 22,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Proceeds of Offering

   $ 14,025      $ 16,500      $ 18,975      $ 21,821   

Less: expenses

     1,400        1,400        1,400        1,400   
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net proceeds

     12,625        15,100        17,575        20,421   

Less: Common stock purchased by ESOP (2)

     (1,156     (1,360     (1,564     (1,798

Less: Cash contribution to charitable foundation

     (304     (230     (156     (70

Less: Common stock awarded under stock-based benefit plans (3)

     (578     (680     (782     (899
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net cash proceeds as adjusted

   $ 10,587      $ 12,830      $ 15,073      $ 17,654   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the Year Ended December 31, 2013

        

Net Income:

        

Historical

   $ 368      $ 368      $ 368      $ 368   

Pro forma income on net proceeds

     111        135        158        185   

Pro forma ESOP adjustment(2)

     (23     (27     (31     (36

Pro forma stock award adjustment (3)

     (69     (82     (94     (108

Pro forma stock option adjustment (4)

     (87     (103     (118     (136
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income

   $ 300      $ 291      $ 283      $ 273   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share net income:

        

Historical

   $ 0.28      $ 0.24      $ 0.21      $ 0.18   

Pro forma income on net proceeds

     0.08        0.09        0.09        0.09   

Pro forma ESOP adjustment (2)

     (0.02     (0.02     (0.02     (0.02

Pro forma stock award adjustment (3)

     (0.05     (0.05     (0.05     (0.05

Pro forma stock option adjustment (4)

     (0.07     (0.07     (0.07     (0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share (5)

   $ 0.22      $ 0.19      $ 0.16      $ 0.13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as a multiple of pro forma net earnings per share

     45.45     52.63     62.50     76.92

Number of shares outstanding for pro forma net income per share calculations (5)

     1,332,861        1,568,072        1,803,283        2,073,775   

At December 31, 2013

        

Stockholders’ equity:

        

Historical

   $ 12,504      $ 12,504      $ 12,504      $ 12,504   

Estimated net proceeds

     12,625        15,100        17,575        20,421   

Plus: market value of shares issued to charitable foundation

     421        495        569        655   

Plus: tax benefit of contribution to charitable foundation

     290        290        290        290   

Less: Common stock acquired by ESOP (2)

     (1,156     (1,360     (1,564     (1,798

Less: Common stock awarded under stock-based benefit plans (3) (4)

     (578     (680     (782     (899

Less: expense of contribution to charitable foundation (6)

     (725     (725     (725     (725
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity

   $ 23,381      $ 25,624      $ 27,867      $ 30,448   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity per share:

        

Historical

   $ 8.66      $ 7.37      $ 6.40      $ 5.56   

Estimated net proceeds

     8.74        8.88        8.99        9.09   

Plus: market value of shares issued to charitable foundation

     0.29        0.29        0.29        0.29   

Plus: tax benefit of contribution to charitable foundation

     0.20        0.17        0.15        0.13   

Less: Common stock acquired by ESOP (2)

     (0.80     (0.80     (0.80     (0.80

Less: Common stock awarded under stock-based benefit plans (3) (4)

     (0.40     (0.40     (0.40     (0.40

Less: expense of contribution to charitable foundation

     (0.50     (0.43     (0.37     (0.32
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share (7)

   $ 16.19      $ 15.08      $ 14.26      $ 13.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as percentage of pro forma stockholders’ equity per share

     61.77     66.31     70.13     73.80

Number of shares outstanding for pro forma book value per share calculations

     1,444,575        1,699,500        1,954,425        2,247,589   

 

 

(footnotes begin on following page)

 

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(Footnotes from previous pages)

 

 

(1) As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) Assumes that 8% of shares of common stock issued in the conversion (including shares to be contributed to the charitable foundation) will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Pilgrim Bancshares, Inc. at a rate per annum equal to the Prime Rate. Pilgrim Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Pilgrim Bank’s total annual payments on the employee stock ownership plan debt are based upon 30 equal annual installments of principal and interest. Accounting Standard Codification 718-40-30 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Pilgrim Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 40.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 963, 1,133, 1,303 and 1,498 shares were committed to be released during the three months ended March 31, 2014 and 3,852, 4,532, 5,212 and 5,994 shares were committed to be released during the year ended December 31, 2013 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. In accordance with Accounting Standard Codification 718-40-30, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of income per share calculations.
(3) If approved by Pilgrim Bancshares, Inc.’s stockholders, one or more stock-based benefit plans may issue an aggregate number of shares of common stock equal to 4% of the shares to be issued in the conversion including shares contributed to the charitable foundation (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion) for award as restricted stock to our officers, employees and directors. Stockholder approval of the stock-based benefit plans, and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Pilgrim Bancshares, Inc. or through open market purchases. The funds to be used by the stock-based benefit plans to purchase the shares will be provided by Pilgrim Bancshares, Inc. The table assumes that (i) the stock-based benefit plans acquire the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the stock-based benefit plans is amortized as an expense during the fiscal year and (iii) the stock-based benefit plans expense reflects an effective combined federal and state tax rate of 40.0%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4% of the shares issued in the conversion, including shares contributed to the charitable foundation) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 3.9%.
(4) If approved by Pilgrim Bancshares, Inc.’s stockholders, one or more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be issued in the conversion including shares contributed to the charitable foundation (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock options to be granted under stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $3.36 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options. The actual expense of the stock options to be granted under the stock-based benefit plans will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock-based benefit plans is obtained from the issuance of authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock used to fund stock options (equal to 10% of the shares issued in the conversion, including shares contributed to the charitable foundation) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 9.1%.
(5) Income per share computations are determined by taking the number of shares assumed to be sold in the offering and, in accordance with applicable accounting standards for employee stock ownership plans, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See note 2 above.
(6)

Does not give effect to the nonrecurring expense that is expected to be recognized in the year ended December 31, 2014 as a result of the contribution of cash and shares of common stock to the charitable foundation. Assuming the contribution to the foundation was expensed during year ended December 31, 2013 and the three months ended March 31, 2014, the estimated before tax expense, estimated after-tax expense and pro forma tax benefit associated with the

 

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  contribution to the foundation, and the pro forma net income (loss) and pro forma net income (loss) per share are set forth in the table below. The pro forma data assume that we will realize 100.0% of the income tax benefit as a result of the contribution to the foundation based on a 40.0% income tax rate. The realization of the tax benefit is limited annually to 10.0% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

 

    Minimum of
Offering Range
    Midpoint of
Offering Range
    Maximum of
Offering Range
    Maximum, as
adjusted, of
Offering Range
 
    (in thousands, except per share data)  

Three Months Ended March 31, 2014

       

Before tax expense of contribution

  $ 725      $ 725      $ 725      $ 725   

Estimated after tax expense of contribution

    435        435        435        435   

Pro forma net income (loss)

    (327     (329     (331     (333

Pro forma net income (loss) per share

    (0.25     (0.21     (0.18     (0.16

Pro forma tax benefit

    290        290        290        290   

Year Ended December 31, 2013

       

Before tax expense of contribution

  $ 725      $ 725      $ 725      $ 725   

Estimated after tax expense of contribution

    435        435        435        435   

Pro forma net income (loss)

    (135     (144     (152     (162

Pro forma net income (loss) per share

    (0.10     (0.09     (0.08     (0.08

Pro forma tax benefit

    290        290        290        290   

 

(7) The retained earnings of Pilgrim Bank will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion and Plan of Distribution—Liquidation Rights” and “Supervision and Regulation.” The number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering.

 

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COMPARISON OF VALUATION AND PRO FORMA INFORMATION

WITH AND WITHOUT THE CHARITABLE FOUNDATION

As reflected in the table below, if the charitable foundation is not established and funded as part of the offering, RP Financial, LC estimates that our pro forma valuation would be greater and, as a result, a greater number of shares of common stock would be issued in the offering. At the minimum, midpoint, maximum and adjusted maximum of the valuation range, our pro forma valuation is $14.4 million, $17.0 million, $19.5 million and $22.5 million, respectively, with the charitable foundation, as compared to $15.3 million, $18.0 million, $20.7 million and $23.8 million, respectively, without the charitable foundation. There is no assurance that in the event the charitable foundation were not formed, the appraisal prepared at that time would conclude that our pro forma market value would be the same as that estimated in the table below. Any appraisal prepared at that time would be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions.

For comparative purposes only, set forth below are certain pricing ratios and financial data and ratios at and for the three months ended March 31, 2014 at the minimum, midpoint, maximum and adjusted maximum of the offering range, assuming the offering was completed at the beginning of the year, with and without the charitable foundation.

 

    Minimum of Offering Range     Midpoint of Offering Range     Maximum of Offering Range     Adjusted Maximum of
Offering Range
 
    With
Foundation
    Without
Foundation
    With
Foundation
    Without
Foundation
    With
Foundation
    Without
Foundation
    With
Foundation
    Without
Foundation
 
    (Dollars in thousands, except per share amounts)  

Estimated offering amount

  $ 14,025      $ 15,300      $ 16,500      $ 18,000      $ 18,975      $ 20,700      $ 21,821      $ 23,805   

Estimated full value

    14,446        15,300        16,995        18,000        19,544        20,700        22,476        23,805   

Total assets

    180,248        181,435        182,492        183,811        184,735        186,187        187,315        188,919   

Total liabilities

    156,645        156,645        156,645        156,645        156,645        156,645        156,645        156,645   

Pro forma stockholders’ equity

    23,603        24,790        25,846        27,166        28,089        29,542        30,670        32,274   

Pro forma net income

    108        110        106        107        104        106        102        102   

Pro forma stockholders’ equity per share

    16.34        16.20        15.21        15.09        14.37        14.27        13.65        13.56   

Pro forma net income per share

    0.08        0.08        0.07        0.06        0.06        0.06        0.05        0.05   

Pro forma pricing ratios:

               

Offering price as a percentage of pro forma stockholders’ equity per share

    61.20     61.73     65.75     66.27     69.59     70.08     73.26     73.75

Offering price to pro forma net income per share

    31.25     31.25     35.71     35.71     41.67     41.67     50.00     50.00

Pro forma financial ratios:

               

Return on assets
(annualized)

    0.24     0.24     0.23     0.23     0.23     0.23     0.22     0.22

Return on equity
(annualized)

    1.83        1.77        1.64        1.58        1.48        1.44        1.33        1.26   

Equity to assets

    13.09        13.66        14.16        14.78        15.21        15.87        16.37        17.08   

Total shares issued

    1,444,575        1,530,000        1,699,500        1,800,000        1,954,425        2,070,000        2,247,589        2,380,500   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This section is intended to help potential investors understand the financial performance of Conahasset Bancshares, MHC and its subsidiaries through a discussion of the factors affecting our financial condition at March 31, 2014, December 31, 2013 and December 31, 2012 and our results of operations for the three months ended March 31, 2014 and 2013 and the years ended December 31, 2013 and 2012. This section should be read in conjunction with the consolidated financial statements and notes thereto that appear elsewhere in this prospectus. Pilgrim Bancshares, Inc. had not engaged in any activities at March 31, 2014 or December 31, 2013; therefore, the information reflected in this section reflects the consolidated financial performance of Conahasset Bancshares, MHC and subsidiaries.

Overview

We conduct our operations from our main office and an adjacent operations center in Cohasset, Massachusetts and our two additional full-service banking offices located in Cohasset and Marion, Massachusetts. Our primary market area is the South Shore and South Coast areas of Massachusetts, which includes portions of Plymouth, Norfolk and Bristol counties. We serve customers located in a number of small towns in these areas, including Cohasset, Scituate, Hull, Hingham, Norwell, Marshfield, Marion, Mattapoisett, Plymouth, Rochester and Wareham. Although our current operations are not focused in Boston, we are affected by economic conditions in Boston because our loan portfolio includes a significant number of loans that are secured by real estate or that have borrowers located in Boston. In addition, a number of our customers who reside in our market area are employed in Boston and a number of our non-owner occupied residential and multi-family loan customers have properties in Boston as well as in our market area. We intend to continue to make loans, particularly commercial real estate, multi-family, non-owner occupied residential and construction loans, in Boston, so we will continue to be affected by economic conditions in Boston.

Our business consists primarily of attracting deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate, commercial real estate, multi-family and construction loans, and, to a lesser extent, commercial and industrial and consumer loans. We have historically conducted our lending operations with a view towards the specific needs of customers in the communities that we serve, measuring our success by customer satisfaction and the extent of our customer relationships, rather than on volume based loan origination. Accordingly because of the demographics of our market area, we have focused, and expect to continue to focus, on “jumbo” loans. At March 31, 2014, $91.7 million, or 68.9% of our total loan portfolio, was comprised of one- to four-family residential real estate loans, including non-owner occupied residential real estate loans of $17.7 million, or 13.3% of our loan portfolio, and jumbo loans of $40.5 million, or 54.7% of our owner occupied one- to four-family residential loans and 30.4% of our total loans. Of the jumbo loans, $24.4 million were originated by Pilgrim Bank and $16.1 million were purchased loans. We also invest in securities, which consist primarily of U.S. government agency obligations and U.S. government agency mortgage-backed securities and to a lesser extent, state and municipal securities and U.S. government agency collateralized mortgage obligations. We historically have relied heavily on certificates of deposit for funding, but we offer a variety of deposit accounts, including checking accounts, NOW accounts, savings accounts, money market accounts and certificate of deposit accounts, including IRAs. We utilize advances from the FHLB-Boston for asset/liability management purposes, to leverage loan purchases, and, to a much lesser extent, for additional funding for our operations. At March 31, 2014, we had $7.0 million in advances outstanding with FHLB-Boston.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan

 

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losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of service charges on deposit accounts, loan servicing income, gain on sales of securities and loans, debit card income, income from bank-owned life insurance and miscellaneous other income. Noninterest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy and equipment, data processing, federal deposit insurance premiums, ATM charges, professional fees, advertising and other operating expenses.

Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities. We expect our return on equity to remain relatively low until we are able to leverage the additional capital that we receive from the offering. See “Risk Factors—Risks Related to the Offering— The capital we raise in the offering will reduce our return on equity. This could negatively affect the trading price of our common stock.”

Business Strategy

We have historically operated as a traditional thrift headquartered in Cohasset, Massachusetts. As a traditional thrift, our focus has been, and will continue to be, one- to four-family residential mortgage lending, particularly “jumbo” mortgage loans and construction loans for owner occupied properties, in our market area. In 2005, we determined that we would be more competitive and profitable if we transitioned a portion of our operations to a commercial bank model. Accordingly, we made a decision to diversify our lending portfolio by expanding commercial real estate and construction lending in order to increase revenues and manage our interest rate and concentration risk. Because we realized that endeavoring to expand commercial real estate and construction lending placed us in a highly competitive space in our market area, we hired additional experienced commercial lenders who had previously worked in the South Shore and Boston markets to support our expanding commercial real estate and construction activities.

While we were successful in expanding our commercial real estate and construction lending, these lenders also brought knowledge of and experience with a niche of select customers engaged in investing in and renovating residential properties. To satisfy the demands of and enhance our banking relationships with these borrowers, we developed a loan product that consist of a construction loan for the rehabilitation of existing non-owner occupied properties that automatically converts to a fully-amortizing residential mortgage loan following the construction period. We approve the construction / rehabilitation and the permanent portions of the loan at the time the borrower submits an application, which fixes the interest rate for the borrower at the initial extension of credit, and eliminates the need or reapplication for permanent financing and a second closing.

The result of these efforts was an expansion in our non-owner occupied residential portfolio and our portfolio of construction and renovation loans related to non-owner occupied residential properties. The business cycles of these customers naturally led them to engage in larger projects, and we responded by developing multi-family loan products, and related construction and renovation loan products, to offer to these customers. Accordingly, a significant portion of our portfolio consists of high-quality non-owner occupied residential loans and construction loans and, although we have experienced a slight decline in multi-family loans due to payoffs in recent periods, we also have a moderate portfolio of multi-family loans. We historically have had a significant construction lending portfolio, although balances have decreased recently due to payoffs and the transition of construction loans to permanent loans. However, we intend to increase originations of construction loans, particularly non-owner occupied rehabilitation-to-permanent loans.

 

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In addition, as we continued to develop relationships with both our residential mortgage customers and our commercial, multi-family and non-owner occupied real estate loan customers, we recognized that, although certain towns within our market area are primarily residential, other towns are home to a diverse variety of small businesses providing services to the residents of our market area, and that there was an opportunity to for us to offer customized business banking products to those small businesses. We determined that we could further diversify our portfolio by increasing our commercial and industrial lending activities, and in 2013 we hired a lender with significant experience in commercial and industrial and Small Business Administration (“SBA”) lending.

Our principal objective is to distinguish ourselves as a strong independent bank in our market are by improving our offering of diverse products and superior customer service to customers, maintaining our commitment to community involvement, develop market niches and explore new lines of business and growth opportunities while adhering to a sound financial plan that provides for strong capital position and profits and asset growth sufficient to allow us to provide for the financial needs of our customers. We believe that our primary competitive advantage is and will continue to be our motivation to create relationships rather than “one product” customers, and that the first step in beginning a banking relationship is exhibiting the flexibility to customize products and services, particularly loan products, to meet the specific needs of the customer. We believe that, in our market area, this can be accomplished by working with customers to extend credit, within prudent and conservative guidelines, in situations where characteristics of non-conforming loans may be present, with particular focus on “jumbo” loans. We strive to provide friendly, knowledgeable, courteous and professional services as we invite current and potential customers to “Discover the Pilgrim Difference.”

We recognize that, although we have managed to operate profitably throughout a challenging economic period, modest organic growth in our market area and continued expansion into the customer base in contiguous areas is essential to our continued profitability. We intend to take advantage of the opportunities presented by our market area to expand our operations. Highlights of our current business strategy following the completion of the offering, subject to regulatory approval where applicable and market conditions, are set forth below.

Prudently and opportunistically grow our earnings base by leveraging the expertise and contacts of our current lending staff and by hiring additional lending personnel with extensive experience in our market area and in the Boston area. We believe that in order to increase our income and profitability, we must focus on continuing to grow our earnings base, particularly our loan portfolio. Our total loan portfolio, before allowance for loan losses decreased $500,000, or 0.4%, to $133.1 million at March 31, 2014 from $133.6 million at December 31, 2013, and increased $20.0 million, or 17.6%, to $133.6 million at December 31, 2013, from $113.6 million at December 31, 2012, and increased $3.8 million, or 3.5%, to $113.6 million at December 31, 2012, from $109.8 million at December 31, 2011. However, these increases occurred during periods of minimal or no deposit growth, resulting in steadily declining levels of cash, interest-bearing deposits with other financial institutions and securities. Accordingly, our total assets decreased $2.2 million, or 1.3%, to $169.4 million at March 31, 2014 from $171.6 million at December 31, 2013. This followed a decrease of $985,000, or 0.6%, to $171.6 million at December 31, 2013, from $172.5 million at December 31, 2012 and an increase of $2.2 million, or 1.3%, from $170.3 million at December 31, 2011. The planned lack of significant growth in total assets reflects our efforts to improve our capital ratios and reduce our risk profile. We intend to utilize a portion of the proceeds of the offering to grow our balance sheet through increased originations of one-to four family residential real estate, specifically conventional non-conforming and jumbo loans, on which we have historically focused. Specifically, we intend to increase our marketing efforts, inside and outside our current market area, foster deposit relationships as we increase core deposits, and develop mortgage products customized to serve the needs of our customer base, including “jumbo” loans, non-conforming residential loans, non-owner occupied residential loans and rehabilitation-to-permanent loans. We believe that a significant portion of our loan growth over the past several years was the direct result of relationships between borrowers and experienced lending staff that we hired in connection with our decision to enter into commercial real estate and multi-family lending. We intend to continue to leverage

 

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the business relationships of these lenders, and also to hire additional lenders with experience in our market area and the greater Boston area to obtain additional relationships in these communities and to complement our existing staff. To better serve and expand our customer base we intend to develop and continually review a pricing model that will attract prospective customers, particularly homeowners and investors in non-owner occupied residential and multi-family property and commercial real estate.

Increase our focus on commercial real estate, multi-family, owner occupied residential and construction lending and continue to expand our niche in non-owner occupied residential and construction lending. Although one- to four-family residential lending has been and will continue to be a key component of our strategy, we recognize that, with recent downward trends in interest rates on residential loans, a prudent approach to expanding our origination of a diverse variety of loans is essential to our profitability. We intend to increase our focus on commercial real estate, multi-family, non-owner occupied residential and construction loans, both in our market area and in the greater Boston area, and also expand the portfolio of non-owner occupied residential lending that we have developed in the past several years. In particular, we believe that our continued focus on our rehabilitation-to-permanent loan product will serve to initiate commercial lending relationships that will, over time, increase in size and complexity. Because commercial lending is based on relationships, in the past several years we have hired, and expect to continue to hire, commercial lending officers who we believe either already have strong borrower relationships or have the capability and experience to develop those relationships. We believe that fostering these relationships will allow us to increase our multi-family and commercial real estate lending, as well as related construction lending, as customers who began banking with us in the non-owner occupied residential and construction rehabilitation loan space grow their operations and become involved in larger projects. We also believe that these relationships will, despite increased relationship balances, serve to mitigate risk because these relationships tend to consist of more loans with smaller balances and secured by different properties as compared to commercial real estate loans. The change in the diversification of our loan portfolio is not dependent on the proceeds of the offering.

As we have gradually increased our commercial real estate, multi-family, non-owner occupied residential and construction lending, we have been able to rely on the experience of our lenders to develop a culture of diligence with respect to adherence to policies and procedures designed to mitigate risk, and to enhance our lending policies and procedures with respect to these types of lending. Accordingly, we believe that we are positioned, with experienced key members of our lending team and policies and procedures developed to mitigate credit risk as we grow, to develop a significant portfolio of high-quality commercial real estate, multi-family, non-owner occupied residential and construction loans. Commercial real estate, multi-family, non-owner occupied residential and particularly construction loans generally have shorter terms and repricing characteristics than fixed-rate, longer-term, one- to four-family residential real estate loans. We expect that a disciplined approach to increasing our commercial real estate, multi-family, non-owner occupied residential and construction lending will diversify and increase the yield on our loan portfolio. In addition, because we will focus on providing excellent customer service and fostering relationship banking with respect to these loans in our market area and nearby Boston, we expect that an increase in lending will result in a corresponding increase in our customer base for deposits and other services.

Continue to expand our traditional originations of one- to four-family residential mortgage loans, customize non-conforming and jumbo mortgage loans to suit the needs of our customer base, foster multiple-loan relationships and market our niche non-owner occupied rehabilitation-to-permanent loans. Although we believe that we must increase non-residential lending in order to grow, increase profitability and diversify our portfolio, we also recognize that we have developed our reputation in our market area based on a tradition of conventional residential real estate mortgage lending. We believe that one- to four-family lending is essential to maintaining customer relations and our status as a community-oriented bank, and also creates invaluable ties to the communities that we serve. While expanding our conventional mortgage activities in our market area and in nearby Boston is important to

 

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our growth as well as our asset/liability and interest rate risk management, we recognize that, in order to fully serve the customers in our market area, we must increase our originations of loans of “jumbo” loans, loans where one or more characteristics of non-conforming loans, such as high debt-to-income ratios, are present but mitigated by other factors such as low loan-to-value ratios, and our niche rehabilitation-to-permanent loans in order to meet the needs of customers in our market area, subject to prudent credit risk management and underwriting policies. In addition, we expect to hire additional mortgage originators with lending experience in our market area and Boston in order to increase our origination capacity. We also believe that retention and servicing of the loans that we originate, particularly residential mortgage loans, is important to maintaining our status as a community-focused institution and preserving customer relationships. Accordingly, we intend to continue to retain in our portfolio the majority of the loans that we originate. We do not originate one- to four-family residential or other loans specifically for resale or rely on the sale of loans to generate noninterest income, and do not intend to do so in the future. However, we recognize that a policy of selling and purchasing select loans will allow us to supplement our interest income and, more importantly, manage interest rate risk. As we have done in the past, we will evaluate opportunities to sell certain long-term fixed-rate one- to four-family loans and to purchase quality residential real estate loans when such activities fulfill our asset/liability, interest rate risk and credit risk needs. We will also consider opening one or more loan production offices to increase our exposure to customers in portions of our market area without ready access to our branch offices, although we do not currently have specific plans to do so, and positioning a portion of our origination staff to these locations in order to expand our marketing reach to outlying portions of our market area.

Increasing core deposits through aggressive marketing and the offering of new deposit products. Although we have historically depended on certificate of deposits to fund our investment activity and loan originations, as well as supporting our liquidity needs, we also offer checking, NOW, savings and money market deposit accounts, which we refer to as “core” deposits. We recognize that we can obtain greater leverage from our deposits by focusing on relationship banking rather than “one product” customers that typically invest in certificates of deposits. Core deposits, which include all deposit account types except certificates of deposit, comprised 55.6% of our total deposits at March 31, 2014, down from 58.1% of total deposits at December 31, 2013. We market core deposits through the internet, in-branch and local mail, print and radio advertising, as well as programs that link various accounts and services together, minimizing service fees. We intend to pursue increased origination of these low cost deposits, with particular focus on transaction accounts, by implementing pro-active marketing and promotional programs, offering attractive interest rates, and offering competitive products to meet the needs of the demographic groups in our market areas, such as remote deposit capture for business customers, mobile banking, and broadening banking relationships with lending customers, particularly as we expand our commercial real estate, multi-family, non-owner occupied residential and construction lending. We expect to focus on employee training and development with respect to deposit generation, deposit retention and knowledge of our products and services so that our branches become sources of deposit generation. We also believe that the implementation of our strategy to increase relationship-based commercial real estate, multi-family non-owner occupied residential and construction lending and to establish additional product delivery channels and technological services such as electronic and mobile banking applications will serve to increase our core deposits. An increase in transaction deposits and relationship banking will decrease our dependence on certificates of deposit, reduce our interest rate sensitivity, and allow us to continue to utilize FHLB-Boston advances primarily for asset/liability management purposes rather than to fund our operations. Our efforts to increase deposits, including through increased lending activities, are not dependent upon the proceeds of the offering.

Continuing to improve our risk profile by managing our credit risk to maintain a low level of non-performing assets and enhancing our policies and procedures as needed. We believe that strong asset quality is a key to long-term financial success, and that managing credit risk is an essential part of successfully managing a financial institution. We have sought to grow and diversify the loan portfolio, while maintaining strong asset quality and moderate credit risk, using underwriting standards that we

 

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believe are conservative, as well as diligent monitoring of the portfolio and loans in non-accrual status and on-going collection efforts. In order to grow our loan portfolio, we must originate loans that have higher risks than conventional one- to four-family residential loans, including commercial real estate, multi-family, non-owner occupied residential and construction loans, as well as residential loans where certain characteristics of non-conforming loans are present. However, we believe that continued adherence to our philosophy of managing large loan exposures through our experienced, risk-based approach to lending will serve to mitigate the risks associated with such loans. We are committed to devoting significant resources to maintaining low levels of delinquencies and non-performing assets as we diversify our loan portfolio, and we remain acutely focused on the credit risks associated with these loans because we intend to retain the majority of these loans in our portfolio for an extended time.

Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. Specifically, we have implemented procedures to perform internal reviews of selected loans based on risk features and dollar volume. We have instituted a risk-rating matrix to appropriately identify potential risks and rate loans based on key risk characteristics. Additionally, we have implemented a policy that requires a third-party independent loan review of at least 25% of our commercial real estate, multi-family, non-owner occupied residential and construction portfolio, with a focus on new relationships, large dollar volume relationships, and identified problem loans. The loan review policy also requires a third-party review of a sample of loans originated by each loan officer. The third party reviewer provides an initial review of risk-rating conclusions and discusses its findings with management. The report is also presented to the board of directors. Final risk-rating conclusions are based on the third party reviewer’s independent research plus information provided by management. During the year ended December 31, 2013, a third party reviewed approximately $18.7 million, or approximately 40% of our commercial real estate, multi-family, non-owner occupied residential and construction loan portfolio. The third party reviewer downgraded one loan to substandard from special mention but otherwise concurred with our internal risk ratings with respect to loans reviewed in its initial findings, based on dollar amount outstanding. Accordingly, management concluded that our improved internal reviews and risk rating procedures are effective in evaluating our credit risk. We believe that policies and procedures are only effective when implemented and monitored by qualified and dedicated personnel. Accordingly, we created the position of Assistant Vice President—Credit Analyst in 2011 and maintain a staff with experience managing commercial loan administration. We expect to hire additional credit administration and collections personnel as needed to support the planned growth of our loan portfolio. We also intend to continually enhance our loan underwriting, credit administration and collection procedures, and to implement improved credit risk management and asset-liability management techniques, such as portfolio stress testing, portfolio credit analysis, and credit decision monitoring matrices. Finally, we believe that focusing on commercial lending relationships with active management teams or owners and on complete banking relationships (instead of loan only relationships) will also mitigate some of the risks associated with commercial and industrial and consumer lending.

Credit risk management also applies to our investment philosophy. We continually monitor the investment portfolio for credit risk, with a quarterly formal review by our executive committee and our asset/liability committee, which is composed of our President and Chief Executive Officer, our Senior Vice President and Chief Financial Officer, our Vice President of Commercial Lending and our Assistant Vice President—Credit Analyst, of any issuers that have heightened credit risk factors such as rating agency and analyst downgrades and declines in market valuation. We intend to replace maturing investments in 2014 as determined to be appropriate in accordance with our risk management policies, asset/liability analysis and our funding needs. We have also invested in money market mutual fund accounts in the past, which we utilize as an alternative to investing excess cash in federal funds, but do not have any positions at this time.

 

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As was the case with many financial institutions, we experienced elevated levels of problem assets following the economic downturn that began in 2008. However, as a result of our credit risk management initiatives, we have reduced classified loans to $5.7 million, or 4.3% of total loans, at March 31, 2014 from a high of $8.4 million or 7.2% of total loans in June 2012, non-performing loans to $1.7 million, or 1.3% of total loans, at March 31, 2014 from a high of $4.6 million or 4.2% of total loans in September 2012, and delinquent loans to $1.6 million, or 1.2% of total loans, at March 31, 2014 from a high of $8.3 million or 7.5% of total loans in April 2011. Classified assets other than loans totaled $175,000 at March 31, 2014 and consisted entirely of private mortgage-backed securities we obtained as a distribution in kind of securities in 2009 after the manager of a mutual fund in which we had invested restricted cash redemptions. Accordingly, we believe that our credit risk and asset quality management initiatives have been effective and, as long as we continually review, evaluate and enhance, as necessary, our policies and procedures, will continue to be effective in maintaining low levels of classified, non-performing and delinquent loans.

Develop a commercial and industrial loan origination platform in our market area, including developing an SBA loan program. Our primary immediate strategic focus will be to expand one- to four-family residential lending in our market area and increase commercial real estate, multi-family, non-owner occupied and construction lending. However, we believe that, because our market area is increasingly becoming home to a variety of small businesses in our communities that serve the residential population, it is important to develop a commercial and industrial loan origination platform as a secondary complimentary source of income in the medium term. We have recently hired a lender with significant commercial and industrial lending experience, particularly in SBA lending. We have actively participated as a lender under the SBA Section 504 lending program, and were recently approved as a lender for the Section 7a SBA program. To expand commercial and industrial lending, we intend to target small- to mid-sized commercial clients, including retail businesses and medical and other professional practices, as well as construction firms and traditional commercial businesses, located in our market area; develop loan products that will satisfy the needs of small business borrowers in our market area; and expand SBA offerings in all areas of our market area. We believe that the development of a commercial and industrial lending platform will allow us to provide additional products and services to and deepen our banking relationships with our existing and future commercial customers, including customers engaged in commercial real estate, multi-family and construction industries, and the owners and employees of such businesses.

These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated by future market conditions, regulatory restrictions and other factors. We have adopted a strategic plan to leverage the capital raised in the offering to increase our earnings base, especially the size of our loan portfolio, and therefore our profitability. Our strategic plan assumes that, beginning in 2014, we will not incur the same level of charge-offs, provisions for loan losses, write downs on real estate owned and losses on sales of real estate owned or expenses related to problem assets as we have in recent periods, and that we will not incur the non-recurring expenses related to write-downs of securities and the construction of our home office that we incurred in 2012 and 2013. However, the conversion will have a short-term adverse impact on our operating results, due to additional costs related to becoming a public company, increased compensation expenses associated with our employee stock ownership plan and the possible implementation of one or more stock-based benefit plans after the completion of the conversion. In addition, growth of earning assets is essential to our future profitability, and we expect to incur expenses related to the implementation of our growth plan, including hiring initiatives, deposit generation campaigns and the potential opening of loan production offices. We may not be able to successfully implement our strategic plan, and therefore may not operate profitably in the periods following the conversion.

 

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Critical Accounting Policies

Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 2 of the Notes to Consolidated Financial Statements included in this prospectus.

The recently enacted JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, bank regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Deferred Tax Assets. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.

 

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Anticipated Increase in Noninterest Expense

Following the completion of the conversion and offering, we anticipate that our noninterest expense will increase as a result of increased compensation expenses associated with the implementation of our employee stock ownership plan and the implementation of a stock-based incentive plan, if that incentive plan is approved by our stockholders. For further information, see “Summary—Benefits to Management and Potential Dilution to Stockholders Following the Conversion,” “Risk Factors—Risks Related to the Offering—Our stock-based benefit plans will increase our costs, which will reduce our income,” and “Management of Pilgrim Bancshares, Inc.—Benefit Plans and Agreements” and “—Benefits to be Considered Following Completion of the Offering.”

Our noninterest expense will also increase as a result of our contribution of cash and shares of common stock to our charitable foundation, and as a result of our operation as a public company. For further information, please see “Summary—Our Issuance of Cash and Shares of Our Common Stock to Pilgrim Bank Foundation,” “Risk Factors—Risks Related to Our Business—The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses” and “—Risks Related to the Offering—The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in the year we complete the offering,” and “Pilgrim Bank Foundation.”

Comparison of Financial Condition at March 31, 2014 and December 31, 2013

Total Assets. Total assets decreased $2.2 million, or 1.3%, to $169.4 million at March 31, 2014 from $171.6 million at December 31, 2013. The decrease was primarily the result of a decrease in deposits of $4.3 million as a result of customer year-end cash management, offset by increased borrowings from the Federal Home Loan Bank of Boston of $2.0 million. Loans, adjusting for loan sales during the quarter, were flat to December 31, 2013.

Cash and Cash Equivalents and Time Deposits with Other Banks. Total cash and cash equivalents decreased $389,000 or 4.3%, to $8.6 million at March 31, 2014 from $9.0 million at December 31, 2013. Time deposits with other banks decreased $746,000, or 16.5%, to $3.8 million at March 31, 2014 from $4.5 million at December 31, 2013. The decrease in total cash and cash equivalents reflected ordinary cash management activities and the decrease in time deposits with other banks reflected their maturation.

Net Loans. Net loans decreased $468,000, or 0.4%, to $132.5 million at March 31, 2014 from $132.9 million at December 31, 2013. During the three months ended March 31, 2014, one- to four-family residential real estate loans decreased $653,000, or 0.7%, to $91.7 million at March 31, 2014 from $92.4 million at December 31, 2013, commercial real estate loans decreased $1.3 million, or 6.7%, to $18.1 million at March 31, 2014 from $19.4 million at December 31, 2013, home equity loans and lines of credit decreased $628,000, or 15.8%, to $3.3 million at March 31, 2014 from $4.0 million at December 31, 2013 and consumer loans decreased $242,000, or 12.5%, to $1.7 million at March 31, 2014 from $1.9 million at December 31, 2013, while construction loans increased $2.1 million, or 58.7%, to $5.6 million at March 31, 2014 from $3.5 million at December 31, 2013 and commercial and industrial loans increased $132,000, or 5.3%, to $2.6 million at March 31, 2014 from $2.5 million at December 31, 2013. Over $3.5 million in new originations were offset by $3.0 million of loan payoffs and amortizations, and the sale of $499,000 of mortgages to the FHLB.

Investment Securities. Investment securities classified as available-for-sale decreased $938,000 or 7.0%, to $12.6 million at March 31, 2014 from $13.5 million at December 31, 2013, due to the redemption of a mutual fund position after being notified the fund would be closed. Investment securities classified as held-to-maturity decreased $12,000 or 4.7%, to $242,000 at March 31, 2014 from $254,000 at December 31, 2013 due to maturities in the ordinary course of business. At March 31, 2014, investment

 

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securities classified as available-for-sale consisted primarily of debt securities issued by the U.S. Treasury and U.S. government corporations and agencies, debt securities issued by states and political subdivisions, and government-sponsored mortgage-backed securities, with a focus on suitable government-sponsored securities to augment risk-based capital.

Bank Owned Life Insurance. Bank-owned life insurance (“BOLI”) at March 31, 2014 was essentially flat at $2.2 million compared to December 31, 2013 as balances increased $12,000, or 0.6%, due to normal increases in cash surrender value.

Deposits. Deposits decreased $4.3 million, or 2.8%, to $149.4 million at March 31, 2014 from $153.7 million at December 31, 2013. During the three months ended March 31, 2014, demand deposits decreased $580,000, or 4.8%, to $11.4 million from $12.0 million, NOW account deposits decreased $1.3 million, or 6.4%, to $18.7 million from $20.0 million, savings accounts decreased $1.0 million, or 5.6%, to $16.3 million from $17.3 million, money market accounts decreased $3.3 million, or 8.4%, to $36.6 million from $39.9 million, while certificates of deposit increased $1.8 million, or 2.8%, to $66.3 million from $64.5 million. Our core deposits, which we consider to be our noninterest demand accounts, NOW accounts, savings accounts and money market accounts, decreased $6.1 million, or 6.8%, to $83.1 million at March 31, 2014 from $89.2 million at December 31, 2013. The decreases in core deposits reflected normal post year end activity, particularly in DDA and NOW accounts. The growth in certificates of deposit resulted from a promotional campaign to attract new customers to the bank and grow IRA certificate of deposit balances during tax season.

Other Liabilities. Federal Home Loan Bank advances increased $2.0 million, or 40.0%, to $7.0 million at March 31, 2014 from $5.0 million at December 31, 2013, which reflects management’s efforts to manage our balance sheet and our asset/liability position. The advances were short term advances. Other liabilities, which include interest payable, accruals for employee pension and medical plans and normal accruals for expenses, decreased $54,000, or 16.9%, to $266,000 at March 31, 2014 from $320,000 at December 31, 2013, reflecting routine timing fluctuations.

Total Equity. Total equity increased $222,000, or 1.8%, to $12.7 million at March 31, 2014 from $12.5 million at December 31, 2013. The increase resulted from net income of $126,000 during the three months ended March 31, 2014, and a decrease of $96,000 in accumulated other comprehensive loss due to a decrease in the net unrealized loss position of our available-for-sale investment securities portfolio.

Comparison of Financial Condition at December 31, 2013 and December 31, 2012

Total Assets. Total assets decreased $985,000, or 0.6%, to $171.6 million at December 31, 2013 from $172.5 million at December 31, 2012. The decrease was primarily the result of a decrease in cash and cash equivalents caused by decreases of deposits of $2.9 million as we managed our asset base in order to maintain our Tier 1 capital ratio and reduce our exposure to single product certificate of deposit customers. In addition, we increased borrowings from the Federal Home Loan Bank of Boston by $1.7 million to reduce funding costs.

Cash and Cash Equivalents and Time Deposits. Total cash and cash equivalents decreased $12.1 million, or 57.3%, to $9.0 million at December 31, 2013 from $21.1 million at December 31, 2012. Time deposits decreased $6.2 million, or 57.9%, to $4.5 million at December 31, 2013 from $10.7 million at December 31, 2012. The decrease in total cash and cash equivalents and time deposits reflected the maturation of time deposits, an increase of $20.3 million in net loans and normal year-end cash management.

 

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Net Loans. Net loans increased $20.3 million, or 18.0%, to $132.9 million at December 31, 2013 from $112.6 million at December 31, 2012. During the year ended December 31, 2013, one- to four-family residential real estate loans increased $16.2 million, or 21.3%, to $92.4 million at December 31, 2013 from $76.2 million at December 31, 2012, commercial real estate loans increased $3.7 million, or 19.1%, to $19.4 million at December 31, 2013 from $15.7 million at December 31, 2012 and commercial and industrial loans increased $354,000, or 16.4%, to $2.5 million at December 31, 2013 from $2.2 million at December 31, 2012, while construction loans decreased $1.5 million, or 30.0%, to $3.5 million at December 31, 2013 from $5.0 million at December 31, 2012, home equity loans and lines of credit decreased $772,000, or 16.3%, to $4.0 million at December 31, 2013 from $4.7 million at December 31, 2012 and consumer loans decreased $1.0 million, or 34.5%, to $1.9 million at December 31, 2013 from $2.9 million at December 31, 2012. Increases in loan origination reflect strong growth in demand for loans in our market area in the current low interest rate environment, particularly one- to four-family residential, non-owner occupied residential, commercial real estate and multi-family loans, as well as our decision to grow loans during this time of strong demand. In addition, we continued to purchase high quality loans, particularly jumbo loans, in order to complement our loan originations.

Investment Securities. Investment securities classified as available-for-sale decreased $2.2 million, or 14.0%, to $13.5 million at December 31, 2013 from $15.7 million at December 31, 2012, as management sold these securities to generate cash to deploy in lending activities. Investment securities classified as held-to-maturity decreased $142,000, or 35.9%, to $254,000 at December 31, 2013 from $396,000 at December 31, 2012 due to maturities in the ordinary course of business and write-downs of impaired securities in the amount of $247,000. At December 31, 2013, investment securities classified as available-for-sale consisted primarily of debt securities issued by the U.S. Treasury and U.S. government corporations and agencies, debt securities issued by states and political subdivisions, and government-sponsored mortgage-backed securities, with a focus on suitable government-sponsored securities to augment risk-based capital.

Bank Owned Life Insurance. Bank-owned life insurance (“BOLI”) increased $52,000, or 2.4%, to $2.2 million at December 31, 2013 from $2.1 million at December 31, 2012 due to normal increases in cash surrender value.

Deposits. Deposits decreased $3.0 million, or 1.9%, to $153.7 million at December 31, 2013 from $156.7 million at December 31, 2012. During the year ended December 31, 2013, demand deposits increased $3.0 million, or 34.1%, to $12.0 million from $9.0 million, NOW account deposits increased $496,000, or 2.5%, to $20.0 million from $19.5 million, savings accounts increased $257,000, or 1.5%, to $17.3 million from $17.0 million, money market accounts decreased $1.5 million, or 3.6%, to $39.9 million from $41.4 million and certificates of deposit decreased $5.3 million, or 7.6%, to $64.5 million from $69.8 million. Our core deposits, which we consider to be our noninterest demand accounts, NOW accounts, savings accounts and money market accounts, increased $2.4 million, or 2.8%, to $89.3 million at December 31, 2013 from $86.9 million at December 31, 2012. The decreases in certificates of deposit resulted primarily from management’s efforts to manage our balance sheet in order to improve capital ratios and reduce expenses, and were offset by increased deposits from commercial real estate, multi-family and non-owner occupied residential real estate borrowers who opened deposit accounts with us in connection with new loan originations.

Other Liabilities. Federal Home Loan Bank advances increased $1.7 million, or 51.5%, to $5.0 million at December 31, 2013 from $3.3 million at December 31, 2012, which reflects management’s efforts to manage our balance sheet and our asset/liability position. Other liabilities, which include interest payable, accruals for employee pension and medical plans and normal accruals for expenses, increased $113,000, or 54.6%, to $320,000 at December 31, 2013 from $207,000 at December 31, 2012, reflecting routine timing fluctuations.

 

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Total Equity. Total equity increased $130,000, or 1.1%, to $12.5 million at December 31, 2013 from $12.4 million at December 31, 2012. The increase resulted primarily from net income of $368,000 during the year ended December 31, 2013, offset by a decrease of $238,000 in accumulated other comprehensive income due to an increase in the net unrealized loss position of our available-for-sale investment securities portfolio.

Comparison of Operating Results for the Three Months Ended March 31, 2014 and March 31, 2013

General. Net income for the three months ended March 31, 2014 was $126,000, compared to net income of $48,000 for the three months ended March 31, 2013. The increase in net income was primarily due to an $179,000 increase in net interest income as a result of increased loans and lower deposit costs and a decrease in provision of $36,000, offset by a decrease in gains from the sale of other real estate owned of $64,000 that was recognized in 2013.

Interest and Dividend Income. On a tax-equivalent basis, total interest and dividend income for the three months ended March 31, 2014 increased $129,000, or 9.0%, to $1.6 million compared to $1.4 million for the three months ended March 31, 2013. The increase in interest income was the result of a $156,000 increase in interest on loans offset by a $27,000 decrease in interest on investment securities and interest earning deposits. The average balance of loans during the three months ended March 31, 2014 increased $19.2 million to $133.2 million from $114.0 million for the three months ended March 31, 2013, while the average yield on loans decreased by 20 basis points to 4.40% for the three months ended March 31, 2014 from 4.60% for the three months ended March 31, 2013. The decrease in yield reflected the lower market rates for originated loans in 2014 compared to 2013. The average balance of investment securities decreased $2.5 million to $13.0 million for the three months ended March 31, 2014 from $15.5 million for the three months ended March 31, 2013, and the yield on investment securities (on a tax-equivalent basis) increased by 14 basis points to 2.49% for the three months ended March 31, 2014 from 2.35% for the three months ended March 31, 2013.

Interest Expense. Total interest expense decreased $50,000, or 16.0%, to $262,000 for the three months ended March 31, 2014 from $312,000 for the three months ended March 31, 2013. Interest expense on interest-bearing deposit accounts decreased $50,000, or 16.9%, to $246,000 for the three months ended March 31, 2014 from $296,000 for the three months ended March 31, 2013. The decrease was primarily due to the impact of maturing certificates of deposit renewing at lower rates, shift in deposit mix toward core deposits and deposit rate reductions in core deposits.

Interest expense on Federal Home Loan Bank of Boston advances of $16,000 for the three months ended March 31, 2014 was flat compared to the three months ended March 31, 2013. The average balance of advances increased by $3.3 million to $6.6 million for the three months ended March 31, 2014 from $3.3 million for the three months ended March 31, 2013, as we drew advances and used the cash for funding loan production, deposit withdrawals and operating cash management. The cost decreased 100 basis points to 0.97% for the three months ended March 31, 2014 from 1.97% for the three months ended March 31, 2013.

Net Interest and Dividend Income. On a tax-equivalent basis, net interest and dividend income increased $179,000, or 16.0%, for the three months ended March 31, 2014 from the three months ended March 31, 2013. The increase resulted primarily from a $129,000 increase in interest income and a $50,000 decrease in interest expense. Our average interest-earning assets decreased $3.3 million to $156.2 million for the three months ended March 31, 2014 from $159.5 million for the three months ended March 31, 2013, but our net interest rate spread increased 51 basis points to 3.26% for the three months ended March 31, 2014 from 2.75% for the three months ended March 31, 2013. Our net interest margin increased 52 basis points to 3.32% for the three months ended March 31, 2014 from 2.80% for the three months ended March 31, 2013. The improvement in our interest rate spread and net interest margin reflected the shift of earning assets to loans from interest bearing deposits in addition to the repricing of our interest-bearing liabilities in a decreasing interest rate environment. In addition, we benefited from the repricing of long-term certificates of deposit at maturity in the ordinary course.

 

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Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” we did not record a provision for loan losses for the three months ended March 31, 2014, compared to a provision of $36,000 for the three months ended March 31, 2013. We analyze our allowance for loan losses on a monthly basis and we expect to resume recording provisions for loan losses when consistent with our loan origination and credit risk. The fact that we did not record a provision for loan losses for the three months ended March 31, 2014 reflected net charge-offs of $0 for the three months ended March 31, 2014 compared to net charge-offs of $43,000 for the three months ended March 31, 2013. The allowance for loan losses was $742,000 or 0.56% of total loans at March 31, 2014 compared to $781,000, or 0.66% of total loans at March 31, 2013. Total non-performing loans were $1.7 million at March 31, 2014 compared to $3.7 million at March 31, 2013. As a percentage of non-performing loans, the allowance for loan losses was 44.8% at March 31, 2014 compared to 21.0% at March 31, 2013. Total classified loans were $5.7 million at March 31, 2014 compared to $8.6 million at March 31, 2013. The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses, which were inherent in the loan portfolio at March 31, 2014 and March 31, 2013.

Noninterest Income. Noninterest income decreased $48,000, or 25.7%, to $139,000 for the three months ended March 31, 2014 from $187,000 for the three months ended March 31, 2013. The decrease was primarily related to a decrease in the gain on OREO property of $64,000 to $0 for the three months ended March 31, 2014 from $64,000 for the three months ended March 31, 2013 resulting from the sale of other real estate owned. This decrease in other noninterest income was offset by an increase in gains on sales of loans of $19,000 and an increase in rental income of $7,000 to $59,000 for the three months ended March 31, 2014 from $52,000 for the three months ended March 31, 2013.

Noninterest Expense. Noninterest expense increased $16,000 to $1.2 million for the three months ended March 31, 2014 from $1.2 million for the three months ended March 31, 2013. The increase primarily reflected increases in salaries and employee benefits expense of $51,000, occupancy and equipment expense of $10,000 and $12,000 in data processing expense, offset by decreases in FDIC assessments of $21,000, and a decrease of $33,000 in other expense, which consisted primarily of a decrease in other real estate owned expenses.

Income Taxes. Income tax expense was $85,000 for the three months ended March 31, 2014 compared to $12,000 for the three months ended March 31, 2013. The effective tax rate as a percent of pre-tax income was 40.2% and 19.3% for the three months ended March 31, 2014 and 2013, respectively. The increase in the effective tax rate for the three months ended March 31, 2014 was due to an increase in income before taxes to $211,000 from $60,000. We performed an evaluation of our deferred tax assets at March 31, 2014 and March 31, 2013. In making the determination whether a deferred tax asset is more likely than not to be realized, we seek to evaluate all available positive and negative evidence including the possibility of future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results. A deferred tax asset valuation allowance is established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the deferred tax asset will not be realized. At each of March 31, 2014 and March 31, 2013, our deferred tax asset valuation allowance was $14,000 and $381,000, respectively, reducing our net deferred tax asset to $300,000 and $190,000, respectively, at those dates. The deferred tax asset valuation allowance relates to uncertainty regarding the utilization of the capital loss carry forwards related to security sales. At March 31, 2014, capital loss carryovers were $230,000, which are due to expire in the years 2016 through 2019.

 

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Comparison of Operating Results for the Years Ended December 31, 2013 and December 31, 2012

General. Net income for the year ended December 31, 2013 was $368,000, compared to net income of $742,000 for the year ended December 31, 2012. The decrease in net income was primarily due to a write-down of securities of $247,000 in the year ended December 31, 2013 compared to a write-down of securities of $52,000 in the year ended December 31, 2012, a decrease of $362,000, or 95.5%, in gains on sale of mortgages to $17,000 from $379,000, and an increase in expenses of $188,000, or 4.3%, to $4.6 million from $4.4 million, offset by a decrease of $156,000 in provision for loan losses to $0 from $156,000 and an increase of $75,000 in gains from the sale of other real estate owned to $121,000 from $46,000.

Interest and Dividend Income. On a tax-equivalent basis, total interest and dividend income remained relatively stable at $6.0 million for the year ended December 31, 2013 and the year ended December 31, 2012. The slight decrease in interest income was the result of a $62,000 increase in interest on loans and a $119,000 decrease in interest on investment securities. The average balance of loans during the year ended December 31, 2013 increased $12.8 million to $124.3 million from $111.5 million for the year ended December 31, 2012, while the average yield on loans decreased by 46 basis points to 4.51% for the year ended December 31, 2013 from 4.97% for the year ended December 31, 2012. The decrease in yield reflected the lower market rates for originated loans in 2012 and early 2013. The average balance of investment securities decreased $4.3 million to $14.2 million for the year ended December 31, 2013 from $18.5 million for the year ended December 31, 2012, and the yield on investment securities (on a tax-equivalent basis) decreased by 8 basis points to 2.43% for the year ended December 31, 2013 from 2.51% for the year ended December 31, 2012.

Interest Expense. Total interest expense decreased $139,000, or 10.6%, to $1.2 million for the year ended December 31, 2013 from $1.3 million for the year ended December 31, 2012. Interest expense on interest-bearing deposit accounts decreased $137,000, or 11.0%, to $1.1 million for the year ended December 31, 2013 from $1.2 million for the year ended December 31, 2012. The decrease was primarily due to the impact of maturing certificates of deposit renewing at lower rates, shift in deposit mix toward core deposits and deposit rate reductions in core deposits.

Interest expense on Federal Home Loan Bank of Boston advances decreased $2,000 to $65,000 for the year ended December 31, 2013 from $67,000 for the year ended December 31, 2012. The average balance of advances increased by $640,000 to $4.1 million for the year ended December 31, 2013 from $3.5 million for the year ended December 31, 2012, as we drew advances and used the cash for funding loan production, deposit withdrawals and operating cash management. The cost decreased 36 basis points to 1.58% for the year ended December 31, 2013 from 1.94% for the year ended December 31, 2012.

Net Interest and Dividend Income. On a tax-equivalent basis, net interest and dividend income increased $68,000, or 1.4%, for the year ended December 31, 2013 from the year ended December 31, 2012. The increase resulted primarily from a $139,000 decrease in interest expense, which was offset by a $71,000 decrease in interest income. Our average interest-earning assets increased to $159.0 million for the year ended December 31, 2013 from $155.5 million for the year ended December 31, 2012, and our net interest rate spread decreased 4 basis points to 2.99% for the year ended December 31, 2013 from 3.03% for the year ended December 31, 2012. Our net interest margin decreased slightly to 3.05% for the year ended December 31, 2013 from 3.07% for the year ended December 31, 2012. The stability in our interest rate spread and net interest margin reflected primarily the management of the repricing of our interest-bearing liabilities and our interest-earning assets in a decreasing interest rate environment, including the increase in loan origination. In addition, we benefited from the repricing of long-term certificates of deposit at maturity in the ordinary course.

 

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Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” we did not record a provision for loan losses for the year ended December 31, 2013, compared to a provision of $156,000 for the year ended December 31, 2012. We analyze our allowance for loan losses on a monthly basis and we expect to resume recording provisions for loan losses when consistent with our loan origination and credit risk. The fact that we did not record a provision for loan losses for the year ended December 31, 2013 reflected net charge-offs of $46,000 for the year compared to net charge-offs of $230,000 for the year ended December 31, 2012. The allowance for loan losses was $742,000 or 0.56% of total loans at December 31, 2013 compared to $788,000, or 0.69% of total loans at December 31, 2012. Total non-performing loans were $2.4 million at December 31, 2013 compared to $4.7 million at December 31, 2012. As a percentage of non-performing loans, the allowance for loan losses was 31.6% at December 31, 2013 compared to 16.9% at December 31, 2012. Total classified loans were $6.6 million at December 31, 2013 compared to $9.5 million at December 31, 2012. The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses, which were inherent in the loan portfolio at December 31, 2013 and 2012.

Noninterest Income. Noninterest income decreased $626,000, or 64.1%, to $351,000 for the year ended December 31, 2013 from $977,000 for the year ended December 31, 2012. The decrease was primarily related to a decrease in the gain on sale of loans of $379,000 to $0 for the year ended December 31, 2013 from $379,000 for the year ended December 31, 2012 as an increase in interest rates caused a decline in refinancing activity and we elected to retain loans in 2013 instead of selling as we did in 2012. We also experienced an increase in the write-down on securities of $195,000 to $247,000 for the year ended December 31, 2013 from $52,000 for the year ended December 31, 2012, which was primarily related to a write-down of $218,000 on mutual fund securities. Additionally, there was a $88,000 decrease in net gain on sales and calls of securities to $5,000 for the year ended December 31, 2013 from $93,000 for the year ended December 31, 2012, resulting from market conditions, and a decrease in rental income of $41,000 to $204,000 for the year ended December 31, 2013 from $245,000 for the year ended December 31, 2012 resulting from the sale of other real estate owned and the payment by one tenant in 2012 of a significant amount of past due maintenance expenses from 2011. These decreases in noninterest income were offset by an increase in other income, which consisted primarily of an increase of $75,000 in gains on the sale of other real estate owned to $121,000 for the year ended December 31, 2013 from $46,000 for the year ended December 31, 2012.

Noninterest Expense. Noninterest expense increased $188,000 to $4.3 million for the year ended December 31, 2013 from $4.4 million for the year ended December 31, 2012. The increase primarily reflected increases in salaries and employee benefits expense of $159,000, occupancy and equipment expense of $101,000, and $44,000 in data processing expense, offset by slight decreases in professional fees, communications and supplies expenses, and a decrease of $78,000 in other expense, which consisted primarily of a decrease in other real estate owned expenses.

Income Taxes. Income tax expense was $160,000 for the year ended December 31, 2013 compared to $387,000 for the year ended December 31, 2012. The effective tax rate as a percent of pre-tax income was 30.3% and 34.3% for the years ended December 31, 2013 and 2012, respectively. The decrease in the effective tax rate for 2013 was due to a decrease in income before taxes to $528,000 from $1.1 million. We performed an evaluation of our deferred tax assets at December 31, 2013 and December 31, 2012. In making the determination whether a deferred tax asset is more likely than not to be realized, we seek to evaluate all available positive and negative evidence including the possibility of future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results. A deferred tax asset valuation allowance is established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the deferred tax asset will not be realized. At each of December 31, 2013 and December 31, 2012, our deferred tax asset valuation allowance was $1,000 and $381,000, respectively, reducing our net

 

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deferred tax asset to $365,000 and $156,000, respectively, at those dates. The deferred tax asset valuation allowance relates to uncertainty regarding the utilization of the capital loss carry forwards related to security sales. Approximately $87,000 of our net deferred tax asset at December 31, 2013 related to the $218,000 write-down of our mutual fund investment managed by Shay Financial. As a result of the termination of this mutual fund investment in January 2014, we must generate future capital gains in order to utilize this portion of our deferred tax asset, which expires during the year ending December 31, 2019.

Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information at March 31, 2014 and for the periods indicated. Tax-equivalent yield adjustments have been made because we had tax-free interest-earning assets during the years. 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.

 

    At
March 31,
2014
    For the Three Months Ended March 31,  
      2014     2013  
      Average
Outstanding
Balance
    Interest     Average
Yield/Rate
(1)
    Average
Outstanding
Balance
    Interest     Average
Yield/Rate
(1)
 
  Yield/Rate              
    (Dollars in thousands)  

Interest-earning assets:

             

Loans

    4.38   $ 133,232      $ 1,466        4.40   $ 113,968      $ 1,310        4.60

Interest-earning deposits

    0.35     8,897        8        0.36     28,943        27        0.37

Investment securities (2)

    2.76     13,037        81        2.49     15,480        91        2.35

Federal Home Loan Bank stock and The Co-Operative Central Reserve Fund

    0.94     1,056        3        1.14     1,113        1        0.36
   

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    3.96     156,222        1,558        3.99     159,504        1,429        3.58
     

 

 

       

 

 

   

Noninterest-earning assets

      12,010            12,795       
   

 

 

       

 

 

     

Total assets

    $ 168,232          $ 172,299       
   

 

 

       

 

 

     

Interest-bearing liabilities:

             

Savings accounts

    0.20   $ 16,324        8        0.20   $ 17,464        9        0.21

NOW accounts

    0.10     18,138        4        0.09     18,523        4        0.09

Money market accounts

    0.38     37,226        35        0.38     40,993        47        0.46

Certificates of deposit

    1.25     65,297        199        1.22     70,655        236        1.34
   

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

    0.74     136,985        246        0.72     147,635        296        0.80

Federal Home Loan Bank advances

    0.96     6,578        16        0.97     3,251        16        1.97
   

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    0.75     143,563        262        0.73     150,886        312        0.83
   

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-bearing liabilities:

             

Noninterest-bearing deposits

      11,684            8,775       

Other noninterest-bearing liabilities

      356            306       
   

 

 

       

 

 

     

Total noninterest-bearing liabilities

      12,040            9,081       
   

 

 

       

 

 

     

Total liabilities

      155,603            159,967       

Total equity

      12,629            12,332       
   

 

 

       

 

 

     

Total liabilities and total equity

    $ 168,232          $ 172,299       
   

 

 

       

 

 

     

Net interest income

      $ 1,296          $ 1,117     
     

 

 

       

 

 

   

Net interest rate spread (3)

          3.26         2.75

Net interest-earning assets (4)

    $ 12,659          $ 8,618       
   

 

 

       

 

 

     

Net interest margin (5)

          3.32         2.80

Average interest-earning assets to interest-bearing liabilities

      108.82         105.71    

 

(1) Yields and rates are annualized.
(2) Includes securities available-for-sale and held-to-maturity. A tax equivalent adjustment of $15,000 and $15,000 was applied to tax-exempt income for the three months ended March 31, 2014 and March 31, 2013, 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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The following tables set forth average balance sheets, average yields and costs, and certain other information at December 31, 2013 and for the periods indicated. Tax-equivalent yield adjustments have been made because we had tax-free interest-earning assets during the years. 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.

 

     At
December 31,
2013
    For the Year Ended December 31,  
       2013     2012  
       Average
Outstanding
Balance
    Interest      Average
Yield/Rate
    Average
Outstanding
Balance
    Interest      Average
Yield/Rate
 
   Yield/Rate                
     (Dollars in thousands)  

Interest-earning assets:

                

Loans

     4.35   $ 124,298      $ 5,600         4.51   $ 111,492      $ 5,538         4.97

Interest-earning deposits

     0.38     19,410        74         0.38        24,284        85         0.35   

Investment securities (1)

     2.82     14,248        346         2.43        18,526        465         2.51   

Federal Home Loan Bank stock and The Co-Operative Central Reserve Fund

     0.25     1,055        3         0.28        1,165        6         0.52   
    

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     3.80     159,011        6,023         3.79        155,467        6,094         3.92   
      

 

 

        

 

 

    

Noninterest-earning assets

       12,276             13,394        
    

 

 

        

 

 

      

Total assets

     $ 171,287           $ 168,861        
    

 

 

        

 

 

      

Interest-bearing liabilities:

                

Savings accounts

     0.20   $ 17,323        34         0.20   $ 16,609        33         0.20

NOW accounts

     0.10     17,390        19         0.11        17,017        18         0.11   

Money market accounts

     0.40     39,799        164         0.41        37,994        197         0.52   

Certificates of deposit

     1.25     68,985        893         1.29        72,215</