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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2014

OR

 

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

For the transition period from                      to                     

Commission File No. 000-55290

 

 

Pilgrim Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland		46-5110553
(State or other jurisdiction of in Company or organization)		(I.R.S. Employer Identification Number)
40 South Main Street, Cohasset, Massachusetts		02025
(Address of Principal Executive Offices)		Zip Code

(781) 383-0541

(Registrant’s telephone number)

N/A

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 smaller reporting company)		Smaller reporting company		x

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

As of November 12, 2014, 2,247,589 shares of the Registrant’s Common Stock, par value of $0.01 per share, were issued and outstanding.

 

 

 

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Pilgrim Bancshares, Inc.

Form 10-Q

Index

 

				Page
Part I. Financial Information
Item 1.		Consolidated Financial Statements
		Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013			5
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)			6
		Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)			7
		Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2014 and September  30, 2013 (unaudited)			8
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and September 30, 2013 (unaudited)			9
		Notes to Consolidated Financial Statements (unaudited)			10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			46
Item 4.		Controls and Procedures			46

 

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Part II. Other Information
Item 1.		Legal Proceedings			47
Item 1A.		Risk Factors			47
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3.		Defaults upon Senior Securities			47
Item 4.		Mine Safety Disclosures			48
Item 5.		Other Information			48
Item 6.		Exhibits			48
		Signature Page			49

 

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EXPLANATORY NOTE

Pilgrim Bancshares, Inc., a Maryland corporation, was formed on February 27, 2014 to serve as the stock holding company for Pilgrim Bank, a Massachusetts-chartered co-operative bank (the “Bank”), as part of the mutual-to-stock conversion of Conahasset Bancshares, MHC, the former mutual holding company of the Bank. As of September 30, 2014, the conversion had not been completed, and, as of that date, Pilgrim Bancshares, Inc. had no assets or liabilities, and had not conducted any business other than that of an organizational nature. Accordingly, financial and other information of Conahasset Bancshares, MHC on a consolidated basis is included in this Quarterly Report on Form 10-Q. The conversion was completed on October 10, 2014.

 

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Part I. - Financial Information

CONAHASSET BANCSHARES, MHC AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

		September 30, 2014				December 31, 2013
		(unaudited)
ASSETS
Cash and due from banks		$	1,618			$	1,671
Interest-bearing demand deposits with other banks			33,038				7,320
Cash and cash equivalents			34,656				8,991
Interest-bearing time deposits with other banks			2,823				4,511
Investments in available-for-sale securities (at fair value)			12,569				13,496
Investments in held-to-maturity securities (fair value of $253 at September 30, 2014 (unaudited), and $284 at December 31, 2013)			203				254
Federal Home Loan Bank stock, at cost			694				667
Investment in The Co-operative Central Reserve Fund, at cost			384				384
Loans, net of allowance for loan losses of $743 at September 30, 2014 (unaudited), and $742 at December 31, 2013			131,881				132,923
Premises and equipment, net			5,470				5,571
Investment in real estate, net			1,634				1,662
Accrued interest receivable			458				399
Deferred income tax asset, net			284				365
Bank-owned life insurance			2,217				2,181
Other assets			1,257				152
Total assets		$	194,530			$	171,556
LIABILITIES AND EQUITY
Deposits:
Noninterest-bearing		$	12,501			$	12,023
Interest-bearing			167,693				141,709
Total deposits			180,194				153,732
Federal Home Loan Bank advances			1,000				5,000
Other liabilities			280				320
Total liabilities			181,474				159,052
Equity:
Retained earnings			13,150				12,718
Accumulated other comprehensive loss			(94	)			(214	)
Total equity			13,056				12,504
Total liabilities and equity		$	194,530			$	171,556

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

 

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CONAHASSET BANCSHARES, MHC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
		(unaudited)								(unaudited)
Interest and dividend income:
Interest and fees on loans		$	1,414			$	1,429			$	4,274			$	4,170
Interest on debt securities:
Taxable			47				47				136				146
Tax-exempt			15				22				55				67
Other interest and dividends			13				15				37				65
Total interest and dividend income			1,489				1,513				4,502				4,448
Interest expense:
Interest on deposits			266				273				770				853
Interest on Federal Home Loan Bank advances			7				16				37				49
Total interest expense			273				289				807				902
Net interest and dividend income			1,216				1,224				3,695				3,546
Provision for loan losses			—				36				—				165
Net interest and dividend income after provision for loan losses			1,216				1,188				3,695				3,381
Noninterest income:
Service charges on deposit accounts			29				36				90				104
Net gain on sales and calls of securities			1				1				69				8
Writedown of securities (includes losses of $12 and $12, net of $0 and $0 recognized in other comprehensive income for the nine month period ended September 30, 2014 and 2013, respectively, before taxes)			—				—				(12	)			(12	)
Gain on sales of loans, net			—				—				48				—
Rental income			67				50				193				153
Other income			31				34				95				224
Total noninterest income			128				121				483				477
Noninterest expense:
Salaries and employee benefits			649				646				2,005				1,969
Occupancy expense			110				112				369				355
Equipment expense			45				44				124				120
Data processing expense			98				82				285				249
Professional fees			79				67				213				202
FDIC assessment			36				59				97				176
Communications expense			29				24				88				71
Advertising and public relations expense			16				13				61				55
Insurance expense			17				17				50				49
Supplies expense			14				15				45				39
Other expense			51				44				162				177
Total noninterest expense			1,144				1,123				3,499				3,462
Income before income taxes			200				186				679				396
Income tax expense			69				61				247				119
Net income		$	131			$	125			$	432			$	277

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

 

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CONAHASSET BANCSHARES, MHC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

 

		Three Months Ended September 30								Nine Months Ended September 30,
		2014				2013				2014				2013
		(unaudited)								(unaudited)
Net income		$	131			$	125			$	432			$	277
Other comprehensive (loss) income, net of tax:
Net unrealized holding (loss) gain on available-for-sale securities		$	(29	)		$	(91	)		$	261			$	(501	)
Reclassification adjustment for net realized gains in net income(1)			(1	)			(1	)			(69	)			(8	)
Other comprehensive (loss) income before income tax effect			(30	)			(92	)			192				(509	)
Income tax benefit (expense)			11				33				(72	)			190
Other comprehensive (loss) income, net of tax			(19	)			(59	)			120				(319	)
Comprehensive income (loss)		$	112			$	66			$	552			$	(42	)

 

(1)

Reclassification adjustments are comprised of realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive loss and have affected certain lines in the consolidated statements of income as follows; the pre-tax amount is included in net gain on sales and calls of securities, the tax expense amount is included in income tax expense and the after tax amount is included in net income.

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

 

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CONAHASSET BANCSHARES, MHC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Nine Months Ended September 30, 2014 and 2013 (unaudited)

(In Thousands)

 

		Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
Balance, December 31, 2012		$	12,350			$	24			$	12,374
Net income			277				—				277
Other comprehensive loss, net of tax effect			—				(319	)			(319	)
Balance, September 30, 2013 (unaudited)		$	12,627			$	(295	)		$	12,332
Balance, December 31, 2013		$	12,718			$	(214	)		$	12,504
Net income			432				—				432
Other comprehensive income, net of tax effect			—				120				120
Balance, September 30, 2014 (unaudited)		$	13,150			$	(94	)		$	13,056

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

 

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CONAHASSET BANCSHARES, MHC AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

		Nine Months Ended September 30,
		2014				2013
		(unaudited)
Cash flows from operating activities:
Net income		$	432			$	277
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Capitalized interest - interest-bearing time deposits			(5	)			(15	)
Amortization of securities, net			70				97
Net gain on sales and calls of securities			(69	)			(8	)
Loans originated for sale			(1,800	)			—
Proceeds from sales of loans originated for sale			1,848				—
Gain on sales of loans			(48	)			—
Writedown of securities			12				12
Provision for loan losses			—				165
Change in deferred origination fees, costs and discounts, excluding purchase discounts			(9	)			(317	)
Gain on sale of other real estate owned			—				(121	)
Writedown of other real estate owned			—				229
Depreciation and amortization			248				241
Increase in accrued interest receivable			(59	)			(12	)
(Increase) decrease in other assets			(1,096	)			209
(Increase) decrease in prepaid expenses			(9	)			160
Deferred tax expense (benefit)			9				(165	)
Increase in bank-owned life insurance			(36	)			(43	)
(Decrease) increase in other liabilities			(39	)			88
(Decrease) increase in accrued expenses			—				84
Net cash (used in) provided by operating activities			(551	)			881
Cash flows from investing activities:
Proceeds from redemption and maturities of interest-bearing time deposits			1,693				3,997
Purchase of Federal Home Loan Bank stock			(170	)			(26	)
Redemption of Federal Home Loan Bank stock			143				116
Purchases of available-for-sale securities			(2,797	)			(3,897	)
Proceeds from maturities of available-for-sale securities			1,191				1,530
Proceeds from sales of available-for-sale securities			2,718				3,575
Principal payments received on held-to-maturity securities			45				95
Loan principal collections and originations, net			7,812				(6,524	)
Loans purchased			(6,763	)			(11,037	)
Recoveries on loans previously charged off			1				5
Capital expenditures			(119	)			(187	)
Proceeds from the sale of other real estate owned			—				922
Net cash provided by (used in) investing activities			3,754				(11,431	)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and savings accounts			22,702				(1,016	)
Net increase (decrease) in time deposits			3,760				(1,999	)
Payments on Federal Home Loan Bank long-term advances			(1,500	)			(751	)
Net change in short-term Federal Home Loan Bank advances			(2,500	)			3,000
Net cash provided by (used in) financing activities			22,462				(766	)
Net increase (decrease) in cash and cash equivalents			25,665				(11,316	)
Cash and cash equivalents at beginning of period			8,991				21,141
Cash and cash equivalents at end of period		$	34,656			$	9,825
Supplemental disclosures:
Interest paid		$	812			$	902
Income taxes paid			186				55
Transfer from loans to other real estate owned			—				785

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

 

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CONAHASSET BANCSHARES, MHC AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF OPERATIONS

Conahasset Bancshares, MHC (the “Company”), a Massachusetts chartered mutual holding company, and its wholly-owned subsidiary, Conahasset Bancshares, Inc., a Maryland chartered mid-tier stock holding company, were formed on January 26, 2010. Pilgrim Bank (the “Bank”) is a wholly-owned subsidiary of Conahasset Bancshares, Inc. The Company is headquartered in Cohasset, Massachusetts.

The Bank is a Massachusetts-chartered stock bank which was incorporated in 1916 and is headquartered in Cohasset, Massachusetts. The Bank operates its business from three banking offices located in Massachusetts. The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and commercial real estate loans, and in commercial, consumer and small business loans.

NOTE 2 - ACCOUNTING POLICIES

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and Rule 10-01 of Regulation S-X. Information included herein as of September 30, 2014 and for the interim periods ended September 30, 2014 and 2013 is unaudited; however, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and were of a normal recurring nature. The results of operations for the three months ended September 30, 2014 and 2013 and the nine months ended September 30, 2014 and 2013 are not necessarily indicative of the results that may be expected for the entire year or any other interim period.

The accounting and reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements were prepared using the accrual basis of accounting. The significant accounting policies are summarized below to assist the reader in better understanding the consolidated financial statements and other data contained herein.

USE OF ESTIMATES:

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of securities and the valuation of deferred tax assets.

BASIS OF PRESENTATION:

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

 

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CASH AND CASH EQUIVALENTS:

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash items, due from banks and interest-bearing demand deposits with other banks.

SECURITIES:

Investments in debt securities are adjusted for amortization of premiums and accretion of discounts so as to approximate the interest method. Gains or losses on sales of investment securities are computed on a specific identification basis.

The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. These security classifications may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale.

 

•

Held-to-maturity securities are measured at amortized cost in the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings or in a separate component of equity. They are merely disclosed in the notes to the consolidated financial statements.

 

•

Available-for-sale securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings, but are reported as a net amount (less expected tax) in a separate component of equity until realized.

 

•

Trading securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings.

For any debt security with a fair value less than its amortized cost basis, the Company will determine whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, the Company will recognize a full impairment charge to earnings. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the credit loss portion of impairment will be recognized in earnings as realized losses. The other-than-temporary impairment related to all other factors will be recorded in other comprehensive income.

Declines in marketable equity securities below their cost that are deemed other than temporary are reflected in earnings as realized losses.

As a member of the Federal Home Loan Bank of Boston (FHLB), the Company is required to invest in $100 par value stock of the FHLB. The FHLB capital structure mandates that members must own stock as determined by their Total Stock Investment Requirement which is the sum of a member’s Membership Stock Investment Requirement and Activity-Based Stock Investment Requirement. The Membership Stock Investment Requirement is calculated as 0.35% of a member’s Stock Investment Base, subject to a minimum investment of $10,000 and a maximum investment of $25,000,000. The Stock Investment Base is an amount calculated based on certain assets held by a member that are reflected on call reports submitted to applicable regulatory authorities. The Activity-Based Stock Investment Requirement is calculated as 3.0% for overnight advances, 4.0% for FHLB advances with original terms to maturity of two days to three months and 4.5% for other advances plus a percentage of advance commitments, 0.5% of standby letters of credit issued by the FHLB and 4.5% of the value of intermediated derivative contracts. Management evaluates the Company’s investment in FHLB stock for other-than-temporary impairment at least on a quarterly basis and more frequently when economic

 

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or market conditions warrant such evaluation. Based on its most recent analysis of the FHLB as of September 30, 2014 (unaudited) and December 31, 2013, management deems its investment in FHLB stock to be not other-than-temporarily impaired.

LOANS:

Loans receivable that management has the intent and ability to hold until maturity or payoff are reported at their outstanding principal balances adjusted for amounts due borrowers on unadvanced loans, any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.

Interest on loans is recognized on a simple interest basis.

Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount amortized as an adjustment of the related loan’s yield. The Company is amortizing these amounts over the contractual lives of the related loans.

Residential real estate loans are generally placed on nonaccrual when reaching 90 days past due or in process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months.

Cash receipts of interest income on impaired loans is credited to principal to the extent necessary to eliminate doubt as to the collectibility of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

ALLOWANCE FOR LOAN LOSSES:

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

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

 

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General Component:

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the nine months ended September 30, 2014 (unaudited) and the year ended December 31, 2013.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate: The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial and multi-family real estate: Loans in this segment are primarily income-producing properties throughout Eastern Massachusetts, specifically the South Shore. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management periodically obtains rent rolls and continually monitors the cash flows of these loans.

Construction loans: Loans in this segment include speculative investment properties, rehab to rental properties and owner occupied residential properties. Payment is derived from sale of the property and long term rental cash flows once converted to permanent financing. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Commercial loans: Loans in this segment are made to businesses, are generally secured by assets of the business and are primarily guaranteed by the United States Government. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer loans: Loans in this segment are primarily secured by automobiles and repayment is dependent on the credit quality of the individual borrower.

Allocated Component:

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan are lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

 

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A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

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

Unallocated Component:

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

PREMISES AND EQUIPMENT:

Land is stated at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in income or expense. Depreciation and amortization are calculated principally on a straight-line basis over the estimated useful lives of the assets.

OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:

Other real estate owned includes properties acquired through foreclosure and properties classified as in-substance foreclosures in accordance with ASC 310-40, “Receivables - Troubled Debt Restructuring by Creditors.” These properties are carried at the lower of cost or estimated fair value, less estimated selling costs. Any writedown from cost to estimated fair value required at the time of foreclosure or classification as in-substance foreclosure is charged to the allowance for loan losses. Expenses incurred in connection with maintaining these assets, subsequent writedowns and gains or losses recognized upon sale are included in other expense.

In accordance with ASC 310-10-35, “Receivables - Overall - Subsequent Measurements,” the Company classifies loans as in-substance repossessed or foreclosed if the Company receives physical possession of the debtor’s assets regardless of whether formal foreclosure proceedings take place.

BANK-OWNED LIFE INSURANCE:

The Company has purchased insurance policies on the lives of certain directors, executive officers and employees. Bank-owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value. Changes in net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the consolidated statements of income and are not subject to income taxes.

 

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ADVERTISING:

The Company directly expenses costs associated with advertising as they are incurred.

INCOME TAXES:

The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled.

FAIR VALUES OF FINANCIAL INSTRUMENTS:

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

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

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

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

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

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

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

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

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

 

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PENSION PLAN:

Through April 30, 2014, the Company provided pension benefits for its employees through participation in the Co-Operative Banks’ Employees Retirement Association (CBERA) multiemployer plan and it was the Company’s policy to fund pension plan costs in the year of accrual. Effective April 30, 2014, the Company suspended the plan whereby further benefits will neither accrue nor will further contributions to the plan be required. In addition, the Company withdrew from the plan effective April 30, 2014 and has no further obligations under the plan.

RECENT ACCOUNTING PRONOUNCEMENTS:

In February 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” The objective of the amendments in this ASU is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. Examples of obligations within the scope of this ASU include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The guidance should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU scope that exist at the beginning of an entity’s fiscal year of adoption. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2013, the FASB issued ASU 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.” The amendments in this ASU are being issued to clarify when an entity should apply the liquidation basis of accounting. The guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. Additionally, the amendments require disclosures about an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this ASU provide guidance for the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this ASU are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments apply to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

 

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In January 2014, the FASB issued ASU 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in this ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes as follows:

 

1.

For reporting entities that meet the conditions for and that elect to use the proportional amortization method to account for investments in qualified affordable housing projects, all amendments in this ASU apply.

 

2.

For reporting entities that do not meet the conditions for or that do not elect the proportional amortization method, only the amendments in this ASU that are related to disclosures apply.

The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company does not expect that the adoption of this ASU will have an impact on its consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in this ASU is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this ASU using either a modified retrospective transition method or a prospective transition method. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In March, 2014, the FASB issued ASU No. 2014-07, “Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements.” Under the ASU, a private company lessee (the reporting entity) could elect, when certain conditions exist, not to apply the variable interest entity (VIE) guidance to a lessor entity under common control. The guidance in this ASU is effective for annual reporting periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application would be permitted.

 

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Entities that elect the alternative to not apply VIE guidance would use a full retrospective approach to apply it. The Company does not expect that the adoption of this ASU will have an impact on its consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of this ASU is to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early application is permitted, but no earlier than an annual reporting period beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The amendments in this ASU require two accounting changes. First, the amendments in this ASU change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. This ASU also includes new disclosure requirements. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.” The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Earlier adoption is permitted. ASU 2014-12 may be adopted either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements, and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

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In August 2014, the FASB issued ASU 2014-13, “Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity.” This ASU applies to entities that meet the following criteria:

 

1.

they are required to consolidate a collateralized entity under the Variable Interest Entities guidance;

 

2.

they measure all of the financial assets and the financial liabilities of that consolidated collateralized financing entity at fair value in the consolidated financial statements based on other FASB rules; and

 

3.

those changes in fair value are reflected in earnings.

Under ASU 2014-13, entities that meet these criteria are provided an alternative under which they can choose to eliminate the difference between the fair value of financial assets and financial liabilities of a consolidated collateralized financing entity. If that alternative is not elected, then ASU 2014-13 indicates that the fair value of the financial assets and the fair value of the financial liabilities of the consolidated collateralized financing entity should be measured in accordance with ASC 820. Fair Value Measurement, and differences between the fair value of the financial assets and the financial liabilities of that consolidated collateralized financing entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income or loss. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted as of the beginning of an annual period. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government - Guaranteed Mortgage Loans upon Foreclosure.” The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met:

 

1.

the loan has a government guarantee that is not separable from the loan before foreclosure;

 

2.

at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and

 

3.

at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.

Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

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NOTE 3 - INVESTMENTS IN SECURITIES

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

 

		Amortized Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In Thousands)
Available-for-sale securities:
September 30, 2014 (unaudited):
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	1,984			$	—			$	46			$	1,938
Debt securities issued by states of the United States and political subdivisions of the states			3,210				3				34				3,179
Mortgage-backed securities			7,524				30				102				7,452
		$	12,718			$	33			$	182			$	12,569
December 31, 2013:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	2,460			$	—			$	138			$	2,322
Debt securities issued by states of the United States and political subdivisions of the states			4,447				45				120				4,372
Mortgage-backed securities			6,148				27				155				6,020
Mutual funds			782				—				—				782
			$13,837			$	72			$	413			$	13,496
		Amortized Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In Thousands)
Held-to-maturity securities:
September 30, 2014 (unaudited):
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	25			$	—			$	1			$	24
Mortgage-backed securities			178				51				—				229
		$	203			$	51			$	1			$	253
December 31, 2013:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	26			$	—			$	1			$	25
Mortgage-backed securities			228				43				12				259
		$	254			$	43			$	13			$	284

 

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The scheduled maturities of debt securities were as follows as of September 30, 2014 (unaudited):

 

		Available-For-Sale				Held-To-Maturity
		Fair Value				Amortized Cost Basis				Fair Value
		(In Thousands)
Due within one year		$	662			$	—			$	—
Due after one year through five years			1,462				25				24
Due after five years through ten years			1,472				—				—
Due after ten years			1,521				—				—
Mortgage-backed securities			7,452				178				229
		$	12,569			$	203			$	253

The scheduled maturities of debt securities were as follows as of December 31, 2013:

 

		Available-For-Sale				Held-To-Maturity
		Fair Value				Amortized Cost Basis				Fair Value
		(In Thousands)
Due within one year		$	659			$	—			$	—
Due after one year through five years			2,265				26				25
Due after five years through ten years			1,766				—				—
Due after ten years			2,004				—				—
Mortgage-backed securities			6,020				228				259
		$	12,714			$	254			$	284

Proceeds from sales of available-for-sale securities during the nine months ended September 30, 2014 (unaudited) were $2,718,000 with gross realized gains of $69,000 and gross realized losses of $0. Proceeds from sales of available-for-sale securities during the nine months ended September 30, 2013 (unaudited) were $3,575,000 with gross realized gains of $37,000 and gross realized losses of $29,000. The tax expense applicable to these net realized gains for each of the nine month periods ended September 30, 2014 and 2013 (unaudited) amounted to $25,000 and $2,000, respectively.

As of September 30, 2014 (unaudited) and December 31, 2013, there were no securities whose aggregate carrying amount exceeded 10% of equity.

 

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The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more are as follows:

 

		Less than 12 Months								12 Months or Longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In Thousands)
September 30, 2014 (unaudited):
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	—			$	—			$	1,962			$	47			$	1,962			$	47
Debt securities issued by states of the United States and political subdivisions of the states			291				2				1,485				32				1,776				34
Mortgage-backed securities			1,743				12				2,751				90				4,494				102
Total temporarily impaired securities			2,034				14				6,198				169				8,232				183
Other-than-temporarily impaired securities:
Mortgage-backed securities			—				—				7				—				7				—
Total temporarily impaired and other-than-temporarily impaired securities		$	2,034			$	14			$	6,205			$	169			$	8,239			$	183
December 31, 2013:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	2,322			$	138			$	25			$	1			$	2,347			$	139
Debt securities issued by states of the United States and political subdivisions of the states			686				55				926				65				1,612				120
Mortgage-backed securities			2,701				75				1,058				79				3,759				154
Total temporarily impaired securities			5,709				268				2,009				145				7,718				413
Other-than-temporarily impaired securities:
Mortgage-backed securities			—				—				7				13				7				13
Total temporarily impaired and other-than-temporarily impaired securities		$	5,709			$	268			$	2,016			$	158			$	7,725			$	426

As of September 30, 2014 (unaudited), and December 31, 2013 investment securities with unrealized losses consist of debt securities issued by the U.S. Treasury and other U.S. government corporations and government-sponsored agencies, debt securities issued by states of the United States and political subdivisions of the states and non-agency mortgage-backed securities. The Company reviews investments for other-than-temporary impairment using a number of factors including the length of time and the extent to which the market value has been less than cost and by examining any credit deterioration or ratings downgrades. The unrealized losses in the above tables are primarily attributable to changes in market interest rates. As Company management has the intent and ability to hold impaired debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

 

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

Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of debt securities within the scope of the guidance for investments in debt and equity securities. For securities where the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial assets impairment model. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses the debt and equity securities impairment model.

The following table summarizes other-than-temporary impairment losses on securities for the three and nine months ended September 30:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
		Non-Agency Mortgage-Backed Securities				Non-Agency Mortgage-Backed Securities				Non-Agency Mortgage-Backed Securities				Non-Agency Mortgage-Backed Securities
		(unaudited)
		(In Thousands)
Total other-than-temporary impairment losses		$	—			$	—			$	12			$	12
Less: unrealized other-than-temporary losses recognized in other comprehensive income(1)			—				—				—				—
Net impairment losses recognized in earnings(2)		$	—			$	—			$	12			$	12

 

(1)	Represents the noncredit component of the other-than-temporary impairment on the securities.

(2)	Represents the credit component of the other-than-temporary impairment on securities.

For the nine months ended September 30, 2014 and September 30, 2013 (unaudited), debt securities with other-than-temporary impairment losses related to credit quality that were recognized in earnings consisted of non-agency mortgage-backed securities. The Company estimated the credit component portion of loss for the non-agency mortgage-backed securities using a discounted cash flow model. Significant inputs for the non-agency mortgage-backed securities included estimated cash flows of the underlying collateral based on key assumptions such as default rate, loss severity and prepayment rate. The present value of the expected cash flows were compared to the Company’s holdings to determine the credit-related impairment loss. Based on the expected cash flows derived from the model, the Company expects to recover the remaining unrealized losses on non-agency mortgage-backed securities.

 

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NOTE 4 - LOANS

Loans consisted of the following:

 

		September 30, 2014				December 31, 2013
		(In Thousands)
		(unaudited)
Real estate loans:
One- to four-family residential		$	90,418			$	92,383
Commercial			17,991				19,380
Multi-family			9,227				9,882
Home equity loans and lines of credit			3,196				3,976
Construction			6,091				3,513
Commercial and industrial loans			2,949				2,506
Consumer loans:
Consumer line of credit			20				19
Other consumer loans			2,636				1,919
			132,528				133,578
Net deferred loan origination fees, costs and discounts			96				87
Allowance for loan losses			(743	)			(742	)
Net loans		$	131,881			$	132,923

The following tables set forth information regarding the allowance for loan losses as of and for the nine months ended September 30, 2014 and 2013 (unaudited):

 

		Real Estate:																								Consumer
		One- to four-family Residential				Commercial				Multi-family				Home Equity Loans and Lines of Credit				Construction				Commercial and Industrial Loans				Consumer Line of Credit				Other Consumer				Unallocated				Total
		(In Thousands)
September 30, 2014 (unaudited):
Allowance for loan losses:
Beginning balance		$	323			$	195			$	51			$	30			$	49			$	16			$	1			$	20			$	57			$	742
Charge-offs			—				—				—				—				—				—				—				—				—				—
Recoveries			1				—				—				—				—				—				—				—				—				1
(Benefit) provision			(8	)			(49	)			—				7				72				(7	)			(1	)			6				(20	)			—
Ending balance		$	316			$	146			$	51			$	37			$	121			$	9			$	—			$	26			$	37			$	743
Ending balance:
Individually evaluated for impairment		$	42			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	42
Ending balance:
Collectively evaluated for impairment			274				146				51				37				121				9				—				26				37				701
Total allowance for loan losses ending balance		$	316			$	146			$	51			$	37			$	121			$	9			$	—			$	26			$	37			$	743
Loans:
Ending balance:
Individually evaluated for impairment		$	6,078			$	697			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	6,775
Ending balance:
Collectively evaluated for impairment			84,340				17,294				9,227				3,196				6,091				2,949				20				2,636				—				125,753
Total loans ending balance		$	90,418			$	17,991			$	9,227			$	3,196			$	6,091			$	2,949			$	20			$	2,636			$	—			$	132,528
		Real Estate:																								Consumer
		One- to four-family Residential				Commercial				Multi-family				Home Equity Loans and Lines of Credit				Construction				Commercial and Industrial Loans				Consumer Line of Credit				Other Consumer				Unallocated				Total
		(In Thousands)
September 30, 2013 (unaudited):
Allowance for loan losses:
Beginning balance		$	362			$	152			$	35			$	46			$	50			$	7			$	2			$	37			$	97			$	788
Charge-offs			(50	)			—				—				—				—				—				—				—				—				(50	)
Recoveries			5				—				—				—				—				—				—				—				—				5
Provision (benefit)			49				12				22				(27	)			2				8				(1	)			(10	)			110				165
Ending balance		$	366			$	164			$	57			$	19			$	52			$	15			$	1			$	27			$	207			$	908

 

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The following table set forth information regarding the allowance for loan losses as of and for the year ended December 31:

 

		Real Estate:																								Consumer
		One- to four-family Residential				Commercial				Multi-family				Home Equity Loans and Lines of Credit				Construction				Commercial and Industrial Loans				Consumer Line of Credit				Other Consumer				Unallocated				Total
		(In Thousands)
December 31, 2013:
Allowance for loan losses:
Beginning balance		$	362			$	152			$	35			$	46			$	50			$	7			$	2			$	37			$	97			$	788
Charge-offs			(48	)			—				—				—				—				—				—				(3	)			—				(51	)
Recoveries			—				—				—				—				—				—				—				5				—				5
Provision (benefit)			9				43				16				(16	)			(1	)			9				(1	)			(19	)			(40	)			—
Ending balance		$	323			$	195			$	51			$	30			$	49			$	16			$	1			$	20			$	57			$	742
Ending balance:
Individually evaluated for impairment		$	80			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	80
Ending balance:
Collectively evaluated for impairment			243				195				51				30				49				16				1				20				57				662
Total allowance for loan losses ending balance		$	323			$	195			$	51			$	30			$	49			$	16			$	1			$	20			$	57			$	742
Loans:
Ending balance:
Individually evaluated for impairment		$	6,126			$	703			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	6,829
Ending balance:
Collectively evaluated for impairment			86,257				18,677				9,882				3,976				3,513				2,506				19				1,919				—				126,749
Total loans ending balance		$	92,383			$	19,380			$	9,882			$	3,976			$	3,513			$	2,506			$	19			$	1,919			$	—			$	133,578

The following tables set forth information regarding nonaccrual loans and past-due loans:

 

		30-59 Days				60-89 Days				90 Days or More Past Due				Total Past Due				Total Current				Total				90 Days or More Past Due and Accruing				Nonaccrual Loans
		(In Thousands)
September 30, 2014 (unaudited):
Real estate loans:
One- to four-family residential		$	—			$	—			$	1,393			$	1,393			$	89,025			$	90,418			$	—			$	1,422
Commercial			—				—				—				—				17,991				17,991				—				—
Multi-family			941				—				—				941				8,286				9,227				—				—
Home equity loans and lines of credit			—				—				—				—				3,196				3,196				—				—
Construction			—				—				—				—				6,091				6,091				—				—
Commercial and industrial loans			—				—				—				—				2,949				2,949				—				—
Consumer loans:
Consumer line of credit			—				—				—				—				20				20				—				—
Other consumer			16				—				—				16				2,620				2,636				—				—
Total		$	957			$	—			$	1,393			$	2,350			$	130,178			$	132,528			$	—			$	1,422
December 31, 2013:
Real estate loans:
One- to four-family residential		$	—			$	240			$	2,075			$	2,315			$	90,068			$	92,383			$	—			$	2,344
Commercial			—				—				—				—				19,380				19,380				—				—
Multi-family			—				—				—				—				9,882				9,882				—				—
Home equity loans and lines of credit			—				—				—				—				3,976				3,976				—				8
Construction			—				—				—				—				3,513				3,513				—				—
Commercial and industrial loans			—				—				—				—				2,506				2,506				—				—
Consumer loans:
Consumer line of credit			—				—				—				—				19				19				—				—
Other consumer			—				—				—				—				1,919				1,919				—				—
Total		$	—			$	240			$	2,075			$	2,315			$	131,263			$	133,578			$	—			$	2,352

 

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Information about loans that meet the definition of an impaired loan in ASC 310-10-35, “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality - Subsequent Measurement,” is as follows:

 

		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(In Thousands)
September 30, 2014 (unaudited):
With no related allowance recorded:
Real estate loans:
One- to four-family residential		$	5,491			$	5,491			$	—			$	5,515			$	171
Commercial			697				697				—				700				39
Total impaired with no related allowance		$	6,188			$	6,188			$	—			$	6,215			$	210
With an allowance recorded:
Real estate loans:
One- to four-family residential		$	587			$	587			$	42			$	590			$	18
Commercial			—				—				—				—				—
Total impaired with an allowance recorded		$	587			$	587			$	42			$	590			$	18
Total
Real estate loans:
One- to four-family residential		$	6,078			$	6,078			$	42			$	6,105			$	189
Commercial			697				697				—				700				39
Total impaired loans		$	6,775			$	6,775			$	42			$	6,805			$	228
December 31, 2013:
With no related allowance recorded:
Real estate loans:
One- to four-family residential		$	4,143			$	4,143			$	—			$	4,150			$	168
Commercial			703				703				—				706				58
Total impaired with no related allowance		$	4,846			$	4,846			$	—			$	4,856			$	226
With an allowance recorded:
Real estate loans:
One- to four-family residential		$	1,983			$	1,983			$	80			$	1,997			$	103
Commercial			—				—				—				—				—
Total impaired with an allowance recorded		$	1,983			$	1,983			$	80			$	1,997			$	103
Total
Real estate loans:
One- to four-family residential		$	6,126			$	6,126			$	80			$	6,147			$	271
Commercial			703				703				—				706				58
Total impaired loans		$	6,829			$	6,829			$	80			$	6,853			$	329

 

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

 

		Real Estate:																								Consumer
		One-to four- family Residential				Commercial				Multi-family				Home Equity Loans and Lines of Credit				Construction				Commercial and Industrial Loans				Consumer Line of Credit				Other Consumer				Total
		(In Thousands)
September 30, 2014 (unaudited):
Grade:
Pass		$	—			$	17,162			$	8,286			$	—			$	6,091			$	2,949			$	—			$	—			$	34,488
Special mention			1,103				132				—				8				—				—				—				—				1,243
Substandard			3,300				697				941				—				—				—				—				—				4,938
Loans not formally rated			86,015				—				—				3,188				—				—				20				2,636				91,859
Total		$	90,418			$	17,991			$	9,227			$	3,196			$	6,091			$	2,949			$	20			$	2,636			$	132,528
December 31, 2013:
Grade:
Pass		$	—			$	17,829			$	8,932			$	—			$	3,513			$	2,506			$	—			$	—			$	32,780
Special mention			302				132				—				—				—				—				—				—				434
Substandard			4,227				1,419				950				8				—				—				—				—				6,604
Loans not formally rated			87,854				—				—				3,968				—				—				19				1,919				93,760
Total		$	92,383			$	19,380			$	9,882			$	3,976			$	3,513			$	2,506			$	19			$	1,919			$	133,578

Credit Quality Information

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

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

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

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

Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

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

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

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

During the nine months ended September 30, 2014 and 2013 (unaudited), there were no loans modified as TDRs.

 

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As of September 30, 2014 (unaudited), there were no commitments to lend additional funds to borrowers whose loans were modified as troubled debt restructurings.

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $17,545,000 and $16,755,000 at September 30, 2014 (unaudited) and December 31, 2013, respectively.

NOTE 5 - DEPOSITS

The aggregate amount of time deposit accounts in denominations of $100,000 or more as of September 30, 2014 (unaudited) and December 31, 2013 was $39,346,000 and $35,437,000, respectively.

For time deposits as of September 30, 2014 (unaudited), the scheduled maturities for each of the following five years ended September 30 are:

 

		(In Thousands)
2015		$	32,884
2016			10,941
2017			9,241
2018			14,626
2019			540
Total		$	68,232

For time deposits as of December 31, 2013, the scheduled maturities for each of the following five years ended December 31 are:

 

		(In Thousands)
2014		$	35,847
2015			11,585
2016			5,829
2017			7,951
2018			3,260
Total		$	64,472

 

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NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES

Maturities of advances from the FHLB for the years ending after September 30, 2014 (unaudited) are summarized as follows:

 

		(In Thousands)
2015		$	1,000
		$	1,000

Maturities of advances from the FHLB for the years ending after December 31, 2013 are summarized as follows:

 

		(In Thousands)
2014		$	4,000
2015			1,000
		$	5,000

Interest rates range from 2.03% to 2.32% with a weighted-average interest rate of 2.18% at September 30, 2014 (unaudited). Interest rates range from .25% to 2.32% with a weighted-average interest rate of 1.27% at December 31, 2013.

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

 

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NOTE 7 - FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value as of September 30, 2014 (unaudited) and December 31, 2013. The Company did not have any significant transfers between level 1 and level 2 of the fair value hierarchy during the nine months ended September 30, 2014 (unaudited).

The Company’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

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

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

 

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

Other real estate owned values are estimated using level 2 inputs based upon appraisals of similar properties obtained from a third party. For level 3 inputs, fair values are based on management estimates.

The following summarizes assets measured at fair value as of September 30, 2014 (unaudited) and December 31, 2013.

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

 

		Fair Value Measurements at Reporting Date Using:
		Total				Quoted Prices in Active Markets for Identical Assets Level 1				Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3
		(In Thousands)
September 30, 2014 (unaudited):
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	1,938			$	—			$	1,938			$	—
Debt securities issued by states of the United States and political subdivisions of the states			3,179				—				3,179				—
Mortgage-backed securities			7,452				—				7,452				—
Totals		$	12,569			$	—			$	12,569			$	—
December 31, 2013:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies		$	2,322			$	—			$	2,322			$	—
Debt securities issued by states of the United States and political subdivisions of the states			4,372				—				4,372				—
Mortgage-backed securities			6,020				—				6,020				—
Mutual funds			782				782				—				—
Totals		$	13,496			$	782			$	12,714			$	—

 

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ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

Under certain circumstances we make adjustments to fair value for certain assets and liabilities although they are not measured at fair value on an ongoing basis. The following table presents assets carried on the consolidated balance sheet by caption and by level in the fair value hierarchy at September 30, 2014 (unaudited) and December 31, 2013, for which a nonrecurring change in fair value has been recorded:

 

		Fair Value Measurements at Reporting Date Using:
		Total				Quoted Prices in Active Markets for Identical Assets Level 1				Significant Other Observable Inputs Level 2				Significant Unobservable Inputs Level 3
		(In Thousands)
September 30, 2014 (unaudited):
Impaired loans		$	545			$	—			$	—			$	545
Totals		$	545			$	—			$	—			$	545
December 31, 2013:
Impaired loans		$	1,903			$	—			$	—			$	1,903
Totals		$	1,903			$	—			$	—			$	1,903

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

 

		September 30, 2014 (unaudited)
		Carrying				Fair Value
		Amount				Level 1				Level 2				Level 3				Total
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	34,656			$	34,656			$	—			$	—			$	34,656
Interest-bearing time deposits with other banks			2,823				—				2,829				—				2,829
Available-for-sale securities			12,569				—				12,569				—				12,569
Held-to-maturity securities			203				—				253				—				253
Federal Home Loan Banks tock			694				694				—				—				694
Investment in The Co-operative Central Reserve Fund			384				384				—				—				384
Loans, net			131,881				—				—				134,138				134,138
Accrued interest receivable			458				458				—				—				458
Financial liabilities:
Deposits			180,194				—				180,852				—				180,852
FHLB advances			1,000				—				1,010				—				1,010
		December 31, 2013
		Carrying				Fair Value
		Amount				Level 1				Level 2				Level 3				Total
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	8,991			$	8,991			$	—			$	—			$	8,991
Interest-bearing time deposits with other banks			4,511				—				4,518				—				4,518
Available-for-sale securities			13,496				782				12,714				—				13,496
Held-to-maturity securities			254				—				284				—				284
Federal Home Loan Banks tock			667				667				—				—				667
Investment in The Co-operative Central Reserve Fund			384				384				—				—				384
Loans, net			132,923				—				—				134,272				134,272
Accrued interest receivable			399				399				—				—				399
Financial liabilities:
Deposits			153,732				—				154,278				—				154,278
FHLB advances			5,000				—				5,182				—				5,182

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets as of September 30, 2014 (unaudited) and December 31, 2013 under the indicated captions. Accounting policies related to financial instruments are described in Note 2.

 

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NOTE 8 - PLAN OF CONVERSION

On February 25, 2014, the Board of Trustees of Conahasset Bancshares, MHC (the “Company”), the Board of Directors of Conahasset Bancshares, Inc. (the “Mid-Tier Holding Company”), and the Board of Directors of Pilgrim Bank (the “Bank”) adopted a plan of conversion (the “Plan”). The Plan provided for the conversion of the Company from a mutual holding company into a stock holding company, Pilgrim Bancshares, Inc., and an offering by Pilgrim Bancshares, Inc. of shares of its common stock to eligible depositors of the Bank, the Bank’s tax-qualified employee benefit plans (including the employee stock ownership plan that was established in connection with the conversion) and the public. As of September 30, 2014, Pilgrim Bancshares, Inc. had received $29.6 million in cash and $700,000 in pledges from eligible depositors, for a total of $30.3 million which is included in deposits pending the completion of the conversion. The offering was oversubscribed by approximately $10.3 million, which is included in the above total. The conversion was completed with the sale of 2,182,125 shares on October 10, 2014 and Pilgrim Bancshares, Inc. ’s shares began trading on October 13, 2014, on the OTC Pink Marketplace operated by OTC Markets Group, Inc. under the symbol PLRM. Pilgrim Bancshares, Inc. received $21.8 million in proceeds, including shares issued to the Employee Stock Ownership Plan (ESOP) in the amount of $1.8 million, and refunded $10.3 million of oversubscriptions to eligible depositors. Pilgrim Bancshares, Inc. was incorporated under the laws of the State of Maryland and, as of October 10, 2014, owns all of the outstanding common stock of the Bank.

In addition, in conjunction with the conversion and the stock offering, on October 10, 2014, Pilgrim Bancshares, Inc. contributed a total of $725,000 (consisting of 65,464 shares of common stock and $70,360 in cash from the proceeds of the offering) to a charitable foundation established by the Bank in connection with the conversion.

The cost of the conversion and issuing the capital stock will be deferred and deducted from the proceeds of the offering. At September 30, 2014 (unaudited) and December 31, 2013, the MHC had incurred approximately $1.1 million and $2,000 in conversion costs, respectively, which are included in other assets on the consolidated balance sheets.

At the time of conversion, Pilgrim Bancshares, Inc. substantially restricted retained earnings by establishing a liquidation account and the Bank established a parallel liquidation account. The liquidation accounts will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts. In the event of a complete liquidation of the Bank or the Bank and Pilgrim Bancshares, Inc. , and only in such event, each account holder will be entitled to receive a distribution from the liquidation accounts in an amount proportionate to the adjusted qualifying account balances then held. Pilgrim Bancshares, Inc. and the Bank may not pay dividends if those dividends would cause regulatory capital to be reduced below applicable capital requirements or the amount required to maintain its respective liquidation account amount. The conversion will be accounted for as a change in corporate form with the historic basis of the Company’s and the Bank’s assets, liabilities and equity unchanged as a result.

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

General

Management’s discussion and analysis of the financial condition and results of operations at and for three and nine months ended September 30, 2014 and 2013 is intended to assist in understanding the financial condition and results of operations of the Company on a consolidated basis. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

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This Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “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 Report.

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

 

•

our ability to manage our operations under the current adverse economic conditions nationally and in our market area;

 

•

adverse changes in the financial industry, securities, credit and national 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;

 

•

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;

 

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•

changes in consumer spending, borrowing and saving habits;

 

•

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

 

•

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

 

•

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

 

•

changes in the level of government support of housing finance;

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

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

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in Pilgrim Bancshares, Inc.’s Prospectus dated August 11, 2014, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on August 20, 2014.

 

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Comparison of Financial Condition at September 30, 2014 (unaudited) and December 31, 2013

Total Assets. Total assets increased $22.9 million, or 13.3%, to $194.5 million at September 30, 2014 from $171.6 million at December 31, 2013. The increase resulted from the subscriptions received in the stock offering, $29.6 million, offset by pay-downs of short-term borrowings from the Federal Home Loan Bank of Boston (“FHLB”) of $4.0 million.

Cash and Cash Equivalents and Time Deposits with Other Banks. Total cash and cash equivalents increased $25.7 million or 285.5%, to $34.7 million at September 30, 2014 from $9.0 million at December 31, 2013. The increase in cash resulted from the subscriptions received in the stock offering, offset by pay-downs of FHLB borrowings. Time deposits with other banks decreased $1.7 million, or 37.8%, to $2.8 million at September 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 $1.0 million, or 0.75%, to $131.9 million at September 30, 2014 from $132.9 million at December 31, 2013. During the nine months ended September 30, 2014, one- to four-family residential real estate loans decreased $2.0 million, or 2.2%, to $90.4 million at September 30, 2014 from $92.4 million at December 31, 2013, commercial real estate loans decreased $1.4 million, or 7.2%, to $18.0 million at September 30, 2014 from $19.4 million at December 31, 2013, multi-family loans decreased $655,000, or 6.6%, to $9.2 million at September 30, 2014 from $9.9 million at December 31, 2013, and home equity loans and lines of credit decreased $780,000, or 19.6%, to $3.2 million at September 30, 2014 from $4.0 million at December 31, 2013, while construction loans increased $2.6 million, or 74.3%, to $6.1 million at September 30, 2014 from $3.5 million at December 31, 2013, commercial and industrial loans increased $443,000, or 17.7%, to $3.0 million at September 30, 2014 from $2.5 million at December 31, 2013, and consumer loans increased $718,000, or 37.0%, to $2.7 million at September 30, 2014 from $1.9 million at December 31, 2013. Over $17.9 million in new originations were offset by $17.6 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 $900,000 or 6.7%, to $12.6 million at September 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 $51,000 or 20.0%, to $203,000 at September 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 September 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 at September 30, 2014 increased $36,000, or 1.7%, compared to December 31, 2013 due to normal increases in cash surrender value.

Deposits. Deposits increased $26.5 million, or 17.2%, to $180.2 million at September 30, 2014 from $153.7 million at December 31, 2013. The increase was attributed to $29.6 million of subscriptions received in the stock offering which were included in deposits as of September 30, 2014 pending the completion of the stock offering and which included $10.3 million of over-subscriptions that were subsequently refunded. During the nine months ended September 30, 2014, demand deposits increased $478,000, or 4.0%, to $12.5 million from $12.0 million, NOW account deposits decreased $600,000, or 3.0%, to $19.4 million from $20.0 million, savings accounts increased $29.6 million, or 171.1%, to $46.9 million from $17.3 million, money market accounts decreased $6.8 million, or 17.0%, to $33.1 million from $39.9 million, while certificates of deposit increased $3.7 million, or 5.7%, to $68.2 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, excluding the proceeds from the stock offering conversion, decreased $6.9 million, or 7.7%, to $82.3 million at September 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.

 

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Borrowings and Other Liabilities. Federal Home Loan Bank advances decreased $4.0 million, or 80.0%, to $1.0 million at September 30, 2014 from $5.0 million at December 31, 2013, which reflects maturation of borrowings. Other liabilities, which include interest payable, accruals for employee pension and medical plans and normal accruals for expenses, decreased $40,000, or 12.5%, to $280,000 at September 30, 2014 from $320,000 at December 31, 2013.

Total Equity. Total equity increased $552,000, or 4.4%, to $13.1 million at September 30, 2014 from $12.5 million at December 31, 2013. The increase resulted from net income of $432,000 during the nine months ended September 30, 2014, and a decrease of $120,000 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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Delinquent Loans. The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.

 

		At September 30, 2014												At December 31, 2013
		(unaudited)
		30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due
		(In Thousands)
Real estate loans:
One- to four-family residential(1)		$	—			$	—			$	1,393			$	—			$	240			$	2,075
Commercial			—				—				—				—				—				—
Multi-family			941				—				—				—				—				—
Home equity loans and lines of credit			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Total real estate			941				—				1,393				—				240				2,075
Commercial and industrial loans			—				—				—				—				—				—
Consumer loans			16				—				—				—				—				—
Total loans		$	957			$	—			$	1,393			$	—			$	240			$	2,075

 

(1)	There were no delinquent non-owner occupied residential real estate loans at September 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 September 30, 2014 and December 31, 2013. The classified assets total includes $1.4 million and $2.4 million of non-performing loans, respectively. The related specific valuation allowance in the allowance for loan losses for such non-performing and classified loans was $82,000 at each of September 30, 2014 and December 31, 2013.

 

		At September 30, 2014				At December 31, 2013
		(In Thousands)
		(unaudited)
Classified assets:
Substandard:
Loans(1)		$	4,938			$	6,604
Securities			145				182
Total substandard			5,083				6,786
Doubtful			—				—
Loss			—				—
Other real estate owned			—				—
Total classified assets		$	5,083			$	6,786
Special mention		$	1,243			$	434

 

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

The decrease in classified assets from December 31, 2013 to September 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 $900,000 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 September 30, 2014				At December 31, 2013
		(Dollars In Thousands)
		(unaudited)
Non-accrual loans:
Real estate loans:
One- to four-family residential(1)		$	1,422			$	2,344
Commercial			—				—
Multi-family			—				—
Home equity loans and lines of credit			—				8
Construction			—				—
Total real estate			1,422				2,352
Commercial and industrial loans			—				—
Consumer loans			—				—
Total non-accrual loans			1,422				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			1,422				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			1,422				2,352
Performing troubled debt restructurings:
Real estate loans:
One- to four-family residential(2)			4,685				3,908
Commercial			697				703
Multi-family			—				—
Other			—				—
Total real estate			5,382				4,611
Commercial and industrial loans			—				—
Consumer loans			—				—
Total troubled debt restructurings			5,382				4,611
Total non-performing loans and troubled debt restructurings		$	6,804			$	6,963
Non-performing loans to total loans			1.07	%			1.76	%
Non-performing assets to total assets			0.73	%			1.37	%
Non-performing assets and troubled debt restructurings to total assets			3.50	%			4.06	%

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

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

 

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Interest income that would have been recorded for the nine months ended September 30, 2014, had non-accruing loans been current according to their original terms amounted to $29,000. Interest of approximately $1,000 related to these loans was included in interest income for the nine months ended September 30, 2014.

Non-performing loans totaled $1.4 million at September 30, 2014, and consisted of three 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 September 30, 2014. We had no non-performing commercial real estate and multi-family loans at September 30, 2014. We had no foreclosed real estate at September 30, 2014.

Other Loans of Concern. There were no other loans at September 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 September 30, 2014 and September 30, 2013

General. Net income for the three months ended September 30, 2014 was $131,000, compared to net income of $125,000 for the three months ended September 30, 2013. The increase in net income was primarily due to a decrease in provision for loan losses of $36,000, and an increase in rental income of $17,000, offset by lower net interest income of $8,000 and an increase in noninterest expense of $21,000.

Interest and Dividend Income. On a tax-equivalent basis, total interest and dividend income for the three months ended September 30, 2014 decreased $29,000, or 1.9%, to $1.50 million compared to $1.53 million for the three months ended September 30, 2013. The decrease in interest income was the result of lower average loans and decrease in interest on investment securities and interest earning deposits, as well as reduction in loan yields. The average balance of loans during the three months ended September 30, 2014 decreased $242,000 to $131.3 million from $131.5 million for the three months ended September 30, 2013, while the average yield on loans decreased by 4 basis points to 4.31% for the three months ended September 30, 2014 from 4.35% for the three months ended September 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 $1.7 million to $12.5 million for the three months ended September 30, 2014 from $14.2 million for the three months ended September 30, 2013, and the yield on investment securities (on a tax-equivalent basis) decreased by 6 basis points to 2.31% for the three months ended September 30, 2014 from 2.37% for the three months ended September 30, 2013.

Interest Expense. Total interest expense decreased $16,000, or 5.5%, to $273,000 for the three months ended September 30, 2014 from $289,000 for the three months ended September 30, 2013. Interest expense on interest-bearing deposit accounts decreased $7,000, or 2.6%, to $266,000 for the three months ended September 30, 2014 from $273,000 for the three months ended September 30, 2013. The decrease was primarily due to the impact of maturing certificates of deposit renewing at lower rates and overall deposit mix.

Interest expense on Federal Home Loan Bank of Boston advances decreased $9,000, or 56.3%, to $7,000 for the three months ended September 30, 2014 from $16,000 for the three months ended September 30, 2013. The average balance of advances decreased by $2.7 million, or 49.5%, to $2.8 million for the three months ended September 30, 2014 from $5.5 million for the three months ended September 30, 2013, due to the maturity of advances. The cost of funds decreased 15 basis points to 1.00% for the three months ended September 30, 2014 from 1.15% for the three months ended September 30, 2013.

 

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Net Interest and Dividend Income. On a tax-equivalent basis, net interest and dividend income decreased $13,000, or 1.1%, for the three months ended September 30, 2014 from the three months ended September 30, 2013. The decrease resulted primarily from a $29,000 decrease in interest income offset by a $16,000 decrease in interest expense. Our average interest-earning assets increased $4.0 million to $163.7 million for the three months ended September 30, 2014 from $159.7 million for the three months ended September 30, 2013, but our net interest rate spread decreased 12 basis points to 2.94% for the three months ended September 30, 2014 from 3.06% for the three months ended September 30, 2013. Our net interest margin decreased 10 basis points to 3.00% for the three months ended September 30, 2014 from 3.10% for the three months ended September 30, 2013. The reduction in our interest rate spread and net interest margin reflected the impact of increased lower yielding assets due to the proceeds received from the stock offering which were placed in overnight funds.

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 September 30, 2014, compared to a provision of $36,000 for the three months ended September 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 September 30, 2014 was due to the adequacy of our allowance for loan loss based on credit risk. Net recoveries were $1,000 for the three months ended September 30, 2014 compared to $0 for the three months ended September 30, 2013. The allowance for loan losses was $743,000 or 0.56% of total loans at September 30, 2014 compared to $908,000, or 0.70% of total loans at September 30, 2013. Total non-performing loans were $1.4 million at September 30, 2014 compared to $2.5 million at September 30, 2013. As a percentage of non-performing loans, the allowance for loan losses was 52.25% at September 30, 2014 compared to 36.90% at September 30, 2013. This increase is due primarily to the reduction in non-performing loans at September 30, 2014. Total classified loans were $4.9 million at September 30, 2014 compared to $8.0 million at September 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 September 30, 2014 and September 30, 2013.

Noninterest Income. Noninterest income increased $7,000, or 5.8%, to $128,000 for the three months ended September 30, 2014 from $121,000 for the three months ended September 30, 2013. The increase was due to an increase in rental income of $17,000 to $67,000 for the three months ended September 30, 2014 from $50,000 for the three months ended September 30, 2013, partially offset by a decrease in deposit service charges and other income of $10,000.

Noninterest Expense. Noninterest expense increased $21,000 to $1.1 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. Decreases in FDIC assessments of $23,000, were offset by increases in data processing expense of $16,000, professional fees of $12,000 and an increase in other expenses of $16,000.

Income Taxes. Income tax expense was $69,000 for the three months ended September 30, 2014 compared to $61,000 for the three months ended September 30, 2013. The effective tax rate as a percent of pre-tax income was 34.5% and 32.8% for the three months ended September 30, 2014 and 2013, respectively. The increase in the effective tax rate for the three months ended September 30, 2014 was due to an increase in income before taxes to $200,000 from $186,000.

Comparison of Operating Results for the Nine Months Ended September 30, 2014 and September 30, 2013

General. Net income for the nine months ended September 30, 2014 was $432,000, compared to net income of $277,000 for the nine months ended September 30, 2013. The increase in net income was primarily due to a $149,000 increase in net interest income as a result of increased loans and lower deposit costs and a decrease in the provision for loan loss of $165,000, offset by an increase in total noninterest expenses of $37,000.

 

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Interest and Dividend Income. On a tax-equivalent basis, total interest and dividend income for the nine months ended September 30, 2014 increased $45,000, or 1.0%, to $4.54 million compared to $4.49 million for the nine months ended September 30, 2013. The increase in interest income was the result of a $104,000 increase in interest on loans offset by a $59,000 decrease in interest on investment securities and interest earning deposits. The average balance of loans during the nine months ended September 30, 2014 increased $9.5 million to $132.2 million from $122.7 million for the nine months ended September 30, 2013, while the average yield on loans decreased by 22 basis points to 4.31% for the nine months ended September 30, 2014 from 4.53% for the nine months ended September 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 $12.8 million for the nine months ended September 30, 2014 from $14.3 million for the nine months ended September 30, 2013, and the yield on investment securities (on a tax-equivalent basis) decreased 3 basis points to 2.37% for the nine months ended September 30, 2014 from 2.40% for the nine months ended September 30, 2013.

Interest Expense. Total interest expense decreased $95,000, or 10.5%, to $807,000 for the nine months ended September 30, 2014 from $902,000 for the nine months ended September 30, 2013. Interest expense on interest-bearing deposit accounts decreased $83,000 or 9.7%, to $770,000 for the nine months ended September 30, 2014 from $853,000 for the nine months ended September 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 $12,000, or 24.5%, to $37,000 for the nine months ended September 30, 2014 from $49,000 for the nine months ended September 30, 2013. The average balance of advances increased by $901,000 to $4.9 million for the nine months ended September 30, 2014 from $4.0 million for the nine months ended September 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 62 basis points to 1.01% for the nine months ended September 30, 2014 from 1.63% for the nine months ended September 30, 2013.

Net Interest and Dividend Income. On a tax-equivalent basis, net interest and dividend income increased $140,000, or 3.9%, for the nine months ended September 30, 2014 from the nine months ended September 30, 2013. The increase resulted from a $45,000 increase in interest income and a $95,000 decrease in interest expense. Our average interest-earning assets decreased $1.4 million to $159.1 million for the nine months ended September 30, 2014 from $160.5 million for the nine months ended September 30, 2013, but our net interest rate spread increased 13 basis points to 3.06% for the nine months ended September 30, 2014 from 2.93% for the nine months ended September 30, 2013. Our net interest margin increased 15 basis points to 3.13% for the nine months ended September 30, 2014 from 2.98% for the nine months ended September 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 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 nine months ended September 30, 2014, compared to a provision of $165,000 for the nine months ended September 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 nine months ended September 30, 2014 reflected net recoveries of $1,000 for the nine months ended September 30, 2014 compared to net charge-offs of

 

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$45,000 for the nine months ended September 30, 2013. The allowance for loan losses was $743,000 or 0.56% of total loans at September 30, 2014 compared to $908,000, or 0.70% of total loans at September 30, 2013. Total non-performing loans were $1.4 million at September 30, 2014 compared to $2.5 million at September 30, 2013. As a percentage of non-performing loans, the allowance for loan losses was 52.25% at September 30, 2014 compared to 36.90% at September 30, 2013. This increase is due primarily to the reduction in non-performing loans at September 30, 2014. Total classified loans were $4.9 million at September 30, 2014 compared to $8.0 million at September 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 September 30, 2014 and September 30, 2013.

Noninterest Income. Noninterest income increased $6,000, 1.3% to $483,000 for the nine months ended September 30, 2014 compared to $477,000 for the nine months ended September 30, 2013. Increases were recognized in gains on the sale of securities of $61,000 to $69,000 for the nine months ended September 30, 2014 from $8,000 for the nine months ended September 30, 2013, gains on the sale of mortgages of $48,000 to $48,000 for the nine months ended September 30, 2014 from $0 for the nine months ended September 30, 2013, and in rental income of $40,000 to $193,000 for the nine months ended September 30, 2014 from $153,000 for the nine months ended September 30, 2013. These increases were partially offset by a decrease in the gain on sales of OREO property of $121,000 recognized for the nine months ended September 30, 2013.

Noninterest Expense. Noninterest expense increased $37,000 to $3.5 million for the nine months ended September 30, 2014. Increases in salaries and employee benefits expense of $36,000, occupancy and equipment expense of $18,000 and data processing expense of $36,000 were partially offset by a decrease in FDIC assessments of $79,000.

Income Taxes. Income tax expense was $247,000 for the nine months ended September 30, 2014 compared to $119,000 for the nine months ended September 30, 2013. The effective tax rate as a percent of pre-tax income was 36.4% and 30.0% for the nine months ended September 30, 2014 and 2013, respectively. The increase in the effective tax rate for the nine months ended September 30, 2014 was due to an increase in income before taxes to $679,000 from $396,000.

 

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Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information at September 30, 2014 and 2013 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.

 

		For the Three Months Ended September 30,
		2014												2013
		Average Outstanding Balance				Interest				Average Yield/Rate(1)				Average Outstanding Balance				Interest				Average Yield/Rate(1)
		(In thousands)												(In thousands)
Interest-earning assets:
Loans		$	131,297			$	1,414				4.31	%		$	131,539			$	1,429				4.35	%
Interest-earning deposits			18,784				10				0.21	%			12,931				14				0.43	%
Investment securities(2)			12,486				72				2.31	%			14,180				84				2.37	%
Federal Home Loan Bank stock and The Cooperative Central Reserve Fund			1,083				3				1.11	%			1,035				1				0.39	%
Total interest-earning assets			163,650				1,499				3.66	%			159,685				1,528				3.83	%
Noninterest-earning assets			12,695												11,292
Total assets		$	176,345											$	170,977
Interest-bearing liabilities:
Savings accounts		$	24,303				9				0.15	%		$	17,399				9				0.21	%
NOW accounts			18,834				5				0.11	%			19,207				5				0.10	%
Money market accounts			36,206				35				0.39	%			38,359				38				0.40	%
Certificates of deposit			68,641				217				1.26	%			68,845				221				1.28	%
Total interest-bearing deposits			147,984				266				0.72	%			143,810				273				0.76	%
Federal Home Loan Bank advances			2,799				7				1.00	%			5,547				16				1.15	%
Total interest-bearing liabilities			150,783				273				0.72	%			149,357				289				0.77	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			12,213												9,002
Other noninterest-bearing liabilities			282												315
Total noninterest-bearing liabilities			12,495												9,317
Total liabilities			163,278												158,674
Total equity			13,067												12,303
Total liabilities and total equity		$	176,345											$	170,977
Net interest income						$	1,226											$	1,239
Net interest rate spread(3)											2.94	%											3.06	%
Net interest-earning assets(4)		$	12,867											$	10,328
Net interest margin(5)											3.00	%											3.10	%
Average interest-earning assets to interest-bearing liabilities			108.53	%											106.91	%

 

(1)	Yields and rates are annualized.

(2)	Includes securities available-for-sale and held-to-maturity. A tax equivalent adjustment of $10,000 and $15,000 was applied to tax-exempt income for the three months ended September 30, 2014 and September 30, 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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		For the Nine Months Ended September 30,
		2014												2013
		Average Outstanding Balance				Interest				Average Yield/Rate(1)				Average Outstanding Balance				Interest				Average Yield/Rate(1)
		(In thousands)												(In thousands)
Interest-earning assets:
Loans		$	132,181			$	4,274				4.31	%		$	122,743			$	4,170				4.53	%
Interest-earning deposits			13,023				30				0.31	%			22,338				62				0.37	%
Investment securities(2)			12,771				227				2.37	%			14,312				258				2.40	%
Federal Home Loan Bank stock and The Cooperative Central Reserve Fund			1,079				7				0.86	%			1,057				3				0.38	%
Total interest-earning assets			159,054				4,538				3.80	%			160,450				4,493				3.73	%
Noninterest-earning assets			11,961												11,499
Total assets		$	171,015											$	171,949
Interest-bearing liabilities:
Savings accounts		$	18,969				25				0.18	%		$	17,487				26				0.20	%
NOW accounts			18,470				14				0.10	%			18,991				14				0.10	%
Money market accounts			36,667				105				0.38	%			39,715				124				0.42	%
Certificates of deposit			67,121				626				1.24	%			70,169				689				1.31	%
Total interest-bearing deposits			141,227				770				0.73	%			146,362				853				0.78	%
Federal Home Loan Bank advances			4,899				37				1.01	%			3,998				49				1.63	%
Total interest-bearing liabilities			146,126				807				0.74	%			150,360				902				0.80	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			11,683												8,973
Other noninterest-bearing liabilities			318												219
Total noninterest-bearing liabilities			12,001												9,192
Total liabilities			158,127												159,552
Total equity			12,888												12,397
Total liabilities and total equity		$	171,015											$	171,949
Net interest income						$	3,731											$	3,591
Net interest rate spread(3)											3.06	%											2.93	%
Net interest-earning assets(4)		$	12,928											$	10,090
Net interest margin(5)											3.13	%											2.98	%
Average interest-earning assets to interest-bearing liabilities			108.85	%											106.71	%

 

(1)	Yields and rates are annualized.

(2)	Includes securities available-for-sale and held-to-maturity. A tax equivalent adjustment of $36,000 and $45,000 was applied to tax-exempt income for the nine months ended September 30, 2014 and September 30, 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.

Liquidity and Capital Resources

Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, proceeds from maturities and calls of securities, maturities of certificate of deposit investments and Federal Home Loan Bank advances. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities

 

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was $(551,000), and $881,000 for the nine months ended September 30, 2014 and September 30, 2013, respectively. Net cash (used in) provided by investing activities, which consists primarily of disbursements for loan originations, the purchase of securities and the purchase of time deposits with other banks, offset by principal collections on loans, proceeds from the sale of securities, proceeds from redemption of time deposits and proceeds from maturing securities and pay downs on mortgage-backed securities, was $3.8 million, and $(11.4) million for the nine months ended September 30, 2014 and September 30, 2013, respectively. During the nine months ended September 30, 2014, we purchased $2.8 million and sold $2.7 million in securities held as available-for-sale, and during the nine months ended September 30, 2013, we purchased $3.9 million and sold $3.6 million in securities held as available-for-sale. Net cash provided by (used in) financing activities, consisting primarily of the activity in deposit accounts and Federal Home Loan Bank advances, was $22.5 million, and $(766,000) for the nine months ended September 30, 2014 and September 30, 2013, respectively, resulting from subscription funds from the stock offering and our strategy of managing growth and cash flows to preserve capital ratios and reduce expenses.

At September 30, 2014, we exceeded all of our regulatory capital requirements with a tier 1 leverage capital level of $13.1 million, or 7.4% of average assets, which is above the well capitalized level of $8.8 million, or 5.00%; and total risk-based capital of $13.8 million, or 14.3% of risk-weighted assets, which is above the well capitalized level of $9.7 million, or 10.00%. At December 31, 2013, we exceeded all of our regulatory capital requirements with a tier 1 leverage capital level of $12.7 million, or 7.5% of average assets, which is above the well capitalized level of $8.4 million, or 5.00%; and total risk-based capital of $13.4 million, or 13.5% of risk-weighted assets, which is above the well capitalized level of $9.9 million, or 10.00%. Accordingly, Pilgrim Bank was categorized as well capitalized at September 30, 2014 and December 31, 2013. Management is not aware of any conditions or events since the most recent notification that would change our category.

At September 30, 2014, we had outstanding commitments to originate loans of $8.8 million and unadvanced funds on loans of $7.9 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2014 totaled $32.9 million. Management expects, based on historical experience, that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures above market risk are not required by smaller reporting companies, such as the Company.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2014. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2014, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II - Other Information

 

Item 1.

Legal Proceedings

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

 

Item 1A.

Risk Factors

Disclosure of risk factors is not required by smaller reporting companies, such as the Company.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

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

 

(b)

Use of Proceeds. On March 11, 2014, Pilgrim Bancshares, Inc. filed a Registration Statement on Form S-1 with the Securities and Exchange Commission in connection with the conversion of Conahasset Bancshares, MHC and the related offering of common stock by Pilgrim Bancshares, Inc. The Registration Statement (File No. 333-194485) was declared effective by the Securities and Exchange Commission on August 11, 2014. Pilgrim Bancshares, Inc. registered 2,182,125 shares of common stock, par value $0.01 per share, pursuant to the Registration Statement for an aggregate price of $21.8 million. The stock offering commenced on August 12, 2014 and ended on September 11, 2014, and the conversion and stock offering closed on October 10, 2014.

Keefe, Bruyette & Woods, Inc. was engaged to assist in the marketing of the common stock. For its services, Keefe, Bruyette & Woods, Inc. received a fee of $225,000. Keefe, Bruyette & Woods, Inc. was also reimbursed $116,000 for its reasonable out-of-pocket expenses, inclusive of its legal fees and expenses. Keefe, Bruyette & Woods, Inc. also was engaged to provide assistance with the conversion, and for these services received an additional fee of $20,000.

The stock offering resulted in gross proceeds of $21.8 million, through the sale of 2,182,125 shares at a price of $10.00 per share. Expenses related to the offering were approximately $1.7 million, including $316,000 paid to Keefe, Bruyette & Woods, Inc. Net proceeds of the offering were approximately $20.1 million.

Pilgrim Bancshares, Inc. contributed $10.1 million of the net proceeds of the offering to Pilgrim Bank, and contributed 65,464 shares of common stock and $70,360 of the net proceeds to Pilgrim Bank Foundation, which was formed in connection with the conversion. In addition, $1.8 million of the net proceeds were used to fund the loan to the employee stock ownership plan, and $8.3 million of the net proceeds were retained by Pilgrim Bancshares, Inc. The net proceeds contributed to Pilgrim Bank have been invested in short term instruments and will be used to make loans. The net proceeds retained by Pilgrim Bancshares, Inc. have been deposited with Pilgrim Bank and will be invested.

 

(c)

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

 

Item 3.

Defaults Upon Senior Securities

None.

 

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Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

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

 

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SIGNATURES

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

 

				Pilgrim Bancshares, Inc.
Date: November 14, 2014				/s/ Francis E. Campbell
				Francis E. Campbell
				President and Chief Executive Officer
Date: November 14, 2014				/s/ Christopher G. McCourt
				Christopher G. McCourt
				Senior Vice President, Chief Financial Officer and Treasurer

 

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INDEX TO EXHIBITS

 

3.1		Articles of Incorporation of Pilgrim Bancshares, Inc.*
3.2		Bylaws of Pilgrim Bancshares, Inc.*
10.1		Employment Agreement between Pilgrim Bank and Francis E. Campbell
10.2		Change in Control Agreement between Pilgrim Bank and Christopher G. McCourt
10.3		Change in Control Agreement between Pilgrim Bank and Joan A. MacIntyre
10.4		Pilgrim Bank Supplemental Executive Retirement Plan
10.5		Pilgrim Bank Executive Annual Incentive Plan
10.6		Pilgrim Bank Employee Stock Ownership Plan
31.1		Certification of Francis E. Campbell, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
31.2		Certification of Christopher G. McCourt, Senior Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
32		Certification of Francis E. Campbell, President and Chief Executive Officer, and Christopher G. McCourt, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from the Company’s Quarterly Report on Form 10Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language):
		(i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Changes in Equity; (v) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements

 

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

 

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