Pilgrim Bancshares, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - Pilgrim Bancshares, Inc.	v451669_ex31-1.htm
EX-32 - EXHIBIT 32 - Pilgrim Bancshares, Inc.	v451669_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Pilgrim Bancshares, Inc.	v451669_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016.

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

For the transition period from ______________ to ______________.

Commission file number: 000-55290

PILGRIM BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

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

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

As of November 14, 2016, there were issued and outstanding 2,253,439 shares of the Registrant’s Common Stock with a par value of $0.01 per share.

Pilgrim Bancshares, Inc.

Form 10-Q

Index

		Page
Part I. Financial Information

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	3

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and September 30, 2015 (unaudited)	4

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and September 30, 2015 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2016 and September 30, 2015 (unaudited)	6

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and September 30, 2015 (unaudited)	7

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4.	Controls and Procedures	38

Part II. Other Information

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	39

	Signature Page	40

Part I. – Financial Information

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In Thousands, except share data)

	September 30,			December 31,
	2016			2015
	(unaudited)
ASSETS
Cash and due from banks	$	2,264		$	2,351
Interest-bearing demand deposits with other banks		9,637			8,319
Total cash and cash equivalents		11,901			10,670
Interest-bearing time deposits with other banks		1,092			1,087
Investments in available-for-sale securities (at fair value)		17,595			16,556
Investments in held-to-maturity securities (fair value of $139 at September 30, 2016, and $155 at December 31, 2015)		107			120
Federal Home Loan Bank stock, at cost		2,231			971
Investment in The Co-operative Central Reserve Fund, at cost		384			384
Loans, net of allowance for loan losses of $1,013 at September 30, 2016, and $886 at December 31, 2015		207,515			170,427
Premises and equipment, net		4,979			5,177
Investment in real estate, net		1,545			1,578
Accrued interest receivable		581			508
Deferred income tax asset, net		426			496
Bank-owned life insurance		2,307			2,276
Other assets		217			257
Total assets	$	250,880		$	210,507

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	18,506		$	15,290
Interest-bearing		162,975			154,082
Total deposits		181,481			169,372
Federal Home Loan Bank advances		36,372			8,500
Other liabilities		715			666
Total liabilities		218,568			178,538
Stockholders' equity:
Common stock $.01 par value per share: 10,000,000 shares authorized, 2,253,439 shares issued at September 30, 2016 and 2,224,489 shares issued at December 31, 2015		23			22
Additional paid-in capital		20,876			20,466
Retained earnings		13,870			13,253
Unearned compensation - ESOP (163,324 shares unallocated at September 30, 2016 and 167,819 shares unallocated at December 31, 2015)		(1,634	)		(1,679	)
Unearned compensation - Restricted Stock		(852	)		-
Accumulated other comprehensive income (loss)		29			(93	)
Total stockholders' equity		32,312			31,969
Total liabilities and stockholders' equity	$	250,880		$	210,507

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

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, except share and per share data)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016		2015
	(unaudited)					(unaudited)
Interest and dividend income:
Interest and fees on loans	$	2,119	$	1,696		$	5,730	$	4,839
Interest on debt securities:
Taxable		46		47			152		133
Tax-exempt		8		17			34		51
Other interest and dividends		21		12			72		37
Total interest and dividend income		2,194		1,772			5,988		5,060
Interest expense:
Interest on deposits		357		250			1,033		730
Interest on Federal Home Loan Bank advances		69		18			119		45
Total interest expense		426		268			1,152		775
Net interest and dividend income		1,768		1,504			4,836		4,285
Provision for loan losses		62		36			134		96
Net interest and dividend income after provision for loan losses		1,706		1,468			4,702		4,189
Noninterest income:
Service charges on deposit accounts		27		30			81		90
Gain on sales/calls of securities, net		25		16			28		17
Writedown of securities (includes losses of $3 for the three and nine month periods ended September 30, 2015, no amounts recognized in other comprehensive income in any of the periods before taxes)		-		(3	)		-		(3	)
Gain on sales of loans, net		9		17			43		54
Rental income		62		63			196		194
Other income		32		33			100		96
Total noninterest income		155		156			448		448
Noninterest expense:
Salaries and employee benefits		847		749			2,467		2,259
Occupancy expense		106		120			366		418
Equipment expense		49		45			143		138
Data processing expense		107		100			304		277
Professional fees		112		104			311		300
Federal Deposit Insurance Corporation assessment		38		36			112		106
Communications expense		27		31			91		90
Advertising and public relations expense		33		36			96		92
Insurance expense		15		20			46		61
Supplies expense		13		14			41		47
Other expense		54		49			167		173
Total noninterest expense		1,401		1,304			4,144		3,961
Income before income taxes		460		320			1,006		676
Income tax expense		184		117			389		238
Net income	$	276	$	203		$	617	$	438

Weighted-average number of common shares outstanding:
Basic		2,025,166		2,077,522			2,026,604		2,076,024
Diluted		2,025,829		2,077,522			2,026,809		2,076,024

Earnings per share:
Basic	$	0.14	$	0.10		$	0.30	$	0.21
Diluted	$	0.14	$	0.10		$	0.30	$	0.21

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

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Net income	$	276		$	203		$	617		$	438
Other comprehensive (loss) income, net of tax:
Net unrealized holding (loss) gain on available-for-sale securities		(36	)		110			220			63
Reclassification adjustment for net realized gains in net income ⁽¹⁾		(25	)		(16	)		(28	)		(16	)
Other comprehensive (loss) income before income tax effect		(61	)		94			192			47
Income tax expense		23			(35	)		(70	)		(17	)
Other comprehensive (loss) income, net of tax		(38	)		59			122			30
Comprehensive income	$	238		$	262		$	739		$	468

(1) Reclassification adjustments are comprised of realized security gains. The realized gains have been reclassified out of accumulated other comprehensive income (loss) and have affected certain lines in the consolidated statements of income as follows: the pre-tax amount is included in gain on sales/calls of securities, net; the tax expense amount which was $9,000 and $5,000 for the three months ended September 30, 2016 and 2015, respectively, and $10,000 and $6,000 for the nine months ended September 30, 2016 and 2015, respectively, is included in income tax expense. The after tax amount included in net income was $16,000 and $11,000 for the three months ended September 30, 2016 and 2015, respectively, and $18,000 and $10,000 for the nine months ended September 30, 2016 and 2015, respectively.

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

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2016 and 2015 (unaudited)

(In Thousands, except share data)

	Common Stock					Additional Paid-in			Retained		Unearned Compensation-			Unearned Compensation-			Other Comprehensive
	Shares			Amount		Capital			Earnings		ESOP			Restricted Stock			(Loss) Income			Total
Balance, December 31, 2014		2,247,589		$	22	$	20,770		$	12,599	$	(1,738	)	$	-		$	(51	)	$	31,602
Net income		-			-		-			438		-			-			-			438
Common stock held by ESOP committed to be allocated (4,495 shares)		-			-		8			-		45			-			-			53
Other comprehensive income, net of tax effect		-			-		-			-		-			-			30			30
Issuance costs related to initial public offering		-			-		(17	)		-		-			-			-			(17	)
Balance, September 30, 2015		2,247,589		$	22	$	20,761		$	13,037	$	(1,693	)	$	-		$	(21	)	$	32,106

Balance, December 31, 2015		2,224,489		$	22	$	20,466		$	13,253	$	(1,679	)	$	-		$	(93	)	$	31,969
Net income		-			-		-			617		-			-			-			617
Common stock held by ESOP committed to be allocated (4,495 shares)		-			-		13			-		45			-			-			58
Restricted stock granted in connection with equity incentive plan		70,950			1		911			-		-			(912	)		-			-
Share based compensation-restricted stock		-			-		-			-		-			60			-			60
Share based compensation-options		-			-		36			-		-			-			-			36
Shares purchased and retired		(42,000	)		-		(550	)		-		-			-			-			(550	)
Other comprehensive income, net of tax effect		-			-		-			-		-			-			122			122
Balance, September 30, 2016		2,253,439		$	23	$	20,876		$	13,870	$	(1,634	)	$	(852	)	$	29		$	32,312

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

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Nine Months Ended September 30,
	2016			2015
	(unaudited)
Cash flows from operating activities:
Net income	$	617		$	438
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		134			96
Capitalized interest on interest-bearing time deposits		(5	)		(9	)
Amortization of securities, net		65			63
Gain on sales/calls of securities, net		(28	)		(17	)
Loans originated for sale		(2,205	)		(2,631	)
Proceeds from sales of loans originated for sale		2,248			2,685
Gain on sales of loans, net		(43	)		(54	)
Change in deferred origination fees, costs and discounts		(224	)		(47	)
Writedown of securities		-			3
Depreciation and amortization		254			255
Stock based compensation expense		154			53
Increase in accrued interest receivable		(73	)		(33	)
Increase in bank-owned life insurance		(31	)		(35	)
Decrease in other assets		40			121
Increase in other liabilities		49			99

Net cash provided by operating activities		952			987

Cash flows from investing activities:
Proceeds from redemption and maturities of interest-bearing time deposits		-			1,500
Purchase of Federal Home Loan Bank stock		(1,339	)		(251	)
Redemption of Federal Home Loan Bank stock		79			-
Purchases of available-for-sale securities		(6,342	)		(4,384	)
Proceeds from maturities/calls/pay downs of available-for-sale securities		4,245			2,438
Proceeds from sales of available-for-sale securities		1,208			-
Proceeds from maturities of held-to-maturity securities		18			28
Loan principal originations and collections, net		(12,875	)		(13,284	)
Loans purchased		(29,158	)		(8,558	)
Loan participations sold		5,035			1,650
Capital expenditures		(23	)		(52	)

Net cash used in investing activities		(39,152	)		(20,913	)

Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and savings accounts		3,660			(1,909	)
Net increase in time deposits		8,449			7,004
Payments on Federal Home Loan Bank long-term advances		(2,728	)		(1,000	)
Proceeds from Federal Home Loan Bank long-term advances		30,600			5,500
Net change in short-term Federal Home Loan Bank advances		-			(500	)
Issuance costs related to initial public offering		-			(17	)
Purchase and retirement of common stock		(550	)		-

Net cash provided by financing activities		39,431			9,078

Net increase (decrease) in cash and cash equivalents		1,231			(10,848	)
Cash and cash equivalents at beginning of period		10,670			18,295
Cash and cash equivalents at end of period	$	11,901		$	7,447

Supplemental disclosures:
Interest paid	$	1,133		$	773
Income taxes paid		500			149

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

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 - NATURE OF OPERATIONS

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

NOTE 2 - BASIS OF PRESENTATION

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

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

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

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

As an “emerging growth company,” as defined in Title 1 of the Jumpstart Our Business Startups (JOBS) Act, the Company has elected to use the extended transition period to delay adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, the consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of September 30, 2016, there is no significant difference in the comparability of the financial statements as a result of this extended transition period.

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

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

Simplify the impairment assessment of equity investments without determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.

Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.

Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

Require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.

Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

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

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

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

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

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. Under the extended transition period for an emerging growth company, the amendments in ASU 2016-15 are effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 4 - EARNINGS PER SHARE (EPS)

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

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (In thousands)	$	276		$	203		$	617		$	438

Basic and diluted common shares:
Weighted average common shares outstanding		2,189,239			2,247,589			2,192,175			2,247,589
Weighted average unallocated ESOP shares		(164,073	)		(170,067	)		(165,571	)		(171,565	)
Basic weighted average shares outstanding		2,025,166			2,077,522			2,026,604			2,076,024

Dilutive effect of unearned restricted stock		663			-			205			-
Diluted weighted average shares outstanding		2,025,829			2,077,522			2,026,809			2,076,024

Basic earnings per share	$	0.14		$	0.10		$	0.30		$	0.21
Diluted earnings per share (1)	$	0.14		$	0.10		$	0.30		$	0.21

(1) Options to purchase 169,500 shares, representing all outstanding options, were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2016 because the effect is anti-dilutive.

NOTE 5 - INVESTMENTS IN SECURITIES

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

	Amortized		Gross		Gross
	Cost		Unrealized		Unrealized		Fair
	Basis		Gains		Losses		Value
	(In Thousands)
Available-for-sale securities:
September 30, 2016 (unaudited):
Debt securities issued by U.S. government corporations and agencies	$	8,879	$	25	$	2	$	8,902
Debt securities issued by states of the United States and political subdivisions of the states		2,706		31		14		2,723
Mortgage-backed securities		5,965		37		32		5,970
	$	17,550	$	93	$	48	$	17,595

December 31, 2015:
Debt securities issued by U.S. government corporations and agencies	$	6,339	$	6	$	34	$	6,311
Debt securities issued by states of the United States and political subdivisions of the states		2,456		7		19		2,444
Mortgage-backed securities		7,908		6		113		7,801
	$	16,703	$	19	$	166	$	16,556

	Amortized		Gross		Gross
	Cost		Unrealized		Unrealized		Fair
	Basis		Gains		Losses		Value
	(In Thousands)
Held-to-maturity securities:
September 30, 2016 (unaudited):
Mortgage-backed securities	$	107	$	32	$	-	$	139
	$	107	$	32	$	-	$	139

December 31, 2015:
Mortgage-backed securities	$	120	$	35	$	-	$	155
	$	120	$	35	$	-	$	155

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

	Available-For-Sale		Held-To-Maturity
			Amortized
	Fair		Cost		Fair
	Value		Basis		Value
	(In Thousands)
Due within one year	$	-	$	-	$	-
Due after one year through five years		10,043		-		-
Due after five years through ten years		1,314		-		-
Due after ten years		268		-		-
Mortgage-backed securities		5,970		107		139
	$	17,595	$	107	$	139

Proceeds from sales of available-for-sale securities during the nine months ended September 30, 2016 (unaudited) were $1.2 million with gross realized gains of $24,000 and no gross realized losses. The tax expense related to these net realized gains for the nine month period ended September 30, 2016 (unaudited) amounted to $9,000.

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

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

	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(In Thousands)
September 30, 2016 (unaudited):
Debt securities issued by U.S. government corporations and agencies	$	1,997	$	2	$	-	$	-	$	1,997	$	2
Debt securities issued by states of the United States and political subdivisions of the states		203		-		436		14		639		14
Mortgage-backed securities		586		3		1,477		29		2,063		32
Total temporarily impaired securities	$	2,786	$	5	$	1,913	$	43	$	4,699	$	48

December 31, 2015:
Debt securities issued by U.S. government corporations and agencies	$	5,320	$	21	$	487	$	13	$	5,807	$	34
Debt securities issued by states of the United States and political subdivisions of the states		-		-		912		19		912		19
Mortgage-backed securities		4,302		46		2,101		67		6,403		113
Total temporarily impaired securities	$	9,622	$	67	$	3,500	$	99	$	13,122	$	166

As of September 30, 2016 (unaudited), investment securities with unrealized losses consist of 4 debt securities issued by U.S. government agencies and government-sponsored enterprises, 3 debt securities issued by states of the United States and political subdivisions of the states and 12 mortgage-backed securities. The Company reviews investments for other-than-temporary impairment using a number of factors including the length of time and the extent to which the market value has been less than cost and by examining any credit deterioration or ratings downgrades. The unrealized losses in the above tables are primarily attributable to changes in market interest rates. As Company management has the intent and ability to hold impaired debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

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

The following table summarizes other-than-temporary impairment losses on securities for the three and nine months ended September 30, 2016 and 2015 (unaudited):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	Non-Agency		Non-Agency		Non-Agency		Non-Agency
	Mortgage-Backed		Mortgage-Backed		Mortgage-Backed		Mortgage-Backed
	Securities		Securities		Securities		Securities
	(In Thousands)				(In Thousands)

Total other-than-temporary impairment losses	$	-	$	3	$	-	$	3
Less: unrealized other-than-temporary losses recognized in other comprehensive income (loss) (1)		-		-		-		-
Net impairment losses recognized in earnings (2)	$	-	$	3	$	-	$	3

(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

No other-than-temporary impairment losses were recognized for the nine months ended September 30, 2016. For the three and nine months ended September 30, 2015, 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 was 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.

NOTE 6 - LOANS

Loans consisted of the following:

	September 30,			December 31,
	2016			2015
	(unaudited)
	(In Thousands)

Real estate loans:
One-to four- family residential	$	132,440		$	104,861
Commercial		25,521			21,848
Multi-family		18,850			16,559
Home equity loans and lines of credit		2,230			2,093
Construction		23,952			18,755
Commercial and industrial loans		2,975			3,964
Consumer loans:
Consumer lines of credit		17			20
Other consumer loans		2,166			3,060
		208,151			171,160
Net deferred loan origination fees, costs and discounts		377			153
Allowance for loan losses		(1,013	)		(886	)
Net loans	$	207,515		$	170,427

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

	Real Estate:															Consumer
	One- to four-family							Home Equity Loans					Commercial and			Consumer		Other
	Residential		Commercial			Multi-family		and Lines of Credit			Construction		Industrial Loans			Line of Credit		Consumer			Unallocated			Total
	(In Thousands)
Nine months ended September 30, 2016 (unaudited):
Allowance for loan losses:
Beginning balance	$	373	$	146		$	62	$	14		$	216	$	13		$	1	$	29		$	32		$	886
Charge-offs		-		-			-		-			-		-			-		(7	)		-			(7	)
Recoveries		-		-			-		-			-		-			-		-			-			-
Provision (benefit)		72		1			9		(2	)		60		(3	)		-		(1	)		(2	)		134
Ending balance	$	445	$	147		$	71	$	12		$	276	$	10		$	1	$	21		$	30		$	1,013

Nine months ended September 30, 2015 (unaudited):
Allowance for loan losses:
Beginning balance	$	362	$	134		$	36	$	27		$	121	$	8		$	1	$	20		$	34		$	743
Charge-offs		-		-			-		-			-		-			-		-			-			-
Recoveries		-		-			-		-			-		-			-		-			-			-
Provision (benefit)		8		(14	)		19		(13	)		99		9			-		12			(24	)		96
Ending balance	$	370	$	120		$	55	$	14		$	220	$	17		$	1	$	32		$	10		$	839

At September 30, 2016 (unaudited):
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment	$	21	$	-		$	-	$	-		$	-	$	-		$	-	$	-		$	-		$	21
Ending balance:
Collectively evaluated for impairment		424		147			71		12			276		10			1		21			30			992
Total allowance for loan losses ending balance	$	445	$	147		$	71	$	12		$	276	$	10		$	1	$	21		$	30		$	1,013

Loans:
Ending balance:
Individually evaluated for impairment	$	3,423	$	659		$	-	$	6		$	-	$	-		$	-	$	-		$	-		$	4,088
Ending balance:
Collectively evaluated for impairment		129,017		24,862			18,850		2,224			23,952		2,975			17		2,166			-			204,063
Total loans ending balance	$	132,440	$	25,521		$	18,850	$	2,230		$	23,952	$	2,975		$	17	$	2,166		$	-		$	208,151

	Real Estate:												Consumer
	One- to four-family						Home Equity Loans				Commercial and		Consumer		Other
	Residential		Commercial		Multi-family		and Lines of Credit		Construction		Industrial Loans		Line of Credit		Consumer		Unallocated		Total
At December 31, 2015:
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment	$	21	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	21
Ending balance:
Collectively evaluated for impairment		352		146		62		14		216		13		1		29		32		865
Total allowance for loan losses ending balance	$	373	$	146	$	62	$	14	$	216	$	13	$	1	$	29	$	32	$	886

Loans:
Ending balance:
Individually evaluated for impairment	$	5,665	$	679	$	-	$	59	$	-	$	-	$	-	$	-	$	-	$	6,403
Ending balance:
Collectively evaluated for impairment		99,196		21,169		16,559		2,034		18,755		3,964		20		3,060		-		164,757
Total loans ending balance	$	104,861	$	21,848	$	16,559	$	2,093	$	18,755	$	3,964	$	20	$	3,060	$	-	$	171,160

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

													90 Days
					90 Days								or More
					or More		Total		Total				Past Due		Nonaccrual
	30-59 Days		60-89 Days		Past Due		Past Due		Current		Total		and Accruing		Loans
	(In Thousands)
September 30, 2016 (unaudited):
Real estate loans:
One- to four-family residential	$	567	$	-	$	-	$	567	$	131,873	$	132,440	$	-	$	11
Commercial				-		-		-		25,521		25,521		-		-
Multi-family		-		-		-		-		18,850		18,850		-		-
Home equity loans and lines of credit		6		-		-		6		2,224		2,230		-		-
Construction		-		-		-		-		23,952		23,952		-		-
Commercial and industrial loans		-		-		-		-		2,975		2,975		-		-
Consumer loans:
Consumer lines of credit		-		-		-		-		17		17		-		-
Other consumer				-		-		-		2,166		2,166		-		-
Total	$	573	$	-	$	-	$	573	$	207,578	$	208,151	$	-	$	11

December 31, 2015:
Real estate loans:
One- to four-family residential	$	1,088	$	18	$	1,393	$	2,499	$	102,362	$	104,861	$	-	$	1,410
Commercial		-		-		-		-		21,848		21,848		-		-
Multi-family		-		-		-		-		16,559		16,559		-		-
Home equity loans and lines of credit		-		59		-		59		2,034		2,093		-		-
Construction		-		-		-		-		18,755		18,755		-		-
Commercial and industrial loans		-		-		-		-		3,964		3,964		-		-
Consumer loans:
Consumer lines of credit		-		-		-		-		20		20		-		-
Other consumer		16		-		-		16		3,044		3,060		-		-
Total	$	1,104	$	77	$	1,393	$	2,574	$	168,586	$	171,160	$	-	$	1,410

Information about loans that meet the definition of an impaired loan in ASC 310-10-35, “Receivables – Overall Subsequent Measurement,” is as follows at September 30, 2016 and December 31, 2015.

			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In Thousands)

September 30, 2016 (unaudited):
With no related allowance recorded:
Real estate loans:
One- to four-family residential	$	2,856	$	2,856	$	-
Commercial		659		659		-
Home equity loans and lines of credit		6		88		-
Total impaired with no related allowance	$	3,521	$	3,603	$	-

With an allowance recorded:
Real estate loans:
One- to four-family residential	$	567	$	567	$	21
Commercial		-		-		-
Home equity loans and lines of credit		-		-		-
Total impaired with an allowance recorded	$	567	$	567	$	21

Total
Real estate loans:
One- to four-family residential	$	3,423	$	3,423	$	21
Commercial		659		659		-
Home equity loans and lines of credit		6		88		-
Total impaired loans	$	4,088	$	4,170	$	21

December 31, 2015:
With no related allowance recorded:
Real estate loans:
One- to four-family residential	$	5,098	$	5,098	$	-
Commercial		679		679		-
Home equity loans and lines of credit		59		141		-
Total impaired with no related allowance	$	5,836	$	5,918	$	-

With an allowance recorded:
Real estate loans:
One- to four-family residential	$	567	$	567	$	21
Commercial		-		-		-
Home equity loans and lines of credit		-		-		-
Total impaired with an allowance recorded	$	567	$	567	$	21

Total
Real estate loans:
One- to four-family residential	$	5,665	$	5,665	$	21
Commercial		679		679		-
Home equity loans and lines of credit		59		141		-
Total impaired loans	$	6,403	$	6,485	$	21

The following presents by class, information related to average recorded investment and interest income recognized on impaired loans for the nine months ended September 30, 2016 and 2015 (unaudited).

	Nine Months Ended				Nine Months Ended
	September 30, 2016				September 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized

With no related allowance recorded:
Real estate loans:
One- to four-family residential	$	3,607	$	135	$	5,840	$	147
Commercial		670		28		691		29
Home equity loans and lines of credit		48		4		53		1
Total impaired with no related allowance	$	4,325	$	167	$	6,584	$	177

With an allowance recorded:
Real estate loans:
One- to four-family residential	$	567	$	17	$	573	$	17
Commercial		-		-		-		-
Home equity loans and lines of credit		-		-		-		-
Total impaired with an allowance recorded	$	567	$	17	$	573	$	17

Total
Real estate loans:
One- to four-family residential	$	4,174	$	152	$	6,413	$	164
Commercial		670		28		691		29
Home equity loans and lines of credit		48		4		53		1
Total impaired loans	$	4,892	$	184	$	7,157	$	194

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

	Real Estate:												Consumer
	One- to four-family						Home Equity Loans				Commercial and		Consumer		Other
	Residential		Commercial		Multi-family		and Lines of Credit		Construction		Industrial Loans		Lines of Credit		Consumer		Total
	(In Thousands)
September 30, 2016 (unaudited):
Grade:
Pass	$	-	$	24,862	$	18,850	$	-	$	23,952	$	2,975	$	-	$	-	$	70,639
Special mention		2,026		659		-				-		-		-		-		2,685
Substandard		567		-		-		6		-		-		-		-		573
Loans not formally rated		129,847		-		-		2,224		-		-		17		2,166		134,254
Total	$	132,440	$	25,521	$	18,850	$	2,230	$	23,952	$	2,975	$	17	$	2,166	$	208,151

December 31, 2015:
Grade:
Pass	$	-	$	21,169	$	16,559	$	-	$	18,755	$	3,964	$	-	$	-	$	60,447
Special mention		539		-		-		53		-		-		-		-		592
Substandard		3,796		679		-		6		-		-		-		-		4,481
Loans not formally rated		100,526		-		-		2,034		-		-		20		3,060		105,640
Total	$	104,861	$	21,848	$	16,559	$	2,093	$	18,755	$	3,964	$	20	$	3,060	$	171,160

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

Credit Quality Information

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

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

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

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

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

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

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

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

During the three months ended September 30, 2016 (unaudited), there were no loans modified as TDRs. During the nine months ended September 30, 2016 (unaudited), five loans were modified as TDRs. Three of the modified loans paid off by September 30, 2016. During the nine months ended September 30, 2015 (unaudited), there were no loans modified as TDRs. The following table sets forth information regarding the remaining loans modified as TDRs during the nine months ended September 30, 2016.

			Pre-Modification		Post-Modification
	Number of		Outstanding Recorded		Outstanding Recorded
	Contracts		Investment		Investment
	(Dollars In Thousands)

September 30, 2016:
Troubled Debt Restructurings:
Real estate loans:
One- to four- family residential		1	$	567	$	567
Home equity loans and lines of credit		1		6		6
		2	$	573	$	573

At September 30, 2016 (unaudited) there were no loans modified as TDRs that subsequently defaulted.

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

The following table provides information on how loans outstanding as of September 30, 2016 were modified as TDRs:

	Rate		Interest Only		Rate Reduction and
	Reduction		Period		Interest Only Period
	(In Thousands)

September 30, 2016 (unaudited):
Real estate loans:
One- to four- family residential	$	-	$	567	$	-
Home equity loans and lines of credit		-		6		-
Total	$	-	$	573	$	-

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

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $27.5 million and $21.8 million at September 30, 2016 (unaudited) and December 31, 2015, respectively.

On March 25, 2016, the Company entered into an agreement to purchase $20.0 million of residential mortgages, with 50% of the purchase being fixed rate loans and 50% being adjustable rate mortgages of varying maturities. The purchase premium is fixed at 1%. As of September 30, 2016, the Company had purchased $17.8 million of loans under this agreement.

NOTE 7 – DEPOSITS

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

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

	(In Thousands)
2017	$	59,008
2018		17,444
2019		3,949
2020		3,410
2021		7,888
Total	$	91,699

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

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

	(In Thousands)
2017	$	3,600
2018		4,500
2019		4,377
2020		-
2021		7,895
Thereafter		16,000
	$	36,372

Interest rates range from 0.39% to 1.41% with a weighted-average interest rate of 0.91% at September 30, 2016 (unaudited).

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

NOTE 9 - FAIR VALUE MEASUREMENTS

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

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

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

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

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

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, 2016 (unaudited) and December 31, 2015. The Company did not have any significant transfers between level 1 and level 2 of the fair value hierarchy during the nine months ended September 30, 2016 (unaudited) and the year ended December 31, 2015.

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

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

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

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

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		Level 1		Level 2		Level 3
	(In Thousands)
September 30, 2016 (unaudited) :
Debt securities issued by U.S. government corporations and agencies	$	8,902	$	-	$	8,902	$	-
Debt securities issued by states of the United States and political subdivisions of the states		2,723		-		2,723		-
Mortgage-backed securities		5,970		-		5,970		-
Totals	$	17,595	$	-	$	17,595	$	-

December 31, 2015 :
Debt securities issued by U.S. government corporations and agencies	$	6,311	$	-	$	6,311	$	-
Debt securities issued by states of the United States and political subdivisions of the states		2,444		-		2,444		-
Mortgage-backed securities		7,801		-		7,801		-
Totals	$	16,556	$	-	$	16,556	$	-

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

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

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

December 31, 2015:
Impaired loans	$	546	$	-	$	-	$	546
Totals	$	546	$	-	$	-	$	546

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, 2016 (unaudited)
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	11,901	$	11,901	$	-	$	-	$	11,901
Interest-bearing time deposits with other banks		1,092		-		1,094		-		1,094
Available-for-sale securities		17,595		-		17,595		-		17,595
Held-to-maturity securities		107		-		139		-		139
Federal Home Loan Bank stock		2,231		2,231		-		-		2,231
Investment in The Co-operative Central
Reserve Fund		384		384		-		-		384
Loans, net		207,515		-		-		209,319		209,319
Accrued interest receivable		581		581		-		-		581

Financial liabilities:
Deposits		181,481		-		182,267		-		182,267
FHLB advances		36,372		-		36,242		-		36,242

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

Financial liabilities:
Deposits		169,372		-		170,134		-		170,134
FHLB advances		8,500		-		8,458		-		8,458

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

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

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

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

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

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

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

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

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

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

NOTE 10 – REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to new capital regulations adopted by the Board of Governors of the Federal Reserve System (“FRB”) and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new common equity Tier 1 (“CET1”) capital ratio of 4.5%, increase the minimum Tier 1 capital to risk-weighted assets ratio to 6.0% from 4.0%, require a minimum total capital to risk-weighted assets ratio of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% (new) and a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk based capital ratio of 10.0% (unchanged) and a Tier 1 leverage ratio of 5.0% (unchanged). In addition, the regulations establish a capital conservation buffer above the required capital ratios that began phasing in on January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses.

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

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

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

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

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

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars In Thousands)
As of September 30, 2016 (unaudited) :
Total Capital (to Risk Weighted Assets)	$	23,998		14.4	%	$	13,350		8.0	%	$	16,687		10.0	%
Tier 1 Capital (to Risk Weighted Assets)		22,974		13.8			10,012		6.0			13,350		8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		22,974		13.8			7,509		4.5			10,846		6.5
Tier 1 Capital (to Average Assets)		22,974		9.5			9,721		4.0			12,151		5.0

As of December 31, 2015:
Total Capital (to Risk Weighted Assets)	$	23,066		16.2	%	$	11,408		8.0	%	$	14,260		10.0	%
Tier 1 Capital (to Risk Weighted Assets)		22,171		15.6			8,556		6.0			11,408		8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		22,171		15.6			6,417		4.5			9,269		6.5
Tier 1 Capital (to Average Assets)		22,171		10.9			8,169		4.0			10,211		5.0

NOTE 11 – COMMON STOCK REPURCHASES

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

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

During the nine month period ending September 30, 2016 (unaudited), a total of 42,000 shares of common stock were repurchased at an average cost of $13.10.

NOTE 12 – EQUITY INCENTIVE PLANS

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

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

The weighted average assumptions used and fair value for options granted during the nine months ended September 30, 2016 (unaudited) are as follows:

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

A summary of activity for the 2015 Equity Incentive Plan as of and for the nine months ended September 30, 2016 (unaudited) is as follows:

	Stock Options
	2016

	Number of
	Shares

Outstanding at beginning of period		-
Granted		169,500
Outstanding at end of period		169,500

Exercisable at end of period		-

Weighted average fair value of options granted during the period	$	3.17
Weighted average contractual life remaining		9.6 years
Weighted average exercise price	$	12.85

	Non-vested
	Restricted Stock
	2016

	Number of
	Shares

Outstanding at beginning of period		-
Granted		70,950
Outstanding at end of period		70,950
Weighted average grant date fair value	$	12.85

As of September 30, 2016 (unaudited), unrecognized share-based compensation expense related to non-vested options amounted to $501,000 and the unrecognized share-based compensation expense related to non-vested restricted stock amounted to $852,000. The unrecognized expense related to the non-vested options and non-vested restricted stock will be recognized over a weighted average period of 4.4 years.

For the three months ended September 30, 2016 (unaudited), the Company recognized stock option related compensation expense of $26,000, and the recognized tax benefit related to this expense was $3,000. For the nine months ended September 30, 2016 (unaudited), the Company recognized stock option related compensation expense of $36,000, and the recognized tax benefit related to this expense was $4,000. For the three months ended September 30, 2016 (unaudited), the Company recognized restricted stock related compensation expense of $46,000, and the recognized tax benefit related to this expense was $18,000. For the nine months ended September 30, 2016 (unaudited), the Company recognized restricted stock related compensation expense of $60,000, and the recognized tax benefit related to this expense was $24,000.

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

General

Management’s discussion and analysis of the financial condition and results of operations at and for the three and nine months ended September 30, 2016 and 2015 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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

statements of our goals, intentions and expectations;

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

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

estimates of our risks and future costs and benefits.

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

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

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

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

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

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

competition among depository and other financial institutions;

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

our success in introducing new financial products;

our ability to attract and maintain deposits;

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

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

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

changes in consumer spending, borrowing and saving habits;

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

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

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

changes in the level of government support of housing finance;

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

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

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

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

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

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

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

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

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

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

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. During the nine months ended September 30, 2016, there were no material changes to the critical accounting policies disclosed in Pilgrim Bancshares, Inc.’s 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on March 28, 2016.

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

Total assets increased $40.4 million, or 19.2%, to $250.9 million at September 30, 2016 from $210.5 million at December 31, 2015. The increase was primarily due to an increase in loans.

Total cash and cash equivalents increased $1.2 million, or 11.5%, to $11.9 million at September 30, 2016 from $10.7 million at December 31, 2015. The increase in cash resulted from the timing of normal cash flows.

Net loans increased $37.1 million, or 21.8%, to $207.5 million at September 30, 2016 from $170.4 million at December 31, 2015. The Company originated $60.2 million and purchased $29.2 million of new loans during the nine months ended September 30, 2016. Partially offsetting the loan originations and purchases were $35.0 million of loan payoffs and amortization, $7.2 million of loans and loan participations sold and $10.1 million of unadvanced funds on loans originated during the nine months ended September 30, 2016.

Investment securities classified as available-for-sale increased $1.0 million, or 6.3%, to $17.6 million at September 30, 2016 from $16.6 million at December 31, 2015, due to the purchase of U.S. government and agency securities. Investment securities classified as held-to-maturity decreased $13,000, or 10.8%, to $107,000 at September 30, 2016, from $120,000 at December 31, 2015 due to payments in the ordinary course of business and a payoff of one security.

Bank-owned life insurance at September 30, 2016 increased $31,000, or 1.4%, compared to December 31, 2015 due to normal increases in cash surrender value.

Deposits increased $12.1 million, or 7.1%, to $181.5 million at September 30, 2016 from $169.4 million at December 31, 2015, primarily due to a $12.1 million increase in certificates of deposit, a $3.2 million increase in noninterest-bearing demand accounts, a $1.3 million increase in savings accounts, a $1.5 million increase in Money Market accounts, and a $2.4 million decrease in NOW accounts. Our core deposits, which we consider to be our noninterest-bearing demand accounts, NOW accounts, savings accounts and money market accounts, collectively increased $3.7 million, or 4.2%, to $89.8 million at September 30, 2016 from $86.1 million at December 31, 2015.

FHLB advances increased $27.9 million, or 327.9%, to $36.4 million at September 30, 2016 from $8.5 million at December 31, 2015, to fund loan growth. FHLB advances as of September 30, 2016 consisted of short and long term borrowings.

Stockholders’ equity increased $343,000, or 1.1%, to $32.3 million at September 30, 2016 from $32.0 million at December 31, 2015. The increase was driven by $617,000 of net income for the nine months ended September 30, 2016 and $122,000 in other comprehensive income, due to an increase in the net unrealized gain position of our available-for-sale investment securities portfolio. Partially offsetting the increase was the purchase and retirement of 42,000 shares of the Company’s common stock at a cost of $550,000.

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

	At September 30, 2016						At December 31, 2015
	(unaudited)
	30-59		60-89		90 Days or		30-59		60-89		90 Days or
	Days		Days		More		Days		Days		More
	Past Due		Past Due		Past Due		Past Due		Past Due		Past Due
	(In Thousands)
Real estate loans:
One- to four-family residential⁽¹⁾	$	567	$	-	$	-	$	1,088	$	18	$	1,393
Commercial				-		-		-		-		-
Multi-family		-		-		-		-		-		-
Home equity loans and lines of credit		6				-		-		59		-
Construction		-		-		-		-		-		-
Total real estate		573		-		-		1,088		77		1,393
Commercial and industrial loans		-		-		-		-		-		-
Consumer loans				-		-		16		-		-
Total loans	$	573	$	-	$	-	$	1,104	$	77	$	1,393

(1)

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

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

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

	At September 30,		At December 31,
	2016		2015
	(unaudited)
	(In Thousands)

Classified assets:
Substandard:
Loans⁽¹⁾	$	573	$	4,481
Securities		106		115
Other real estate owned		-		-
Total substandard		679		4,596
Doubtful		-		-
Loss		-		-
Other real estate owned		-		-
Total classified assets	$	679	$	4,596
Special mention	$	2,685	$	592

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

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

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,			At December 31,
	2016			2015
	(unaudited)
	(Dollars In Thousands)

Non-accrual loans:
Real estate loans:
One- to four-family residential⁽¹⁾	$	11		$	1,410
Commercial		-			-
Multi-family		-			-
Home equity loans and lines of credit		-			-
Construction		-			-
Total real estate		11			1,410
Commercial and industrial loans		-			-
Consumer loans		-			-
Total non-accrual loans		11			1,410

Total accruing loans past due 90 days or more		-			-
Total of nonaccrual loans and accruing loans 90 days or more past due		11			1,410

Other non-performing assets		-			-
Total non-performing assets		11			1,410

Performing troubled debt restructurings:
Real estate loans:
One- to four-family residential⁽²⁾		3,423			4,272
Commercial		659			679
Multi-family		-			-
Home equity loans and lines of credit		6			59
Total real estate		4,088			5,010
Commercial and industrial loans		-			-
Consumer loans		-			-
Total troubled debt restructurings		4,088			5,010

Total non-performing loans and troubled debt restructurings	$	4,099		$	6,420

Non-performing loans to total loans		0.01	%		0.82	%
Non-performing assets to total assets		0.00	%		0.67	%
Non-performing assets and troubled debt restructurings to total assets		1.63	%		3.05	%

(1)

There were no non-performing non-owner occupied residential real estate loans at September 30, 2016 or December 31, 2015.

(2)

There were no troubled debt restructurings related to non-owner occupied residential real estate loans at September 30, 2016 or December 31, 2015.

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

Non-performing loans totaled $11,000 at September 30, 2016, and consisted of one owner occupied one- to four- family residential loan. We had no non-performing commercial real estate and multi-family loans at September 30, 2016. We had no foreclosed real estate at September 30, 2016.

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

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

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

General. Net income for the three months ended September 30, 2016 was $276,000, compared to net income of $203,000 for the three months ended September 30, 2015. The increase of $73,000, or 36.0%, in net income was due to an increase in net interest income, partially offset by an increase in provision for loan losses, and an increase in noninterest expense.

Interest and Dividend Income. Total interest and dividend income for the three months ended September 30, 2016 increased $422,000, or 23.8%, to $2.2 million compared to $1.8 million for the three months ended September 30, 2015. The increase in interest and dividend income was the result of higher average loans in the three months ended September 30, 2016. The average balance of loans during the three months ended September 30, 2016 increased $43.5 million to $204.3 million from $160.8 million for the three months ended September 30, 2015, while the average yield on loans decreased 7 basis points to 4.15% for the three months ended September 30, 2016 from 4.22% for the three months ended September 30, 2015. The average balance of investment securities increased $1.8 million to $16.3 million for the three months ended September 30, 2016 from $14.5 million for the three months ended September 30, 2015, and the yield on investment securities (on a tax-equivalent basis) decreased 60 basis points to 1.41% for the three months ended September 30, 2016 from 2.01% for the three months ended September 30, 2015.

Interest Expense. Total interest expense increased $158,000, or 59.0%, to $426,000 for the three months ended September 30, 2016 from $268,000 for the three months ended September 30, 2015. Interest expense on interest-bearing deposit accounts increased $107,000, or 42.8%, to $357,000 for the three months ended September 30, 2016 from $250,000 for the three months ended September 30, 2015. The increase was primarily due to higher average deposit balances and overall changes in the deposit mix.

Interest expense on FHLB advances increased $51,000, or 283.3%, to $69,000 for the three months ended September 30, 2016 from $18,000 for the three months ended September 30, 2015. The average balance of advances increased $19.4 million, or 199.4%, to $29.2 million for the three months ended September 30, 2016 from $9.8 million for the three months ended September 30, 2015. The cost of funds on FHLB advances increased 19 basis points to 0.92% for the three months ended September 30, 2016 from 0.73% for the three months ended September 30, 2015.

Net Interest and Dividend Income. Net interest and dividend income increased $264,000, or 17.6%, to $1.8 million for the three months ended September 30, 2016 from $1.5 million for the three months ended September 30, 2015. On a tax-equivalent basis, net interest and dividend income increased $259,000, or 17.1%, to $1.8 million for the three months ended September 30, 2016 from $1.5 million for the three months ended September 30, 2015. The tax-equivalent basis increase resulted from a $417,000 increase in interest income, partially offset by a $158,000 increase in interest expense. Our average interest-earning assets increased $48.7 million to $232.3 million for the three months ended September 30, 2016 from $183.5 million for the three months ended September 30, 2015. Our net interest rate spread decreased 25 basis points to 2.89% for the three months ended September 30, 2016 from 3.14% for the three months ended September 30, 2015, and our net interest margin decreased 25 basis points to 3.05% for the three months ended September 30, 2016 from 3.30% for the three months ended September 30, 2015. The decrease in our interest rate spread and net interest margin reflected a reduction in the average yield on loans and higher average balances of certificates of deposit and Federal Home Loan Bank advances.

Provision for Loan Losses. We recorded a provision for loan losses for the three months ended September 30, 2016 of $62,000, compared to a provision of $36,000 for the three months ended September 30, 2015. We maintain the allowance for loan losses at levels we believe are adequate to cover our estimate of probable credit losses as of the end of the reporting period. There were no charge-offs recognized for the three months ended September 30, 2015 and 2016, respectively. The allowance for loan losses was $1.0 million, or 0.49% of total loans at September 30, 2016, compared to $839,000, or 0.51% of total loans at September 30, 2015.

Noninterest Income. Noninterest income decreased $1,000, or 0.6%, to $155,000 for the three months ended September 30, 2016 from $156,000 for the three months ended September 30, 2015. The slight decrease was spread across various categories.

Noninterest Expense. Noninterest expense increased $97,000, or 7.4%, to $1.4 million for the three months ended September 30, 2016 compared to $1.3 million for the three months ended September 30, 2015. The increase was primarily driven by an increase of $98,000 in salaries and benefits expense, due to staff merit increases and equity incentive compensation. Additionally, professional fees increased $8,000, occupancy expense decreased $14,000, and all other noninterest expenses increased $5,000, spread across various categories.

Income Taxes. Income before income taxes of $460,000 resulted in income tax expense of $184,000 for the three months ended September 30, 2016, compared to income before income taxes of $320,000 resulting in an income tax expense of $117,000 for the three months ended September 30, 2015. The effective income tax rate was 40.0% for the three months ended September 30, 2016 compared to 36.6% for the three months ended September 30, 2015.

Comparison of Operating Results for the Nine Months Ended September 30, 2016 and September 30, 2015

General. Net income for the nine months ended September 30, 2016 was $617,000, compared to net income of $438,000 for the nine months ended September 30, 2015. The increase of $179,000, or 40.9%, in net income, was due to an increase in net interest income, partially offset by an increase in provision for loan losses, and an increase in noninterest expense.

Interest and Dividend Income. Total interest and dividend income for the nine months ended September 30, 2016 increased $928,000, or 18.3%, to $6.0 million compared to $5.1 million for the nine months ended September 30, 2015. The increase in interest and dividend income was the result of higher average loans in the nine months ended September 30, 2016. The average balance of loans during the nine months ended September 30, 2016 increased $30.5 million to $185.8 million from $155.3 million for the nine months ended September 30, 2015, while the average yield on loans decreased five basis points to 4.11% for the nine months ended September 30, 2016 from 4.16% for the nine months ended September 30, 2015. The average balance of investment securities increased $3.5 million to $16.9 million for the nine months ended September 30, 2016 from $13.3 million for the nine months ended September 30, 2015, and the yield on investment securities (on a tax-equivalent basis) decreased 50 basis points to 1.62% for the nine months ended September 30, 2016 from 2.12% for the nine months ended September 30, 2015.

Interest Expense. Total interest expense increased $377,000, or 48.6%, to $1.2 million for the nine months ended September 30, 2016 from $775,000 for the nine months ended September 30, 2015. Interest expense on interest-bearing deposit accounts increased $303,000, or 41.5%, to $1.0 million for the nine months ended September 30, 2016 from $730,000 for the nine months ended September 30, 2015. The increase was primarily due to higher average deposit balances and Federal Home Loan Bank advances, and overall changes in the deposit mix.

Interest expense on FHLB advances increased $74,000, or 164.4%, to $119,000 for the nine months ended September 30, 2016 from $45,000 for the nine months ended September 30, 2015. The average balance of advances increased $8.0 million, or 97.0%, to $16.2 million for the nine months ended September 30, 2016 from $8.2 million for the nine months ended September 30, 2015. The cost of funds on FHLB advances increased 22 basis points to 0.97% for the nine months ended September 30, 2016 from 0.75% for the nine months ended September 30, 2015.

Net Interest and Dividend Income. Net interest and dividend income increased $551,000, or 12.9%, to $4.8 million for the nine months ended September 30, 2016 from $4.3 million for the nine months ended September 30, 2015. On a tax-equivalent basis, net interest and dividend income increased $541,000, or 12.5%, to $4.9 million for the nine months ended September 30, 2016 from $4.3 million for the nine months ended September 30, 2015. The tax-equivalent basis increase resulted from a $918,000 increase in interest income, partially offset by a $377,000 increase in interest expense. Our average interest-earning assets increased $35.9 million to $215.9 million for the nine months ended September 30, 2016 from $180.0 million for the nine months ended September 30, 2015. Our net interest rate spread decreased 20 basis points to 2.85% for the nine months ended September 30, 2016 from 3.05% for the nine months ended September 30, 2015, and our net interest margin decreased 19 basis points to 3.00% for the nine months ended September 30, 2016 from 3.19% for the nine months ended September 30, 2015. The decrease in our interest rate spread and net interest margin reflected higher average balances of certificates of deposit and Federal Home Loan Bank advances, and related cost of funds.

Provision for Loan Losses. We recorded a provision for loan losses for the nine months ended September 30, 2016 of $134,000, compared to a provision of $96,000 for the nine months ended September 30, 2015. We maintain the allowance for loan losses at levels we believe are adequate to cover our estimate of probable credit losses as of the end of the reporting period. There was a charge-off of $7,000 related to a consumer loan for the nine months ended September 30, 2016. No charge-offs were recognized for the nine months ended September 30, 2015. The allowance for loan losses was $1.0 million, or 0.49% of total loans at September 30, 2016, compared to $839,000, or 0.51% of total loans at September 30, 2015.

Noninterest Income. Noninterest income was level at $448,000 for the nine months ended September 30, 2016 and 2015, respectively.

Noninterest Expense. Noninterest expense increased $183,000, or 4.6%, to $4.1 million for the nine months ended September 30, 2016 compared to $4.0 million for the nine months ended September 30, 2015. The increase was primarily driven by an increase of $208,000 in salaries and benefits expense, due to staff merit increases and equity incentive compensation. Additionally, data processing expense increased $27,000 and occupancy expense decreased $52,000.

Income Taxes. Income before income taxes of $1.0 million resulted in income tax expense of $389,000 for the nine months ended September 30, 2016, compared to income before income taxes of $676,000 resulting in an income tax expense of $238,000 for the nine months ended September 30, 2015. The effective income tax rate was 38.7% for the nine months ended September 30, 2016 compared to 35.2% for the nine months ended September 30, 2015.

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

	For the Three Months Ended September 30,
	2016								2015
	Average Outstanding Balance			Interest		Average Yield/Rate⁽¹⁾			Average Outstanding Balance			Interest		Average Yield/Rate⁽¹⁾

	(In Thousands)
Interest-earning assets:
Loans	$	204,324		$	2,119		4.15	%	$	160,780		$	1,696		4.22	%
Interest-earning deposits		9,430			12		0.51	%		6,961			5		0.37	%
Investment securities⁽²⁾		16,307			58		1.41	%		14,470			73		2.01	%
Federal Home Loan Bank stock and
The Co- operative Central Reserve Fund		2,200			9		1.62	%		1,310			7		2.02	%
Total interest-earning assets		232,261			2,198		3.79	%		183,522			1,781		3.88	%
Noninterest-earning assets		10,919								11,164
Total assets	$	243,180							$	194,686

Interest-bearing liabilities:
Savings accounts	$	20,969			8		0.15	%	$	19,189			7		0.20	%
NOW accounts		19,722			2		0.05	%		18,996			3		0.06	%
Money market accounts		28,755			27		0.37	%		30,180			29		0.37	%
Certificates of deposit		93,910			320		1.36	%		68,141			211		1.24	%
Total interest-bearing deposits		163,356			357		0.87	%		136,506			250		0.70	%
Federal Home Loan Bank advances		29,198			69		0.92	%		9,751			18		0.73	%
Total interest-bearing liabilities		192,554			426		0.88	%		146,257			268		0.73	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		17,611								14,988
Other noninterest-bearing liabilities		648								1,411
Total noninterest-bearing liabilities		18,259								16,399
Total liabilities		210,813								162,656
Total stockholders' equity		32,367								32,029
Total liabilities and total stockholders' equity	$	243,180							$	194,685
Net interest income				$	1,772							$	1,513
Net interest rate spread⁽³⁾							2.89	%							3.14	%
Net interest-earning assets⁽⁴⁾	$	39,707							$	37,265
Net interest margin⁽⁵⁾							3.05	%							3.30	%
Average interest-earning assets to interest-bearing liabilities		120.62	%							124.63	%

(1)

Yields and rates are annualized.

(2)

Includes securities available-for-sale and held-to-maturity. A tax equivalent adjustment of $4,000 and $9,000 was applied to tax-exempt income for the three months ended September 30, 2016 and September 30, 2015, respectively.

(3)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(4)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(5)

Net interest margin represents net interest income divided by average total interest-earning assets.

	For the Nine Months Ended September 30,
	2016								2015
	Average Outstanding Balance			Interest		Average Yield/Rate⁽¹⁾			Average Outstanding Balance			Interest		Average Yield/Rate⁽¹⁾

	(In Thousands)
Interest-earning assets:
Loans	$	185,764		$	5,730		4.11	%	$	155,264		$	4,839		4.16	%
Interest-earning deposits		11,656			46		0.53	%		10,183			23		0.31	%
Investment securities⁽²⁾		16,862			204		1.62	%		13,337			212		2.12	%
Federal Home Loan Bank stock and
The Co- operative Central Reserve Fund		1,634			26		2.13	%		1,213			14		1.51	%
Total interest-earning assets		215,916			6,006		3.71	%		179,997			5,088		3.77	%
Noninterest-earning assets		11,003								11,347

Total assets	$	226,919							$	191,344

Interest-bearing liabilities:
Savings accounts	$	20,741			23		0.15	%	$	18,568			26		0.18	%
NOW accounts		21,030			8		0.05	%		19,667			13		0.09	%
Money market accounts		28,582			80		0.37	%		31,587			89		0.37	%
Certificates of deposit		91,061			922		1.35	%		66,270			602		1.20	%
Total interest-bearing deposits		161,414			1,033		0.85	%		136,092			730		0.70	%
Federal Home Loan Bank advances		16,153			119		0.97	%		8,200			45		0.75	%
Total interest-bearing liabilities		177,567			1,152		0.87	%		144,292			775		0.72	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		16,675								13,900
Other noninterest-bearing liabilities		607								1,266
Total noninterest-bearing liabilities		17,282								15,166
Total liabilities		194,849								159,458
Total stockholders' equity		32,070								31,886
Total liabilities and total stockholders' equity	$	226,919							$	191,344
Net interest income				$	4,854							$	4,313
Net interest rate spread⁽³⁾							2.85	%							3.05	%
Net interest-earning assets⁽⁴⁾	$	38,349							$	35,705
Net interest margin⁽⁵⁾							3.00	%							3.19	%
Average interest-earning assets to interest-bearing liabilities		121.60	%							124.18	%

(1)

Yields and rates are annualized.

(2)

Includes securities available-for-sale and held-to-maturity. A tax equivalent adjustment of $18,000 and $28,000 was applied to tax-exempt income for the nine months ended September 30, 2016 and September 30, 2015, respectively.

(3)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(4)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(5)

Net interest margin represents net interest income divided by average total interest-earning assets.

Liquidity and Capital Resources

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

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $952,000 and $987,000 for the nine months ended September 30, 2016 and September 30, 2015, respectively. For the nine months ended September 30, 2016 and 2015, net cash used in investing activities consists primarily of disbursements for the purchase of loans, the origination of loans, and the purchase of available-for-sale securities, offset by principal collections on loans, proceeds from loan sales, proceeds from maturing securities and pay downs on mortgage-backed securities. Net cash used in investing activities was $39.2 million and $20.9 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. During the nine months ended September 30, 2016, we purchased $6.3 million of securities held as available-for-sale securities, and during the nine months ended September 30, 2015, we purchased $4.4 million of securities held as available-for-sale. We sold $1.2 million and $0 of securities during the nine months ended September 30, 2016 and 2015, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB advances, was $39.4 million and $9.1 million for the nine months ended September 30, 2016 and September 30, 2015, respectively.

At September 30, 2016, we exceeded all “well capitalized” regulatory capital requirements with a CET1 capital level of $23.0 million or 13.8% of risk-weighted assets, which is above the required level of $10.8 million, or 6.5% of risk-weighted assets; a tier 1 capital level of $23.0 million, or 13.8% of risk-weighted assets, which is above the required level of $13.4 million, or 8.0% of risk-weighted assets; a tier 1 leverage capital level of $23.0 million, or 9.5% of average assets, which is above the required level of $12.2 million, or 5.0% of average assets; and total risk-based capital of $24.0 million, or 14.4% of risk-weighted assets, which is above the required level of $16.7 million, or 10.0% of risk-weighted assets. At December 31, 2015, we exceeded all of our regulatory capital requirements with a CET1 capital level of $22.2 million, or 15.6% of risk-weighted assets, which was the above the required level of $9.3 million, or 6.5% of risk-weighted assets; a tier 1 capital level of $ 22.2 million, or 15.6% of risk-weighted assets which is above the required level of $11.4 million, or 8.0% of risk-weighted assets; a tier 1 leverage capital level of $22.2 million, or 10.9% of average assets, which is above the required level of $10.2 million, or 5.0% of average assets; and a total risk-based capital of $23.1 million, or 16.2% of risk-weighted assets, which is above the required level of $14.3 million, or 10.0% of risk-weighted assets. Accordingly, Pilgrim Bank was categorized as well capitalized at September 30, 2016 and December 31, 2015. Management is not aware of any conditions or events since the most recent notification that would change our category.

At September 30, 2016, we had outstanding commitments to originate loans of $8.3 million, commitments to purchase loans of $2.2 million, and unadvanced funds on loans of $21.8 million. We anticipate that we will have sufficient funds available to meet our current loan origination, loan purchase and securities purchase commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2016 totaled $59.0 million. Management expects, based on historical experience, that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2016, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

(b) Not applicable.

(c) The following table presents a summary of the Company’s share repurchases during the three months ended September 30, 2016.

					Total Number of Shares		Maximum Number of
					Purchased as Part of		Shares That May Yet be
	Total Number of		Average Price Paid		Publicly Announced		Purchased Under the
Period	Shares Purchased		Per Share		Program (1)		Program (1)
July 1 through July 31, 2016		-	$	-		-		31,803
August 1 through August 31, 2016		-	$	-		-		31,803
September 1 through September 30, 2016		7,000	$	13.01		7,000		24,803

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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

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, 2016		/s/ Francis E. Campbell
		Francis E. Campbell
		President and Chief Executive Officer

Date: November 14, 2016		/s/ Christopher G. McCourt
		Christopher G. McCourt
		Senior Vice President, Chief Financial Officer
		and Treasurer

INDEX TO EXHIBITS

3.1 Articles of Incorporation of Pilgrim Bancshares, Inc.*

3.2 Bylaws of Pilgrim Bancshares, Inc.*

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

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

32 Certification of Francis E. Campbell, President and Chief Executive Officer, and Christopher G. McCourt, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 The following materials from the Company’s Quarterly Report on Form 10Q for the quarter ended September 30, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements

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

Pilgrim Bancshares, Inc. - FORM 10-Q - November 14, 2016

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Pilgrim Bancshares, Inc. Reports