10-Q 1 v416860_10q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2015.

Or

 

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

 

For the transition period from ______________ to ______________.

 

Commission file number: 000-55290

 

PILGRIM BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of August 14, 2015, there were issued and outstanding 2,247,589 shares of the Registrant’s Common Stock with a par value of $0.01 per share.

 

 
 

 

Pilgrim Bancshares, Inc.

Form 10-Q

 

Index

 

        Page
Part I. Financial Information
         
Item 1.   Consolidated Financial Statements    
         
    Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014   4
         
    Consolidated Statements of Income for the Three and Six  Months Ended June 30, 2015 and June 30, 2014 (unaudited)   5
         
    Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and June 30, 2014 (unaudited)   6
         
    Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2015 and June 30, 2014 (unaudited)   7
         
    Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and June 30, 2014 (unaudited)   8
         
    Notes to Consolidated Financial Statements (unaudited)   9
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   25
         
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   38
         
Item 4.   Controls and Procedures   38

 

2
 

 

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   38
         
Item 4.   Mine Safety Disclosures   38
         
Item 5.   Other Information   39
         
Item 6.   Exhibits   39
         
    Signature Page   40

 

3
 

 

Part I. – Financial Information

 

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

 

(In Thousands, except share data)

 

   June 30,   December 31, 
   2015   2014 
   (unaudited)     
ASSETS          
Cash and due from banks  $1,475   $1,938 
Interest-bearing demand deposits with other banks   5,422    16,357 
Total cash and cash equivalents   6,897    18,295 
Interest-bearing time deposits with other banks   1,080    2,575 
Investments in available-for-sale securities (at fair value)   13,476    11,767 
Investments in held-to-maturity securities (fair value of $175 at June 30, 2015, and $196 at December 31, 2014)   133    149 
Federal Home Loan Bank stock, at cost   831    694 
Investment in The Co-operative Central Reserve Fund, at cost   384    384 
Loans, net of allowance for loan losses of  $803 at June 30, 2015, and $743 at December 31, 2014   159,846    143,774 
Premises and equipment, net   5,304    5,409 
Investment in real estate, net   1,600    1,623 
Accrued interest receivable   455    447 
Deferred income tax asset, net   427    410 
Bank-owned life insurance   2,254    2,230 
Other assets   247    278 
Total assets  $192,934   $188,035 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Deposits:          
Noninterest-bearing  $15,981   $13,978 
Interest-bearing   135,722    137,032 
Total deposits   151,703    151,010 
Federal Home Loan Bank advances   9,000    5,000 
Other liabilities   404    423 
Total liabilities   161,107    156,433 
Stockholders' equity:          
Common stock $.01 par value per share: 10,000,000 shares authorized, 2,247,589 shares issued at June 30, 2015 and December 31, 2014   22    22 
Additional paid-in capital   20,759    20,770 
Retained earnings   12,834    12,599 
Unearned compensation - ESOP (170,816 shares unallocated at June 30, 2015 and 173,813 shares unallocated at December 31, 2014)   (1,708)   (1,738)
Accumulated other comprehensive loss   (80)   (51)
Total stockholders' equity   31,827    31,602 
Total liabilities and stockholders' equity  $192,934   $188,035 

 

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

 

4
 

 

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF INCOME

 

(In Thousands, except share and per share data)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2015   2014   2015   2014 
   (unaudited)   (unaudited) 
Interest and dividend income:                    
Interest and fees on loans  $1,609   $1,394   $3,143   $2,860 
Interest on debt securities:                    
Taxable   45    46    86    89 
Tax-exempt   17    17    34    40 
Other interest and dividends   11    13    25    24 
Total interest and dividend income   1,682    1,470    3,288    3,013 
Interest expense:                    
Interest on deposits   238    258    479    504 
Interest on Federal Home Loan Bank advances   15    14    28    30 
Total interest expense   253    272    507    534 
Net interest and dividend income   1,429    1,198    2,781    2,479 
Provision for loan losses   38    -    60    - 
Net interest and dividend income after provision for loan losses   1,391    1,198    2,721    2,479 
Noninterest income:                    
Service charges on deposit accounts   32    31    60    61 
Net gain on sales of securities   -    63    -    68 
Writedown of securities (includes losses of $12 and $12, with no amounts recognized in other comprehensive income for the three and six month periods ended June 30, 2014, before taxes)   -    (12)   -    (12)
Gain on sales of loans, net   3    33    37    48 
Rental income   64    67    131    126 
Other income   34    35    64    64 
Total noninterest income   133    217    292    355 
Noninterest expense:                    
Salaries and employee benefits   739    641    1,510    1,356 
Occupancy expense   135    129    298    259 
Equipment expense   45    40    93    79 
Data processing expense   89    98    177    187 
Professional fees   103    67    196    134 
FDIC assessment   34    25    71    61 
Communications expense   30    31    60    59 
Advertising and public relations expense   40    29    56    45 
Insurance expense   20    16    40    33 
Supplies expense   17    13    32    31 
Other expense   61    58    124    111 
Total noninterest expense   1,313    1,147    2,657    2,355 
Income before income taxes   211    268    356    479 
Income tax expense   77    93    121    178 
Net income  $134   $175   $235   $301 
                     
Weighted-average number of common shares outstanding:                    
Basic   2,076,024    na    2,075,274    na 
Diluted   2,076,024    na    2,075,274    na 
                     
Earnings per share:                    
Basic  $0.06   $na   $0.11   $na 
Diluted  $0.06   $na   $0.11   $na 

 

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

 

5
 

 

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In Thousands)

 

   Three Months Ended June 30,   Six  Months Ended June 30, 
   2015   2014   2015   2014 
   (unaudited)   (unaudited) 
Net income  $134   $175   $235   $301 
Other comprehensive (loss) income, net of tax:                    
Net unrealized holding (loss) gain on available-for-sale securities   (110)   132    (46)   289 
Reclassification adjustment for net realized gains in net income (1)   -    (63)   -    (68)
Other comprehensive (loss) income before income tax effect   (110)   69    (46)   221 
Income tax benefit (expense)   41    (26)   17    (82)
Other comprehensive (loss) income, net of tax   (69)   43    (29)   139 
Comprehensive income  $65   $218   $206   $440 

 

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

 

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

 

6
 

 

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

For the Six Months Ended June 30, 2015 and 2014 (unaudited)

 

(In Thousands, except share data)

 

                       Accumulated     
   Common   Additional       Unearned   Other     
   Stock   Paid-in   Retained   Compensation-   Comprehensive     
   Shares   Amount   Capital   Earnings   ESOP   Loss   Total 
Balance, December 31, 2013   -   $-   $-   $12,718   $-   $(214)  $12,504 
Net income   -    -    -    301    -    -    301 
Other comprehensive income, net of tax effect   -    -    -    -    -    139    139 
Balance, June 30, 2014   -   $-   $-   $13,019   $-   $(75)  $12,944 
                                    
Balance, December 31, 2014   2,247,589   $22   $20,770   $12,599   $(1,738)  $(51)  $31,602 
Net income   -    -    -    235    -    -    235 
Common stock held by ESOP committed to be allocated (2,997 shares)   -    -    5    -    30    -    35 
Other comprehensive loss, net of tax effect   -    -    -    -    -    (29)   (29)
Issuance costs related to initial public offering   -    -    (16)   -    -    -    (16)
Balance, June 30, 2015   2,247,589   $22   $20,759   $12,834   $(1,708)  $(80)  $31,827 

 

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

 

7
 

 

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In Thousands)

 

   Six Months  Ended June 30, 
   2015   2014 
   (unaudited) 
Cash flows from operating activities:          
Net income  $235   $301 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Provision for loan losses   60    - 
Capitalized interest - interest-bearing time deposits   (5)   (1)
Amortization of securities, net   43    52 
Net gain on sales  of securities   -    (68)
Loans originated for sale   (1,260)   (1,800)
Proceeds from sales of loans originated for sale   1,297    1,848 
Gain on sales of loans   (37)   (48)
Change in deferred origination fees, costs and discounts, excluding purchase discounts   (2)   32 
Writedown of securities   -    12 
Depreciation and amortization   171    157 
(Increase) decrease in accrued interest receivable   (8)   16 
Decrease (increase) in other assets   34    (800)
Increase in prepaid expenses   (41)   (48)
Decrease in income taxes receivable   38    - 
Deferred tax benefit   -    2 
Increase in bank-owned life insurance   (24)   (24)
Stock based compensation expense   35    - 
(Decrease) increase in other liabilities   (37)   10 
Increase (decrease) in accrued expenses   18    (58)
           
Net cash provided by (used in) operating activities   517    (417)
           
Cash flows from investing activities:          
Proceeds from redemption and maturities of interest-bearing time deposits   1,500    1,246 
Purchase of Federal Home Loan Bank stock   (137)   (65)
Purchases of available-for-sale securities   (2,787)   (1,185)
Proceeds from maturities of available-for-sale securities   250    240 
Proceeds from sales of available-for-sale securities   -    3,300 
Principal payments received on available-for-sale securities   736    - 
Principal payments received on held-to-maturity securities   19    30 
Loan principal collections and originations, net   (9,725)   4,860 
Loans purchased   (8,055)   - 
Loan participations sold   1,650    - 
Capital expenditures   (43)   (84)
           
Net cash (used in) provided by investing activities   (16,592)   8,342 
           
Cash flows from financing activities:          
Net increase (decrease) in demand deposits, NOW and savings accounts   2,021    (6,570)
Net (decrease) increase in time deposits   (1,328)   4,442 
Payments on Federal Home Loan Bank long-term advances   (500)   (1,000)
Federal Home Loan Bank long-term advances received   5,500    - 
Net change in short-term Federal Home Loan Bank advances   (1,000)   (2,500)
Issuance costs related to initial public offering   (16)   - 
           
Net cash provided by (used in) financing activities   4,677    (5,628)
           
Net (decrease) increase in cash and cash equivalents   (11,398)   2,297 
Cash and cash equivalents at beginning of period   18,295    8,991 
Cash and cash equivalents at end of period  $6,897   $11,288 
           
Supplemental disclosures:          
Interest paid  $504   $536 
Income taxes paid   83    119 

 

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

 

8
 

 

PILGRIM BANCSHARES, INC. AND SUBSIDIARY

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - NATURE OF OPERATIONS

 

Pilgrim Bank (“the Bank”) is a Massachusetts-chartered stock co-operative 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.

 

On October 10, 2014, in accordance with a Plan of Conversion (the “Conversion”), Conahasset Bancshares, MHC, the Bank’s former mutual holding company, completed a mutual-to-stock conversion pursuant to which the Bank became a wholly owned subsidiary of Pilgrim Bancshares, Inc., (the “Company”) a stock holding company incorporated in February 2014. In connection with the conversion, the Company sold 2,182,125 shares of common stock, including 179,807 shares to a newly established employee stock ownership plan, at an offering price of $10 per share, and issued an additional 65,464 shares of its common stock to the Pilgrim Bank Foundation (the “Foundation”), resulting in an aggregate issuance of 2,247,589 shares of common stock. The Foundation supports charitable causes and community development activities in the Bank’s area of operations. The net proceeds from the stock offering, net of offering costs of $1,685,000, amounted to $20,136,000. The Company’s stock began trading on October 13, 2014 under the symbol PLRM on the OTC Pink Marketplace operated by OTC Market Group.

 

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

 

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 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 U.S. generally accepted accounting principles for complete financial statements. Information included herein as of June 30, 2015 and for the interim periods ended June 30, 2015 and 2014 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 six months ended June 30, 2015 and 2014 are not necessarily indicative of the results that may be expected for the entire year or any other interim period.

 

9
 

 

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, 2014. In preparing consolidated financial statements in conformity with U.S. generally accepted accounting principles, 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

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of this ASU is to clarify principles for recognizing revenue and to develop a common revenue standard for Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. However, in July 2015, the FASB voted to approve deferring the effective date by one year (i.e. interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e. interim and annual reporting periods beginning after December 15, 2016). The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The standard is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The guidance should be applied on a retrospective basis. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

10
 

 

In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820) - Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” The objective of this update is to address the diversity in practice related to how certain investments measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this ASU 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, if presented, 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. Because the formation of the Company was completed on October 10, 2014, earnings per share data is not meaningful for prior comparative periods and is therefore not presented.

 

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

 

EPS for the three and six months ended June 30, 2015 has been computed based on the following:

 

   Three Months Ended   Six Months Ended 
   June 30, 2015   June 30, 2015 
Net income (In thousands)  $134   $235 
           
Basic common shares:          
Weighted average shares outstanding   2,247,589    2,247,589 
Less: Weighted average unallocated ESOP shares   (171,565)   (172,315)
Basic weighted average shares outstanding   2,076,024    2,075,274 
           
Basic earnings per share  $0.06   $0.11 
Diluted earnings per share (1)  $0.06   $0.11 

 

(1)    No potentially dilutive common shares

 

11
 

 

NOTE 5 - INVESTMENTS IN SECURITIES

 

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

 

   Amortized   Gross   Gross     
   Cost   Unrealized   Unrealized   Fair 
   Basis   Gains   Losses   Value 
   (In Thousands) 
Available-for-sale securities:                    
June 30, 2015 (unaudited):                    
Debt securities issued by U.S. government corporations and agencies  $2,785   $11   $17   $2,779 
Debt securities issued by states of the United States and political subdivisions of the states   2,998    1    54    2,945 
Mortgage-backed securities   7,821    23    92    7,752 
   $13,604   $35   $163   $13,476 
                     
December 31, 2014 :                    
Debt securities issued by U.S. government corporations and agencies  $1,985   $7   $17   $1,975 
Debt securities issued by states of the United States and political subdivisions of the states   3,258    5    30    3,233 
Mortgage-backed securities   6,606    24    71    6,559 
   $11,849   $36   $118   $11,767 

 

   Amortized   Gross   Gross     
   Cost   Unrealized   Unrealized   Fair 
   Basis   Gains   Losses   Value 
   (In Thousands) 
Held-to-maturity securities:                    
June 30, 2015 (unaudited):                    
Mortgage-backed securities  $133   $44   $2   $175 
   $133   $44   $2   $175 
                     
December 31, 2014 :                    
Mortgage-backed securities  $149   $47   $-   $196 
   $149   $47   $-   $196 

 

12
 

 

The scheduled maturities of debt securities were as follows as of June 30, 2015 (unaudited):

 

   Available-For-Sale   Held-To-Maturity 
       Amortized     
   Fair   Cost   Fair 
   Value   Basis   Value 
   (In Thousands) 
Due within one year  $407   $-   $- 
Due after one year through five years   2,357    -    - 
Due after five years through ten years   1,461    -    - 
Due after ten years   1,499    -    - 
Mortgage-backed securities   7,752    133    175 
   $13,476   $133   $175 

 

There were no sales of available-for-sale securities during the six months ended June 30, 2015 (unaudited). Proceeds from sales of available-for-sale securities during the six months ended June 30, 2014 (unaudited) were $3,300,000 with gross realized gains of $68,000 and no gross realized losses. The tax expense applicable to these net realized gains for the six month periods ended June 30, 2014 (unaudited) amounted to $28,000.

 

As of June 30, 2015 (unaudited) and December 31, 2014, 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 are as follows:

 

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
   (In Thousands) 
June 30, 2015 (unaudited) :                              
Debt securities issued by U.S. government corporations and agencies  $299   $1   $484   $16   $783   $17 
Debt securities issued by states of the United States and political subdivisions of the states   1,462    23    1,366    31    2,828    54 
Mortgage-backed securities   2,151    21    2,339    72    4,490    93 
Total temporarily impaired securities   3,912    45    4,189    119    8,101    164 
Other-than-temporarily impaired securities:                              
Mortgage-backed securities   -    -    2    1    2    1 
Total temporarily impaired and other- than-temporarily impaired securities  $3,912   $45   $4,191   $120   $8,103   $165 
                               
December 31, 2014 :                              
Debt securities issued by U.S. government corporations and agencies  $-   $-   $1,485   $17   $1,485   $17 
Debt securities issued by states of the United States and political subdivisions of the states   950    8    1,232    22    2,182    30 
Mortgage-backed securities   1,411    3    2,641    68    4,052    71 
Total temporarily impaired securities   2,361    11    5,358    107    7,719    118 
Other-than-temporarily impaired securities:                              
Mortgage-backed securities   -    -    3    -    3    - 
Total temporarily impaired and other- than-temporarily impaired securities  $2,361   $11   $5,361   $107   $7,722   $118 

 

13
 

 

As of June 30, 2015 (unaudited) and December 31, 2014, investment securities with unrealized losses consist of debt securities issued by U.S. government agencies and government-sponsored enterprises, debt securities issued by states of the United States and political subdivisions of the states and non-agency mortgage-backed securities. The Company reviews investments for other-than-temporary impairment using a number of factors including the length of time and the extent to which the market value has been less than cost and by examining any credit deterioration or ratings downgrades. The unrealized losses in the above tables are primarily attributable to changes in market interest rates. As Company management has the intent and ability to hold impaired debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

 

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

 

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

 

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

 

The following table summarizes other-than-temporary impairment losses on securities for the three and six months ended June 30, 2015 and 2014 (unaudited):

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2015   2014   2015   2014 
   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  $-   $12   $-   $12 
Less: unrealized other-than-temporary losses recognized in other comprehensive income (1)   -    -    -    - 
Net impairment losses recognized in earnings (2)  $-   $12   $-   $12 

 

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

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

 

For the three and six months ended June 30, 2014, 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.

 

14
 

 

NOTE 6 - LOANS

 

Loans consisted of the following:

 

   June 30,   December 31, 
   2015   2014 
   (unaudited)     
   (In Thousands) 
Real estate loans:          
One-to four- family residential  $101,123   $96,440 
Commercial   18,836    17,401 
Multi-family   12,562    10,171 
Home equity loans and lines of credit   2,121    2,854 
Construction   17,556    12,072 
Commercial and industrial loans   4,661    3,012 
Consumer loans:          
Consumer line of credit   23    21 
Other consumer loans   3,665    2,446 
    160,547    144,417 
Net deferred loan origination fees, costs and discounts   102    100 
Allowance for loan losses   (803)   (743)
Net loans  $159,846   $143,774 

 

The following tables set forth information regarding the allowance for loan losses as of and for the six months ended June 30, 2015 and 2014 (unaudited) and at December 31, 2014:

 

   Real Estate:       Consumer         
   One- to four-family           Home Equity Loans       Commercial and   Consumer             
   Residential   Commercial   Multi-family   and Lines of Credit   Construction   Industrial Loans   Line of Credit   Other Consumer   Unallocated   Total 
   (In Thousands) 
Six months ended June 30, 2015 (unaudited):                                                  
Allowance for loan losses:                                                  
Beginning balance  $362   $134   $36   $27   $121   $8   $1   $20   $34   $743 
Charge-offs   -    -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    -    - 
(Benefit) provision   (15)   1    5    (5)   81    11    -    14    (32)   60 
Ending balance  $347   $135   $41   $22   $202   $19   $1   $34   $2   $803 
                                                   
Six months ended June 30, 2014 (unaudited):                                                  
Allowance for loan losses:                                                  
Beginning balance  $323   $195   $51   $30   $49   $16   $1   $20   $57   $742 
Charge-offs   -    -    -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    -    -    - 
(Benefit) provision   (45)   (23)   1    (5)   30    9    -    (4)   37    - 
Ending balance  $278   $172   $52   $25   $79   $25   $1   $16   $94   $742 
                                                   
At June 30, 2015 (unaudited):                                                  
Allowance for loan losses:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $28   $-   $-   $-   $-   $-   $-   $-   $-   $28 
Ending balance:                                                  
Collectively evaluated for impairment   319    135    41    22    202    19    1    34    2    775 
Total allowance for loan losses ending balance  $347   $135   $41   $22   $202   $19   $1   $34   $2   $803 
                                                   
Loans:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $6,517   $691   $-   $53   $-   $-   $-   $-   $-   $7,261 
Ending balance:                                                  
Collectively evaluated for impairment   94,606    18,145    12,562    2,068    17,556    4,661    23    3,665    -    153,286 
Total loans ending balance  $101,123   $18,836   $12,562   $2,121   $17,556   $4,661   $23   $3,665   $-   $160,547 
                                                   
At December 31, 2014 :                                                  
Allowance for loan losses:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $37   $-   $-   $-   $-   $-   $-   $-   $-   $37 
Ending balance:                                                  
Collectively evaluated for impairment   325    134    36    27    121    8    1    20    34    706 
Total allowance for loan losses ending balance  $362   $134   $36   $27   $121   $8   $1   $20   $34   $743 
                                                   
Loans:                                                  
Ending balance:                                                  
Individually evaluated for impairment  $6,572   $695   $-   $53   $-   $-   $-   $-   $-   $7,320 
Ending balance:                                                  
Collectively evaluated for impairment   89,868    16,706    10,171    2,801    12,072    3,012    21    2,446    -    137,097 
Total loans ending balance  $96,440   $17,401   $10,171   $2,854   $12,072   $3,012   $21   $2,446   $-   $144,417 

 

15
 

 

The following tables set forth information regarding nonaccrual loans and past-due loans at June 30, 2015 and December 31, 2014:

 

                           90 Days     
           90 Days               or More     
           or More   Total   Total       Past Due   Nonaccrual 
   30-59 Days   60-89 Days   Past Due   Past Due   Current   Total   and Accruing   Loans 
   (In Thousands) 
June 30, 2015 (unaudited):                                        
Real estate loans:                                        
One- to four-family residential  $1,103   $-   $1,393   $2,496   $98,627   $101,123   $-   $1,414 
Commercial        -    -    -    18,836    18,836    -    - 
Multi-family   -    -    -    -    12,562    12,562    -    - 
Home equity loans and lines of credit   178    53    -    231    1,890    2,121    -    - 
Construction   -    -    -    -    17,556    17,556    -    - 
Commercial and industrial loans   7    -    -    7    4,654    4,661    -    - 
Consumer loans:                                        
Consumer line of credit   -    -    -    -    23    23    -    - 
Other consumer   8    -    -    8    3,657    3,665    -    - 
Total  $1,296   $53   $1,393   $2,742   $157,805   $160,547   $-   $1,414 
                                         
December 31, 2014:                                        
Real estate loans:                                        
One- to four-family residential  $728   $-   $1,393   $2,121   $94,319   $96,440   $-   $1,419 
Commercial   -    -    -    -    17,401    17,401    -    - 
Multi-family   938    -    -    938    9,233    10,171    -    - 
Home equity loans and lines of credit   -    53    -    53    2,801    2,854    -    - 
Construction   -    -    -    -    12,072    12,072    -    - 
Commercial and industrial loans   -    -    -    -    3,012    3,012    -    - 
Consumer loans:                                        
Consumer line of credit   -    -    -    -    21    21    -    - 
Other consumer   9    -    -    9    2,437    2,446    -    - 
Total  $1,675   $53   $1,393   $3,121   $141,296   $144,417   $-   $1,419 

 

16
 

 

Information about loans that meet the definition of an impaired loan in ASC 310-10-35, “Receivables – Overall – Subsequent Measurement,” is as follows at June 30, 2015 and December 31, 2014 and the six months and year then ended, respectively.

 

       Unpaid       Average   Interest 
   Recorded   Principal   Related   Recorded   Income 
   Investment   Balance   Allowance   Investment   Recognized 
   (In Thousands) 
June 30, 2015 (unaudited):                         
With no related allowance recorded:                         
Real estate loans:                         
One- to four-family residential  $5,945   $5,945   $-   $5,966   $108 
Commercial   691    691    -    693    22 
Home equity lines of credit   53    53    -    53    1 
Total impaired with no related allowance  $6,689   $6,689   $-   $6,712   $131 
                          
With an allowance recorded:                         
Real estate loans:                         
One- to four-family residential  $572   $572   $28   $575   $11 
Commercial   -    -    -    -    - 
Home equity lines of credit   -    -    -    -    - 
Total impaired with an allowance recorded  $572   $572   $28   $575   $11 
                          
Total                         
Real estate loans:                         
One- to four-family residential  $6,517   $6,517   $28   $6,541   $119 
Commercial   691    691    -    693    22 
Home equity lines of credit   53    53    -    53    1 
Total impaired loans  $7,261   $7,261   $28   $7,287   $142 
                          
December 31, 2014:                         
With no related allowance recorded:                         
Real estate loans:                         
One- to four-family residential  $5,991   $5,991   $-   $5,586   $226 
Commercial   695    695    -    699    50 
Home equity lines of credit   53    53    -    8    - 
Total impaired with no related allowance  $6,739   $6,739   $-   $6,293   $276 
                          
With an allowance recorded:                         
Real estate loans:                         
One- to four-family residential  $581   $581   $37   $589   $22 
Commercial   -    -    -    -    - 
Home equity lines of credit   -    -    -    -    - 
Total impaired with an allowance recorded  $581   $581   $37   $589   $22 
                          
Total                         
Real estate loans:                         
One- to four-family residential  $6,572   $6,572   $37   $6,175   $248 
Commercial   695    695    -    699    50 
Home equity lines of credit   53    53    -    8    - 
Total impaired loans  $7,320   $7,320   $37   $6,882   $298 

 

17
 

 

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

 

   Real Estate:       Consumer     
   One- to four-family           Home Equity Loans       Commercial and   Consumer         
   Residential   Commercial   Multi-family   and Lines of Credit   Construction   Industrial Loans   Line of Credit   Other Consumer   Total 
   (In Thousands) 
June 30, 2015 (unaudited):                                             
Grade:                                             
Pass  $-   $18,145   $11,631   $-   $17,556   $4,661   $-   $-   $51,993 
Special mention   2,397    691    -    53    -    -    -    -    3,141 
Substandard   1,393    -    931    -    -    -    -    -    2,324 
Loans not formally rated   97,333              2,068    -    -    23    3,665    103,089 
Total  $101,123   $18,836   $12,562   $2,121   $17,556   $4,661   $23   $3,665   $160,547 
                                              
December 31, 2014:                                             
Grade:                                             
Pass  $-   $16,706   $9,233   $-   $12,072   $3,012   $-   $-   $41,023 
Special mention   2,417    695    -    53    -    -    -    -    3,165 
Substandard   1,393    -    938    -    -    -    -    -    2,331 
Loans not formally rated   92,630    -    -    2,801    -    -    21    2,446    97,898 
Total  $96,440   $17,401   $10,171   $2,854   $12,072   $3,012   $21   $2,446   $144,417 

 

At June 30, 2015 and December 31, 2014, 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 six months ended June 30, 2015 (unaudited), there were no loans modified as TDRs.

 

18
 

 

As of June 30, 2015 (unaudited), there were no commitments to lend additional funds to borrowers whose loans were modified as troubled debt restructurings.

 

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $19.5 million and $17.6 million at June 30, 2015 (unaudited) and December 31, 2014, respectively.

 

NOTE 7 – DEPOSITS

 

The aggregate amount of time deposit accounts in denominations of $100,000 or more as of June 30, 2015 (unaudited) and December 31, 2014 was $38.9 million and $38.7 million, respectively.

 

The aggregate amount of time deposits in denominations that meet or exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 at June 30, 2015 (unaudited) and December 31, 2014 was $15.8 million and $15.7 million, respectively.

 

For time deposits as of June 30, 2015 (unaudited), the scheduled maturities for each of the following five years ended June 30 are:

 

   (In Thousands) 
2016  $33,794 
2017   12,029 
2018   16,109 
2019   1,966 
2020   1,257 
Total  $65,155 

 

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

 

Maturities of advances from the Federal Home Loan Bank of Boston (“FHLB”) for the years ending after June 30, 2015 (unaudited) are summarized as follows:

 

   (In Thousands) 
2016  $3,500 
2017   2,500 
2018   3,000 
   $9,000 

 

Interest rates range from 0.24% to 2.03% with a weighted-average interest rate of 0.80% at June 30, 2015 (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.

 

19
 

 

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

 

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

 

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

 

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

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value as of June 30, 2015 (unaudited) and December 31, 2014. The Company did not have any significant transfers between level 1 and level 2 of the fair value hierarchy during the six months ended June 30, 2015 (unaudited) and the year ended December 31, 2014.

 

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.

 

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

 

The following summarizes assets measured at fair value as of June 30, 2015 (unaudited) and December 31, 2014.

 

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

 

   Fair Value Measurements at Reporting Date Using: 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
   Total   Level 1   Level 2   Level 3 
   (In Thousands) 
June 30, 2015 (unaudited):                    
Debt securities issued by U.S. government corporations and agencies  $2,779   $       -   $2,779   $      - 
Debt securities issued by states of the United States and political subdivisions of the states   2,945    -    2,945    - 
Mortgage-backed securities   7,752    -    7,752    - 
Totals  $13,476   $-   $13,476   $- 
                     
December 31, 2014:                    
Debt securities issued by U.S. government corporations and agencies  $1,975   $-   $1,975   $- 
Debt securities issued by states of the United States and political subdivisions of the states   3,233    -    3,233    - 
Mortgage-backed securities   6,559    -    6,559    - 
Totals  $11,767   $-   $11,767   $- 

 

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

 

Under certain circumstances we make adjustments to fair value for certain assets and liabilities although they are not measured at fair value on an ongoing basis. The following table presents assets carried on the consolidated balance sheets by caption and by level in the fair value hierarchy at June 30, 2015 (unaudited) and December 31, 2014, for which a nonrecurring change in fair value has been recorded:

 

   Fair Value Measurements at Reporting Date Using: 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
   Total   Level 1   Level 2   Level 3 
   (In Thousands) 
June 30, 2015 (unaudited):                    
Impaired loans  $544   $      -   $      -   $544 
Totals  $544   $-   $-   $544 
                     
December 31, 2014:                    
Impaired loans  $544   $-   $-   $544 
Totals  $544   $-   $-   $544 

 

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

 

   June 30, 2015 (unaudited) 
   Carrying   Fair Value 
   Amount   Level 1   Level 2   Level 3   Total 
   (In Thousands) 
Financial assets:                         
Cash and cash equivalents  $6,897   $6,897   $-   $-   $6,897 
Interest-bearing time deposits with other banks   1,080    -    1,081    -    1,081 
Available-for-sale securities   13,476    -    13,476    -    13,476 
Held-to-maturity securities   133    -    175    -    175 
Federal Home Loan Bank stock   831    831    -    -    831 
Investment in The Co-operative Central Reserve Fund   384    384    -    -    384 
Loans, net   159,846    -    -    162,415    162,415 
Accrued interest receivable   455    455    -    -    455 
                          
Financial liabilities:                         
Deposits   151,703    -    152,290    -    152,290 
FHLB advances   9,000    -    8,987    -    8,987 

 

   December 31, 2014 
   Carrying   Fair Value 
   Amount   Level 1   Level 2   Level 3   Total 
   (In Thousands) 
Financial assets:                         
Cash and cash equivalents  $18,295   $18,295   $-   $-   $18,295 
Interest-bearing time deposits with other banks   2,575    -    2,578    -    2,578 
Available-for-sale securities   11,767    -    11,767    -    11,767 
Held-to-maturity securities   149    -    196    -    196 
Federal Home Loan Bank stock   694    694    -    -    694 
Investment in The Co-operative Central Reserve Fund   384    384    -    -    384 
Loans, net   143,774    -    -    146,705    146,705 
Accrued interest receivable   447    447    -    -    447 
                          
Financial liabilities:                         
Deposits   151,010    -    151,638    -    151,638 
FHLB advances   5,000    -    5,006    -    5,006 

 

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets as of June 30, 2015 (unaudited) and December 31, 2014 under the indicated captions. Accounting policies related to financial instruments are described below.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

NOTE 10 – REGULATORY CAPITAL

 

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

 

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to new capital regulations adopted by the Board of Governors of the Federal Reserve System (“FRB”) and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new common equity Tier 1 (“CETI”) 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%. CETI 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 CETI 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 phases in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses.

 

The new regulations implemented changes to 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 CETI will be deducted from capital. The Bank has elected to permanently opt out of the inclusion of accumulated other comprehensive income (loss) in capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital ratios.

 

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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 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 0%.

 

As of June 30, 2015 (unaudited), the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

 

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

 

   June 30,   December 31, 
Regulatory Capital and Ratios  2015   2014 
   (Dollars In Thousands) 
Regulatory Capital          
Total Shareholders' Equity  $21,612   $21,347 
Add (deduct): Net unrealized losses on investment securities   80    51 
                        Other   -    - 
Common Equity Tier 1 Capital   21,692    na 
           
Tier 1 Capital   21,692    21,398 
Allowable reserve for credit losses and unfunded commitments   824    755 
Total Regulatory Capital (1)  $22,516   $22,153 
           
Risk Weighted Assets (1)  $133,375   $101,078 
           
Key Regulatory Ratios (1)          
Common Equity Tier 1 Capital Ratio   16.3%   na 
Tier 1 Capital Ratio   16.3    21.2%
Total Capital Ratio   16.9    21.9 
Tier 1 Leverage Ratio   11.4    11.7 

 

(1) June 30, 2015 capital levels and ratios were calculated under the new capital regulations, which became effective January 1, 2015

 

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

 

General

 

Management’s discussion and analysis of the financial condition and results of operations at and for the three and six months ended June 30, 2015 and 2014 is intended to assist in understanding the financial condition and results of operations of the Company on a consolidated basis. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing 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,” “believe,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

·statements of our goals, intentions and expectations;

 

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

 

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

 

·estimates of our risks and future costs and benefits.

 

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

 

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

 

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

 

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

 

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·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

 

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·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 six months ended June 30, 2015, there were no material changes to the critical accounting policies disclosed in Pilgrim Bancshares, Inc.’s 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on March 25, 2015.

 

Comparison of Financial Condition at June 30, 2015 (unaudited) and December 31, 2014

 

Total Assets. Total assets increased $4.9 million, or 2.6%, to $192.9 million at June 30, 2015 from $188.0 million at December 31, 2014.

 

Cash and Cash Equivalents and Time Deposits with Other Banks. Total cash and cash equivalents decreased $11.4 million, or 62.3%, to $6.9 million at June 30, 2015 from $18.3 million at December 31, 2014. The decrease in cash resulted from $16.1 million in net loan growth and $1.7 million in investment securities purchases net of principal payments and maturities, offset by a $693,000 increase in deposits and a $4.0 million increase in FHLB borrowings. Interest-bearing time deposits with other banks decreased by $1.5 million, or 58.1%, to $1.1 million at June 30, 2015 from $2.6 million at December 31, 2014.

 

Net Loans. Net loans increased $16.1 million, or 11.2%, to $159.8 million at June 30, 2015 from $143.8 million at December 31, 2014. The Company originated $41.5 million and purchased $8.1 million of new loans during the six months ended June 30, 2015. Partially offsetting the loan originations and purchases were $19.0 million of loan payoffs and amortization, $1.6 million of loan participations sold, $1.3 million of mortgages sold to the FHLB, and $11.6 million of unadvanced funds on loans originated during the six months ended June 30, 2015.

 

Investment Securities. Investment securities classified as available-for-sale increased $1.7 million, or 14.5%, to $13.5 million at June 30, 2015 from $11.8 million at December 31, 2014, due to the purchase of mortgage backed securities partially offset by the maturity of a municipal security. Investment securities classified as held-to-maturity decreased $16,000, or 10.7%, to $133,000 at June 30, 2015, from $149,000 at December 31, 2014 due to maturities in the ordinary course of business. At June 30, 2015, investment securities classified as available-for-sale consisted primarily of debt securities issued by U.S. government corporations and agencies, debt securities issued by states and political subdivisions, and U.S. government-sponsored mortgage-backed securities, with a focus on suitable U.S. government-sponsored securities to augment risk-based capital.

 

Bank Owned Life Insurance. Bank-owned life insurance at June 30, 2015 increased $24,000, or 1.1%, compared to December 31, 2014 due to normal increases in cash surrender value.

 

Deposits. Deposits increased $693,000, or 0.5%, to $151.7 million at June 30, 2015 from $151.0 million at December 31, 2014, primarily due to a $2.4 million increase in savings accounts and a $2.0 million increase in noninterest bearing accounts, offset by a $1.4 million decrease in NOW accounts, $1.3 million decrease in certificates of deposits, and a $1.0 million decrease in money market deposits. Our core deposits, which we consider to be our noninterest bearing demand accounts, NOW accounts, savings accounts and money market accounts, increased $2.0 million, or 2.4%, to $86.5 million at June 30, 2015 from $84.5 million at December 31, 2014.

 

Borrowings and Other Liabilities. FHLB advances increased $4.0 million, or 80.0%, to $9.0 million at June 30, 2015 from $5.0 million at December 31, 2014. FHLB borrowings as of June 30, 2015 consist of $3.0 million in short term borrowings, and $6.0 million in long term borrowings, with $500,000 maturing in 2015. Other liabilities, which include interest payable, accruals for employee pension and medical plans and normal accruals for expenses, decreased $19,000, or 4.5%, to $404,000 at June 30, 2015 from $423,000 at December 31, 2014.

 

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Total Stockholders’ Equity. Stockholders’ equity increased $225,000, or 0.7%, to $31.8 million at June 30, 2015 from $31.6 million at December 31, 2014. The increase resulted from net income of $235,000 during the six months ended June 30, 2015 and the committed allocation of common stock held by the ESOP of $35,000, offset by an increase of $29,000 in accumulated other comprehensive loss due to an increase in the net unrealized loss position of our available-for-sale investment securities portfolio and additional issuance costs related to the public offering of $16,000.

 

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

 

   At June 30, 2015   At December 31, 2014 
   (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)  $1,103   $-   $1,393   $728   $-   $1,393 
Commercial   -    -    -    -    -    - 
Multi-family   -    -    -    938    -    - 
Home equity loans and lines of credit   178    53    -    -    53    - 
Construction   -    -    -    -    -    - 
Total real estate   1,281    53    1,393    1,666    53    1,393 
Commercial and industrial loans   7    -    -    -    -    - 
Consumer loans   8    -    -    9    -    - 
Total loans  $1,296   $53   $1,393   $1,675   $53   $1,393 

 

(1)There were no delinquent non-owner occupied residential real estate loans at June 30, 2015 or December 31, 2014.

 

The net decrease in total delinquent loans in the 30 – 59 day period from December 31, 2014 to June 30, 2015 was the result of current payments on the loans.

 

Classified Assets. The following table sets forth our amounts of classified assets and assets designated as special mention as of June 30, 2015 and December 31, 2014.

 

   At June 30,   At December 31, 
   2015   2014 
   (In Thousands) 
   (unaudited)     
Classified assets:          
Substandard:          
Loans(1)  $2,324   $2,331 
Securities   125    138 
Total substandard   2,449    2,469 
Doubtful   -    - 
Loss   -    - 
Other real estate owned   -    - 
Total classified assets  $2,449   $2,469 
Special mention  $3,141   $3,165 

 

(1) Includes $1.4 million of non-accruing loans that are more than 90 days past due for each period.

 

The decrease in classified assets from December 31, 2014 to June 30, 2015 was the result of loan and securities amortization from contractual payments.

 

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

 

   At June 30,   At December 31, 
   2015   2014 
   (Dollars In Thousands) 
   (unaudited)     
Non-accrual loans:          
Real estate loans:          
One- to four-family residential(1)   $1,414   $1,419 
Commercial   -    - 
Multi-family   -    - 
Home equity loans and lines of credit   -    - 
Construction   -    - 
Total real estate   1,414    1,419 
Commercial and industrial loans   -    - 
Consumer loans   -    - 
Total non-accrual loans   1,414    1,419 
           
Accruing loans past due 90 days or more:          
Real estate loans:          
One- to four-family residential