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Section 1: 10-Q (FORM 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2017

 

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

For the transition period from _______________ to ______________________

 

Commission File No. 001-37504

 

 

 

Provident Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Massachusetts   45-3231576
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

 

5 Market Street, Amesbury, Massachusetts   01913
(Address of Principal Executive Offices)   Zip Code

 

(978) 834-8555

(Registrant’s telephone number)

 

N/A

 

(Former name, former address, and former fiscal year if changed since last report)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES x NO ¨

 

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

 

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

 

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

 

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

 

As of May 08, 2017, there were 9,640,988 shares of the Registrant’s common stock, no par value per share, issued and outstanding.

 

 

 

 

 

 

Provident Bancorp, Inc.

Form 10-Q

 

    Page
Part I. Financial Information  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016 2
     
  Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016 (unaudited) 3
     
  Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (unaudited) 4
     
  Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2017 and 2016 (unaudited) 5
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited) 6
     
  Notes to Consolidated Financial Statements (unaudited) 8
     
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operation 27
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
     
Item 4. Controls and Procedures 39
     
Part II. Other Information  
     
Item 1. Legal Proceedings 39
     
Item 1A. Risk Factors 39
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
     
Item 3. Defaults upon Senior Securities 40
     
Item 4. Mine Safety Disclosures 40
     
Item 5. Other Information 40
     
Item 6. Exhibits 40
     
Signatures 41

 

 

Table of Contents 

 

Part I. Financial Information

Item 1. Financial Statements

 

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

 

   At   At 
   March 31,   December 31, 
(Dollars in thousands)  2017   2016 
   (unaudited)     
Assets          
Cash and due from banks  $8,416   $7,939 
Interest-bearing demand deposits with other banks   2,276    2,637 
Money market mutual funds   655    129 
Cash and cash equivalents   11,347    10,705 
Investments in available-for-sale securities (at fair value)   123,832    117,867 
Federal Home Loan Bank stock, at cost   3,894    2,787 
Loans, net   650,874    624,425 
Bank owned life insurance   19,544    19,395 
Premises and equipment, net   14,461    11,587 
Accrued interest receivable   2,333    2,320 
Deferred tax asset, net   4,816    4,913 
Other assets   1,840    1,544 
Total assets  $832,941   $795,543 
           
Liabilities and Equity          
Deposits:          
Noninterest-bearing  $162,126   $158,075 
Interest-bearing   518,471    469,907 
Total deposits   680,597    627,982 
Federal Home Loan Bank advances   32,870    49,858 
Other liabilities   8,239    8,554 
Total liabilities   721,706    686,394 
Shareholders' equity:          
Preferred stock; authorized 50,000 shares: no shares issued and outstanding   -    - 
Common stock, no par value: 30,000,000 shares authorized; 9,652,448 and 9,640,988 shares issued and outstanding at March 31, 2017 and 9,652,448 issued and outstanding at December 31, 2016   -    - 
Additional paid-in capital   43,679    43,393 
Treasury stock: 11,460 shares at March 31, 2017   (222)   - 
Retained earnings   68,031    66,229 
Accumulated other comprehensive income   2,783    2,622 
Unearned compensation - ESOP   (3,036)   (3,095)
Total shareholders' equity   111,235    109,149 
Total liabilities and shareholders' equity  $832,941   $795,543 

 

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

 

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PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

(Unaudited)

 

   Three Months Ended 
   March 31, 
(Dollars in thousands, except per share data)  2017   2016 
   (unaudited) 
Interest and dividend income:          
Interest and fees on loans  $7,233   $6,091 
Interest and dividends on securities   873    881 
Interest on interest-bearing deposits   6    8 
Total interest and dividend income   8,112    6,980 
Interest expense:          
Interest on deposits   570    555 
Interest on Federal Home Loan Bank advances   211    142 
Total interest expense   781    697 
Net interest and dividend income   7,331    6,283 
Provision for loan losses   563    111 
Net interest and dividend income after provision for loan losses   6,768    6,172 
Noninterest income:          
Customer service fees on deposit accounts   338    305 
Service charges and fees - other   502    418 
Gain on sale of securities, net   482    20 
Other income   180    192 
Total noninterest income   1,502    935 
Noninterest expense:          
Salaries and employee benefits   3,676    3,122 
Occupancy expense   471    365 
Equipment expense   150    145 
FDIC assessment   68    94 
Data processing   190    163 
Marketing expense   50    57 
Professional fees   214    265 
Other   802    713 
Total noninterest expense   5,621    4,924 
Income before income tax expense   2,649    2,183 
Income tax expense   847    696 
Net income  $1,802   $1,487 
           
Income per share:          
Basic  $0.20    0.16 
Diluted  $0.20    0.16 
           
Weighted Average Shares:          
Basic   9,192,568    9,167,364 
Diluted   9,192,568    9,167,364 

 

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

 

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PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(Unaudited)

 

   Three Months Ended 
   March 31, 
(In thousands)  2017   2016 
         
Net income  $1,802   $1,487 
Other comprehensive income:          
Change in net unrealized holding gains   740    843 
Reclassification adjustment for realized gains in net income   (482)   (20)
Net change in unrealized gain   258    823 
Income tax effect   (97)   (318)
Net of tax amount   161    505 
Total comprehensive income  $1,963   $1,992 

 

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

 

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PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(Unaudited)

 

               Accumulated             
   Shares of   Additional       Other   Unearned         
   Common   Paid-in   Retained   Comprehensive   Compensation   Treasury     
(In  thousands, except share data)  Stock   Capital   Earnings   Income   ESOP   Stock   Total 
                             
Balance, December 31, 2016   9,652,448   $43,393   $66,229   $2,622   $(3,095)  $-   $109,149 
Net income   -    -    1,802    -    -    -    1,802 
Net change in other comprehensive income   -    -    -    161    -    -    161 
Stock-based compensation expense   -    231    -    -    -    -    231 
Treasury stock acquired   (11,460)   -    -    -    -    (222)   (222)
ESOP shares earned   -    55    -    -    59    -    114 
Balance, March 31, 2017   9,640,988   $43,679   $68,031   $2,783   $(3,036)  $(222)  $111,235 
                                    
Balance, December 31, 2015   9,498,722   $43,159   $59,890   $1,690   $(3,333)  $-   $101,406 
Net income   -    -    1,487    -    -    -    1,487 
Net change in other comprehensive income   -    -    -    505    -    -    505 
ESOP shares earned   -    18    -    -    59    -    77 
Balance, March 31, 2016   9,498,722   $43,177   $61,377   $2,195   $(3,274)  $-   $103,475 

 

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

 

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PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

   Three Months Ended 
   March 31, 
(In thousands)  2017   2016 
Cash flows from operating activities:          
Net income  $1,802   $1,487 
Adjustments to reconcile net income to net cash provided by operating activities:          
Amortization of securities premiums, net of accretion   192    201 
ESOP expense   114    77 
Gain on sale of securities, net   (482)   (20)
Change in deferred loan fees, net   71    23 
Provision for loan losses   563    111 
Depreciation and amortization   208    207 
(Increase) decrease in accrued interest receivable   (13)   31 
Increase in taxes payable   746    7 
Share-based compensation expense   231    - 
Increase in cash surrender value of life insurance   (149)   (166)
(Increase) decrease in other assets   (356)   154 
Decrease in other liabilities   (1,001)   (40)
Net cash provided by operating activities   1,926    2,072 
           
Cash flows from investing activities:          
Purchases of available-for-sale securities   (11,318)   - 
Proceeds from sales of available-for-sale securities   1,555    24 
Proceeds from pay downs, maturities and calls of available-for-sale securities   4,346    2,480 
Proceeds from pay downs, maturities and calls of held-to-maturity securities   -    220 
(Purchase) redemption of Federal Home Loan Bank Stock   (1,107)   923 
Loan originations and purchases, net of paydowns   (27,083)   (682)
Recoveries of loans previously charged off   -    14 
Additions to premises and equipment   (3,082)   (682)
Net cash (used in) provided by investing activities   (36,689)   2,297 

 

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

 

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PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

 

(Unaudited)

 

    
   March 31, 
(In thousands)  2017   2016 
Cash flows from financing activities:          
Net increase in demand deposits, NOW and savings accounts   6,911    23,192 
Net increase (decrease) in time deposits   45,704    (4,058)
Proceeeds from advances from Federal Home Loan Bank   7,000    - 
Net change in Federal Home Loan Bank short-term advances   (23,988)   (27,988)
Purchase of treasury stock   (222)   - 
Net cash provided by (used in) by financing activities   35,405    (8,854)
           
Net increase (decrease) in cash and cash equivalents   642    (4,485)
Cash and cash equivalents at beginning of period   10,705    20,464 
Cash and cash equivalents at end of period  $11,347   $15,979 
           
Supplemental disclosures:          
Interest paid  $788   $687 
Income taxes paid   100    82 

 

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

 

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PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

 

(Unaudited)

 

(1)Basis of Presentation

The accompanying unaudited financial statements of Provident Bancorp, Inc., a Massachusetts corporation (the “Company”), were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of the financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. Certain amounts in the prior year have been reclassified to be consistent with the current year’s consolidated financial statement presentation, and had no effect on the net income reported in the consolidated income statement. These financial statements should be read in conjunction with the annual financial statements and notes thereto included in the annual report on Form 10-K the Company filed with the Securities and Exchange Commission on March 16, 2017.

 

The consolidated financial statements include the accounts of Provident Bancorp, Inc., its wholly owned subsidiary, The Provident Bank (the “Bank”), and the Bank’s wholly owned subsidiaries, Provident Security Corporation and 5 Market Street Security Corporation. Provident Security Corporation and 5 Market Street Security Corporation were established to buy, sell, and hold investments for their own account. All significant inter-company balances and transactions have been eliminated in consolidation.

 

(2)Corporate Structure

On July 15, 2015, the Company issued 4,274,425 shares of common stock to the public at $10.00 per share, including 357,152 shares purchased by The Provident Bank Employee Stock Ownership Plan. In addition, the Company issued 5,034,323 shares to Provident Bancorp, the Company’s mutual holding company (the “MHC”), and 189,974 shares to The Provident Community Charitable Organization, Inc., a charitable foundation that was formed in connection with the stock offering and is dedicated to supporting charitable organizations operating in the Bank’s local community.

 

Expenses incurred related to the offering were $1.5 million, and were recorded against offering proceeds.

 

Upon the completion of the stock offering, a special “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to the percentage ownership interest in the equity of the Company to be held by persons other than the MHC as of the date of the latest balance sheet contained in the prospectus utilized in connection with the offering. The Company is not permitted to pay dividends on its capital stock if the Company’s shareholders’ equity would be reduced below the amount of the liquidation account. The liquidation account is 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 account.

 

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(3)Recent Accounting Pronouncements

ASU (Accounting Standards Update) No. 2014-09 – Revenue from Contracts with Customers (Topic 606). The ASU establishes a single comprehensive model for an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, and will supersede nearly all existing revenue recognition guidance, to clarify and converge revenue recognition principles under US GAAP and International Financial Reporting Standards (IFRS). The update outlines five steps to recognizing revenue: (i) identify the contracts with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations; (v) recognize revenue when each performance obligation is satisfied. The update requires more comprehensive disclosures, relating to quantitative and qualitative information for amounts, timing, the nature and uncertainty of revenue, and cash flows arising from contracts with customers, which will mainly impact construction and high-tech industries. The most significant potential impact to banking entities relates to less prescriptive derecognition requirements on the sale of other real estate owned (OREO) property. In August 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Accordingly, the amendments are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for annual and interim reporting periods beginning after December 15, 2016. An entity may elect either a full retrospective or a modified retrospective application. The Company does not expect the application of this guidance will have a material impact on the Company's financial statements.

 

ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.” The ASU has been issued to improve the recognition and measurement of financial instruments by requiring 1) 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; 2) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 3) the use of the exit price notion when measuring fair value of financial instruments for disclosure purposes; and 4) separate presentation by the reporting organization in other comprehensive income for the portion of the total change in the fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The standard is effective for the Company beginning on January 1, 2018. The Company holds a portfolio of marketable equity securities; depending on the size and composition of the portfolio at the adoption date, the impact of the ASU could be material to the Company’s consolidated financial statements.  

 

ASU 2016-02, Leases (Topic 842). The amendments in this update require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. The guidance will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.

 

ASU 2016-09, Compensation Stock – Compensation (Topic 718): “Improvements to Employee Share Based Payment Accounting.” This ASU changes how companies account for certain aspects of share based payments to employees. Entities will be required to recognize the income tax effects of awards in the statement of income when the awards vest or are settled, the guidance on employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures is changing and the update requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The amendments in this update were effective for the Company on January 1, 2017. The adoption of this ASU did not have a material impact to the Company’s financial statements.

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ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The amendments in this update will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of its pending adoption of this guidance on the Company’s financial statements.

 

ASU No. 2016-15, Statement of Cash Flows (Topic 230): “Classification of Certain Cash Receipts and Cash Payments.” This ASU changes how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The amendments address the classification of the following eight items in the statement of cash flows; debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the Predominance Principle. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.

 

ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash.” This ASU provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.

 

ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments will be effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.

 

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(4)Investment Securities

The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at March 31, 2017 and December 31, 2016:

 

   Amortized   Gross   Gross     
   Cost   Unrealized   Unrealized   Fair 
(In thousands)  Basis   Gains   Losses   Value 
     
March 31, 2017                    
State and municipal  $57,953   $1,458   $125   $59,286 
Corporate debt   1,000    20    -    1,020 
Asset-backed securities   8,544    -    31    8,513 
Government mortgage-backed securities   39,088    396    341    39,143 
Trust preferred securities   1,361    -    379    982 
Marketable equity securities   12,079    3,680    216    15,543 
    120,025    5,554    1,092    124,487 
Money market mutual funds included in cash and cash equivalents   (655)   -    -    (655)
Total available-for-sale securities  $119,370   $5,554   $1,092   $123,832 
                     
December 31, 2016                    
State and municipal  $49,367   $1,281   $68   $50,580 
Corporate debt   1,000    31    -    1,031 
Asset-backed securities   8,747    -    69    8,678 
Government mortgage-backed securities   41,818    435    339    41,914 
Trust preferred securities   1,368    -    400    968 
Marketable equity securities   11,492    3,551    218    14,825 
    113,792    5,298    1,094    117,996 
Money market mutual funds included in cash and cash equivalents   (129)   -    -    (129)
Total available-for-sale securities  $113,663   $5,298   $1,094   $117,867 

 

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

 

   Available-for-Sale 
   Amortized   Fair 
(In thousands)  Cost   Value 
         
Due within one year  $1,000   $1,020 
Due after one year through five years   2,279    2,332 
Due after five years through ten years   9,026    9,289 
Due after ten years   48,009    48,647 
Government mortgage-backed securities   39,088    39,143 
Asset-backed securities   8,544    8,513 
   $107,946   $108,944 

 

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 at March 31, 2017 and December 31, 2016:

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(In thousands)  Value   Losses   Value   Losses   Value   Losses 
                         
March 31, 2017                              
Temporarily impaired securities:                              
State and municipal  $11,398   $121   $160   $4   $11,558   $125 
Asset-backed securities   7,952    22    561    9    8,513    31 
Government mortgage-backed securities   19,797    247    2,729    94    22,526    341 
Trust preferred securities   26    5    943    374    969    379 
Marketable equity securities   2,414    122    611    94    3,025    216 
Total temporarily impaired securities  $41,587   $517   $5,004   $575   $46,591   $1,092 
                               
December 31, 2016                              
Temporarily impaired securities:                              
State and municipal  $6,413   $63   $160   $5   $6,573   $68 
Asset-backed securities   8,104    60    574    9    8,678    69 
Government mortgage-backed securities   20,868    247    2,770    92    23,638    339 
Trust preferred securities   26    18    942    382    968    400 
Marketable equity securities   1,942    104    768    114    2,710    218 
Total temporarily impaired securities  $37,353   $492   $5,214   $602   $42,567   $1,094 

 

Government mortgage-backed securities, state and municipal securities and asset-backed securities: Management believes that no individual unrealized loss at March 31, 2017 represents an other-than-temporarily impairment (OTTI) because the decline in fair value of these securities is primarily attributable to changes in interest rates and not credit quality, and because the Company has the intent and ability to hold these investments until market price recovery or maturity.

 

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Marketable equity securities: Management continuously monitors equity securities for impairment by reviewing the financial condition of the issuer, company-specific events, industry developments, and general economic conditions. Management reviews corporate financial reports, credit agency reports and other publicly available information. Based on these reviews, none of these securities are considered to be other-than-temporarily impaired.

 

Trust preferred securities: Management monitors its pooled-trust preferred securities for possible other-than-temporary impairment on a quarterly basis. This review includes an analysis of collateral reports, cash flows, stress default levels and financial ratios of the underlying issuers. Management utilizes a third party to compile this data and perform other-than-temporary impairment cash flow testing. Critical assumptions that go into the other-than-temporary impairment cash flow testing are prepayment speeds, default rates of the underlying issuers and discount margins. The result of the third-party other-than-temporary impairment cash flow testing indicated no other-than-temporary impairment as of March 31, 2017.

 

(5)Loans

A summary of loans is as follows:

 

   At   At 
   March 31,   December 31, 
(In thousands)  2017   2016 
   Amount   Percent   Amount   Percent 
Commercial real estate  $337,727    51.13%  $336,102    53.07%
Commercial   182,395    27.61%   166,157    26.23%
Residential real estate   74,567    11.29%   76,850    12.13%
Construction and land development   57,036    8.64%   48,161    7.60%
Consumer   8,786    1.33%   6,172    0.97%
    660,511    100.00%   633,442    100.00%
Allowance for loan losses   (9,139)        (8,590)     
Deferred loan fees, net   (498)        (427)     
Net loans  $650,874        $624,425      

 

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The following table sets forth information regarding the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017 and 2016:

 

   For the three months ended March 31, 
               Construction             
   Commercial       Residential   and Land             
(In thousands)  Real Estate   Commercial   Real Estate   Development   Consumer   Unallocated   Total 
Allowance for loan losses:                                   
                                    
Balance at December 31, 2016  $4,503   $2,513   $328   $882   $279   $85   $8,590 
Charge-offs   (6)   -    -    -    (8)   -    (14)
Recoveries   -    -    -    -    -    -    - 
Provision (benefit)   16    267    (8)   159    104    25    563 
Balance at March 31, 2017  $4,513   $2,780   $320   $1,041   $375   $110   $9,139 
                                    
Balance at December 31, 2015  $3,827   $2,138   $412   $1,236   $119   $173   $7,905 
Charge-offs   -    -    -    -    (10)   -    (10)
Recoveries   -    1    13    -    -    -    14 
Provision (benefit)   203    (55)   (41)   (52)   2    54    111 
Balance at March 31, 2016  $4,030   $2,084   $384   $1,184   $111   $227   $8,020 

 

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The following table sets forth information regarding the allowance for loan losses and related loan balances by segment at March 31, 2017 and December 31, 2016:

 

               Construction             
   Commercial       Residential   and Land             
(In thousands)  Real Estate   Commercial   Real Estate   Development   Consumer   Unallocated   Total 
                             
March 31, 2017                                   
Allowance for loan losses:                                   
Ending balance:                                   
Individually evaluated for impairment  $-   $29   $-   $-   $-   $-   $29 
Ending balance:                                   
Collectively evaluated for impairment   4,513    2,751    320    1,041    375    110    9,110 
Total allowance for loan losses ending balance  $4,513   $2,780   $320   $1,041   $375   $110   $9,139 
                                    
Loans:                                   
Ending balance:                                   
Individually evaluated for impairment  $1,594   $1,845   $416   $-   $-   $-   $3,855 
Ending balance:                                   
Collectively evaluated for impairment   336,133   180,550    74,151    57,036    8,786    -    656,656 
Total loans ending balance  $337,727   $182,395   $74,567   $57,036   $8,786   $-   $660,511 
                                    
December 31, 2016                                   
Allowance for loan losses:                                   
Ending balance:                                   
Individually evaluated for impairment  $-   $46   $-   $-   $-   $-   $46 
Ending balance:                                   
Collectively evaluated for impairment   4,503    2,467    328    882    279    85    8,544 
Total allowance for loan losses ending balance  $4,503   $2,513   $328   $882   $279   $85   $8,590 
                                    
Loans:                                   
Ending balance:                                   
Individually evaluated for impairment  $1,956   $1,660   $422   $-   $-   $-   $4,038 
Ending balance:                                   
Collectively evaluated for impairment   334,146    164,497    76,428    48,161    6,172    -    629,404 
Total loans ending balance  $336,102   $166,157   $76,850   $48,161   $6,172   $-   $633,442 

 

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The following tables set forth information regarding non-accrual loans and loan delinquencies by portfolio segment at March 31, 2017 and December 31, 2016:

 

                           90 Days     
           90 Days   Total           or More     
   30 - 59   60 - 89   or More   Past   Total   Total   Past Due   Non-accrual 
(In thousands)  Days   Days   Past Due   Due   Current   Loans   and Accruing   Loans 
                                 
March 31, 2017                                        
Commercial real estate  $-   $-   $-   $-   $337,727   $337,727   $-   $- 
Commercial   -    38    -    38    182,357    182,395    -    914 
Residential real estate   232    207    83    522    74,045    74,567    -    465 
Construction and land development   -    -    -    -    57,036    57,036    -    - 
Consumer   -    -    -    -    8,786    8,786    -    - 
Total  $232   $245   $83   $560   $659,951   $660,511   $-   $1,379 
                                         
December 31, 2016                                        
Commercial real estate  $-   $-   $346   $346   $335,756   $336,102   $-   $346 
Commercial   29    -    -    29    166,128    166,157    -    933 
Residential real estate   -    -    -    -    76,850    76,850         303 
Construction and land development   -    -    -    -    48,161    48,161    -    - 
Consumer   -    -    -    -    6,172    6,172    -    - 
Total  $29   $-   $346   $375   $633,067   $633,442   $-   $1,582 

 

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Information about the Company’s impaired loans by portfolio segment was as follows at and for the period ended March 31, 2017 and at and for the year ended December 31, 2016:

 

       Unpaid       Average   Interest 
   Recorded   Principal   Related   Recorded   Income 
(In thousands)  Investment   Balance   Allowance   Investment   Recognized 
                     
March 31, 2017                    
With no related allowance recorded:                         
Commercial real estate  $1,594   $1,594   $-   $1,602   $22 
Commercial   1,000    1,000    -    899    16 
Residential real estate   416    416    -    419    6 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with no related allowance   3,010    3,010    -    2,920    44 
                          
With an allowance recorded:                         
Commercial real estate   -   -   -   -   - 
Commercial   845    845    29    853    - 
Residential real estate   -    -    -    -    - 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with an allowance recorded   845    845    29    853    - 
                          
Total                         
Commercial real estate   1,594    1,594    -    1,602    22 
Commercial   1,845    1,845    29    1,752    16 
Residential real estate   416    416    -    419    6 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired loans  $3,855   $3,855   $29   $3,773   $44 
                          
December 31, 2016                         
With no related allowance recorded:                         
Commercial real estate  $1,956   $1,956   $-   $2,744   $188 
Commercial   799    799    -    794    42 
Residential real estate   422    422    -    429    20 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with no related allowance   3,177    3,177    -    3,967    250 
                          
With an allowance recorded:                         
Commercial real estate   -   -   -   -   - 
Commercial   861    861    46    886    - 
Residential real estate   -    -    -    -    - 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with an allowance recorded   861    861    46    886    - 
                          
Total                         
Commercial real estate   1,956    1,956    -    2,744    188 
Commercial   1,660    1,660    46    1,680    42 
Residential real estate   422    422    -    429    20 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired loans  $4,038   $4,038   $46   $4,853   $250 

 

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The following summarizes troubled debt restructurings entered into during the three months ended March 31, 2017:

 

       Pre-   Post- 
       Modification   Modification 
   Number   Outstanding   Outstanding 
   of   Recorded   Recorded 
(Dollars in thousands)  Contracts   Investment   Investment 
             
March 31, 2017            
Troubled debt restructurings:               
Commercial   1   $249   $249 
    1   $249   $249 

 

In 2017, the Company approved one troubled debt restructure totaling $249,000, with no specific reserve required based on an analysis of the borrower’s repayment ability and/or collateral coverage. The term of this commercial loan was extended to a three-year term.

 

The following tables present the Company’s loans by risk rating and portfolio segment at March 31, 2017 and December 31, 2016:

 

               Construction         
   Commercial       Residential   and Land         
(In thousands)  Real Estate   Commercial   Real Estate   Development   Consumer   Total 
                         
March 31, 2017                              
Grade:                              
Pass  $321,737   $173,868   $-   $57,036   $-   $552,641 
Special mention   4,437    1,852    -    -    -    6,289 
Substandard   11,553    6,675    713    -    -    18,941 
Not formally rated   -    -    73,854    -    8,786    82,640 
Total  $337,727   $182,395   $74,567   $57,036   $8,786   $660,511 
                               
December 31, 2016                              
Grade:                              
Pass  $319,712   $157,306   $-   $48,161   $-   $525,179 
Special mention   4,471    1,668    -    -    -    6,139 
Substandard   11,919    7,183    729    -    -    19,831 
Not formally rated   -    -    76,121    -    6,172    82,293 
Total  $336,102   $166,157   $76,850   $48,161   $6,172   $633,442 

 

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Credit Quality Information

The Company utilizes a seven grade internal loan risk rating system for commercial real estate, construction and land development, 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 land development, 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 rates such loans as pass. Subsequent risk rating downgrades are based upon the borrower’s payment activity. All other residential and consumer loans are not formally rated.

 

(6) Federal Home Loan Bank Advances

Borrowings from the Federal Home Loan Bank (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 commercial loans and other qualified assets.

 

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

 

(In thousands)    
2017  $11,000 
2018   12,000 
2020   6,370 
Thereafter   3,500 
Total  $32,870 

 

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(7)Fair Value Measurements

The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

 

Basis of Fair Value Measurements

·Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
·Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;
·Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

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.

 

Fair Values of Financial Instruments Measured on a Recurring Basis

The Company’s investments in U.S. Government and federal agency, state and municipal, corporate debt, asset-backed and government mortgage-backed securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these investments, the Company obtains 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.

 

The Company classifies its investments in trust preferred securities as Level 3 securities. 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 classified its investments in marketable equity securities as Level 1 securities. Such securities are classified as Level 1 securities because fair values are obtained through quoted market prices for identical securities in active exchange markets.

 

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The following summarizes financial instruments measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016:

 

   Fair Value Measurements at Reporting Date Using 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
(In thousands)  Total   Level 1   Level 2   Level 3 
March 31, 2017                    
State and municipal  $59,286   $-   $59,286   $- 
Corporate debt   1,020    -    1,020    - 
Asset-backed securities   8,513    -    8,513    - 
Mortgage-backed securities   39,143    -    39,143    - 
Trust preferred securities   982    -    -    982 
Marketable equity securities   14,888    14,888    -    - 
Totals  $123,832   $14,888   $107,962   $982 
                     
December 31, 2016                    
State and municipal  $50,580   $-   $50,580   $- 
Corporate debt   1,031    -    1,031    - 
Asset-backed securities   8,678    -    8,678    - 
Mortgage-backed securities   41,914    -    41,914    - 
Trust preferred securities   968    -    -    968 
Marketable equity securities   14,696    14,696    -    - 
Totals  $117,867   $14,696   $102,203   $968 

 

The following is a summary of activity for Level 3 financial instruments measured at fair value on a recurring basis for the three-month periods ended March 31, 2017 and 2016.

 

(In thousands)  Available-for-
Sale Securities
 
     
Balance beginning January 1, 2017  $968 
Total gains or (losses) (realized/unrealized)     
Included in earnings   3 
Included in other comprehensive income   21 
Paydowns   (10)
Ending balance, March 31, 2017  $982 
      
Balance beginning January 1, 2016  $1,116 
Total gains or (losses) (realized/unrealized)     
Included in earnings   - 
Included in other comprehensive income   (106)
Paydowns   - 
Ending balance, March 31, 2016  $1,010 

 

 

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The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party. However, the Company generally discounts appraisals to arrive at fair value, therefore classifies such loans as Level 3 because the discounts are a significant input that is not observable.

 

The following summarizes financial instruments measured at fair value on a nonrecurring basis at March 31, 2017 and December 31, 2016:

 

   Fair Value Measurements at Reporting Date Using: 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
(In thousands)  Total   Level 1   Level 2   Level 3 
                 
March 31, 2017                    
Impaired loans  $816   $-   $-   $816 
                     
December 31, 2016                    
Impaired loans  $815   $-   $-   $815 

 

The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at March 31, 2017 and December 31, 2016:

 

(In thousands)  Fair Value   Valuation Technique  Unobservable Input  Range
March 31, 2017              
Impaired loans  $816    Real estate appraisals   Discount for dated appraisals  6-10%
December 31, 2016              
Impaired loans  $815    Real estate appraisals   Discount for dated appraisals  6-10%

 

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(8)Fair Value of Financial Instruments

GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

 

The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at March 31, 2017 and December 31, 2016:

 

   Carrying   Fair Value 
(In thousands)  Amount   Level 1   Level 2   Level 3   Total 
                     
March 31, 2017                         
Financial assets:                         
Cash and cash equivalents  $11,347   $11,347   $-   $-   $11,347 
Available-for-sale securities   123,832    14,888    107,962    982    123,832 
Federal Home Loan Bank of Boston stock   3,894    3,894    -    -    3,894 
Loans, net   650,874    -    -    658,595    658,595 
Accrued interest receivable   2,333    -    2,333    -    2,333 
Financial liabilities:                         
Deposits   680,597    -    -    680,728    680,728 
Federal Home Loan Bank advances   32,870    -    32,881    -    32,881 
                          
December 31, 2016                         
Financial assets:                         
Cash and cash equivalents  $10,705   $10,705   $-   $-   $10,705 
Available-for-sale securities   117,867    14,696    102,203    968    117,867 
Federal Home Loan Bank of Boston stock   2,787    2,787    -    -    2,787 
Loans, net   624,425    -    -    632,278    632,278 
Accrued interest receivable   2,320    -    2,320    -    2,320 
Financial liabilities:                         
Deposits   627,982    -    -    628,060    628,060 
Federal Home Loan Bank advances   49,858    -    49,901    -    49,901 

 

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(9)Regulatory Capital

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

 

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to capital regulations adopted by the 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%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that started 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 limits the ability of the Bank and the Company to pay dividends, repurchases shares or pay discretionary bonuses.

 

The new regulations implemented changes to what constitutes regulatory capital. Certain instruments 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 must be deducted from capital. The Bank has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on the Bank’s regulatory capital ratios.

 

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 0%.

 

As of March 31, 2017 and December 31, 2016, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

 

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

 

                      To Be Well 
                      Capitalized Under 
           For Capital   Prompt Corrective 
   Actual   Adequacy Purposes   Action Provisions 
(dollars in thousands)  Amount   Ratio   Amount      Ratio   Amount      Ratio 
March 31, 2017                                    
Total Capital (to Risk Weighted Assets)  $110,318    15.6%  $56,683   >   8.0%  $70,853   >   10.0%
Tier 1 Capital (to Risk Weighted Assets)   99,893    14.1    42,512   >   6.0    56,683   >   8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)   99,893    14.1    31,884   >   4.5    46,055   >   6.5 
Tier 1 Capital (to Average Assets)   99,893    12.2    32,825   >   4.0    41,031   >   5.0 
December 31, 2016                                    
Total Capital (to Risk Weighted Assets)  $107,731    15.9%  $54,272   >   8.0%  $67,840   >   10.0%
Tier 1 Capital (to Risk Weighted Assets)   97,750    14.4    40,704   >   6.0    54,272   >   8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)   97,750    14.4    30,528   >   4.5    44,096   >   6.5 
Tier 1 Capital (to Average Assets)   97,750    12.6    31,058   >   4.0    38,822   >   5.0 

 

The Company may use capital management tools such as cash dividends and common share repurchases. Massachusetts regulations restrict repurchases for the first three years following the stock offering except where compelling and valid business reasons are established to the satisfaction of the Massachusetts Commissioner of Banks, and except to fund stock benefit plans. The Company is also subject to the Federal Reserve Board’s notice provisions for stock repurchases. In January 2017, the Company received a non-objection from the Federal Reserve Bank to adopt a stock repurchase program for up to 6.6% of its common stock. As of March 31, 2017, the Company had repurchased 11,460 shares of its stock at an average price of $19.45 per share, or 1.8% of the 625,015 shares authorized for repurchase under the Company’s repurchase program.

 

(10)Employee Stock Ownership Plan

The Bank maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of Bank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released per year through 2029 is 23,810.

 

The Company contributed funds to a subsidiary to loan to the ESOP to purchase 357,152 shares of the Company’s common stock at a price of $10.00 per share. The loan is payable annually over 15 years at a rate per annum equal to the Prime Rate (3.75% at December 31, 2016). Loan payments are principally funded by cash contributions from the Bank.

 

   March 31, 2017   December 31, 2016 
Allocated   47,620    23,810 
Committed to be allocated   5,952    23,810 
Unallocated   303,580    309,532 
Total   357,152    357,152 

 

The fair value of unallocated shares was approximately $6.4 million at March 31, 2017.

 

Total compensation expense recognized in connection with the ESOP for the three months ended March 31, 2017 and December 31, 2016 was $114,000 and $77,000.

 

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(11)Earnings Per Common Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Unallocated ESOP shares, treasury stock and unvested restricted stock is not deemed outstanding for earnings per share calculation. There were no potentially dilutive common stock equivalents as of March 31, 2017.

 

   Three Months Ended 
   March 31, 
(Dollars in thousands)  2017   2016 
Net Income attributable to common shareholders  $1,802   $1,487 
           
Average number of common shares outstanding   9,652,448    9,498,722 
Less:          
average unallocated ESOP shares   (306,254)   (331,358)
average unvested restricted stock   (148,602)   - 
average treasury stock acquired   (5,024)   - 
Average number of common shares outstanding to calculate basic earnings per common share   9,192,568    9,167,364 
           
Effect of dilutive unvested restricted stock and stock option awards   -    - 
Average number of common shares outstanding to calculate diluted earnings per common share   9,192,568    9,167,364 

 

(12)Share-Based Compensation

Under the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the "Equity Plan"), the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Plan, with the total shares reserved for options equaling 446,440. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the term of each option is generally ten years. The total number of shares reserved for restricted stock or restricted units is 178,575. The value of restricted stock grants is based on the grant date fair value of the related stock. Options and other awards vest ratably over five years.

 

Expense related to options and restricted stock granted to directors is recognized as directors' fees within non-interest expense.

 

Stock Options

 

The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

 

·Volatility is based on peer group volatility because the Company does not have a sufficient trading history.
·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 risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

 

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A summary of the status of the Company’s stock option grants for the quarter ended March 31, 2017, is presented in the table below:

 

   Stock Option
Awards
   Weighted
Average
Exercise
Price
   Weighted Average
Remaining
Contractual Term 
(years)
   Aggregate
Intrinsic
Value
 
Balance at December 31, 2016   384,268   $17.40    -   $- 
Granted   -    -    -    - 
Balance at March 31, 2017   384,268   $17.40    9.64   $1,364,151 
Outstanding and expected to vest at March 31, 2017   384,268   $17.40    9.64   $1,364,151 
Exercisable at March 31, 2017   -    -    -    - 
Unrecognized compensation cost  $1,787,000                
Weighted average remaining recognition period (years)   4.64                

 

Total expense for the stock options was $97,000 for the quarter ended March 31, 2017. There was no stock-based compensation expense for the quarter ended March 31, 2016.

 

Restricted Stock

 

Shares issued upon vesting of restricted stock may be either authorized but unissued shares or reacquired shares held by the Company. Any shares not issued because vesting requirements are not met will again be available for issuance under the Equity Plan. The fair market value of shares awarded, based on the market prices at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period.

 

The following table presents the activity in restricted stock awards under the Equity Plan for the quarter ended March 31, 2017:

 

   Outstanding Restricted
Stock Awards
   Weighted Average 
Grant Price
 
Restricted stock awards at December 31, 2016   153,726   $17.40 
Granted   -    - 
Restricted stock awards at March 31, 2017   153,726   $17.40 
Unrecognized compensation cost  $2,475,000      
Weighted average remaining recognition period (years)   4.64      

 

Total expense for the restricted stock awards was $134,000 for the three months ended March 31, 2017. There was no stock-based compensation expense for the three months ended March 31, 2016.

 

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

 

Management’s discussion and analysis of financial condition and results of operations at March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016 is intended to assist in understanding our financial condition and results of operations. Operating results for the three-month period ended March 31, 2017 may not be indicative of results for all of 2017 or any other period. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

 

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Forward-Looking Statements

 

This document may contain certain forward-looking statements, such as statements of the Company’s or the Bank’s plans, objectives, expectations, estimates and intentions. Forward-looking statements may be identified by the use of words such as “expects,” “subject,” “believes,” “will,” “intends,” “will be,” “would” or similar expressions. Readers should not place undue reliance on any forward-looking statements, which reflect management’s analysis of factors only as of the date of which they are given. These statements are subject to change based on various important factors (some of which are beyond the Company’s or the Bank’s control) and actual results may differ materially. These factors include general economic conditions, including its trends and levels of interest rates, the ability of our borrowers to repay their loans, the ability of the Company or the Bank to effectively manage its growth, real estate values in the market area, loan demand, competition, and results of regulatory examinations, among other factors. The foregoing list of important factors is not exclusive. Readers should carefully review the factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Current Reports on Form 8-K.

 

Except as required by applicable law and regulation, the Company does not undertake — and specifically disclaims any obligation — to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

Critical Accounting Policies

Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

 

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

 

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

 

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

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment disclosures.

 

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The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction and land development, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the three months ended March 31, 2017 or during the twelve months ended December 31, 2016.

 

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

 

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

 

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

 

Construction and land development: Loans in this segment primarily include speculative and pre-sold real estate development loans for which payment is derived from sale of the property and a conversion of the construction loans to permanent loans for which payment is then derived from cash flows of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

 

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

 

Consumer: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

 

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.

 

We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.

 

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

 

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Stock-based Compensation Plans. The Company measures and recognizes compensation cost relating to stock-based payment transactions based on the grant-date fair value of the equity instruments issued. Stock-based compensation is recognized over the period the employee is required to provide services for the award. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options granted. The determination of fair value involves a number of significant estimates, which require a number of assumptions to determine the model inputs. The fair value of restricted stock is recorded based on the grant date value of the equity instrument issued.

 

Income Taxes. The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount expected to be realized.

 

The Company examines its significant income tax positions quarterly to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.

 

Balance Sheet Analysis

 

Assets. Total assets were $832.9 million at March 31, 2017, an increase of $37.4 million, or 4.7%, from $795.5 million at December 31, 2016. The increase resulted primarily from increases in net loans of $26.4 million, investments available-for-sale of $6.0 million and premises and equipment of $2.9 million.

 

Cash and Cash Equivalents. Cash and cash equivalents increased $642,000, or 6.0%, to $11.3 million at March 31, 2017 from $10.7 million at December 31, 2016. The increase in cash and cash equivalents resulted from an increase in deposits.

 

Loans. At March 31, 2017, net loans were $650.9 million, or 78.1% of total assets, compared to $624.4 million, or 78.5% of total assets, at December 31, 2016. An increase in commercial loans of $16.2 million, or 9.8%, and an increase in construction and land development loans of $8.9 million, or 18.4%, were partially offset by a decrease in residential real estate loans of $2.3 million, or 3.0%, reflecting our continued focus on commercial lending.

 

The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.

 

   At   At 
   March 31,   December 31, 
  2017   2016 
(Dollars in thousands)  Amount   Percent   Amount   Percent 
Commercial real estate  $337,727    51.13%   $336,102    53.07% 
Commercial   182,395    27.61%    166,157    26.23% 
Residential real estate   74,567    11.29%    76,850    12.13% 
Construction and land development   57,036    8.64%    48,161    7.60% 
Consumer   8,786    1.33%    6,172    0.97% 
    660,511    100.00%    633,442    100.00% 
Allowance for loan losses   (9,139)        (8,590)     
Deferred loan fees, net   (498)        (427)     
Net loans  $650,874        $624,425      

 

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Securities. Our available-for-sale securities portfolio increased $6.0 million, or 5.1%, to $123.8 million at March 31, 2017 from $117.9 million at December 31, 2016 as we purchased state and municipal securities in the beginning of 2017 to replace investment securities that matured during 2016. The cash flows generated by principal paydowns and maturities were used to fund loan growth throughout 2016.

 

Premises and Equipment. Premises and equipment increased $2.9 million to $14.5 million at March 31, 2017 from $11.6 million as of December 31, 2016. The increase was primarily due to a purchase of a building in Portsmouth, New Hampshire that is intended to provide space for future additional employees as we grow.

 

Deposits. Total deposits increased $52.6 million, or 8.4%, to $680.6 million at March 31, 2017 from $628.0 million at December 31, 2016. The increase was primarily due to an increase in time deposits of $45.7 million, an increase in money market accounts of $4.9 million, and an increase in savings accounts of $5.9 million. The increases were offset by a decrease in NOW accounts of $3.9 million. Increases in time deposits were primarily due to increases in brokered CDs of $30.0 million and an increase of $17.6 million in QwickRate certificates of deposit, where we gather certificates of deposit nationwide by posting rates we will pay on these deposits.

 

Borrowings. Borrowings at March 31, 2017 consisted entirely of Federal Home Loan Bank advances. Borrowings decreased $17.0 million, or 34.1%, to $32.9 million at March 31, 2017 from $49.9 million at December 31, 2016. The decrease was primarily due to the increase in brokered CD’s.

 

Shareholders’ Equity. Total shareholders’ equity increased $2.1 million, or 1.9%, to $111.2 million at March 31, 2017, from $109.1 million at December 31, 2016. The increase was primarily due to year-to-date net income of $1.8 million, increases of $161,000 in accumulated other comprehensive income, reflecting an increase in the fair value of available-for-sale securities, and $231,000 related to stock based compensation, partially offset by repurchases of common stock totaling $222,000. Book value per share increased to $11.54 at March 31, 2017 from $11.31 at December 31, 2016.

 

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Asset Quality.

The following table sets forth information regarding our non-performing assets at the dates indicated.

 

   At   At 
   March 31,   December 31, 
(Dollars in thousands)  2017   2016 
Non-accrual loans:          
Real estate:          
Commercial  $-   $346 
Residential   465    303 
Construction and land development   -    - 
Commercial   914    933 
Consumer   -    - 
Total non-accrual loans   1,379    1,582 
           
Accruing loans past due 90 days or more   -    - 
Real estate owned   -    - 
Total non-performing assets  $1,379   $1,582 
           
Total loans(1)  $660,013   $633,015 
Total assets  $832,941   $795,543 
Total non-performing loans to total loans(1)   0.21%    0.25% 
Total non-performing assets to total assets   0.17%    0.20% 

 

 

(1) Loans are presented before the allowance for loan losses but include deferred fees/costs

 

The decrease in non-performing assets at March 31, 2017 compared to December 31, 2016 was primarily due to a sale of a commercial real estate property at foreclosure.

 

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Allowance for Loan Losses. The allowance for loan losses is maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of the consolidated balance sheet reporting dates. The allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio size and composition, amount of and trend regarding delinquent and non-accrual loans, national and local business conditions, loss experience and an overall evaluation of the quality of the underlying collateral.

 

The following table sets forth activity in our allowance for loan losses for the periods indicated:

 

   Three Months Ended March 31, 
(Dollars in thousands)  2017   2016 
Allowance at beginning of period  $8,590   $7,905 
Provision for loan losses   563    111 
Charge offs:          
Real estate:          
Commercial   6    - 
Residential   -    - 
Construction and land development   -    - 
Commercial   -    - 
Consumer   8    10 
Total charge-offs   14    10 
           
Recoveries:          
Real estate:          
Commercial   -    - 
Residential   -    13 
Construction and land development   -    - 
Commercial   -    1 
Consumer   -    - 
Total recoveries   -    14 
           
Net charge-offs  (recoveries)   14    (4)
           
Allowance at end of period  $9,139   $8,020 
           
Non-performing loans at end of period  $1,379   $1,830 
Total loans outstanding at end of period(1)   660,013    563,483 
Average loans outstanding during the period(1)   646,136    564,823 
           
Allowance to non-performing loans   662.73%    438.25% 
Allowance to total loans outstanding at end of period   1.38%    1.42% 
Net charge-offs (recoveries) to average loans outstanding during the during the period (annualized)   0.01%    (0.00%)


 

(1) Loans are presented before the allowance for loan losses but include deferred fees/costs

 

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Results of Operations for the Three Months Ended March 31, 2017 and 2016

 

General. Net income increased $315,000 to $1.8 million for the three months ended March 31, 2017 from $1.5 million for the three months ended March 31, 2016. The increase was related to an increase of $1.0 million in net interest income and a $567,000 increase in noninterest income, partially offset by an increase in provision for loan losses of $452,000 and an increase in noninterest expense of $697,000.

 

Interest and Dividend Income. Interest and dividend income, which includes Federal Home Loan Bank stock dividends, increased $1.1 million, or 16.2%, to $8.1 million for the three months ended March 31, 2017 from $7.0 million for the three months ended March 31, 2016. This was primarily attributable to an increase in interest and fees on loans, which increased $1.1 million, or 18.7%, to $7.2 million for the three months ended March 31, 2017 from $6.1 million for the three months ended March 31, 2016.

 

The increase in interest income on loans was due to an increase in the average balance of loans of $81.3 million, or 14.4%, to $646.1 million for the three months ended March 31, 2017 from $564.8 million for the three months ended March 31, 2016. Yield on loans also increased 17 basis points to 4.48% for the quarter ended March 31, 2017 due to our continued focus on higher-yielding commercial lending.

 

Interest Expense. Interest expense increased $84,000, or 12.1%, to $781,000 for the three months ended March 31, 2017 from $697,000 for the three months ended March 31, 2016, primarily caused by an increase in interest expense on borrowings. Interest expense on borrowings increased $69,000, or 48.6%, to $211,000 for the three months ended March 31, 2017 from $142,000 for the three months ended March 31, 2016.

 

The interest expense on borrowings increased due to the increase in average outstanding balances of $26.7 million, or 76.8% to $61.6 million for the three months ended March 31, 2017. The increase in average outstanding was partially offset by the cost decrease on 26 basis points to 1.37% for the three months ended March 31, 2017. The average balance in borrowings increased over the quarter to aid in funding the loan growth during the first quarter of the year.

 

Net Interest and Dividend Income. Net interest and dividend income increased $1.0 million, or 16.7%, to $7.3 million for the three months ended March 31, 2017 from $6.3 million for the three months ended March 31, 2016. The increase was due to both higher balances of earning assets and expanding margins. Our net interest rate spread increased 21 basis points to 3.62% for the three months ended March 31, 2017 from 3.41% for the three months ended March 31, 2016. Our net interest margin increased 20 basis points to 3.79% for the three months ended March 31, 2017 from 3.59% for the three months ended March 31, 2016. The average yield we earned on interest-earning assets increased 20 basis points to 4.19% while the average rate paid on interest-bearing liabilities decreased one basis point to 0.57%.

 

Provision for Loan Losses. The provision for loan losses was $563,000 for the three months ended March 31, 2017 compared to $111,000 for the three months ended March 31, 2016. The provision recorded resulted in an allowance for loan losses of $9.1 million, or 1.38% of total loans at March 31, 2017, compared to $8.6 million, or 1.36% of total loans, at December 31, 2016 and $8.0 million, or 1.42% of total loans, at March 31, 2016. The provision for the quarter ended March 31, 2017 resulted primarily from an increase in the loan portfolio as we apply historical loss ratios to newly originated loans, which, absent other factors, results in an increase in the allowance for loan losses as the loan portfolio increases.

 

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Noninterest Income. Noninterest income increased $567,000, or 60.6%, to $1.5 million for the three months ended March 31, 2017 from $935,000 for the three months ended March 31, 2016. The increase was primarily caused by an increase in the gain on sales of securities of $462,000 to $482,000 for the three months ended March 31, 2017 from $20,000 for the three months ended March 31, 2016.

 

Noninterest Expense. Noninterest expense increased $697,000, or 14.2%, to $5.6 million for the three months ended March 31, 2017 from $4.9 million for the three months ended March 31, 2016. The largest increases were related to the salaries and employee benefits expense and occupancy expense. Salaries and employee benefits expense increased $554,000, or 17.7%, to $3.7 million for the three months ended March 31, 2017 from $3.1 million for the three months ended March 31, 2016. The increase in salaries and employee benefits was due primarily to our hiring additional employees and stock-based compensation expense. Occupancy expense increased $106,000, or 29.0%, to $471,000 for the three months ended March 31, 2017 from $365,000 for the three months ended March 31, 2016. The primary reason occupancy expense increased was maintenance expenses related to the purchase of the Portsmouth, New Hampshire building.

 

Income Tax Provision. We recorded a provision for income taxes of $847,000 for the three months ended March 31, 2017, reflecting an effective tax rate of 32.0%, compared to a provision of $696,000 for the three months ended March 31, 2016 reflecting an effective tax rate of 31.9%. The changes in the income tax provision were primarily due to an increase in pre-tax income. Our effective tax rates are below statutory federal and state rates due primarily to tax-exempt income related to investments in BOLI and municipal securities.

 

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Average Balance sheet and Related Yields and Rates

 

The following tables set forth the average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the amount of tax free interest-earning assets is immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

 

   For the Three Months Ended March 31, 
   2017   2016 
       Interest           Interest     
   Average   Earned/   Yield/   Average   Earned/   Yield/ 
   Balance   Paid   Rate   Balance   Paid   Rate 
(Dollars in thousands)                        
Assets:                              
Interest-earning assets:                              
Loans  $646,136   $7,233    4.48%   $564,823   $6,091    4.31% 
Interest-earning deposits   3,686    6    0.65%    7,582    8    0.42% 
Investment securities   121,303    848    2.80%    124,795    863    2.77% 
Federal Home Loan Bank stock   3,511    25    2.85%    2,989    18    2.41% 
Total interest-earning assets   774,636    8,112    4.19%    700,189    6,980    3.99% 
Non-interest earning assets   48,499              39,254           
                               
Total assets  $823,135             $739,443           
                               
Interest-bearing liabilities:                              
Savings accounts  $118,296    59    0.20%   $107,065    44    0.16% 
Money market accounts   149,545    126    0.34%    108,033    71    0.26% 
NOW accounts   114,529    168    0.59%    110,542    152    0.55% 
Certificates of deposit   102,884    217    0.84%    122,257    288    0.94% 
Total interest-bearing deposits   485,254    570    0.47%    447,897    555    0.50% 
Federal Home Loan Bank advances   61,597    211    1.37%    34,844    142    1.63% 
Total interest-bearing liabilities   546,851    781    0.57%    482,741    697    0.58% 
Noninterest-bearing liabilities:                              
Noninterest-bearing deposits   151,522              147,595           
Other noninterest-bearing liabilities   8,330              6,726           
Total liabilities   706,703              637,062           
Total equity   116,432              102,381           
Total liabilities and equity  $823,135             $739,443           
                               
Net interest income       $7,331             $6,283      
Interest rate spread(1)             3.62%              3.41% 
Net interest-earning assets(2)  $227,785             $217,448           
Net interest margin(3)             3.79%              3.59% 
Average interest-earning assets to interest-bearing liabilities   141.65%              145.04%           

 

 

(1)Net interest rate spread represents the difference between the weighted average yield on interest-bearing assets and the weighted average rate of interest-bearing liabilities.
(2)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)Net interest margin represents net interest income divided by average total interest-earning assets

 

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Rate/Volume Analysis

 

The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effect attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

   For the Three Months Ended March 31, 2017 
   Compared to the Three Months Ended March 31, 2016 
   Increase (Decrease) Due to   Total 
   Rate   Volume   Increase (Decrease) 
(In thousands)            
Interest-earning assets:               
Loans  $239   $903   $1,142 
Interest-earning deposits   3    (5)   (2)
Investment securities   9    (24)   (15)
Federal Home Loan Bank Stock   4    3    7 
                
Total interest-earning assets   255    877    1,132 
                
Interest-bearing liabilities:               
Savings accounts   10    5    15 
Money Market Accounts   23    32    55 
Now Accounts   10    6    16 
Certificates of deposit   (28)   (43)   (71)
                
Total interest-bearing deposits   15    -    15 
                
Federal Home Loan Bank advances   (26)   95    69 
                
Total interest-bearing liabilities   (11)   95    84 
                
Change in net interest income  $266   $782   $1,048 

 

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Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities, and sales of securities. 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.

 

We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.

 

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2017, cash and cash equivalents totaled $11.3 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $123.8 million at March 31, 2017.

 

At March 31, 2017, we had the ability to borrow a total of $173.5 million from the Federal Home Loan Bank of Boston. On that date, we had $32.9 million in advances outstanding. At March 31, 2017, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $161.9 million, none of which was outstanding as of that date.

 

We have no material commitments or demands that are likely to affect our liquidity other than set forth below. In the event loan demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of Boston or obtain additional funds through brokered certificates of deposit.

 

At March 31, 2017 and December 31, 2016, we had $2.8 million and $25.4 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at March 31, 2017 and December 31, 2016, we had $178.4 million and $202.0 million in unadvanced funds to borrowers, respectively. We also had $3.9 million and $5.2 million in outstanding letters of credit at March 31, 2017 and December 31, 2016, respectively.

 

Certificates of deposit due within one year of March 31, 2017 totaled $100.9 million, or 14.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit at March 31, 2017. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

Our primary investing activities are the origination of loans and the purchase of securities. During the three months ended March 31, 2017, we originated $56.5 million of loans, all of which were intended to be held in our portfolio. We purchased $4.4 million in loans and $11.3 million in securities. During the three months ended March 31, 2016, we originated $36.5 million of loans, all of which were intended to be held in our portfolio, and we purchased $272,000 in loans. We did not purchase any securities.

 

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increases in total deposits of $52.6 million and $19.1 million for the three months ended March 31, 2017 and 2016, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Federal Home Loan Bank advances decreased $17.0 million and $28.0 million during the three months ended March 31, 2017 and 2016, respectively.

 

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The Provident Bank is subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. At March 31, 2017, The Provident Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 9 of the Notes to the Unaudited Consolidated Financial Statements for additional information.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable, as the Company is a smaller reporting company.

 

Item 4. Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and 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) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2017. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended March 31, 2017, there have been no changes in the Company’s internal control 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 Company 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 Company’s financial condition or results of operations.

 

Item 1A. Risk Factors

 

Not applicable, as the Company is a smaller reporting company.

 

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

 

(a)Not applicable.

 

(b)Not applicable.

 

(c)The Company’s repurchases of common stock for the three months ended March 31, 2017 were as follows:

 

           Total Number of   Maximum Number of 
   Total       Shares Purchased as   Shares that May Yet 
   Number of   Average Price   Part of Publicly   Be Purchased Under 
   Shares   Paid   Announced Plans or   the Plans or 
Period  Purchased   per Share   Programs   Programs(1) 
January 1, 2017 through January 31, 2017   -   $-    -    625,015 
February 1, 2017 through February 28, 2017   3,460   $19.48    3,460    621,555 
March 1, 2017 through March 31, 2017   8,000   $19.37    8,000    613,555 

 

 

(1)          On January 26, 2017, the Company announced a repurchase program under which it would repurchase up to 6.6% of the then-outstanding shares of the Company’s common stock (625,015 shares) from time to time, depending on market conditions.  The repurchase program would continue until it is completed or terminated by the Company’s Board of Directors.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

3.1Amended and Restated Articles of Organization of Provident Bancorp, Inc.(1)
3.2By-Laws of Provident Bancorp, Inc.(1)
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.

 

 

(1)Incorporated by reference to the Company’s Registration Statement on Form S-1 (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015.

 

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SIGNATURES

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

 

    PROVIDENT BANCORP, INC.
     
Date: May 12, 2017 /s/ David P. Mansfield
    David P. Mansfield
    President and Chief Executive Officer
     
Date: May 12, 2017 /s/ Carol L. Houle
    Carol L. Houle
    Executive Vice President and Chief Financial Officer

 

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Section 2: EX-31.1 (EXHIBIT 31.1)

 

Exhibit 31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, David P. Mansfield, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Provident Bancorp, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 12, 2017 /s/ David P. Mansfield  
    David P. Mansfield  
    President and Chief Executive Officer  

 

 

  

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Section 3: EX-31.2 (EXHIBIT 31.2)

 

Exhibit 31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Carol L. Houle, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Provident Bancorp, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 12, 2017 /s/ Carol L. Houle  
    Carol L. Houle  
    Executive Vice President and Chief Financial Officer  

 

 

 

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Section 4: EX-32 (EXHIBIT 32)

 

Exhibit 32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

David P. Mansfield, President and Chief Executive Officer of Provident Bancorp, Inc. (the “Company”), and Carol L. Houle, Executive Vice President and Chief Financial Officer of the Company, each certify in his or her capacity as an officer of the Company that they have reviewed the quarterly report on Form 10-Q for the quarter ended March 31, 2017 (the “Report”) and that to the best of their knowledge:

 

1.the Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 12, 2017 /s/ David P. Mansfield  
    David P. Mansfield  
    President and Chief Executive Officer  
       
Date: May 12, 2017 /s/ Carol L. Houle  
    Carol L. Houle  
    Executive Vice President and Chief Financial Officer  

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 

 

 

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