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

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended March 31, 2020

¨ 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. 001-39090

Provident Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland  84-4132422
(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)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Trading Symbol   Name of each exchange on which registered
Common stock   PVBC   The NASDAQ Stock Market LLC

 

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

YES x NO ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  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 x
Non-accelerated filer ¨ 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 ¨ NO x

 

As of May 1, 2020, there were 19,476,248 shares of the Registrant’s common stock, $0.01 par value per share, outstanding.

 

 

 

 

 

 

Provident Bancorp, Inc.

Form 10-Q

 

Part I.   Financial Information   Page
         
Item 1.   Interim Financial Statements      
           
    Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited)     2
           
    Consolidated Statements of Income for the Three Months Ended March 31, 2020 and 2019 (unaudited)     3
           
    Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and 2019 (unaudited)     4
           
    Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (unaudited)     5
           
    Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited)     6
           
    Notes to Consolidated Financial Statements (unaudited)     8
           
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operation     29
           
Item 3.   Quantitative and Qualitative Disclosures about Market Risk     42
           
Item 4.   Controls and Procedures     42
           
Part II.   Other Information      
           
Item 1.   Legal Proceedings     42
           
Item 1A.   Risk Factors     42 
           
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     42
           
Item 3.   Defaults upon Senior Securities     42
           
Item 4.   Mine Safety Disclosures     42
           
Item 5.   Other Information     42
           
Item 6.   Exhibits     43
           
Signatures         44

 

 

 

 

 

 

Part I.Financial Information
Item 1.Financial Statements

 

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

   At   At 
   March 31,   December 31, 
(Dollars in thousands)  2020   2019 
Assets  (unaudited)     
Cash and due from banks  $8,662   $11,990 
Short-term investments   25,760    47,668 
Cash and cash equivalents   34,422    59,658 
Debt securities available-for-sale (at fair value)   39,081    41,790 
Federal Home Loan Bank stock, at cost   2,736    1,416 
Loans, net of allowance for loan losses of $16,674 and $13,844 as of March 31, 2020 and December 31, 2019, respectively   1,129,282    959,286 
Bank owned life insurance   27,104    26,925 
Premises and equipment, net   14,934    14,728 
Accrued interest receivable   3,236    2,854 
Right-of-use assets   4,375    3,713 
Other assets   11,385    11,418 
Total assets  $1,266,555   $1,121,788 
           
Liabilities and Shareholders' Equity          
Deposits:          
   Noninterest-bearing  $244,728   $222,088 
Interest-bearing   648,804    627,817 
Total deposits   893,532    849,905 
Borrowings   125,010    24,998 
Operating lease liabilities   4,555    3,877 
Other liabilities   10,800    12,075 
Total liabilities   1,033,897    890,855 
Shareholders' equity:          
Preferred stock; authorized 50,000 shares:          
     no shares issued and outstanding   -    - 
Common stock, $0.01 par value, 100,000,000 shares authorized;          
19,476,248 and 19,473,818 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively   195    195 
Additional paid-in capital   146,500    146,174 
Retained earnings   95,390    94,159 
Accumulated other comprehensive income   441    458 
Unearned compensation - ESOP   (9,868)   (10,053)
Total shareholders' equity   232,658    230,933 
Total liabilities and shareholders' equity  $1,266,555   $1,121,788 

 

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

 

2

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   Three Months Ended 
   March 31, 
(Dollars in thousands, except per share data)  2020   2019 
Interest and dividend income:  (unaudited) 
Interest and fees on loans  $13,760   $11,699 
Interest and dividends on securities   258    404 
Interest on short-term investments   71    26 
Total interest and dividend income   14,089    12,129 
Interest expense:          
Interest on deposits   1,646    1,437 
Interest on borrowings   371    534 
Total interest expense   2,017    1,971 
Net interest and dividend income   12,072    10,158 
Provision for loan losses   3,099    1,462 
Net interest and dividend income after provision for loan losses   8,973    8,696 
Noninterest income:          
Customer service fees on deposit accounts   352    329 
Service charges and fees - other   460    412 
Gain on sale of securities, net   -    113 
Bank owned life insurance income   179    177 
Other income   19    15 
 Total noninterest income   1,010    1,046 
Noninterest expense:          
Salaries and employee benefits   5,402    4,294 
Occupancy expense   441    644 
Equipment expense   137    106 
Data processing   201    203 
Marketing expense   64    55 
Professional fees   386    422 
Directors' compensation   194    181 
Software depreciation and implemenation   200    163 
Write down of note receivable   500    - 
Other   781    678 
Total noninterest expense   8,306    6,746 
Income before income tax expense   1,677    2,996 
Income tax expense   446    778 
 Net income  $1,231   $2,218 
           
Earnings per share: (1)          
Basic  $0.07   $0.12 
Diluted  $0.07   $0.12 
           
Weighted Average Shares: (1)          
Basic   18,115,970    18,730,676 
Diluted   18,261,282    18,807,840 

 

(1) Amounts related to periods prior to the date of the Conversion (October 16, 2019) have been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (2.0212-to-one).

 

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

 

3

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended 
   March 31, 
(In thousands)  2020   2019 
Net income  $1,231   $2,218 
Other comprehensive income (loss) :          
Unrealized holding gains arising during the period on debt securities          
available-for-sale   10    215 
Reclassification adjustment for realized gains in net income   -    (113)
Unrealized gain   10    102 
Income tax effect   (27)   (33)
Net of tax amount   (17)   69 
Total comprehensive income  $1,214   $2,287 

 

4

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

   For the three months ended March 31, 2020 and 2019 
                                 
                   Accumulated             
   Shares of       Additional       Other   Unearned         
   Common   Common   Paid-in   Retained   Comprehensive   Compensation   Treasury     
(In  thousands, except share data)  Stock (1)   Stock   Capital   Earnings   Income (Loss)   ESOP   Stock   Total 
                                 
Balance, December 31, 2019   19,473,818   $195   $146,174   $94,159   $458   $(10,053)  $-   $230,933 
Net income   -    -    -    1,231    -    -    -    1,231 
Other comprehensive loss   -    -    -    -    (17)   -    -    (17)
Stock-based compensation expense   -    -    261    -    -    -    -    261 
Restricted stock award grants   2,430    -    -    -    -    -    -    - 
ESOP shares earned   -    -    65    -    -    185    -    250 
Balance, March 31, 2020   19,476,248   $195   $146,500   $95,390   $441   $(9,868)  $-   $232,658 
                                         
Balance, December 31, 2018   19,455,503   $-   $45,895   $83,351   $(255)  $(2,619)  $(788)  $125,584 
Net income   -    -    -    2,218    -    -    -    2,218 
Other comprehensive income   -    -    -    -    69    -    -    69 
Stock-based compensation expense   -    -    265    -    -    -    -    265 
Restricted stock award grant forfeiture   (7,877)   -    -    -    -    -    -    - 
ESOP shares earned   -    -    76    -    -    60    -    136 
Balance, March 31, 2019   19,447,627        $46,236   $85,569   $(186)  $(2,559)  $(788)  $128,272 

 

(1) Amounts related to periods prior to the date of the Conversion (October 16, 2019) have been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (2.0212-to-one).

  

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

 

5

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Three Months Ended 
   March 31, 
(In thousands)  2020   2019 
Cash flows from operating activities:          
Net income  $1,231   $2,218 
Adjustments to reconcile net income to net cash provided by operating activities:          
Amortization of securities premiums, net of accretion   78    49 
ESOP expense   250    136 
Gain on sale of securities, net   -    (113)
Change in deferred loan fees, net   494    285 
Provision for loan losses   3,099    1,462 
Depreciation and amortization   266    404 
Increase in accrued interest receivable   (132)   (533)
Share-based compensation expense   261    265 
Increase in cash surrender value of life insurance   (179)   (177)
Principal repayments of operating lease obligations   (15)   (18)
Decrease (increase) in other assets   25    (360)
Decrease in other liabilities   (1,275)   (1,166)
Net cash provided by operating activities   4,103    2,452 
           
Cash flows from investing activities:          
Purchases of debt securities available-for-sale   -    (13,729)
Proceeds from sales of debt securities available-for-sale   -    13,565 
Proceeds from pay downs, maturities and calls of available-for-sale securities   2,641    2,071 
Purchase of Federal Home Loan Bank stock   (1,320)   (865)
Loan originations and purchases, net of paydowns   (106,917)   (25,488)

Cash paid for warehouse asset purchase, net (1)

   (66,962)   - 
Additions to premises and equipment   (420)   (1,950)
Additions to other real estate owned   -    (44)
Net cash used in investing activities   (172,978)   (26,440)

 

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

 

6

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

 

   Three Months Ended 
   March 31, 
(In thousands)  2020   2019 
Cash flows from financing activities:          
Net decrease in noninterest-bearing accounts   22,639    3,440 
Net increase in interest-bearing accounts   20,988    3,741 
Net change in short-term borrowings   100,012    11,920 
Net cash provided by  financing activities   143,639    19,101 
           
Net decrease in cash and cash equivalents   (25,236)   (4,887)
Cash and cash equivalents at beginning of period   59,658    28,613 
Cash and cash equivalents at end of period  $34,422   $23,726 
           
Supplemental disclosures:          
Interest paid  $2,017   $1,995 
Income taxes paid   329    290 
Reclassification of premises and equipment to other assets   3    - 
Recognition of right-of-use assets   693    3,836 
Recognition of operating lease liabilities   693    3,938 
Reclassification of accrued rent from other liabilities to premises and equipment   -    102 

 

(1) See Note 15 for warehouse asset purchase

 

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

 

7

 

 

PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)Basis of Presentation

 

The accompanying unaudited financial statements of Provident Bancorp, Inc., a Maryland 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 U.S. generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting only of normal and 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, 2020 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. Certain amounts in 2019 have been reclassified to be consistent with the 2020 consolidated financial statement presentation, and had no effect on the net income reported in the consolidated statement of income. 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 13, 2020.

 

The consolidated financial statements include the accounts of the Company, 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

 

The Company is a Maryland corporation that was incorporated in June 2019 to be the successor corporation to Provident Bancorp, Inc. (“Old Provident”), a Massachusetts corporation, upon completion of the second-step mutual-to-stock conversion (the “Conversion”) of Provident Bancorp (the “MHC”), the top tier mutual holding company of Old Provident. Old Provident was the former mid-tier holding company for the Bank. Prior to completion of the Conversion, approximately 52% of the shares of common stock of Old Provident were owned by the MHC. In conjunction with the Conversion, the MHC was merged into the Company (and ceased to exist) and the Company became its successor under the name Provident Bancorp, Inc. The Conversion was completed on October 16, 2019. The Company raised gross proceeds of $102.1 million by selling 10,212,397 shares of common stock at $10.00 per share in the second-step stock offering. The Company utilized $8.2 million of the proceeds to fund an addition to its Employee Stock Ownership Plan (“ESOP”) loan for the acquisition of an additional 816,992 shares at $10.00 per share. Expenses incurred related to the offering were $2.4 million, and have been recorded against offering proceeds. The Company invested $45.8 million of the net proceeds it received from the sale into the Bank’s operations and has retained the remaining amount for general corporate purposes. Concurrent with the completion of the stock offering, each share of Old Provident common stock owned by public stockholders (stockholders other than the MHC) was exchanged for 2.0212 shares of Company common stock. A total of 19,484,343 shares of common stock were outstanding following the completion of the stock offering.

 

The Bank, headquartered in Amesbury, Massachusetts operates its business from seven banking offices located in Amesbury and Newburyport, Massachusetts and Portsmouth, Exeter, Bedford, and Seabrook, New Hampshire. The Bank also has four loan production offices in Boston, Hingham, and Dedham, Massachusetts and Ponte Vedra, Florida. The Bank provides a variety of financial services to individuals and small businesses. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are commercial mortgages and commercial loans.

 

(3)COVID-19

 

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruption in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.

 

8

 

 

The U.S. government and regulatory agencies have taken several actions to provide support to the U.S. economy. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also includes extensive emergency funding for hospitals and providers. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act, as well as other recent legislative and regulatory relief efforts, are expected to have a material impact on the Company’s operations. Also, the actions of the Board of Governors of the Federal Reserve System (the “FRB”) to combat the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect the Company’s net interest income and margins, and profitability.

 

The Company implemented its business continuity and pandemic plans, which include remote working arrangements for the majority of its workforce. While there has been no material impact to the Company’s employees as of this report date, if COVID-19 escalates further it could also potentially create business continuity issues. The Company does not currently anticipate significant challenges to its ability to maintain systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. While it is not possible to know the full extent of these impacts as of the date of this filing, detailed below are potentially material items of which we are aware.

 

Financial position and results of operations

 

The Company’s fee income will be reduced due to COVID-19. In keeping with the guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds, account maintenance, minimum balance, and ATM fees. These reductions in fees are thought to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, the Company is unable to project the materiality of such an impact.

 

The Company’s interest income could be reduced due to COVID-19. In keeping with the guidance from the regulators, the Company is actively working with COVID-19 affected borrowers to defer payments, interest and fees. While interest and fees will accrue to income through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. As a result, interest income in future periods could be negatively impacted.

 

9

 

 

Allowance for loan losses

 

The provision for loan losses could increase. Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for credit losses. It also is possible that asset quality could worsen, expenses associated with collection efforts could increase and loan charge-offs could increase. The Company is actively participating in the Small Business Administration’s (“SBA’s”) Paycheck Protection Program (“PPP”), providing loans to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government, if that should change, the Company could be required to increase its allowance for loan losses through an additional provision for loan losses charged to earnings.

 

Valuation

 

Valuation and fair value measurement challenges may occur. For example, COVID-19 could cause further and sustained decline in the Company’s stock price or the occurrence of what management would deem a valuation triggering event that could result in an impairment charge to earnings, such as our investment securities.

 

(4)Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Company adopted ASU 2016-02 on January 1, 2019 and on that date the Company’s assets and liabilities increased by $3.8 million (see Note 14).

 

In June 2016, the FASB issued 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 deb 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. On October 16, 2019, FASB approved a delay on the implementation until January 2023 for smaller reporting companies as defined by the SEC. The amendments in this update will be effective for the Company on January 1, 2023. 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.

 

10

 

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): “Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The Company adopted the provision of ASU 2018-13 effective January 1, 2020 and the adoption did not have a material impact on the consolidated financial statements.

 

(5)Investment Securities

 

The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at March 31, 2020 and December 31, 2019:

 

   Amortized   Gross   Gross     
   Cost   Unrealized   Unrealized   Fair 
(In thousands)  Basis   Gains   Losses   Value 
March 31, 2020                    
State and municipal securities  $10,793   $26   $145   $10,674 
Asset-backed securities   5,233    131    -    5,364 
Government mortgage-backed securities   22,450    619    26    23,043 
Total debt securities available-for-sale  $38,476   $776   $171   $39,081 
                     
December 31, 2019                    
State and municipal securities  $10,808   $398   $-   $11,206 
Asset-backed securities   5,433    71    4    5,500 
Government mortgage-backed securities   24,954    197    67    25,084 
Total debt securities available-for-sale  $41,195   $666   $71   $41,790 

  

The scheduled maturities of debt securities were as follows at March 31, 2020. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

 

   Available-for-Sale 
   Amortized   Fair 
(In thousands)  Cost   Value 
Due after one year through five years  $1,207   $1,214 
Due after five years through ten years   912    916 
Due after ten years   8,674    8,544 
Government mortgage-backed securities   22,450    23,043 
Asset-backed securities   5,233    5,364 
   $38,476   $39,081 

  

There were no realized gains or losses on sales and calls during the three months ended March 31, 2020. During the three months ended March 31, 2019, gross realized gains on sales and calls were $216,000, and gross realized losses were $103,000.

 

Securities with carrying amounts of  $28.4 million and $30.6 million were pledged to secure available borrowings with the Federal Reserve Bank and Federal Home Loan Bank at March 31, 2020 and December 31, 2019, respectively.

 

11

 

 

Other-than-temporary impairment assessment: Management assesses whether the decline in fair value of investment securities is other-than-temporary on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates impairments in value both qualitatively and quantitatively to assess whether they are other-than-temporary.

 

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 longer are as follows at March 31, 2020 and December 31, 2019:

 

   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, 2020                              
Temporarily impaired securities:                              
State and municipal securities  $5,682   $145   $-   $-   $5,682   $145 
Government mortgage-backed securities   1,421    15    242    11    1,663    26 
Total temporarily impaired debt securities  $7,103   $160   $242   $11   $7,345   $171 
                               
December 31, 2019                              
Temporarily impaired securities:                              
Asset-backed securities  $606   $4   $-   $-   $606   $4 
Government mortgage-backed securities   5,207    8    5,418    59    10,625    67 
Total temporarily impaired debt securities  $5,813   $12   $5,418   $59   $11,231   $71 

   

Government mortgage-backed and state and municipal securities: The gross unrealized losses on government mortgage-backed and state and municipal securities were primarily attributable to relative changes in interest rates since the time of purchase. Management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2020.

 

12

 

 

(6)Loans

 

A summary of loans is as follows:

 

   At   At 
   March 31,   December 31, 
   2020   2019 
(Dollars in thousands)  Amount   Amount 
Commercial real estate  $415,792   $418,356 
Commercial   631,453    451,791 
Residential real estate   42,561    45,695 
Construction and land development   48,317    46,763 
Consumer   10,538    12,737 
    1,148,661    975,342 
Allowance for loan losses   (16,674)   (13,844)
Deferred loan fees, net   (2,705)   (2,212)
Net loans  $1,129,282   $959,286 

  

The following tables set forth information regarding the activity in the allowance for loan losses by portfolio segment for the three months ended Mach 31, 2020 and 2019:

 

    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, 2019  $6,104   $6,086   $254   $749   $650   $1   $13,844 
Charge-offs   -    (97)   -    -    (229)   -    (326)
Recoveries   -    7    4    -    46    -    57 
Provision (credit)   395    2,061    (45)   40    582    66    3,099 
Balance at March 31, 2020  $6,499   $8,057   $213   $789   $1,049   $67   $16,674 
                                    
Balance at December 31, 2018  $4,152   $5,742   $251   $738   $710   $87   $11,680 
Charge-offs   -    (1,033)   -    -    (281)   -    (1,314)
Recoveries   -    10    -    -    19    -    29 
Provision (credit)   95    1,027    (11)   (4)   364    (9)   1,462 
Balance at March 31, 2019  $4,247   $5,746   $240   $734   $812   $78   $11,857 

 

13

 

 

The following table sets forth information regarding the allowance for loan losses and related loan balances by portfolio segment at March 31, 2020 and December 31, 2019:

 

               Construction             
   Commercial       Residential   and Land             
(In thousands)  Real Estate   Commercial   Real Estate   Development   Consumer   Unallocated   Total 
March 31, 2020                            
Allowance for loan losses:                                   
Ending balance:                                   
Individually evaluated                                   
for impairment  $1,562   $354   $-   $-   $-   $-   $1,916 
Ending balance:                                   
Collectively evaluated                                   
for impairment   4,937    7,703    213    789    1,049    67    14,758 
Total allowance for loan                                   
losses ending balance  $6,499   $8,057   $213   $789   $1,049   $67   $16,674 
                                    
Loans:                                   
Ending balance:                                   
Individually evaluated                                   
for impairment  $22,427   $3,105   $165   $165   $-        $25,862 
Ending balance:                                   
Collectively evaluated                                   
for impairment   393,365#   628,348    42,396    48,152    10,538         1,122,799 
Total loans ending balance  $415,792   $631,453   $42,561   $48,317   $10,538        $1,148,661 
                                    
December 31, 2019                                   
Allowance for loan losses:                                   
Ending balance:                                   
Individually evaluated                                   
for impairment  $1,508   $174   $-   $-   $-   $-   $1,682 
Ending balance:                                   
Collectively evaluated                                   
for impairment   4,596    5,912    254    749    650    1    12,162 
Total allowance for loan                                   
losses ending balance  $6,104   $6,086   $254   $749   $650   $1   $13,844 
                                    
Loans:                                   
Ending balance:                                   
Individually evaluated                                   
for impairment  $20,990   $3,326   $182   $165   $-        $24,663 
Ending balance:                                   
Collectively evaluated                                   
for impairment   397,366    448,465    45,513    46,598    12,737         950,679 
Total loans ending balance  $418,356   $451,791   $45,695   $46,763   $12,737        $975,342 

  

14

 

 

The following tables set forth information regarding non-accrual loans and loan delinquencies by portfolio segment at March 31, 2020 and December 31, 2019:

 

                           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, 2020                                        
Commercial real estate  $1,713   $-   $1,070   $2,783   $413,009   $415,792   $-   $21,199 
Commercial   51    -    384    435    631,018    631,453    -    2,754 
Residential real estate   410    12    633    1,055    41,506    42,561    -    732 
Construction and land development   -    -    165    165    48,152    48,317    -    165 
Consumer   99    90    84    273    10,265    10,538    -    84 
Total  $2,273   $102   $2,336   $4,711   $1,143,950   $1,148,661   $-   $24,934 
                                         
December 31, 2019                                        
Commercial real estate  $473   $18,256   $1,368   $20,097   $398,259   $418,356   $-   $1,701 
Commercial   529    85    484    1,098    450,693    451,791    -    2,955 
Residential real estate   715    154    832    1,701    43,994    45,695         969 
Construction and land development   -    -    165    165    46,598    46,763    -    165 
Consumer   111    58    38    207    12,530    12,737    -    37 
Total  $1,828   $18,553   $2,887   $23,268   $952,074   $975,342   $-   $5,827 

 

15

 

  

Information about the Company’s impaired loans by portfolio segment was as follows at and for the three months ended March 31, 2020 and at and for the year ended December 31, 2019:

 

       Unpaid       Average   Interest 
   Recorded   Principal   Related   Recorded   Income 
(In thousands)  Investment   Balance   Allowance   Investment   Recognized 
March 31, 2020                    
With no related allowance recorded:                         
Commercial real estate  $2,027   $2,027   $-   $2,041   $19 
Commercial   673    957    -    694    6 
Residential real estate   165    165    -    165    3 
Construction and land development   165    165    -    165    - 
Consumer   -    -    -    -    - 
Total impaired with no related allowance   3,030    3,314    -    3,065    28 
                          
With an allowance recorded:                         
Commercial real estate   20,400    20,402    1,562    20,403    211 
Commercial   2,432    2,855    354    2,480    1 
Residential real estate   -    -    -    -    - 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with an allowance recorded   22,832    23,257    1,916    22,883    212 
                          
Total                         
Commercial real estate   22,427    22,429    1,562    22,444    230 
Commercial   3,105    3,812    354    3,174    7 
Residential real estate   165    165    -    165    3 
Construction and land development   165    165    -    165    - 
Consumer   -    -    -    -    - 
Total impaired loans  $25,862   $26,571   $1,916   $25,948   $240 
                          
December 31, 2019                         
With no related allowance recorded:                         
Commercial real estate  $2,070   $2,082   $-   $2,144   $59 
Commercial   1,348    1,745    -    2,323    26 
Residential real estate   182    182    -    303    16 
Construction and land development   165    165    -    273    - 
Consumer   -    -    -    -    - 
Total impaired with no related allowance   3,765    4,174    -    5,043    101 
                          
With an allowance recorded:                         
Commercial real estate   18,920    18,921    1,508    18,921    - 
Commercial   1,978    2,085    174    2,972    - 
Residential real estate   -    -    -    -    - 
Construction and land development   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total impaired with an allowance recorded   20,898    21,006    1,682    21,893    - 
                          
Total                         
Commercial real estate   20,990    21,003    1,508    21,065    59 
Commercial   3,326    3,830    174    5,295    26 
Residential real estate   182    182    -    303    16 
Construction and land development   165    165    -    273    - 
Consumer   -    -    -    -    - 
Total impaired loans  $24,663   $25,180   $1,682   $26,936   $101 

  

16

 

 

Troubled debt restructurings: Loans are considered to be troubled debt restructurings when the Company has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection.

 

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

 

Troubled debt restructurings are reported as such for at least one year from the date of the restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.

 

The following summarizes troubled debt restructurings entered into during the three months ended March 31, 2020:

 

(Dollars in thousands)  Number of
Contracts
   Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
 
March 31, 2020             
Troubled debt restructurings:               
Commercial  7   $18,646   $20,146  
   7   $18,646   $20,146  

 

In the three months ended March 31, 2020, the Company approved seven troubled debt restructurings for one commercial real estate loan relationship totaling $20.1 million. The Bank analyzed the relationship and modified the relationship as follows:

 

·$16.5 million was placed on interest-only for three years at a reduced rate;

 

·$2.1 million was restructured to amortize and payout over a ten-year term at a reduced rate; and

 

·$1.5 million was advanced for necessary capital expenditures. The advance was placed on interest only payments for three years at a reduced rate.

 

This commercial relationship is currently on non-accrual until satisfactory demonstration of payments. An impairment analysis was performed and a specific reserve of $1.4 million was allocated to this relationship.

 

In the three months ended March 31, 2019, the Company approved one troubled debt restructuring totaling $2.0 million. This commercial loan was placed on an extended 12-month interest-only period with re-amortization to follow. An impairment analysis was performed and a specific reserve of $100,000 was allocated to this relationship.

 

For the three months ended March 31, 2020 and 2019 there were no payment defaults on troubled debt restructured loans modified within the previous 12 months.

 

As of March 31, 2020, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

 

The recorded investment in troubled debt restructurings was $24.2 million and $4.2 million at March 31, 2020 and December 31, 2019, respectively.

  

17

 

 

The following tables present the Company’s loans by risk rating and portfolio segment at March 31, 2020 and December 31, 2019:

 

            Construction         
   Commercial        Residential   and Land         
(In thousands)  Real Estate   Commercial   Real Estate   Development   Consumer   Total 
March 31, 2020                              
Grade:                              
Pass  $385,695   $613,350   $-   $48,152   $-   $1,047,197 
Special mention   8,444    17,359    -    -    -    25,803 
Substandard   21,653    744    1,141    165    -    23,703 
Not formally rated   -    -    41,420    -    10,538    51,958 
Total  $415,792   $631,453   $42,561   $48,317   $10,538   $1,148,661 
                               
December 31, 2019                              
Grade:                              
Pass  $396,217   $433,076   $-   $46,598   $-   $875,891 
Special mention   1,936    14,044    -    -    -    15,980 
Substandard   20,203    4,671    1,379    165    -    26,418 
Not formally rated   -    -    44,316    -    12,737    57,053 
Total  $418,356   $451,791   $45,695   $46,763   $12,737   $975,342 

  

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. Ongoing monitoring is based upon the borrower’s payment activity.

 

18

 

 

(7)Deposits

 

A summary of deposit balances, by type is as follows:

 

   March 31,   December 31, 
(In thousands)  2020   2019 
NOW and demand  $365,372   $369,423 
Regular savings   120,253    115,593 
Money market deposits   254,619    270,471 
Total non-certificate accounts   740,244    755,487 
           
Certificate accounts of $250,000 or more   17,715    15,575 
Certificate accounts less than $250,000   135,573    78,843 
Total certificate accounts   153,288    94,418 
Total deposits  $893,532   $849,905 

   

(8)Borrowings

 

Advances consist of funds borrowed the Federal Home Loan Bank (the “FHLB”) and the Federal Reserve Bank (the “FRB”) borrower-in-custody (“BIC”) program. Maturities of advances from the FHLB and FRB as of March 31, 2020 are summarized as follows:

 

(In thousands)    
Fiscal Year-End  Dollar Amount 
2020  $111,510 
2021   5,000 
2023   8,500 
Total  $125,010 

 

Borrowings from the FRB BIC program are secured by a Uniform Commercial Code (“UCC”) financing statement on qualified collateral, consisting of certain commercial loans and qualified mortgage-backed government securities. At March 31, 2020, FRB borrowings consisted of overnight borrowings totaling $100.0 million and had an interest rate of 0.25%.

 

Borrowings from the FHLB, which aggregated $25.0 million at March 31, 2020, 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 qualified mortgage-backed government securities. The interest rates on FHLB advances ranged from 1.53% to 3.01%, and the weighted average interest rate on FHLB advances was 2.45% at March 31, 2020. All of the FHLB borrowings at March 31, 2020 are long-term with an original maturity of more than one year.

 

19

 

 

(9)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).

 

20

 

 

An asset’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 Assets Measured on a Recurring Basis

 

The Company’s investments in state and municipal, asset-backed and government mortgage-backed available-for-sale securities 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 following summarizes financial instruments measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019:

 

   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, 2020                    
State and municipal securities  $10,674   $               -    $10,674   $                    -  
Asset-backed securities   5,364    -    5,364    - 
Mortgage-backed securities   23,043    -    23,043    - 
Totals  $39,081   $-   $39,081   $- 
                     
December 31, 2019                    
State and municipal securities  $11,206   $-   $11,206   $- 
Asset-backed securities   5,500    -    5,500    - 
Mortgage-backed securities   25,084    -    25,084    - 
Totals  $41,790   $-   $41,790   $- 

 

Fair Values of Assets Measured on a Non-Recurring Basis

 

The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or market accounting or write-downs of individual assets.

 

Certain impaired loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.

 

21

 

 

The following summarizes assets measured at fair value on a nonrecurring basis at March 31, 2020 and December 31, 2019:

 

   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, 2020                    
Impaired loans                    
Commercial real estate  $131   $-   $-   $131 
Commercial   2,078    -    -    2,078 
Totals  $2,209   $-   $-   $2,209 
                     
December 31, 2019                    
Impaired loans                    
Commercial real estate  $215   $-   $-   $215 
Commercial   1,805    -    -    1,805 
Totals  $2,020   $-   $-   $2,020 

 

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, 2020 and December 31, 2019:

 

(In thousands)  Fair Value   Valuation Technique  Unobservable Input  Range 
March 31, 2020                
Impaired loans                
Commercial real estate  $131   Real estate appraisals  Discount for dated appraisals   6 - 10%
Commercial   2,078   Business valuation  Comparable company evaluations   - 
                 
December 31, 2019                
Impaired loans                
Commercial real estate  $215   Real estate appraisals  Discount for dated appraisals   6 - 10%
Commercial   1,805   Business valuation  Comparable company evaluations   - 

  

Fair Values 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.

 

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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, 2020 and December 31, 2019:

 

   Carrying   Fair Value 
(In thousands)  Amount   Level 1   Level 2   Level 3   Total 
                     
March 31, 2020                         
Financial assets:                         
Cash and cash equivalents  $34,422   $34,422   $-   $-   $34,422 
Available-for-sale securities   39,081    -    39,081    -    39,081 
Federal Home Loan Bank of Boston stock   2,736     N/A      N/A      N/A      N/A  
Loans, net   1,129,282    -    -    1,146,895    1,146,895 
Accrued interest receivable   3,236    -    3,236    -    3,236 
Financial liabilities:                         
Deposits   893,532    -    894,695    -    894,695 
Borrowings   125,010    -    125,736    -    125,736 
                          
December 31, 2019                         
Financial assets:                         
Cash and cash equivalents  $59,658   $59,658   $-   $-   $59,658 
Available-for-sale securities   41,790    -    41,790    -    41,790 
Federal Home Loan Bank of Boston stock   1,416     N/A      N/A      N/A      N/A  
Loans, net   959,286    -    -    958,270    958,270 
Accrued interest receivable   2,854    -    2,854    -    2,854 
Financial liabilities:                         
Deposits   849,905    -    850,774    -    850,774 
Borrowings   24,998    -    25,351    -    25,351 

 

(10)Regulatory Capital

 

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

 

The Bank is subject to capital regulations that require a 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. 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%. As of March 31, 2020 and December 31, 2019, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

 

Applicable regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. At March 31, 2020, the Bank exceeded the regulatory requirement for the capital conservation buffer.

 

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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, 2020                              
Total Capital (to Risk Weighted Assets)  $185,020    15.35%  $96,399   >   8.0%  $120,498   >   10.0%
Tier 1 Capital (to Risk Weighted Assets)   169,938    14.10   $72,299   >   6.0    96,399   >   8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)   169,938    14.10   $54,224   >   4.5    78,324   >   6.5 
Tier 1 Capital (to Average Assets)   169,938    14.31   $47,509   >   4.0    59,386   >   5.0 
December 31, 2019                                    
Total Capital (to Risk Weighted Assets)  $181,135    17.62%  $82,238   >   8.0%  $102,798   >   10.0%
Tier 1 Capital (to Risk Weighted Assets)   168,273    16.37    61,679   >   6.0    82,238   >   8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)   168,273    16.37    46,259   >   4.5    66,819   >   6.5 
Tier 1 Capital (to Average Assets)   168,273    15.18    44,352   >   4.0    55,440   >   5.0 

 

Community Bank Leverage Ratio:- Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Growth Act”), which was enacted on May 24, 2018, directs the federal banking agencies to establish a community bank leverage ratio of tangible capital to average total consolidated assets of not less than 8% or more than 10%. In September 2019, the federal banking agencies adopted a final rule to implement Section 201 of the Growth Act, effective January 1, 2020, establishing a community bank leverage ratio framework for community banking organizations having total consolidated assets of less than $10 billion, having a leverage ratio of greater than 9%, and satisfying other criteria, such as limitations on the amount of off-balance sheet exposures and on trading assets and liabilities. A community banking organization that qualifies for and elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the banking agencies’ generally applicable capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the Federal Deposit Insurance Act. The final rule includes a two-quarter grace period during which a qualifying banking organization that temporarily fails to meet any of the qualifying criteria, including the greater than 9% leverage ratio requirement, generally would still be deemed well-capitalized so long as the banking organization maintains a leverage ratio greater than 8%. At the end of the grace period, the banking organization must meet all qualifying criteria to remain in the community bank leverage ratio framework or otherwise must comply with and report under the generally applicable rule. The CARES Act temporarily lowered the community bank leverage ratio to 8%. As of March 31, 2020, the Bank did not opt into the alternative framework.

 

Liquidation Accounts

 

Upon the completion of Old Provident’s stock offering in 2015, 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 Old Provident 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.

 

Upon the completion of the Conversion, special “liquidation accounts” for the benefit of certain depositors of The Provident Bank in an amount equal to the MHC’s ownership interest in the retained earnings of the Company as of the date of the latest balance sheet contained in the 2019 prospectus plus the MHC’s net assets (excluding its ownership of the Company) were established by the Company and the Bank. The Company and The Provident Bank are not permitted to pay dividends on their capital stock if the shareholders’ equity of the Company, or the shareholder’s equity of The Provident Bank, would be reduced below the amount of the liquidation accounts. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts.

 

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(11)Employee Stock Ownership Plan

 

Old Provident established an ESOP for its eligible employees effective January 1, 2015 to provide eligible employees the opportunity to own Old Provident stock. The plan is a tax-qualified plan for the benefit of all Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax law limits. The ESOP acquired 721,876 shares in Old Provident’s initial stock offering with the proceeds of a loan totaling $3.6 million. The loan was payable annually over 15 years at a rate per annum equal to the prime rate. In conjunction with the Conversion, the Company refinanced the original loan to the ESOP with an additional $8.2 million payable over 15 years at a rate per annum equal to the prime rate (4.75% as December 31, 2019) to acquire an additional 816,992 shares at $10.00 per share, representing 8% of the shares sold in the Company’s second-step offering. After the Conversion, the unallocated shares had an average price of $8.20 per share. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid. The number of shares committed to be released per year through 2033 is 89,757.

 

Shares held by the ESOP include the following:

 

   March 31, 2020   December 31, 2019 
Allocated   282,256    192,499 
Committed to be allocated   22,439    89,757 
Unallocated   1,234,173    1,256,612 
Total   1,538,868    1,538,868 

 

The fair value of unallocated shares was approximately $10.8 million at March 31, 2020.

 

Share amounts related to periods prior to the date of the Conversion (October 16, 2019) have been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (2.0212-to-one).

 

Total compensation expense recognized in connection with the ESOP for the three months ended March 31, 2020 and 2019 was $250,000 and $136,000, respectively.

 

(12)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. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Unallocated ESOP shares, treasury stock and unvested restricted stock is not deemed outstanding for earnings per share calculations.

 

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   Three Months Ended 
   March 31, 
(Dollars in thousands, except per share amounts)  2020   2019 
Net Income attributable to common shareholders  $1,231   $2,218 
           
Average number of common shares issued   19,476,248    19,529,200 
Less:          
average unallocated ESOP shares   (1,241,654)   (548,805)
average unvested restricted stock   (118,624)   (176,386)
average treasury stock acquired   -    (73,333)
Average number of common shares outstanding
   to calculate basic earnings per common share
   18,115,970    18,730,676 
          
Effect of dilutive unvested restricted stock and stock option awards   145,312    77,164 
Average number of common shares outstanding
   to calculate diluted earnings per common share
   18,261,282    18,807,840 
          
Earnings per common share:          
Basic  $0.07   $0.12 
Diluted  $0.07   $0.12 

  

Share amounts related to periods prior to the date of the Conversion (October 16, 2019) have been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (2.0212-to-one).

 

(13)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 902,344. 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 360,935. Options and other awards vest ratably over three to five years.

 

Expense related to options and restricted stock granted to directors is recognized in directors’ compensation 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.

 

The fair value of options granted in 2020 is based on the following assumptions:

 

   2020 
Vesting period (years)   3 
Expiration date (years)   10 
Expected volatility   30.92%
Expected life (years)   7.5 
Expected dividend yield   0.00%
Risk free interest rate   1.74%
Fair value per option  $4.60 

 

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A summary of the status of the Company’s stock option grants for the three months ended March 31, 2020, is presented in the table below:

 

   Stock Option
Awards
   Weighted
Average Exercise
Price
   Weighted
Average
Remaining
Contractual Term
(years)
   Aggregate
Intrinsic Value
 
Outstanding at December 31, 2019   816,057   $8.93           
Granted   7,293    12.35           
Forfeited   -    -           
Exercised   -    -           
Outstanding at March 31, 2020   823,350   $8.96    6.80   $7,521 
Outstanding and expected to vest
    at March 31, 2020
   823,350   $8.96    6.80   $7,521 
Vested and Exercisable
    at March 31, 2020
   465,994   $8.73    6.67   $4,512 
Unrecognized compensation cost  $821,000                
Weighted average remaining
    recognition period (years)
   1.96                

 

For the three months ended March 31, 2020 and 2019, total expense for the stock options was $111,000 and $97,000, respectively.

 

Restricted Stock

 

Shares issued upon the granting of restricted stock may be either authorized but unissued shares or reacquired shares held by the Company. Any shares forfeited 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 three months ended March 31, 2020:

 

   Unvested
Restricted Stock
Awards
   Weighted
Average Grant
Date Price
 
Unvested restricted stock awards at January 1, 2020   140,019   $9.19 
Granted   2,430    12.35 
Forfeited   -    - 
Vested   -    - 
Unvested restricted stock awards at March 31, 2020   142,449   $9.24 
Unrecognized compensation cost  $1,090,000      
Weighted average remaining recognition period (years)   1.92      

 

For the three months ended March 31, 2020 and 2019, total expense for the restricted stock awards was $150,000 and $168,000, respectively.

 

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(14)Leases

 

The Company recognized right-of-use assets totaling $4.4 million and $3.7 million and operating lease liabilities totaling $4.6 million and $3.9 million at March 31, 2020 and December 31, 2019, respectively. The lease liabilities recognized by the Company represent two leased branch locations and one loan production office.

 

Rent expense for the operating leases has been straight lined for the remaining lease term. For the three months ended March 31, 2020 and 2019, rent expense for the operating leases totaled $71,000 and $72,000, respectively. Variable lease components are expensed as incurred and are not included in the right-of-use assets and operating lease liabilities.

 

The following table presents information regarding the Company’s operating leases:

 

   March 31,  December 31,
   2020  2019
Weighted-average discount rate  3.53%  3.78%
Range of lease expiration dates  3 - 15.5 years  4.5 - 16 years
Range of lease renewal options  5 - 20 years  20 years
Weighted-average remaining lease term  28.1 years  31.9 years

 

The following table presents the undiscounted annual lease payments under the terms of the Company's operating leases at March 31, 2020, including a reconciliation to the present value of operating lease liabilities recognized in the unaudited Consolidated Balance Sheets:

 

(Dollars in thousands)    
Fiscal Year-End  Dollar Amount 
2020  $188 
2021   258 
2022   261 
2023   264 
2024   270 
Thereafter   6,604 
Total lease payments   7,845 
Less imputed interest   (3,290)
Total lease liabilities  $4,555 

 

The lease liabilities recognized include certain lease extensions as it is expected that the Company will use substantially all lease renewal options.

 

(15)Asset Purchase

 

On January 17, 2020, the Company completed an asset purchase of a warehouse line of business, which comprised primarily of warehouse loans. This line of business was originally developed by United Bank in Connecticut. People’s United Bank, N.A. acquired United Bank in 2019 and made the business decision to no longer support the warehouse lending business developed by United Bank. On December 20, 2019, the Company entered into an agreement with People’s United Bank, N.A. to complete the asset purchase at par. The Company acquired the loan portfolio, plus aggregate accrued interest and fees, fixed assets, and prepaid expenses. The Company also assumed the employment contracts of the six employees in the department and agreed to pay all costs associated with the acquisition, which totaled $80,000 and were included in the Company’s income statement for the three months ended March 31, 2020.

 

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The following table summarizes the consideration paid for the warehouse lending business and the amounts of assets purchased:

 

(In thousands)    
Consideration:    
Cash  $66,962 
      
Recognized amounts of identifiable assets acquired:     
Loans   66,672 
Accrued interest and fees   250 
Premises and equipment   24 
Other assets   16 
Total identifiable assets  $66,962 

 

The Company paid par for the purchase. A valuation was performed and the fair value of the loans purchased approximates the purchase price.

 

(16)Revenue Recognition

 

Revenue from contracts with customers in the scope of Accounting Standards Codification (“ASC”) ("Topic 606") is measured based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations.

 

The Company’s performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.

 

In certain cases, other parties are involved with providing services to our customers. If the Company is a principal in the transaction (providing services itself or through a third party on its behalf), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in non-interest expense. If the Company is an agent in the transaction (referring to another party to provide services), the Company reports its net fee or commission retained as revenue.

 

The Company recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Additionally, revenue is collected from loan fees, such as letters of credit, line renewal fees and application fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. 

 

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

 

Management’s discussion and analysis of financial condition and results of operations at March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019 is intended to assist in understanding our financial condition and results of operations. Operating results for the three-month period ended March 31, 2020 may not be indicative of results for all of 2020 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.

 

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,” “may,” “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 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; changes in accounting policies; changes in laws and regulations; our success in introducing new products or entering new markets; our ability to retain key employees; failures or breaches of our IT systems; and results of regulatory examinations, among other factors.

 

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Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend; our wealth management revenues may decline with continuing market turmoil; our cyber security risks are increased as the result of an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experience additional resolution costs.

 

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 Annual and Quarterly Reports on Forms 10-K and 10-Q, and 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 update any forward-looking statements after the date of this quarterly report.

 

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 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 it 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.

 

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, 2020 or during the year ended December 31, 2019.

 

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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.

 

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.

 

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Balance Sheet Analysis

 

Assets. Total assets were $1.27 billion at March 31, 2020, representing an increase of $144.8 million, or 12.9%, from $1.12 billion at December 31, 2019. The increase resulted primarily from increases in net loans of $170.0 million, partially offset by decreases in cash and cash equivalents of $25.2 million and available-for-sale investment securities of $2.7 million.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $25.2 million, or 42.3%, to $34.4 million at March 31, 2020 from $59.7 million at December 31, 2019. The decrease in cash and cash equivalents resulted primarily from the $67.0 million in cash used to purchase the warehouse business line, offset by deposit growth and the increase in borrowings exceeding asset growth.

 

Loans. At March 31, 2020, net loans were $1.13 billion, or 89.2% of total assets, compared to $959.3 million, or 85.5% of total assets, at December 31, 2019. Increases in commercial loans of $179.7 million, or 39.8%, and in construction and land development loans of $1.6 million, or 3.3%, were partially offset by decreases in commercial real estate loans of $2.6 million, or 0.6%, residential real estate loans of $3.1 million, or 6.9%, and consumer loans of $2.2 million, or 17.3%. Our commercial loan growth was primarily due to the purchase and continued growth of the warehouse business line and a continued focus on our specialized enterprise value loans, partially offset by a decrease in renewable energy loan portfolio. On January 17, 2020, the Bank purchased the warehouse business line from People’s United Bank, N.A. The warehouse business line increased $54.8 million, or 82.2%, to $121.5 million at March 31, 2020 from $66.7 million at January 17, 2020. Enterprise value loans increased $22.4 million, or 12.6%, to $200.4 million at March 31, 2020 from $178.0 million at December 31, 2019. Renewable energy loans decreased $7.6 million, or 11.5%, to $58.5 million at March 31, 2020 from $66.1 million at December 31, 2019 due to early payoffs.

 

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, 
(Dollars in thousands)  2020   2019 
   Amount   Percent   Amount   Percent 
Commercial real estate  $415,792    36.20%  $418,356    42.89%
Commercial   631,453    54.97%   451,791    46.32%
Residential real estate   42,561    3.70%   45,695    4.69%
Construction and land development   48,317    4.21%   46,763    4.79%
Consumer   10,538    0.92%   12,737    1.31%
    1,148,661    100.00%   975,342    100.00%
Allowance for loan losses   (16,674)        (13,844)     
Deferred loan fees, net   (2,705)        (2,212)     
Net loans  $1,129,282        $959,286      

 

Securities. Investments in available-for-sale securities decreased $2.7 million, or 6.5%, to $39.1 million at March 31, 2020 from $41.8 million at December 31, 2019. The decrease was primarily due to principal paydowns on government mortgage-backed securities.

 

Deposits. Total deposits increased $43.6 million, or 5.1%, to $893.5 million at March 31, 2020 from $849.9 million at December 31, 2019. The primary reason for the increase in deposits was due to an increase of $58.9 million, or 62.4%, in time deposits and an increase of $4.7 million, or 4.0%, in savings accounts, partially offset by a decrease in money market accounts of $15.9 million, or 5.9%, and NOW and demand deposits of $4.1 million, or 1.1%. The increase in time deposits was primarily due to increases in brokered certificates of deposit of $55.8 million, or 114.9%, and an increase of $2.8 million, or 32.8%, from Qwickrate, where we gather certificates of deposit nationwide by posting rates we will pay on these deposits. The increase in savings accounts was primarily due to municipal deposits. Money market deposits and NOW and demand deposits decreased due to the decrease in some of our high rate relationships within these categories.

 

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Borrowings. Borrowings at March 31, 2020 consisted of FHLB advances and FRB borrowings from the borrower-in-custody program and at December 31, 2019 consisted of FHLB advances. Borrowings increased $100.0 million, or 400.1%, to $125.0 million at March 31, 2020 from $25.0 million at December 31, 2019. The increase was primarily due to funding loan growth.

 

Shareholders’ Equity. Total shareholders’ equity increased $1.7 million, or 0.7%, to $232.7 million at March 31, 2020, from $230.9 million at December 31, 2019. The increase was due to year-to-date net income of $1.2 million, stock-based compensation expense of $261,000, and employee stock option plan shares earned of $250,000. Book value per share increased to $11.95 at March 31, 2020 from $11.86 at December 31, 2019.

 

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)  2020   2019 
Non-accrual loans:          
Real estate:          
Commercial  $21,199   $1,701 
Residential   732    969 
Construction and land development   165    165 
Commercial   2,754    2,955 
Consumer   84    37 
 Total non-accrual loans   24,934    5,827 
           
Accruing loans past due 90 days or more   -    - 
Other real estate owned   -    - 
 Total non-performing assets  $24,934   $5,827 
           
Total loans (1)  $1,145,956   $973,130 
Total assets  $1,266,555   $1,121,788 
Total non-performing loans to total loans (1)   2.18%   0.60%
Total non-performing assets to total assets   1.97%   0.52%

 

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

 

Non-accrual loans as of March 31, 2020 consist primarily of one commercial real estate relationship and one commercial relationship. The commercial real estate loan relationship with a total balance of $18.6 million became impaired in 2019 and in 2020, a troubled debt restructure was completed. The loan was placed on non-accrual status until the relationship can demonstrate the ability to pay the loan under the restructured terms. The loan relationship was evaluated and specific reserves of $1.4 million were allocated in 2019 and remain as of March 31, 2020.

 

The commercial relationship totaling $1.9 million was originated through the BancAlliance network. BancAlliance has a membership of approximately 200 community banks that together participate in middle market commercial and industrial loans as a way to diversify their commercial portfolio. The impaired loan relationship was evaluated and specific reserves of $131,000 were allocated as of March 31, 2020.

 

The Company has cooperative relationships with the vast majority of its non-performing loan customers. Repayment of non-performing loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying collateral. The Company pursues the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, the Company will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.

 

The Company is working with customers affected by COVID-19. As a result of the current economic crisis caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and challenges faced. The extent to which industries, or the tangential impact of those industries to other borrowers or industries are impacted, will likely be in direct proportion to the duration and depth of the COVID-19 pandemic. We had total balances in the following industry types considered to be “at-risk” of significant impact as of March 31, 2020:

 

   Number of Loans   Balance
(in thousands)
 
Restaurant/fast food   116   $28,754 
Hotel/motel/inn   19    28,182 
Amusement and recreation centers   37    13,386 
Personal care services   23    6,274 
Gas stations   38    18,239 
Non-essential retail   306    125,070 
    539   $219,905 

 

Non-essential retail includes, but is not limited to, administrative and support services, repair and maintenance, merchant wholesalers, and retail stores.

 

The Company has established a modification program in accordance with regulations to provide economic relief. In working with our borrowers, the Company has provided up to six month payment deferrals. Under the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for the COVID-19 modifications. Loans that were modified due to COVID-19 will not be classified as troubled debt restructurings. As of May 7, 2020, we have approved loan modifications for approximately 127 commercial real estate loans totaling $142.2 million and 154 commercial business loans totaling $135.9 million.

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The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) program called the Paycheck Protection Program (“PPP”). An eligible business can apply for a PPP loan up to a greater of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP if employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.

 

As of April 24, 2020, the Company received approximately 226 applications for up to $76.7 million of loans under the PPP.

 

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 composition, delinquent and non-accrual loans, national and local business and economic conditions and loss experience and an overall evaluation of the quality of the underlying collateral.

 

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

 

   Three Months Ended
March 31,
 
(Dollars in thousands)  2020   2019 
Allowance at beginning of period  $13,844   $11,680 
Provision for loan losses   3,099    1,462 
Charge offs:          
Real estate:          
 Commercial   -    - 
 Residential   -    - 
 Construction and land development   -    - 
Commercial   97    1,033 
Consumer   229    281 
Total charge-offs   326    1,314 
           
Recoveries:          
Real estate:          
 Commercial   -    - 
 Residential   4    - 
 Construction and land development   -    - 
Commercial   7    10 
Consumer   46    19 
Total recoveries   57    29 
           
Net charge-offs   269    1,285 
           
Allowance at end of period  $16,674   $11,857 
           
Non-performing loans at end of period  $24,934   $8,375 
Total loans outstanding at end of period (1)   1,145,956    871,126 
Average loans outstanding during the period (1)   1,068,525    865,239 
           
Allowance to non-performing loans   66.87%   141.58%
Allowance to total loans outstanding at end of period   1.46%   1.36%
Net charge-offs to average loans outstanding during the during the period (annualized)   0.10%   0.59%

 

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

 

During the three months ended March 31, 2020, total net charge-offs were $269,000 compared to net charge-offs of $1.3 million for the same period in 2019. Charge-offs in 2020 primarily resulted from one BancAlliance relationship and purchased consumer loans. The Bank accepted a short-sale that resulted in a charge-off of $97,000 on a $490,000 loan relationship that was originated through the BancAlliance network. As of March 31, 2020, the Bank has five BancAlliance loan relationships remaining totaling $6.7 million. Out of the five relationships, three totaling $3.3 million are pass rated and two totaling $3.4 million are substandard. One of the substandard relationships totaling $1.9 million is on non-accrual and deemed impaired. We have allocated specific reserves totaling $131,000 for this relationship. Our last BancAlliance loan origination was in February 2017, and at this time we are not anticipating originating any new loans through this network.

 

During the three months ended March 31, 2020, the Bank charged-off $218,000 in unsecured consumer loans that were purchased through the BancAlliance Lending Club Program. This program encompasses loans risk graded by Lending Club as A through C with a 680 minimum credit score, out of a possible risk grade of A through G. The Lending Club retains the servicing of these loans. As of March 31, 2020, we had $10.1 million in outstanding consumer loans that were purchased through this program. Our last Lending Club investment purchase was in May 2018 and as of May 2019, we have stopped reinvesting any proceeds in new pools. At this time we are not anticipating purchasing any new loans through this network.

 

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Results of Operations for the Three Months Ended March 31, 2020 and 2019

 

General. Net income decreased $987,000, or 44.5%, to $1.2 million for the three months ended March 31, 2020 from $2.2 million for the three months ended March 31, 2019. The decrease was primarily related to an increase of $1.6 million in noninterest expense, and an increase in provision for loan losses of $1.6 million, partially offset by an increase in net interest and dividend income of $1.9 million.

 

Interest and Dividend Income. Interest and dividend income increased $2.0 million, or 16.2%, to $14.1 million for the three months ended March 31, 2020 from $12.1 million for the three months ended March 31, 2019. This increase was primarily attributable to an increase in interest and fees on loans, which increased $2.1 million, or 17.6%, to $13.8 million for the three months ended March 31, 2020 from $11.7 million for the three months ended March 31, 2019, partially offset by a decrease in interest and dividends on securities of $146,000, or 36.1%, to $258,000 for the three months ended March 31, 2020 from $404,000 for the three months ended March 31, 2019.

 

The increase in interest income on loans was due to an increase in the average balance of loans of $203.3 million, or 23.5%, to $1.1 billion for the three months ended March 31, 2020, from $865.2 million for the three months ended March 31, 2019. The increase was partially offset by a decrease in loan yields of 26 basis points to 5.15% as of March 31, 2020.

 

The decrease in interest and dividends on securities was to a decrease in the average balance of investment securities of $10.1 million, or 18.6%, to $44.2 million for the three months ended March 31, 2020 from $54.3 million for the three months ended March 31, 2019. In addition, interest and dividend income decreased due to the yield on securities decreasing 64 basis points.

 

Interest Expense. Interest expense increased $46,000, or 2.3%, and was $2.0 million for each of the three months ended March 31, 2020 and 2019. The increase was caused by an increase in interest expense on deposits, partially offset by a decrease in the interest expense on borrowings. Interest expense on deposits increased $209,000, or 14.5%, to $1.6 million for the three months ended March 31, 2020 from $1.4 million for the three months ended March 31, 2019. This was due primarily to an increase in the average balance of interest-bearing deposits of $65.5 million, or 11.5%, to $635.1 million for the three months ended March 31, 2020 from $569.6 million for the three months ended March 31, 2019. The increase resulted primarily from an increase in the average balance of certificates of deposit, which increased $30.0 million, or 28.8%, and money market accounts, which increased $24.1 million, or 10.4%.

 

Interest expense on borrowings decreased $163,000, or 30.5%, to $371,000 for the three months ended March 31, 2020 from $534,000 for the three months ended March 31, 2019. The interest expense on borrowings decreased mainly due to the yield on borrowings decreasing 77 basis points to 1.88% for the three months ended March 31, 2020 from 2.65% for the three months ended March 31, 2019.

 

Net Interest and Dividend Income. Net interest and dividend income increased by $1.9 million, or 18.8%, to $12.1 million for the three months ended March 31, 2020 from $10.2 million for the three months ended March 31, 2019. The growth in net interest and dividend income this quarter over the prior year’s first quarter was primarily the result of an increase in our average interest earning assets of $208.0 million, or 22.5%.

 

Provision for Loan Losses. The provision for loan losses was $3.1 million for the three months ended March 31, 2020 compared to $1.5 million for the three months ended March 31, 2019. The changes in the provision were based on management’s assessment of loan portfolio growth and composition changes, historical charge-off trends, levels of problem loans and other asset quality trends. During the three months ended March 31, 2020, we had $269,000 in loan net charge-offs. The Company has reviewed certain qualitative factors in light of significant economic deterioration due to COVID-19. As businesses remain shut down, the Company continues to work with borrowers and offer relief in the form of short-term payment deferrals as well as originating PPP loans through the SBA. There remains significant uncertainty of the full impact of COVID-19 as there is no set timeline as to when our customers can return to operations. In reviewing the modifications performed as of March 31, 2020 and having an understanding as to the demand of modifications that are currently being considered, increased provisions of approximately $800,000 were recognized due to the probability of incurred losses that COVID-19 could have on our commercial customers.

 

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The provision recorded resulted in an allowance for loan losses of $16.7 million, or 1.46% of total loans, at March 31, 2020, compared to $13.8 million, or 1.42% of total loans, at December 31, 2019, and $11.9 million, or 1.36% of total loans, at March 31, 2019. Non-accrual loans as of March 31, 2020 consisted primarily of one commercial relationship and one commercial real estate relationship. Impairment was evaluated and specific reserves of $1.9 million were allocated to impaired loans as of March 31, 2020.

 

Noninterest Income. Noninterest income decreased $36,000, or 3.4%, and was $1.0 million for each of the three months ended March 31, 2020 and 2019. The decrease was primarily due to a decrease in the gains on sales of securities of $113,000, or 100.0%, partially offset by an increase in other service charges and fees of $48,000, or 11.7%, and an increase of $23,000, or 7.0%, in customer service fees on deposit accounts.

 

Noninterest Expense. Noninterest expense increased $1.6 million, or 23.1%, to $8.3 million for the three months ended March 31, 2020 compared to $6.7 million for the three months ended March 31, 2019. The increase was primarily due to an increase in salaries and employee benefits expense, write-down of a notes receivable, and other expense, partially offset by a decrease in occupancy expense. The increase of $1.1 million, or 25.5%, for the three months ended March 31, 2020 in salary and employee benefits was primarily due to a higher number of sales and operations positions compared to the same period in 2019, the addition of staff from the warehouse business line purchase, and our ESOP expense. The warehouse business line purchase increased salary and employee benefits by $171,000. ESOP expense increased $114,000 due to the acquisition of additional shares from our stock offering in October 2019. A write-down of a notes receivable was completed after the Company evaluated the collectability and determined that $500,000 is uncollectible. Other expense increased $103,000, or 15.2%, due to increased telecommunication expenses and loan workout expenses. Occupancy expense decreased $203,000, or 31.5%, primarily due to the acceleration of our leasehold improvements amortization related to the closure of our Hampton, New Hampshire branch in 2019.

 

Income Tax Provision. We recorded a provision for income taxes of $446,000 for the three months ended March 31, 2020, reflecting an effective tax rate of 26.6%, compared to a provision of $778,000 for the three months ended March 31, 2019, reflecting an effective tax rate of 26.0%.

 

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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, 
   2020   2019 
       Interest           Interest     
   Average   Earned/   Yield/   Average   Earned/   Yield/ 
   Balance