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 June 30, 2015

¨

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

For the transition period from _______________ to ______________________

 

Commission File No. 001-37504

Provident Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Massachusetts		45-3231576
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
5 Market Street, Amesbury, Massachusetts		01913
(Address of Principal Executive Offices)		Zip Code

 

(978) 834-8555

(Registrant’s telephone number)

 

N/A

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

 

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

YES x NO¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO¨.

 

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

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨           Smaller reporting company x

(Do not check if a smaller reporting company)

 

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

 

As of July 28, 2015, there were 9,498,722 shares of the Registrant’s common stock, no par value per share, issued and outstanding.

 

 

 

Provident Bancorp, Inc.

Form 10-Q

 

		Page
Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	2
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)	3
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)	4
	Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2015 and 2014 (unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited)	6-7
	Notes to Consolidated Financial Statements (unaudited)	8-10
Item 2.	Managements Discussion and Analysis of Financial Condition	27
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	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44
Signatures		45
Exhibit Index

 

 

Part I.    Financial Information

Item 1.    Financial Statements

 

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

		At				At
		June 30,				December 31,
(In thousands)		2015				2014
		(unaudited)
Assets
Cash and due from banks		$	9,252			$	7,533
Interest-bearing demand deposits with other banks			44,370				1,311
Money market mutual funds			187				714
Cash and cash equivalents			53,809				9,558
Investments in available-for-sale securities (at fair value)			70,258				76,032
Investments in held-to-maturity securities (fair values of $46,531 as of June 30, 2015 and $47,435 as of December 31, 2014)			45,317				45,559
Federal Home Loan Bank stock, at cost			3,642				3,642
Loans, net			502,101				494,183
Bank owned life insurance			12,336				12,144
Premises and equipment, net			10,268				10,503
Accrued interest receivable			2,102				2,056
Deferred tax asset, net			3,883				3,632
Other assets			2,535				1,297
Total assets		$	706,251			$	658,606
Liabilities and Equity
Deposits:
Noninterest-bearing		$	149,453			$	128,407
Interest-bearing			422,325				408,527
Total deposits			571,778				536,934
Stock subscriptions			32,990				-
Federal Home Loan Bank advances			17,637				39,237
Other liabilities			6,283				6,644
Total liabilities			628,688				582,815
Equity:
Preferred stock; authorized 50,000 shares: senior non-cumulative perpetual, Series A, no par, 17,145 shares issued and outstanding at December 31, 2014 and 2013; liquidation value $1,000 per share			17,145				17,145
Common stock, no par value: 30,000,000 shares authorized; 1,000 shares issued and outstanding			-				-
Additional paid-in capital			275				275
Retained earnings			58,116				55,959
Accumulated other comprehensive income			2,027				2,412
Total equity			77,563				75,791
Total liabilities and equity		$	706,251			$	658,606

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands)		2015				2014				2015				2014
Interest and dividend income:
Interest and fees on loans		$	5,417			$	4,895			$	10,660			$	9,574
Interest and dividends on securities			825				854				1,655				1,744
Interest on interest-bearing deposits			10				2				11				3
Total interest and dividend income			6,252				5,751				12,326				11,321
Interest expense:
Interest on deposits			411				436				817				870
Interest on Federal Home Loan Bank advances			139				144				280				286
Total interest expense			550				580				1,097				1,156
Net interest and dividend income			5,702				5,171				11,229				10,165
Provision for loan losses			193				345				471				734
Net interest and dividend income after provision for loan losses			5,509				4,826				10,758				9,431
Noninterest income:
Service charges on deposit accounts			45				43				83				81
Service charges and fees - other			440				459				821				871
Gain on sales, calls and donated securities, net			21				327				102				424
Other income			353				339				677				664
Total noninterest income			859				1,168				1,683				2,040
Noninterest expense:
Salaries and employee benefits			2,796				2,470				5,665				5,015
Occupancy expense			394				336				787				665
Equipment expense			135				157				268				336
FDIC assessment			96				84				190				170
Data processing			134				123				273				248
Marketing expense			69				60				126				122
Professional fees			228				165				445				318
Other			827				1,045				1,591				1,798
Total noninterest expense			4,679				4,440				9,345				8,672
Income before income tax expense			1,689				1,554				3,096				2,799
Income tax expense			460				180				854				502
Net income		$	1,229			$	1,374			$	2,242			$	2,297
Net income attributable to common shareholders		$	1,189			$	1,374			$	2,157			$	2,253

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands)		2015				2014				2015				2014
Net income		$	1,229			$	1,374			$	2,242			$	2,297
Other comprehensive income before tax:
Unrealized (losses) gains on securities:
Change in net unrealized holding gains arising during the period			(1,098	)			591				(535	)			2,252
Less: Reclassification adjustment for realized gains in net income			(21	)			(327	)			(102	)			(424	)
Other comprehensive (loss) income before tax			(1,119	)			264				(637	)			1,828
Income tax benefit (expense)			440				454				252				(715	)
Other comprehensive (loss) income, net of tax			(679	)			718				(385	)			1,113
Total comprehensive income		$	550			$	2,092			$	1,857			$	3,410

 

  

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

														Accumulated
						Additional								Other
		Preferred				Paid-in				Retained				Comprehensive
(In  thousands)		Stock				Capital				Earnings				Income				Total
Balance, December 31, 2013		$	17,145			$	275			$	51,569			$	838			$	69,827
Net income			-				-				2,297				-				2,297
Net change in other comprehensive income			-				-				-				1,113				1,113
Preferred stock dividends			-				-				(44	)			-				(44	)
Balance, June 30, 2014		$	17,145			$	275			$	53,822			$	1,951			$	73,193
Balance, December 31, 2014		$	17,145			$	275			$	55,959			$	2,412			$	75,791
Net income			-				-				2,242				-				2,242
Net change in other comprehensive income			-				-				-				(385	)			(385	)
Preferred stock dividends			-				-				(85	)			-				(85	)
Balance, June 30, 2015		$	17,145			$	275			$	58,116			$	2,027			$	77,563

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		June 30,
(In thousands)		2015				2014
Cash flows from operating activities:
Net income		$	2,242			$	2,297
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities premiums, net of accretion			438				451
Gain on sales, calls and donations of securities, net			(102	)			(424	)
Change in deferred loan fees, net			(51	)			(31	)
Provision for loan losses			471				734
Depreciation and amortization			362				398
Increase in accrued interest receivable			(46	)			(57	)
(Increase) decrease in taxes receivable			(124	)			156
Increase in cash surrender value of life insurance			(192	)			(188	)
Increase in other assets			(1,114	)			(291	)
Decrease in other liabilities			(361	)			(487	)
Net cash provided by operating activities			1,523				2,558
Cash flows from investing activities:
Purchases of available-for-sale securities			(871	)			(1,156	)
Proceeds from sales of available-for-sale securities			237				1,693
Proceeds from pay downs, maturities and calls of available-for-sale securities			5,678				7,236
Purchases of held-to-maturity securities			-				(1,434	)
Proceeds from pay downs, maturities and calls of held-to-maturity securities			-				1,281
Redemption of Federal Home Loan Bank Stock			-				281
Loan originations and principal collections, net			(8,348	)			(23,080	)
Recoveries of loans previously charged off			10				46
Loans purchased			-				(7,706	)
Proceeds from sales of foreclosed real estate			-				-
Additions to premises and equipment			(127	)			(163	)
Net cash used in investing activities			(3,421	)			(23,002	)

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

 

		Six Months Ended
		June 30,
(In thousands)		2015				2014
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts			36,559				24,151
Net (decrease) increase in time deposits			(1,715	)			2,263
Payments made on Federal Home Loan Bank long-term advances			-				(3,351	)
Net change in Federal Home Loan Bank short-term advances			(21,600	)			5,000
Stock subscriptions received			32,990				-
Preferred stock dividends			(85	)			(44	)
Net cash provided by financing activities			46,149				28,019
Net increase in cash and cash equivalents			44,251				7,575
Cash and cash equivalents at beginning of year			9,558				15,356
Cash and cash equivalents at end of year		$	53,809			$	22,931
Supplemental disclosures:
Interest paid		$	1,087			$	1,149
Income taxes paid			978				346
Loan transferred to foreclosed real estate			-				217

 

 

PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)

Basis of Presentation

The accompanying unaudited financial statements of Provident Bancorp, Inc., a Massachusetts corporation (the “Company”), were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and six-month period ended June 30, 2015 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. These financial statements should be read in conjunction with the annual financial statements and notes thereto that are included in the Company’s Prospectus dated May 14, 2015, as filed with the Securities and Exchange Commission. The consolidated financial statements include the accounts of Provident Bancorp, Inc., its wholly owned subsidiary, The Provident Bank (the “Bank”), and the Bank’s wholly owned subsidiaries, Provident Security Corporation and 5 Market Street Security Corporation. Provident Security Corporation was established to buy, sell, and hold investments for its own account, and 5 Market Street Security Corporation, an inactive corporation, was established to buy, sell, and hold investments for its own account. All significant inter-company balances and transactions have been eliminated in consolidation. These consolidated financial statements consider events that occurred through the date the consolidated financial statements were issued.

 

(2)

Corporate Structure

On March 10, 2015, the Board of Directors of the Company adopted a plan of stock issuance (“the Plan”) pursuant to which the Company sold shares of common stock, representing a minority ownership of the estimated pro forma market value of the Company. On July 15, 2015, the Company closed its offering and issued 4,274,425 shares of common stock at $10.00 per share, including 357,152 shares purchased by The Provident Bank Employee Stock Ownership Plan. In addition, the Company issued 5,034,323 shares to Provident Bancorp, the Company’s mutual holding company, and 189,974 shares to The Provident Community Charitable Organization, Inc., a charitable foundation that was formed in connection with the stock offering and is dedicated to supporting charitable organizations operating in the Bank’s local community. A total of 9,498,722 shares of common stock are outstanding following the completion of the stock offering.

 

The direct cost of the Company’s stock offering are being deferred and deducted from the proceeds of the offering. At June 30, 2015, total deferred costs of $800,000 were included in other assets in the consolidated balance sheet.

 

Upon the completion of the stock offering, a special “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to the percentage ownership interest in the equity of the Company to be held by persons other than the MHC as of the date of the latest balance sheet contained in the prospectus. Following the completion of the offering, the Company will not be 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 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 account.

 

 

(3)

Recent Accounting Pronouncements

ASU No. 2014-01 - Investments - Equity Method and Joint Ventures (Topic 323) - "Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force)”. The ASU permits an entity to make an accounting policy election to account for its investment in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportionate amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). The decision to apply the proportionate amortization method of accounting should be applied consistently to all qualifying affordable housing project investments. A reporting entity that uses the effective yield or other method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply such method to those preexisting investments. The amendments were effective for the Company on January 1, 2015. The application of this guidance did not have a material impact on the Company's financial statements.

 

ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar agreement. In addition, the amendments require disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure in accordance with local requirements of the applicable jurisdiction. An entity can elect to adopt the amendments using either a modified retrospective method or a prospective transition method. The amendments were effective for the Company on January 1, 2015. The application of this guidance did not have a material impact on the Company's financial statements.

 

ASU No. 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) - "Classification of Certain Government-Guaranteed Residential Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”. The ASU has been issued to reduce diversity in practice in the classification of foreclosed residential mortgage loans held by creditors that are fully guaranteed under certain government programs, including the Federal Housing Administration guarantees. A residential mortgage loan would be derecognized and a separate other receivable would be recognized upon foreclosure if the loan has both of the following characteristics: (i) the loan has a government guarantee that is not separable from the loan before foreclosure entitling the creditor to the full unpaid principal balance of the loan; and (ii) at the time of foreclosure, the creditor has the intent to make a claim on the guarantee and the ability to recover the full unpaid principal balance of the loan through the guarantee. Notably, upon foreclosure, the separate other receivable would be measured based on the current amount of the loan balance expected to be recovered under the guarantee. The amendments are effective for the Company beginning on January 1, 2016. The Company does not expect the application of this guidance to have a material impact on the Company's financial statements.

 

ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

 

ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The standard is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The guidance should be applied on a retrospective basis. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

ASU No. 2015-05, “Intangibles — Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

 

(4)

Investment Securities

The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at June 30, 2015 and December 31, 2014:

 

		Amortized				Gross				Gross
		Cost				Unrealized				Unrealized				Fair
(In thousands)		Basis				Gains				Losses				Value
June 30, 2015
U.S. Government and federal agency		$	1,994			$	70			$	-			$	2,064
State and municipal			3,376				297				-				3,673
Corporate debt			1,000				98				-				1,098
Asset-backed securities			2,554				-				54				2,500
Government mortgage-backed securities			48,603				732				315				49,020
Trust preferred securities			1,368				85				263				1,190
Marketable equity securities			8,272				2,800				172				10,900
			67,167				4,082				804				70,445
Money market mutual funds included in cash and cash equivalents			(187	)			-				-				(187	)
Total available-for-sale securities		$	66,980			$	4,082			$	804			$	70,258
December 31, 2014
U.S. Government and federal agency		$	1,991			$	92			$	-			$	2,083
State and municipal			3,479				422				-				3,901
Corporate debt			1,000				114				-				1,114
Asset-backed securities			2,733				-				87				2,646
Government mortgage-backed securities			54,063				989				199				54,853
Trust preferred securities			1,502				-				380				1,122
Marketable equity securities			8,063				3,048				84				11,027
			72,831				4,665				750				76,746
Money market mutual funds included in cash and cash equivalents			(714	)			-				-				(714	)
Total available-for-sale securities		$	72,117			$	4,665			$	750			$	76,032

 

 

The following summarizes the amortized cost of investment securities classified as held-to-maturity and their approximate fair values at June 30, 2015 and December 31, 2014:

 

		Amortized				Gross				Gross
		Cost				Unrealized				Unrealized				Fair
(In thousands)		Basis				Gains				Losses				Value
June 30, 2015
State and municipal		$	45,317			$	1,444			$	230			$	46,531
December 31, 2014
State and municipal		$	45,559			$	1,940			$	64			$	47,435

 

The scheduled maturities of debt securities were as follows at June 30, 2015:

 

		Available- for-Sale				Held-to-Maturity
		Fair				Amortized				Fair
(In thousands)		Value				Cost Basis				Value
Due within one year		$	134			$	90			$	90
Due after one year through five years			3,439				2,300				2,355
Due after five years through ten years			620				5,285				5,374
Due after ten years			3,832				37,642				38,712
Government mortgage-backed securities			49,020				-				-
Asset-backed securities			2,500				-				-
		$	59,545			$	45,317			$	46,531

 

 

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized-loss position for less than twelve months and for twelve months or more, and are temporarily impaired, are as follows at June 30, 2015 and December 31, 2014:

 

		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In thousands)		Value				Losses				Value				Losses				Value				Losses
June 30, 2015
Temporarily impaired securities:
State and municipal		$	10,877			$	159			$	1,866			$	71			$	12,743			$	230
Asset-backed securities			-				-				2,500				54				2,500				54
Government mortgage-backed securities			11,985				49				10,104				266				22,089				315
Trust preferred securities			-				-				1,061				263				1,061				263
Marketable equity securities			1,885				143				189				29				2,074				172
Total temporarily impaired securities		$	24,747			$	351			$	15,720			$	683			$	40,467			$	1,034
December 31, 2014
Temporarily impaired securities:
State and municipal		$	-			$	-			$	5,847			$	64			$	5,847			$	64
Asset-backed securities			-				-				2,645				87				2,645				87
Government mortgage-backed securities			2,472				4				12,518				195				14,990				199
Trust preferred securities			26				36				1,096				344				1,122				380
Marketable equity securities			683				80				115				4				798				84
Total temporarily impaired securities		$	3,181			$	120			$	22,221			$	694			$	25,402			$	814

 

Government mortgage-backed securities, state and municipal securities and asset-backed securities: Because the decline in fair value of the government mortgage-backed securities, asset backed securities and state and municipal securities is primarily attributable to changes in interest rates and not credit quality, and because the Company has the intent and ability to hold these investments until market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

 

Marketable equity securities: Management continuously monitors equity securities for impairment by reviewing the financial condition of the issuer, company-specific events, industry developments, and general economic conditions. Management reviews corporate financial reports, credit agency reports and other publicly available information. Based on these reviews, these securities are not considered to be other-than-temporarily impaired.

 

Trust preferred securities: Management monitors its pooled-trust preferred securities for possible other-than-temporary-impairment on a quarterly basis. This review included an analysis of collateral reports, cash flows, stress default levels and financial ratios of the underlying issuers. Management utilizes a third party to compile this data and perform other-than-temporary-impairment cash flow testing. Critical assumptions that go into the other-than-temporary-impairment cash flow testing are prepayment speeds, default rates of the underlying issuers and discount margins. The result of the third-party other-than-temporary-impairment cash flow testing indicated no other-than-temporary-impairment in 2015.

 

 

(5) Loans

A summary of loans is as follows:

 

		At								At
		June 30,								December 31,
		2015								2014
(In thousands)		Amount				Percent				Amount				Percent
Commercial real estate		$	258,289				50.64	%		$	249,691				49.76	%
Commercial			105,018				20.59	%			97,589				19.45	%
Residential real estate			98,380				19.29	%			104,568				20.84	%
Construction and land development			45,997				9.02	%			47,079				9.38	%
Consumer			2,318				0.45	%			2,863				0.57	%
			510,002				100.00	%			501,790				100.00	%
Allowance for loan losses			(7,569	)							(7,224	)
Deferred loan fees, net			(332	)							(383	)
Net loans		$	502,101							$	494,183

 

 

The following tables set forth information regarding the activity of the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2015 and 2014:

 

		For the three months ended June 30,
(In thousands)		Commercial Real Estate				Construction and Land Development				Residential Real Estate				Commercial				Consumer				Unallocated				Total
Allowance for loan losses:
Balance at March 31, 2014		$	2,927			$	447			$	703			$	2,021			$	167			$	212			$	6,477
Charge-offs			(243	)			-				-				-				(33	)			-				(276	)
Recoveries			20				-				-				1				-				-				21
Provision (benefit)			704				36				9				(467	)			23				40				345
Balance at June 30, 2014		$	3,408			$	483			$	712			$	1,555			$	157			$	252			$	6,567
Balance at March 31, 2015		$	3,814			$	582			$	559			$	2,002			$	172			$	266			$	7,395
Charge-offs			-				-				-				-				(27	)			-				(27	)
Recoveries			-				-				6				1				1				-				8
Provision (benefit)			(304	)			339				(24	)			105				13				64				193
Balance at June 30, 2015		$	3,510			$	921			$	541			$	2,108			$	159			$	330			$	7,569
		For the six months ended June 30,
(In thousands)		Commercial Real Estate				Construction and Land Development				Residential Real Estate				Commercial				Consumer				Unallocated				Total
Allowance for loan losses:
Balance at December 31, 2013		$	3,207			$	1,331			$	725			$	363			$	206			$	245			$	6,077
Charge-offs			(243	)			-				-				-				(47	)			-				(290	)
Recoveries			20				-				24				1				1				-				46
Provision (benefit)			424				(848	)			(37	)			1,191				(3	)			7				734
Balance at June 30, 2014		$	3,408			$	483			$	712			$	1,555			$	157			$	252			$	6,567
Balance at December 31, 2014		$	3,500			$	872			$	560			$	1,751			$	184			$	357			$	7,224
Charge-offs			-				-				-				(103	)			(33	)			-				(136	)
Recoveries			-				-				6				1				3				-				10
Provision (benefit)			10				49				(25	)			459				5				(27	)			471
Balance at June 30, 2015		$	3,510			$	921			$	541			$	2,108			$	159			$	330			$	7,569

 

 

The following table sets forth information regarding loan balances by segment at June 30, 2015 and December 31, 2014:

 

(In thousands)		Commercial Real Estate				Construction and Land Development				Residential  Real Estate				Commercial				Consumer				Unallocated				Total
June 30, 2015
Ending balance:
Individually evaluated for impairment		$	-			$	-			$	-			$	506			$	-			$	-			$	506
Ending balance:
Collectively evaluated for impairment			3,510				921				541				1,602				159				330				7,063
Total allowance for loan  losses ending balance		$	3,510			$	921			$	541			$	2,108			$	159			$	330			$	7,569
Loans:
Ending balance:
Individually evaluated  for impairment		$	3,548			$	-			$	265			$	1,813			$	-			$	-			$	5,626
Ending balance:
Collectively evaluated for impairment			254,741				45,997				98,115				103,205				2,318				-				504,376
Total loans ending balance		$	258,289			$	45,997			$	98,380			$	105,018			$	2,318			$	-			$	510,002
December 31, 2014
Ending balance:
Individually evaluated for impairment		$	-			$	-			$	-			$	62			$	-			$	-			$	62
Ending balance:
Collectively evaluated for impairment			3,500				872				560				1,689				184				357				7,162
Total allowance for loan  losses ending balance		$	3,500			$	872			$	560			$	1,751			$	184			$	357			$	7,224
Loans:
Ending balance:
Individually evaluated  for impairment		$	4,276			$	-			$	221			$	821			$	-			$	-			$	5,318
Ending balance:
Collectively evaluated for impairment			245,415				47,079				104,347				96,768				2,863				-				496,472
Total loans ending balance		$	249,691			$	47,079			$	104,568			$	97,589			$	2,863			$	-			$	501,790

 

 

The following tables set forth information regarding non-accrual loans and past-due loans by portfolio segment at June 30, 2015 and December 31, 2014:

 

																										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
June 30, 2015
Residential real estate		$	-			$	391			$	122			$	513			$	97,867			$	98,380			$	-			$	1,418
Commercial real estate			378				-				361				739				257,550				258,289				-				594
Construction and land development			-				-				-				-				45,997				45,997				-				-
Commercial			507				26				187				720				104,298				105,018				-				1,260
Consumer			-				-				-				-				2,318				2,318				-				-
Total		$	885			$	417			$	670			$	1,972			$	508,030			$	510,002			$	-			$	3,272
December 31, 2014
Residential real estate		$	-			$	404			$	423			$	827			$	103,741			$	104,568			$	-			$	1,564
Commercial real estate			110				132				363				605				249,086				249,691				-				3,002
Construction and land development			-				-				-				-				47,079				47,079				-				-
Commercial			149				108				350				607				96,982				97,589				-				516
Consumer			9				-				-				9				2,854				2,863				-				-
Total		$	268			$	644			$	1,136			$	2,048			$	499,742			$	501,790			$	-			$	5,082

 

 

Information about the Company’s impaired loans by portfolio segment was as follows at June 30, 2015 and December 31, 2014:

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
(In thousands)		Investment				Balance				Allowance				Investment				Recognized
June 30, 2015
With no related allowance recorded:
Residential real estate		$	265			$	265			$	-			$	247			$	6
Commercial real estate			3,548				3,548				-				4,044				68
Construction and land development			-				-				-				-				-
Commercial			724				724				-				561				14
Consumer			-				-				-				-				-
Total impaired with no related allowance			4,537				4,537				-				4,852				88
With an allowance recorded:
Residential real estate			-				-				-				-				-
Commercial real estate			-				-				-				-				-
Construction and land development			-				-				-				-				-
Commercial			1,089				1,089				506				784				-
Consumer			-				-				-				-				-
Total impaired with an allowance recorded			1,089				1,089				506				784				-
Total
Residential real estate			265				265				-				247				6
Commercial real estate			3,548				3,548				-				4,044				68
Construction and land development			-				-				-				-				-
Commercial			1,813				1,813				506				1,345				14
Consumer			-				-				-				-				-
Total impaired loans		$	5,626			$	5,626			$	506			$	5,636			$	88
December 31, 2014
With no related allowance recorded:
Residential real estate		$	221			$	221			$	-			$	368			$	24
Commercial real estate			4,276				4,276				-				3,070				161
Construction and land development			-				-				-				-				-
Commercial			506				506				-				370				20
Consumer			-				-				-				-				-
Total impaired with no related allowance			5,003				5,003				-				3,808				205
With an allowance recorded:
Residential real estate			-				-				-				-				-
Commercial real estate			-				-				-				279				-
Construction and land development			-				-				-				-				-
Commercial			315				318				62				328				12
Consumer			-				-				-				-				-
Total impaired with an allowance recorded			315				318				62				607				12
Total
Residential real estate			221				221				-				368				24
Commercial real estate			4,276				4,276				-				3,349				161
Construction and land development			-				-				-				-				-
Commercial			821				824				62				698				32
Consumer			-				-				-				-				-
Total impaired loans		$	5,318			$	5,321			$	62			$	4,415			$	217

 

 

The following summarizes troubled debt restructurings entered into during the six months ended June 30, 2015:

 

(Dollars in thousands)		Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
June 30, 2015
Troubled debt restructurings:
Commercial			4			$	1,479			$	1,479
Residential real estate			1				48				48
Commercial real estate			2				464				464
			7			$	1,991			$	1,991

 

We approved six troubled debt restructures with no specific reserves required based on our analysis of the borrowers’ repayment ability and/or collateral coverage. Of these, two commercial loans to the same borrower were placed on a 13-month interest only period with re-amortization to follow based on the remaining term. One commercial loan and one owner-occupied commercial real estate mortgage to the same borrower were re-amortized over an extended term and maturity to ease up the borrowers’ cash flow.  One investment commercial real estate loan was placed on interest only payments to allow the borrower time to market the property, with principal and interest payments to follow.  Finally, one residential real estate loan was modified to interest only payments and later re-advanced to combine 1^st and 2^nd mortgage balances and was re-amortized over an extended term and maturity.

 

We approved one troubled debt restructure that required a specific reserve consisting of a commercial loan that was modified to defer interest payments. We have classified this loan as doubtful and maintain a 50% reserve on the balance of the loan.  

 

The following tables present the Company’s loans by risk rating and portfolio segment at June 30, 2015 and December 31, 2014:

 

(In thousands)		Residential Real Estate				Commercial Real Estate				Construction  and Land Development				Commercial				Consumer				Total
June 30, 2015
Grade:
Pass		$	-			$	246,138			$	41,197			$	96,535			$	-			$	383,870
Special mention			-				10,395				4,800				7,247				-				22,442
Substandard			1,658				1,756				-				294				-				3,708
Doubtful			-				-				-				942				-				942
Not formally rated			96,722				-				-				-				2,318				99,040
Total		$	98,380			$	258,289			$	45,997			$	105,018			$	2,318			$	510,002
December 31, 2014
Grade:
Pass		$	-			$	236,689			$	37,867			$	89,269			$	-			$	363,825
Special mention			-				5,336				9,212				6,498				-				21,046
Substandard			1,374				7,666				-				1,822				-				10,862
Not formally rated			103,194				-				-				-				2,863				106,057
Total		$	104,568			$	249,691			$	47,079			$	97,589			$	2,863			$	501,790

 

 

Credit Quality Information

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

 

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

 

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

 

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

 

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

 

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

 

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and land development, and commercial loans.

 

For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Subsequent risk rating downgrades are based upon the borrower’s payment activity.

 

(6) Federal Home Loan Bank Advances

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

 

Maturities of advances from the FHLB ending after June 30, 2015 are summarized as follows:

 

(In thousands)
2016		$	9,112
2017			8,525
Total		$	17,637

 

 

(7)

Fair Value Measurements

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

 

Basis of Fair Value Measurements

·

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

·

Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

·

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

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

 

Fair Values of Financial Instruments Measured on a Recurring Basis

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

 

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

 

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

 

 

The following summarizes financial instruments measured at fair value on a recurring basis at June 30, 2015 and December 31, 2014:

 

		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
June 30, 2015
U.S. Government and federal agency		$	2,064			$	-			$	2,064			$	-
State and municipal			3,673				-				3,673				-
Corporate debt			1,098				-				1,098				-
Asset-backed securities			2,500				-				2,500				-
Mortgage-backed securities			49,020				-				49,020				-
Trust preferred securities			1,190				-				-				1,190
Marketable equity securities			10,713				10,713				-				-
Totals		$	70,258			$	10,713			$	58,355			$	1,190
December 31, 2014
U.S. Government and federal agency		$	2,084			$	-			$	2,084			$	-
State and municipal			3,901				-				3,901				-
Corporate debt			1,114				-				1,114				-
Asset-backed securities			2,645				-				2,645				-
Mortgage-backed securities			54,853				-				54,853				-
Trust preferred securities			1,122				-				-				1,122
Marketable equity securities			10,313				10,313				-				-
Totals		$	76,032			$	10,313			$	64,597			$	1,122

 

 

The following is a summary of activity for Level 3 financial instruments measured at fair value on a recurring basis for the six-month periods ended June 30, 2015 and 2014.

 

(In thousands)		Available-for-Sale Securities
Balance beginning January 1, 2015		$	1,122
Total gains or (losses) (realized/unrealized)
Included in earnings			-
Included in other comprehensive income			183
Paydowns			(115	)
Ending balance, June 30, 2015		$	1,190
Balance beginning January 1, 2014		$	1,392
Total gains or (losses) (realized/unrealized)
Included in earnings			-
Included in other comprehensive income			542
Paydowns			(880	)
Ending balance, June 30, 2014		$	1,054

 

 

Fair Values of Financial Instruments Measured on a Nonrecurring Basis

 

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

 

The following summarizes financial instruments measured at fair value on a nonrecurring basis at June 30, 2015 and December 31, 2014:

 

		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
June 30, 2015
Impaired loans		$	583			$	-			$	-			$	583
December 31, 2014
Impaired loans		$	253			$	-			$	-			$	253

 

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 June 30, 2015 and December 31, 2014:

 

(In thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

June 30, 2015

Impaired loans

$

583

Real estate appraisals

Discount for dated appraisals

6-10%

December 31, 2014

Impaired loans

$

253

Real estate appraisals

Discount for dated appraisals

6-10%

 

 

(8)

Fair Value of Financial Instruments

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

 

The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at June 30, 2015 and December 31, 2014:

 

		Carrying				Fair Value
(In thousands)		Amount				Level 1				Level 2				Level 3				Total
June 30, 2015
Financial assets:
Cash and cash equivalents		$	53,809			$	53,809			$	-			$	-			$	53,809
Available-for-sale securities			70,258				10,713				58,355				1,190				70,258
Held-to-maturity securities			45,317				-				46,531				-				46,531
Federal Home Loan Bank of Boston stock			3,642				3,642				-				-				3,642
Loans, net			502,101				-				-				509,486				509,486
Accrued interest receivable			2,102				-				2,102				-				2,102
Financial liabilities:
Deposits			571,778				-				-				572,035				572,035
Federal Home Loan Bank advances			17,637				-				18,326				-				18,326
December 31, 2014
Financial assets:
Cash and cash equivalents		$	9,558			$	9,558			$	-			$	-			$	9,558
Available-for-sale securities			76,032				10,313				64,597				1,122				76,032
Held-to-maturity securities			45,559				-				47,435				-				47,435
Federal Home Loan Bank of Boston stock			3,642				3,642				-				-				3,642
Loans, net			494,183				-				-				501,049				501,049
Accrued interest receivable			2,056				-				2,056				-				2,056
Financial liabilities:
Deposits			536,934				-				-				537,281				537,281
Federal Home Loan Bank advances			39,237				-				40,020				-				40,020

 

(9)

Regulatory Capital

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

 

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to new capital regulations adopted by the Board of Governors of the Federal Reserve System (“FRB”) and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject

 

 

to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that phases in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends repurchases shares or pay discretionary bonuses.

 

The new regulations implemented changes to what constitutes regulatory capital. Certain instruments no longer constitute qualifying capital, subject to phase-out periods. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 must be deducted from capital. The Bank has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on the Bank’s regulatory capital ratios.

 

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

 

As of June 30, 2015 and December 31, 2014, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. The completion of the stock offering has significantly enhanced the Bank’s Regulatory Capital.

 

 

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
June 30, 2015
Total Capital (to Risk Weighted Assets)		$	83,516				15.2	%		$	44,008			>	8.0	%		$	55,010			>	10.0	%
Tier 1 Capital (to Risk Weighted Assets)			75,447				13.7				33,006			>	6.0				44,008			>	8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)			75,447				13.7				24,754			>	4.5				35,756			>	6.5
Tier 1 Capital (to Average Assets)			75,447				11.4				26,562			>	4.0				33,202			>	5.0
December 31, 2014
Total Capital (to Risk Weighted Assets)		$	81,229				15.4	%		$	42,273			>	8.0	%		$	52,841			>	10.0	%
Tier 1 Capital (to Risk Weighted Assets)			73,282				13.9				21,136			>	4.0				31,705			>	6.0
Tier 1 Capital (to Average Assets)			73,282				11.3				25,915			>	4.0				32,393			>	5.0

 

Item 2.

Management’s Discussion of Financial Condition and Results of Operations

 

Management’s discussion and analysis of financial condition and results of operations at June 30, 2015 and December 31, 2014 and for the three and six months ended June 30, 2015 and 2014 is intended to assist in understanding our financial condition and results of operations. 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 quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

·

statements of our goals, intentions and expectations;

·

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

·

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

·

estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

 

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

·

general economic conditions, either nationally or in our market areas, that are worse than expected;

·

changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the allowance for loan losses;

·

our ability to access cost-effective funding;

·

fluctuations in real estate values and both residential and commercial real estate market conditions;

·

demand for loans and deposits in our market area;

·

our ability to continue to implement our business strategies;

·

competition among depository and other financial institutions;

·

inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase

 

 

the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;

·

adverse changes in the securities markets;

·

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;

·

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations;

·

our ability to manage market risk, credit risk and operational risk in the current economic conditions;

·

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

·

our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

·

changes in consumer spending, borrowing and savings habits;

·

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

·

our ability to retain key employees;

·

our compensation expense associated with equity allocated or awarded to our employees;

·

our ability to redeem the SBLF preferred stock before the dividend rate on the preferred stock increases to 9.0% per annum; and

·

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events or otherwise. For further information, please see “Risk Factors” included in our Prospectus dated May 14, 2015, filed with the Securities and Exchange Commission on May 22, 2015.

 

Critical Accounting Policies

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

 

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

 

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

 

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis,

 

 

taking into consideration the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. 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, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

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 2014 or for the six months ended June 30, 2015.

 

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

 

Income Taxes. We recognize 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.

 

We examine our significant income tax positions annually to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.

 

 

Balance Sheet Analysis

 

Assets. Total assets were $706.3 million at June 30, 2015, an increase of $47.7 million from $658.6 million at December 31, 2014. The increase resulted primarily from an increase in cash and cash equivalents.

 

Cash and Cash Equivalents. Cash and cash equivalents increased $44.2 million, or 460.4%, to $53.8 million at June 30, 2015 from $9.6 million at December 31, 2014. The increase in cash and cash equivalents resulted from the receipt of subscription orders pending completion of the stock offering. Following the completion of the offering in July 2015, funds in excess of the amount of shares issued were returned to subscribers. The proceeds of the offering were initially invested in short-term investments.

 

Loans. At June 30, 2015, net loans were $502.1 million, or 71.1% of total assets, compared to $494.2 million, or 75.0% of total assets at December 31, 2014. An increase in commercial real estate loans of $8.6 million, or 3.4% and an increase in commercial loans of $7.4 million, or 7.6%, was offset by decreases in construction and land development loans and residential real estate loans. The decrease in construction and land development loans resulted primarily from the completion of the construction phase of projects and subsequent transfer of the loans to commercial real estate loans. Loan production during the quarter ended June 30, 2015 was partially affected by an $8 million prepayment of a commercial real estate loan. During the year ended December 31, 2014, we discontinued single-family residential real estate lending, with the exception of home equity lines of credit. We believe that new federal regulations governing the origination of single-family residential real estate loans would increase our costs and expand the risks associated with this type of lending beyond the benefits that we could realize from originating these loans. We have instead focused on commercial lending.

 

The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated, excluding loans held for sale.

 

		At								At
		June 30,								December 31,
		2015								2014
(In thousands)		Amount				Percent				Amount				Percent
Commercial real estate		$	258,289				50.64	%		$	249,691				49.76	%
Commercial			105,018				20.59	%			97,589				19.45	%
Residential real estate			98,380				19.29	%			104,568				20.84	%
Construction and land development			45,997				9.02	%			47,079				9.38	%
Consumer			2,318				0.45	%			2,863				0.57	%
			510,002				100.00	%			501,790				100.00	%
Allowance for loan losses			(7,569	)							(7,224	)
Deferred loan fees, net			(332	)							(383	)
Net loans		$	502,101							$	494,183

 

Securities. Our available-for-sale securities portfolio decreased $5.8 million, or 7.6%, to $70.3 million at June 30, 2015 from $76.0 million at December 31, 2014, while our held-to-maturity securities portfolio decreased $242,000 to $45.3 million at June 30, 2015 from $45.6 million at December 31, 2014. Our securities portfolio decreased during the quarter ended June 30, 2015 as we set aside excess cash to fund potential loan growth instead of re-investing the proceeds in investment securities.

 

Deposits. Total deposits increased $34.9 million, or 6.5%, to $571.8 million at June 30, 2015 from $536.9 million at December 31, 2014. The increase was attributed to our continued strategy of obtaining deposits. Another factor for the increase in June is our municipal deposits are traditionally, seasonally high in the months of December and June.

 

 

Borrowings. Borrowings at June 30, 2015 consisted entirely of Federal Home Loan Bank advances. Borrowings decreased $21.6 million, or 55.1%, to $17.6 million at June 30, 2015 from $39.2 million at December 31, 2014. The decrease in borrowings is as a result of the seasonal highs of municipal deposits.

 

Shareholders’ Equity. Total shareholders’ equity increased $1.8 million, or 2.4%, to $77.6 million at June 30, 2015, from $75.8 million at December 31, 2014. The increase was due primarily to $2.2 million in net income offset by a decrease of $385,000 in accumulated other comprehensive income reflecting a decrease in the fair value of available-for-sale securities.

 

Asset Quality.

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

 

		At				At
		June 30,				December 31,
		2015				2014
(In Thousands)
Non-accrual loans:
Real estate loans:
Residential		$	1,418			$	1,564
Commercial			594				3,002
Construction and land development			-				-
Commercial business loans			1,260				516
Consumer loans			-				-
Total non-accrual loans			3,272				5,082
Accruing loans past due 90 days or more			-				-
Real estate owned			-				-
Total non-performing assets		$	3,272			$	5,082
Total loans (1)		$	509,670			$	501,407
Total assets		$	706,251			$	658,606
Total non-performing to total loans (1)			0.64	%			1.01	%
Total non-performing assets to total assets			0.46	%			0.77	%

 

(1)

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

 

 

The decrease in non-performing assets at June 30, 2015 compared to December 31, 2014 was primarily due to a $2 million restructured loan, having proven the ability to pay the loan and we upgraded the loan to accrual status.

 

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 conditions and loss experience and an overall evaluation of the quality of the underlying collateral.

 

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

 

		Six Months Ended June 30,
		2015				2014
(In thousands)
Allowance at beginning of period		$	7,224			$	6,077
Provision for loan losses			471				734
Charge offs:
Real estate loans:
Residential			-				-
Commercial			-				243
Construction and land development			-				-
Commercial business loans			103				-
Consumer loans			33				47
Total charge-offs			136				290
Recoveries:
Real estate loans:
Residential			6				24
Commercial			-				20
Construction and land development			-				-
Commercial business loans			1				1
Consumer loans			3				1
Total recoveries			10				46
Net charge-offs			126				244
Allowance at end of period		$	7,569			$	6,567
Non-performing loans at end of period		$	3,272			$	5,082
Total loans outstanding at end of period (1)		$	509,670			$	476,100
Average loans outstanding during the period (1)		$	500,141			$	460,268
Allowance to non-performing loans			231.33	%			129.22	%
Allowance to total loans outstanding at end of period			1.49	%			1.38	%
Net charge-offs to average loans outstanding during the period (annualized)			0.05	%			0.11	%

 

 

Results of Operations for the Three Months Ended June 30, 2015 and 2014

 

General. Net income decreased $144,000, or 10.5%, to $1.2 million for the three months ended June 30, 2015 from $1.4 million for the three months ended June 30, 2014. The decrease was due to a decrease in gains on sales of investments of $306,000, an increase in tax expense of $280,000, and an increase in salaries and employee benefits of $326,000 partially offset by an increase in net interest and dividend income of $532,000.

 

Interest and Dividend Income. Interest and dividend income increased $502,000, or 8.7%, to $6.3 million for the three months ended June 30, 2015 from $5.8 million for the three months ended June 30, 2014. This was attributable to an increase in interest and fees on loans, which increased $522,000, or 10.7%, to $5.4 million for the three months ended June 30, 2015 from $4.9 million for the three months ended June 30, 2014.

 

The increase in interest income on loans was due to an increase in average balance of $33.8 million, or 7.2%, to $500.8 million for the three months ended June 30, 2015 from $467.0 million for the three months ended June 30, 2014. This increase was due to our continued success in originating construction and land development loans, commercial real estate loans and commercial business loans. The increase in interest income on loans was also due to a 14 basis point increase in yield, to 4.33% for the three months ended June 30, 2015 from 4.19% for the three months ended June 30, 2014, due to our continued focus on commercial lending.

 

Interest Expense. Interest expense decreased $30,000, or 5.2%, to $550,000 for the three months ended June 30, 2015 from $580,000 for the three months ended June 30, 2014, primarily caused by a decrease in interest expense on deposits. Interest expense on deposits decreased $25,000, or 5.7%, to $411,000 for the three months ended June 30, 2015 from $436,000 for the three months ended June 30, 2014, as the average rate paid on interest-bearing deposits decreased four basis points to 0.40% for the three months ended June 30, 2015 from 0.44% for the three months ended June 30, 2014. The decrease is primarily the result in the decrease in the average rates of the certificates of deposits. The average balance of interest-bearing deposits increased $11.4 million, or 2.9%, to $407.3 million for the three months ended June 30, 2015 from $396.0 million for the three months ended June 30, 2014. The increase resulted from increases in the average balance of all deposit categories, except for certificates of deposits, which decreased slightly.

 

Net Interest and Dividend Income. Net interest and dividend income increased $532,000, or 10.3%, to $5.7 million for the three months ended June 30, 2015 from $5.2 million for the three months ended June 30, 2014. Our net interest rate spread increased 16 basis points to 3.45% for the three months ended June 30, 2015 from 3.29% for the three months ended June 30, 2014, while our net interest margin increased 17 basis points to 3.60% for the three months ended June 30, 2015 from 3.43% for the three months ended June 30, 2014. The average yield we earned on interest-earning assets increased 13 basis points to 3.94% while the average rate paid on interest-bearing liabilities decreased by two basis points to 0.50%.

 

Provision for Loan Losses. The provision for loan losses was $193,000 for the three months ended June 30, 2015 compared to $345,000 for the three months ended June 30, 2014. The provisions recorded resulted in an allowance for loan losses of $7.6 million, or 1.48% of total loans at June 30, 2015, compared to $7.2 million, or 1.44% of total loans at December 31, 2014 and $6.6 million, or 1.38% of total loans at June 30, 2014. The increase in the allowance for loan losses from June 30, 2014 to June 30, 2015 resulted primarily from an increase in our loan portfolio as we apply historical loss ratios to newly originated loans, which, absent other factors, results in an increase in the allowance for loan losses as the loan portfolio increases.

 

Noninterest Income. Noninterest income was $859,000 for the three months ended June 30, 2015 and $1.2 million for the three months ended June 30, 2014. The decrease was caused primarily by a $306,000 decrease in gain on sales of securities to $21,000 for the three months ended June 30, 2015 compared to $327,000 in the same period 2014. Included in the gain on sale of securities for the three months ended June 30, 2014 was $228,000 of gains related to the donation of appreciated securities compared to none recognized during the same period 2015.

 

Noninterest Expense. Noninterest expense increased $239,000, or 5.4%, to $4.7 million for the three months ended June 30, 2015 from $4.4 million for the three months ended June 30, 2014. Salaries and employee

 

 

benefits expense increased $326,000, or 13.2%, to $2.8 million for the three months ended June 30, 2015 from $2.5 million for the three months ended June 30, 2014, due primarily to our hiring additional employees to support our loan growth. Occupancy expense increased $58,000, or 17.3% to $394,000 for the three months ended June 30, 2015, due primarily to the additional costs for snow removal. Professional services expenses increased $63,000, or 38.2%, to $228,000 for the three months ended June 30, 2015 from $165,000 for the three months ended June 30, 2014 due to increased management training and development of our sales team. Other expense decreased $218,000, or 20.9% to $827,000 for the three months ended June 30, 2015, due primarily to a one-time donation of $250,000 during the three months ended June 30, 2014.

 

Income Tax Provision. We recorded a provision for income taxes of $460,000 for the three months ended June 30, 2015, reflecting an effective tax rate of 27.0%, compared to $180,000, or 11.6%, for the three months ended June 30, 2014. The change in the effective tax rate for the three months ended June 30, 2014 was due to a one-time benefit on a contribution that generates state tax credits and favorable tax treatment of donating appreciated marketable equity securities. There were no donations made during the quarter ended June 30, 2015 that generated the same tax credits. The changes in the income tax provision were primarily due to changes in the components of pre-tax income. Our effective tax rates are below statutory federal and states rates due primarily to tax-exempt income related to investments in bank owned life insurance and municipal securities.

 

 

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 June 30,
		2015												2014
						Interest												Interest
		Average				Earned/				Yield/				Average				Earned/				Yield/
		Balance				Paid				Rate				Balance				Paid				Rate
(dollars in thousands)
Assets:
Interest-earning assets:
Loans		$	500,807			$	5,417				4.33	%		$	467,021			$	4,895				4.19	%
Interest-earning deposits			11,800				10				0.34	%			730				2				1.10	%
Investment securities			117,919				809				2.74	%			130,650				834				2.55	%
Federal Home Loan Bank stock			3,642				16				1.76	%			5,129				20				1.56	%
Total interest-earning assets			634,168				6,252				3.94	%			603,530				5,751				3.81	%
Non-interest earning assets			33,918												34,210
Total assets		$	668,086											$	637,740
Interest-bearing liabilities:
Savings accounts		$	94,747				35				0.15	%		$	87,772				33				0.15	%
Money market accounts			113,267				75				0.26	%			111,312				70				0.25	%
Now accounts			75,353				29				0.15	%			70,923				28				0.16	%
Certificates of deposit			123,976				272				0.88	%			125,955				305				0.97	%
Total interest-bearing deposits			407,343				411				0.40	%			395,962				436				0.44	%
Federal Home Loan Bank advances			34,741				139				1.60	%			48,757				144				1.18	%
Total interest-bearing liabilities			442,084				550				0.50	%			444,719				580				0.52	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			136,732												115,587
Other noninterest-bearing liabilities			11,636												5,148
Total liabilities			590,452												565,454
Total equity			77,634												72,286
Total liabilities and equity		$	668,086											$	637,740
Net interest income						$	5,702											$	5,171
Interest rate spread (1)											3.45	%											3.29	%
Net interest-earning assets (2)		$	192,084											$	158,811
Net interest margin (3)											3.60	%											3.43	%
Average interest-earning assets to interest-bearing liabilities			143.45	%											135.71	%

 

(1)

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

(2)

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

(3)

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

 

 

Rate/Volume Analysis

 

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

 

		For the Three Months Ended June 30, 2015
		Compared to the Three Months Ended June 30, 2014
		Increase (Decrease) Due to								Total
		Rate				Volume				Increase (Decrease)
(in thousands)
Interest-earning assets:
Loans		$	160			$	362			$	522
Interest-earning deposits			(2	)			10				8
Investment securities			60				(85	)			(25	)
Federal Home Loan Bank Stock			2				(6	)			(4	)
Total interest-earning assets			220				281				501
Interest-bearing liabilities:
Savings accounts			(1	)			3			$	2
Money Market Accounts			4				1				5
Now Accounts			(1	)			2				1
Certificates of deposit			(28	)			(5	)			(33	)
Total interest-bearing deposits			(26	)			1				(25	)
Federal Home Loan Bank advances			43				(48	)			(5	)
Total interest-bearing liabilities			17				(47	)			(30	)
Change in net interest income		$	203			$	328			$	531

 

Results of Operations for the Six Months Ended June 30, 2015 and 2014

 

General. Net income decreased $55,000, or 2.4%, to $2.2 million for the six months ended June 30, 2015 from $2.3 million for the six months ended June 30, 2014. The decrease was due to a decrease in gains on sales of securities of $322,000, an increase in tax expense of $350,000, and an increase in salaries and employee benefits of $650,000 partially offset by an increase in net interest and dividend income of $1.1 million and a decrease in the provision for loan losses of $263,000.

 

Interest and Dividend Income. Interest and dividend income increased $1.0 million, or 8.9%, to $12.3 million for the six months ended June 30, 2015 from $11.3 million for the six months ended June 30, 2014. This was attributable to an increase in interest and fees on loans, which increased $1.1 million, or 11.3%, to $10.7 million for the six months ended June 30, 2015 from $9.6 million for the six months ended June 30, 2014.

 

The increase in interest income on loans was due to an increase in average balance of $39.9 million, or 8.7%, to $500.1 million for the six months ended June 30, 2015 from $460.3 million for the six months ended June 30, 2014. This average balance increase was due to our continued success in originating construction and land development loans, commercial real estate loans and commercial business loans. The increase in interest

 

 

income on loans was also due to a 10 basis point increase in yield, to 4.26% for the six months ended June 30, 2015 from 4.16% for the six months ended June 30, 2014, due to our continued focus on higher yielding commercial lending.

 

Interest Expense. Interest expense decreased $59,000, or 5.1%, to $1.1 million for the six months ended June 30, 2015 from $1.2 million for the six months ended June 30, 2014, primarily caused by a decrease in interest expense on deposits. Interest expense on deposits decreased $53,000, or 6.1%, to $817,000 for the six months ended June 30, 2015 from $870,000 for the six months ended June 30, 2014 and the average rate paid on interest-bearing deposits decreased four basis points to 0.40% for the six months ended June 30, 2015 from 0.44% for the six months ended June 30, 2014. The decrease is primarily the result in the decrease in the average rates of the certificates of deposits. The average balance of interest-bearing deposits increased $11.2 million, or 3.0%, to $406.2 million for the six months ended June 30, 2015 from $394.5 million for the six months ended June 30, 2014. The increase resulted from increases in the average balance of all deposit categories, except for certificates of deposits accounts, which decreased slightly.

 

Net Interest and Dividend Income. Net interest and dividend income increased $1.1 million, or 10.5%, to $11.2 million for the six months ended June 30, 2015 from $10.2 million for the six months ended June 30, 2014. Our net interest rate spread increased 16 basis points to 3.42% for the six months ended June 30, 2015 from 3.26% for the six months ended June 30, 2014, while our net interest margin increased 17 basis points to 3.56% for the six months ended June 30, 2015 from 3.39% for the six months ended June 30, 2014. The average yield earned on interest-earning assets increased 13 basis points to 3.91% while we were able to decrease the average rate paid on interest-bearing liabilities decreased by three basis points to 0.49%.

 

Provision for Loan Losses. Our provision for loan losses was $471,000 for the six months ended June 30, 2015 compared to $734,000 for the six months ended June 30, 2014. The provisions recorded resulted in an allowance for loan losses of $7.6 million, or 1.48% of total loans at June 30, 2015, compared to $7.2 million, or 1.44% of total loans at December 31, 2014 and $6.6 million, or 1.38% of total loans at June 30, 2014. The increase in the allowance for loan losses from June 30, 2014 to June 30, 2015 resulted primarily from an increase in our loan portfolio as we apply historical loss ratios to newly originated loans, which, absent other factors, results in an increase in the allowance for loan losses as the loan portfolio increases.

 

Noninterest Income. Noninterest income was $1.7 million for the six months ended June 30, 2015 and $2.0 million for the six months ended June 30, 2014. The decrease was caused primarily by a $322,000 decrease in gain on sales, calls and donated securities, which totaled $102,000 for the six months ended June 30, 2015 and $424,000 for the six months ended June 30, 2014. For the six months ended June 30, 2014 the Company recognized $228,000 of gains related to the donation of appreciated securities compared to none recognized during the same period 2015.

 

Noninterest Expense. Noninterest expense increased $673,000, or 7.8%, to $9.3 million for the six months ended June 30, 2015 from $8.7 million for the six months ended June 30, 2014. Salaries and employee benefits expense increased $650,000, or 13.0%, to $5.7 million for the six months ended June 30, 2015 from $5.0 million for the six months ended June 30, 2014, due primarily to our hiring additional employees to support our loan growth. Occupancy expense increased $122,000, or 18.3% to $787,000 for the six months ended June 30, 2015, due primarily to the additional costs for snow removal. Professional services expenses increased $127,000, or 40.0%, to $445,000 for the six months ended June 30, 2015 from $318,000 for the six months ended June 30, 2014 due to increased management training and development of our sales team. Noninterest expense during the quarter ended June 30, 2015 was also adversely affected by above average snowfall in our market area during the quarter. Other expense decreased $207,000, or 11.5% to $1.6 million for the six months ended June 30, 2015, due primarily to a one-time donation of $250,000 during the three months ended June 30, 2014.

 

Income Tax Provision. We recorded a provision for income taxes of $854,000 for the six months ended June 30, 2015, reflecting an effective tax rate of 27.6%, compared to $502,000, or 17.9%, for the six months ended June 30, 2014. The change in the effective tax rate for the six months ended June 30, 2014 was due to a one-time benefit on a contribution that generated state tax credits and favorable tax treatment of donating appreciated marketable equity securities. The changes in the income tax provision were primarily due to changes in the

 

 

components of pre-tax income. The effective tax rates are below statutory federal and states rates due primarily to tax-exempt income related to investments in bank owned life insurance and municipal securities.

 

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 Six Months Ended June 30,
		2015												2014
						Interest												Interest
		Average				Earned/				Yield/				Average				Earned/				Yield/
		Balance				Paid				Rate				Balance				Paid				Rate
(dollars in thousands)
Assets:
Interest-earning assets:
Loans		$	500,141			$	10,660				4.26	%		$	460,268			$	9,574				4.16	%
Interest-earning deposits			7,061				11				0.31	%			2,337				3				0.26	%
Investment securities			119,254				1,639				2.75	%			131,539				1,704				2.59	%
Federal Home Loan Bank Stock			3,642				16				0.88	%			5,223				40				1.53	%
Total interest-earning assets			630,098				12,326				3.91	%			599,367				11,321				3.78	%
Non-interest earning assets			32,458												33,550
Total assets		$	662,556											$	632,917
Interest-bearing liabilities:
Savings accounts		$	93,510				68				0.15	%		$	86,724				64				0.15	%
Money Market Accounts			111,010				146				0.26	%			109,857				137				0.25	%
Now Accounts			77,311				60				0.16	%			72,558				57				0.16	%
Certificates of deposit			124,406				543				0.87	%			125,358				612				0.98	%
Total interest-bearing deposits			406,237				817				0.40	%			394,497				870				0.44	%
Federal Home Loan Bank advances			37,960				280				1.48	%			48,858				286				1.17	%
Total interest-bearing liabilities			444,197				1,097				0.49	%			443,355				1,156				0.52	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			132,362												113,096
Other noninterest-bearing liabilities			8,861												5,055
Total liabilities			585,420												561,506
Total equity			77,136												71,411
Total liabilities and equity		$	662,556											$	632,917
Net interest income						$	11,229											$	10,165
Interest rate spread (1)											3.42	%											3.26	%
Net interest-earning assets (2)		$	185,901											$	156,012
Net interest margin (3)											3.56	%											3.39	%
Average interest-earning assets to interest-bearing liabilities			141.85	%											135.19	%

 

(1)

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

(2)

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

(3)

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

 

 

Rate/Volume Analysis

 

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

 

		For the Six Months Ended June 30, 2015
		Compared to the Six Months Ended June 30, 2014
		Increase (Decrease) Due to								Total
		Rate				Volume				Increase (Decrease)
(in thousands)
Interest-earning assets:
Loans		$	241			$	845			$	1,086
Interest-earning deposits			1				7				8
Investment securities			100				(165	)			(65	)
Federal Home Loan Bank Stock			(14	)			(10	)			(24	)
Total interest-earning assets			328				677				1,005
Interest-bearing liabilities:
Savings accounts			(1	)			5			$	4
Money Market Accounts			8				1				9
Now Accounts			(1	)			4				3
Certificates of deposit			(64	)			(5	)			(69	)
Total interest-bearing deposits			(58	)			5				(53	)
Federal Home Loan Bank advances			65				(71	)			(6	)
Total interest-bearing liabilities			7				(66	)			(59	)
Change in net interest income		$	321			$	743			$	1,064

 

Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

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

 

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2015, cash and cash equivalents totaled $53.8 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $70.3 million at June 30, 2015.

 

At June 30, 2015, we had the ability to borrow a total of $184.6 million from the Federal Home Loan Bank of Boston. On that date, we had $17.6 million in advances outstanding. At June 30, 2015, we also had an available

 

 

line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $102.4 million, none of which was outstanding as of that date.

 

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

 

At June 30, 2015 and December 31, 2014 we had $12.5 million and $9.1 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at June 30, 2015 and December 31, 2014, we had $161.8 million and $115.4 million in un-advanced funds to borrowers, respectively. We also had $3.6 million in outstanding letters of credit at June 30, 2015 and December 31, 2014.

 

Certificates of deposit due within one year of June 30, 2015 totaled $57.1 million, or 10.0% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit at June 30, 2015. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

Our primary investing activities are the origination of loans and the purchase of securities. During the six months ended June 30, 2015, we originated $88.4 million of loans, all of which were intended to be held in our portfolio, and we purchased $871,000 of securities. During the six months ended June 30, 2014, we originated $69.3 million of loans, including $69.2 million of loans to be held in our portfolio, and we purchased $1.2 million of securities.

 

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increases in total deposits of $34.8 million and $26.4 million for the Six months ended June 30, 2015 and 2014, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Federal Home Loan Bank advances reflected a net decrease of $21.6 million and an increase of $5.0 million during the six months ended June 30, 2015 and 2014, respectively.

 

The Provident Bank is subject to various regulatory capital requirements administered by Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. At June 30, 2015, The Provident Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 9 of the Notes to the Unaudited Consolidated Financial Statements for additional information.

 

We paid $41,000 in dividends on our SBLF preferred stock during the quarter ended June 30, 2015. The per annum dividend rate on the SBLF preferred stock is currently 1.00%, but during the first quarter of 2016, the per annum dividend rate will increase to a fixed rate of 9.0% if any SBLF preferred stock remains outstanding at that time. Assuming the increased dividend rate of 9.0% per annum and assuming no redemption our annual dividends payable would increase to $1.5 million, which could have a negative effect on our liquidity and capital resources, including reducing our net income available to holders of our common stock and our earnings per share.

 

The net proceeds from the stock offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of loans. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, resulting in increased net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, as well as other factors associated with the stock offering, our return on equity will be adversely affected following the stock offering.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2015. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended June 30, 2015, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

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

 

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

 

(a)

Not applicable.

(b)

On July 15, 2015, the Company completed the sale of 4,274,425 shares of its common stock, no par value per share, in a minority stock offering, in which the Company also issued 5,034,323 shares to Provident Bancorp and 189,974 shares to a new charitable foundation. As of July 15, 2015, the Company had invested $21.6 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.

 

The effective date of the Company's registration statement (Commission No. 333-202716) was May 14, 2015. The Company registered for offer and sale shares of common stock, no par value per share, at a sales price of $10.00 per share.

 

The selling agent who assisted the Company in the sale of its common stock was Sandler O'Neill & Partners, L.P. For their services, Sandler O'Neill & Partners, L.P. received a fee of approximately $500,000.

 

From the effective date of the registration statement until July 15, 2015, the Company incurred expenses in connection with the offer and sale of the common stock totaling $1.3 million, resulting in net proceeds of $41.4 million.

(c)

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

 

 

From the effective date of the registration statement until July 31, 2015 the Company incurred expenses in connection with the offer and sale of the common stock totaling $1.4 million, resulting in net proceeds to the Company of $41.3 million.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

Item 6. Exhibits

 

3.1	Amended and Restated Articles of Organization of Provident Bancorp, Inc. (1)
3.2	By-Laws of Provident Bancorp, Inc. (1)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.

 

(1)

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

 

 

SIGNATURES

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

 

		PROVIDENT BANCORP, INC.
Date:	August 13, 2015	/s/ David P. Mansfield
		David P. Mansfield
		President and Chief Executive Officer
Date:	August 13, 2015	/s/ Carol L. Houle
		Carol L. Houle
		Executive Vice President and Chief Financial Officer