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EX-32 - EXHIBIT 32 - Provident Bancorp, Inc.t1700974_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Provident Bancorp, Inc.t1700974_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Provident Bancorp, Inc.t1700974_ex31-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                  
Commission File Number: 001-37504
PROVIDENT BANCORP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts
45-3231576
(State or other jurisdiction of
incorporation or organization)
I.R.S. Employer
Identification No.)
5 Market Street, Amesbury, Massachusetts
01913
(Address of principal executive offices)
(Zip Code)
(978) 834-8555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
(Title of Class)
The NASDAQ Stock Market LLC
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
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
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the last sale price as of June 30, 2016, as reported by the Nasdaq Capital Market, was approximately $59 million.
The number of shares outstanding of the registrant’s common stock as of March 8, 2017 was 9,652,448.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant’s Definitive Proxy Statement for the 2017 Annual Meeting of the Stockholders are incorporated by reference in Part III.

Explanatory Note
Provident Bancorp, Inc. (the “Company”) is filing this Amendment No. 2 on Form 10-K/A to its Annual Report on Form 10-K for the year ended December 31, 2016, as initially filed with the Securities and Exchange Commission on March 16, 2017. The Company is re-filing Item 8 of Part II of the Form 10-K to include the signature for the Report of Independent Registered Public Accounting Firm.

INDEX
Part II
3
Part IV
3
2

PART II
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, including supplemental data, of Provident Bancorp, Inc. begin on page F-1 of this Annual Report.
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 The following financial statements from Provident Bancorp, Inc.’s Annual Report on Form 10-K/A for the year ended December 31, 2016, filed on April 5, 2017, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements
3

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 5, 2017 By: /s/ David P. Mansfield
David P. Mansfield
President and Chief Executive Officer
4

Provident Bancorp, Inc. and Subsidiary
Table of Contents
F-1
F-2
F-3
F-4
F-5
F-6
F-8
F-8
F-15
F-18
F-25
F-25
F-26
F-26
F-28
F-30
F-31
F-32
F-32
F-33
F-33
F-36
F-36
F-37
F-37
F-38
F-i

[MISSING IMAGE: t1600727_letterhead-lr.jpg] ​
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders
Provident Bancorp, Inc. and Subsidiary
Amesbury, Massachusetts
We have audited the accompanying consolidated balance sheets of Provident Bancorp, Inc. and Subsidiary (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2016. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Provident Bancorp, Inc. and Subsidiary as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/ Whittlesey & Hadley, P.C.
Hartford, Connecticut
March 13, 2017
F-1

Provident Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2016 and 2015
(In thousands)
2016
2015
Assets
Cash and due from banks
$ 7,939 $ 7,302
Interest-bearing demand deposits with other banks
2,637 12,865
Money market mutual funds
129 297
Cash and cash equivalents
10,705 20,464
Investments in available-for-sale securities (at fair value)
117,867 80,984
Investments in held-to-maturity securities (fair value of  $46,474 as of December 31,
2015)
44,623
Federal Home Loan Bank stock, at cost
2,787 3,310
Loans, net
624,425 554,929
Bank owned life insurance
19,395 18,793
Premises and equipment, net
11,587 11,606
Accrued interest receivable
2,320 2,251
Deferred tax asset, net
4,913 5,056
Other assets
1,544 1,381
Total assets
$ 795,543 $ 743,397
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing
$ 158,075 $ 153,093
Interest-bearing
469,907 424,142
Total deposits
627,982 577,235
Federal Home Loan Bank advances
49,858 57,423
Other liabilities
8,554 7,333
Total liabilities
686,394 641,991
Shareholders’ equity
Preferred stock; authorized 50,000 shares: no shares issued and outstanding
Common stock, no par value: 30,000,000 shares authorized; 9,652,448 and 9,498,722 shares issued and outstanding at December 31, 2016 and 2015, respectively
Additional paid-in capital
43,393 43,159
Retained earnings
66,229 59,890
Accumulated other comprehensive income
2,622 1,690
Unearned compensation – ESOP
(3,095) (3,333)
Total shareholders’ equity
109,149 101,406
Total liabilities and shareholders’ equity
$ 795,543 $ 743,397
The accompanying notes are an integral part of these consolidated financial statements.
F-2

Provident Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
For the Years Ended December 31, 2016 and 2015
(In thousands)
2016
2015
Interest and dividend income:
Interest and fees on loans
$ 25,549 $ 22,124
Interest and dividends on securities
3,312 3,290
Interest on interest-bearing deposits
33 38
Total interest and dividend income
28,894 25,452
Interest expense:
Interest on deposits
2,163 1,630
Interest on Federal Home Loan Bank advances
622 544
Total interest expense
2,785 2,174
Net interest and dividend income
26,109 23,278
Provision for loan losses
703 805
Net interest and dividend income after provision for loan losses
25,406 22,473
Noninterest income:
Customer service fees on deposit accounts
1,274 1,222
Service charges and fees - other
1,777 1,754
Gain on sales of securities, net
690 317
Other income
694 513
Total noninterest income
4,435 3,806
Noninterest expense:
Salaries and employee benefits
12,857 11,797
Occupancy expense
1,548 1,535
Equipment expense
631 528
FDIC assessment
323 378
Data processing
662 568
Marketing expense
249 127
Professional fees
1,088 942
Charitable Foundation expense
2,150
Other
3,119 3,068
Total noninterest expense
20,477 21,093
Income before income tax expense
9,364 5,186
Income tax expense
3,025 1,363
Net income
$ 6,339 $ 3,823
Net income attributable to common shareholders
$ 6,339 $ 3,656
Income per share:
Basic
$ 0.69 N/A
Diluted
$ 0.69 N/A
Weighted Average Shares:
Basic
9,176,384 N/A
Diluted
9,176,384 N/A
The accompanying notes are an integral part of these consolidated financial statements.
F-3

Provident Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2016 and 2015
(In thousands)
2016
2015
Net income
$ 6,339 $ 3,823
Other comprehensive income:
Change in net unrealized holding (losses)
(80) (863)
Reclassification adjustment for realized gains in net income
(690) (317)
Net change in unrealized (loss)
(770) (1,180)
Income tax effect
281 458
Net of tax amount
(489) (722)
Change in net unrealized holding gains on securities transferred from held-to-maturity to available-for-sale
2,239
Income tax effect
(818)
Net of tax amount
1,421
Other comprehensive income (loss)
932 (722)
Total comprehensive income
$ 7,271 $ 3,101
The accompanying notes are an integral part of these consolidated financial statements.
F-4

Provident Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2016 and 2015
(In thousands, except share data)
Shares of
Common
Stock
Preferred
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Unearned
Compensation
ESOP
Total
Balance, December 31, 2014
275,000 $ 17,145 $ 275 $ 55,959 $ 2,412 $ $ 75,791
Net income
3,823 3,823
Net change in other comprehensive income
(722) (722)
Redemption of SBLF preferred stock
(17,145) (17,145)
Preferred stock dividends
(167) (167)
Issuance of 5,034,323 shares to the mutual holding company
5,034,323
Transfer due to stock offering
(275,000) (275) 275
Issuance of 4,274,425 shares in the
initial public offering, net of
expenses of  $1,547,000
4,274,425 41,197 41,197
Issuance and contribution of
189,974 shares to the Provident
Community Charitable
Organization
189,974 1,900 1,900
Purchase of 357,152 shares of common stock by the ESOP
(3,572) (3,572)
ESOP shares earned
62 239 301
Balance, December 31, 2015
9,498,722 43,159 59,890 1,690 (3,333) 101,406
Net income
6,339 6,339
Net change in other comprehensive income
932 932
Stock-based compensation expense
113 113
Restricted stock award grants
153,726
ESOP shares earned
121 238 359
Balance, December 31, 2016
9,652,448 $ $ 43,393 $ 66,229 $ 2,622 $ (3,095) $ 109,149
The accompanying notes are an integral part of these consolidated financial statements.
F-5

Provident Bancorp, Inc. and Subsidiary
   
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2016 and 2015
(In thousands)
2016
2015
Cash flows from operating activities:
Net income
$ 6,339 $ 3,823
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities premiums, net of accretion
849 860
ESOP expense
359 301
Contribution of stock to charitable foundation
1,900
Gain on sales, calls and donations of securities, net
(690) (317)
Change in deferred loan fees, net
50 (6)
Provision for loan losses
703 805
Depreciation and amortization
832 713
Loss (gain) on disposal of premise and equipment
60 (2)
Increase in accrued interest receivable
(69) (195)
(Increase) decrease in taxes receivable
(53) 146
Deferred tax benefit
(394) (966)
Share-based compensation expense
113
Increase in cash surrender value of life insurance
(602) (452)
Increase in other assets
(110) (230)
Increase in other liabilities
1,221 439
Net cash provided by operating activities
8,608 6,819
Cash flows from investing activities:
Purchases of available-for-sale securities
(9,835) (17,841)
Proceeds from sales of available-for-sale securities
3,286 739
Proceeds from pay downs, maturities and calls of available-for-sale securities
15,379 10,913
Proceeds from pay downs, maturities and calls of held-to-maturity securities
220 450
Redemption of Federal Home Loan Bank Stock
523 332
Loan originations and principal collections, net
(55,221) (61,582)
Recoveries of loans previously charged off
26 37
Loans purchased
(15,054)
Additions to premises and equipment
(873) (1,819)
Proceeds from sale of premise and equipment
5
Purchase of bank owned life insurance
(6,197)
Net cash used in investing activities
(61,549) (74,963)
The accompanying notes are an integral part of these consolidated financial statements.
F-6

Provident Bancorp, Inc. and Subsidiary
   
Consolidated Statements of Cash Flows — (Continued)
For the Years Ended December 31, 2016 and 2015
(In thousands)
2016
2015
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts
84,063 40,512
Net (decrease) increase in time deposits
(33,316) 39
Proceeds from sale of common stock, net
41,197
Common stock purchased by ESOP
(3,572)
Proceeds from advances from the Federal Home Loan Bank
5,388
Net change in Federal Home Loan Bank short-term advances
(12,953) 18,186
Redemption of SBLF preferred stock
(17,145)
Preferred stock dividends
(167)
Net cash provided by financing activities
43,182 79,050
Net (decrease) increase in cash and cash equivalents
(9,759) 10,906
Cash and cash equivalents at beginning of year
20,464 9,558
Cash and cash equivalents at end of year
$ 10,705 $ 20,464
Supplemental disclosures:
Interest paid
$ 2,777 $ 2,162
Income taxes paid
3,078 2,183
Held-to-maturity securities transferred to available-for-sale
44,240
The accompanying notes are an integral part of these consolidated financial statements.
F-7

Notes to Consolidated Financial Statements
Note 1 — Nature of Operations
Provident Bancorp, Inc. (the “Company”) is a Massachusetts-chartered corporation organized for the purpose of owning all of the outstanding capital stock of The Provident Bank (the “Bank”). On July 15, 2015, the Company closed its offering and issued 4,274,425 shares of common stock to the public at $10.00 per share, including 357,152 shares purchased by The Provident Bank Employee Stock Ownership Plan. In addition, the Company issued 5,034,323 shares to Provident Bancorp, the Company’s mutual holding company (the “MHC”), and 189,974 shares to The Provident Community Charitable Organization, Inc., a charitable foundation that was formed in connection with the stock offering and is dedicated to supporting charitable organizations operating in the Bank’s local community.
Expenses incurred related to the offering were $1.5 million, and have been recorded against offering proceeds.
Upon the completion of the stock offering, a special “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to the percentage ownership interest in the equity of the Company to be held by persons other than the MHC as of the date of the latest balance sheet contained in the prospectus. Following the completion of the offering, the Company is not permitted to pay dividends on its capital stock if the Company’s shareholders’ equity would be reduced below the amount of the liquidation account. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account.
The Company is headquartered in Amesbury, Massachusetts. The Bank operates its business from eight banking offices located in Amesbury and Newburyport, Massachusetts and Portsmouth, Exeter, Hampton, Bedford, and Seabrook, New Hampshire. The Bank provides a variety of financial services to individuals and small businesses. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are commercial mortgages and commercial loans.
Note 2 — Accounting Policies
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and predominant practices within the banking industry. The consolidated financial statements were prepared using the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, stock-based compensation expense and deferred income taxes.
Basis of Presentation
The consolidated financial statements include the accounts of Provident Bancorp, Inc., its wholly owned subsidiary, 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 material intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, amounts due from banks, interest-bearing demand deposits with other banks, money market mutual funds and federal funds sold.
F-8

Notes to Consolidated Financial Statements
Investment Securities
Investments in debt securities are adjusted for amortization of premiums and accretion of discounts so as to approximate the interest method. Gains or losses on sales of investment securities are computed on a specific identification basis and are recorded as of the trade date.
The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading. These security classifications may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale.

Held-to-maturity securities are measured at amortized cost in the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings or as a separate component of shareholders’ equity.

Available-for-sale securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings, but are reported as a net amount (less expected tax) as a separate component of shareholders’ equity until realized.

Trading securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings.
The Company evaluates debt and equity securities within the Company’s available for sale and held to maturity portfolios for other-than-temporary impairment (“OTTI”), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. In evaluating its marketable equity securities portfolios for OTTI, the Company considers its intent and ability to hold an equity security to recovery of its cost basis in addition to various other factors, including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer. Any OTTI on marketable equity securities is recognized immediately through earnings.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank of Boston (the “FHLB”), the Company is required to invest in $100 par value stock of the FHLB. The FHLB capital structure mandates that members must own stock as determined by their Total Stock Investment Requirement which is the sum of a member’s Membership Stock Investment Requirement and Activity-Based Stock Investment Requirement. FHLB stock is a non-marketable equity security that is carried at cost and evaluated for impairment when deemed necessary.
Loans
Loan receivables that management has the intent and ability to hold until maturity or payoff are reported at their outstanding principal balances adjusted for amounts due to borrowers on unadvanced loans, any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.
Interest income is accrued on the unpaid principal balance.
F-9

Notes to Consolidated Financial Statements
Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is recognized as an adjustment of the related loan yield using the interest method. The Company is amortizing these amounts over the contractual life of the related loans.
Residential real estate loans are generally placed on non-accrual status when reaching 90 days past due or in process of collection. Past due status is based on the contractual terms of the loan. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on non-accrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on non-accrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a period of time, generally six months. Interest income received on non-accrual loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual.
Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.
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 uncollectibality of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the size and composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is allocated to loan types using both a formula-based approach (general component) and an analysis of certain individual loans for impairment (allocated component).
A loan is considered impaired when, based on current information and events, it is probable that the Company 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 all of 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, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
F-10

Notes to Consolidated Financial Statements
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. These historical loss factors are 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.
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:
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 can be adversely impacted by a downturn in the economy resulting in 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 and collateral value of these loans.
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.
Residential real estate:   The Company generally does not originate loans with a loan-to-value ratio greater than 80% and does 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 and value of collateral. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
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.
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.
The Company from time to time, 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 modified loan is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.
An unallocated component can be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
Bank-Owned Life Insurance
Bank-owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the consolidated statements of income and are not subject to income taxes.
F-11

Notes to Consolidated Financial Statements
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in income or expense. Generally, depreciation on the buildings and equipment is calculated principally on the straight line method, and depreciation and amortization expense is charged against operations over the estimated useful lives of the related assets.
Foreclosed and Repossessed Assets
Assets acquired through, or in lieu of, loan foreclosure or repossession are held for sale and are initially recorded at the lower of the investment in the loan or fair value less estimated costs to sell at the date of foreclosure or repossession, establishing a new cost basis. Subsequently, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations, changes in the valuation allowance, any direct write-downs and gains or losses on sales are included in other real estate owned expense.
Advertising
The Company directly expenses costs associated with advertising as they are incurred.
Earnings per Common Share
Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. At December 31, 2016, there are no common stock equivalents.
Employee Stock Ownership Plan
Compensation expense for The Provident Bank Employee Stock Ownership Plan (the “ESOP”) is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair market of the shares during the period. The Company recognizes compensation expense ratably over the year based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP. Unearned compensation applicable to the ESOP is reflected as a reduction of shareholders’ equity on the consolidated balance sheet. The difference between the average fair market value and the cost of the shares by the ESOP is recorded as an adjustment to additional paid-in-capital.
Stock-based Compensation Plans
The Company measures and recognizes compensation cost relating to stock-based payment transactions based on the grant-date fair value of the equity instruments issued. Stock-based compensation is recognized over the period the employee is required to provide services for the award. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options granted. The fair value of restricted stock is recorded based on the grant date value of the equity instrument issued.
Income Taxes
The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount expected to be realized.
F-12

Notes to Consolidated Financial Statements
The Company examines its significant income tax positions annually to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.
Fair Values of Financial Instruments
GAAP requires that the Company disclose estimated fair values for its financial instruments. Fair value methods and assumptions used by the Company in estimating its fair value disclosures are as follows:
Cash and cash equivalents:   The carrying amounts of cash and cash equivalents approximate fair values.
Investments (including government mortgage-backed securities):   Fair values for investments are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans receivable:   For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Accrued interest receivable:   The carrying amount of accrued interest receivable approximates its fair value.
Deposit liabilities:   The fair values disclosed for deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances:   Fair values of Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Off-balance sheet instruments:   The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portions of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.
Recent Accounting Pronouncements
ASU (Accounting Standards Update) No. 2014-09 — Revenue from Contracts with Customers (Topic 606).   The ASU establishes a single comprehensive model for an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, and will supersede nearly all existing revenue recognition guidance, to clarify and converge revenue recognition principles under US GAAP and International Financial Reporting Standards (IFRS). The update outlines five steps to recognizing revenue: (i) identify the contracts with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations; (v) recognize revenue when each performance obligation is satisfied. The update requires more comprehensive disclosures, relating to quantitative and qualitative information for amounts, timing, the nature and uncertainty of revenue, and cash flows arising from contracts with customers, which will mainly impact construction and high-tech industries. The most significant potential impact to banking entities relates to less prescriptive derecognition requirements on the sale of other real estate owned (OREO) property. In August 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 defer the effective date of
F-13

Notes to Consolidated Financial Statements
ASU 2014-09 for all entities by one year. Accordingly, the amendments are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for annual and interim reporting periods beginning after December 15, 2016. An entity may elect either a full retrospective or a modified retrospective application. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.
ASU No. 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 were effective for the Company as of January 1, 2016. This amendment did not impact the Company’s financial statements and the Company does not expect the application of this guidance will have a material impact on the Company’s financial statements in the future.
ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.”   The ASU has been issued to improve the recognition and measurement of financial instruments by requiring 1) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 3) the use of the exit price notion when measuring fair value of financial instruments for disclosure purposes; and 4) separate presentation by the reporting organization in other comprehensive income for the portion of the total change in the fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The standard is effective for the Company beginning on January 1, 2018. The Company holds a portfolio of marketable equity securities; depending on the size and composition of the portfolio at the adoption date, the impact of the ASU could be material to the Company’s consolidated financial statements.
ASU 2016-02, Leases (Topic 842).   The amendments in this update require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. The guidance will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.
ASU 2016-09, Compensation Stock — Compensation (Topic 718): “Improvements to Employee Share Based Payment Accounting.”   This ASU changes how companies account for certain aspects of share based payments to employees. Entities will be required to recognize the income tax effects of awards in the statement of income when the awards vest or are settled, the guidance on employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures is changing and the update requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The amendments in this update will be effective for the Company on January 1, 2017 and interim periods within that annual period. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
F-14

Notes to Consolidated Financial Statements
ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.”   The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The amendments in this update will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of its pending adoption of this guidance on the Company’s financial statements.
ASU No. 2016-15, Statement of Cash Flows (Topic 230): “Classification of Certain Cash Receipts and Cash Payments.”   This ASU changes how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The amendments address the classification of the following eight items in the statement of cash flows; debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the Predominance Principle. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
ASU No. 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash”   This ASU provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
Note 3 — Investments in Securities
In May 2016, the Company reclassified its $44.2 million held-to-maturity investment portfolio to available-for-sale. Due to its strong outlook for loan growth and falling interest rates, the Company decided to proceed with the reclassification to provide liquidity. The reclassification increased total shareholders’ equity by $1.3 million associated with the recording of the net security gains on the portfolio, net of tax effect, to accumulated other comprehensive income. In accordance with regulatory and accounting requirements, the Company is prohibited from classifying security purchases as held-to-maturity for a period of two years.
F-15

Notes to Consolidated Financial Statements
The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at December 31, 2016 and 2015:
(In thousands)
Amortized
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December 31, 2016
State and municipal
$ 49,367 $ 1,281 $ 68 $ 50,580
Corporate debt
1,000 31 1,031
Asset-backed securities
8,747 69 8,678
Government mortgage-backed securities
41,818 435 339 41,914
Trust preferred securities
1,368 400 968
Marketable equity securities
11,492 3,551 218 14,825
113,792 5,298 1,094 117,996
Money market mutual funds included in cash and cash equivalents
(129) (129)
Total available-for-sale securities
$ 113,663 $ 5,298 $ 1,094 $ 117,867
December 31, 2015
U.S. Government and federal agency
$ 1,996 $ 37 $ $ 2,033
State and municipal
3,373 309 3,682
Corporate debt
1,000 71 1,071
Asset-backed securities
9,656 9 41 9,624
Government mortgage-backed securities
52,515 622 325 52,812
Trust preferred securities
1,368 55 307 1,116
Marketable equity securities
8,638 2,653 348 10,943
78,546 3,756 1,021 81,281
Money market mutual funds included in cash and cash equivalents
(297) (297)
Total available-for-sale securities
$ 78,249 $ 3,756 $ 1,021 $ 80,984
The following summarizes the amortized cost of investment securities classified as held-to-maturity and their approximate fair values at December 31, 2015:
(In thousands)
Amortized
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
December 31, 2015
State and municipal
$ 44,623 $ 1,905 $ 54 $ 46,474
The scheduled maturities of debt securities were as follows at December 31, 2016:
Available-
for-Sale
(In thousands)
Fair Value
Due within one year
$ 1,813
Due after one year through five years
2,326
Due after five years through ten years
7,810
Due after ten years
40,630
Government mortgage-backed securities
41,914
Asset-backed securities
8,678
$ 103,171
F-16

Notes to Consolidated Financial Statements
During the years ended December 31, 2016 and 2015, gross realized gains on sales, calls and donated securities were $693,000 and $328,000, respectively, and gross losses realized were $3,000 and $11,000, respectively.
There were no securities of issuers whose aggregate carrying amount exceeded 10% of equity at December 31, 2016.
Securities with carrying amounts of  $60.6 million and $61.7 million were pledged to secure available borrowings with the Federal Reserve Bank and Federal Home Loan Bank at December 31, 2016 and 2015, respectively.
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 December 31, 2016 and 2015:
Less than 12 Months
12 Months or Longer
Total
(In thousands)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
December 31, 2016
Temporarily impaired securities:
State and municipal
$ 6,413 $ 63 $ 160 $ 5 $ 6,573 $ 68
Asset-backed securities
8,104 60 574 9 8,678 69
Government mortgage-backed securities
20,868 247 2,770 92 23,638 339
Trust preferred securities
26 18 942 382 968 400
Marketable equity securities
1,942 104 768 114 2,710 218
Total temporarily impaired securities
$ 37,353 $ 492 $ 5,214 $ 602 $ 42,567 $ 1,094
December 31, 2015
Temporarily impaired securities:
State and municipal
$ 3,195 $ 28 $ 729 $ 26 $ 3,924 $ 54
Asset-backed securities
5,062 7 2,005 34 7,067 41
Government mortgage-backed securities
21,108 88 9,156 237 30,264 325
Trust preferred securities
1,017 307 1,017 307
Marketable equity securities
1,591 166 529 182 2,120 348
Total temporarily impaired securities
$ 30,956 $ 289 $ 13,436 $ 786 $ 44,392 $ 1,075
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
F-17

Notes to Consolidated Financial Statements
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 noted no other-than-temporary-impairment in 2016.
Activity related to the credit component recognized in earnings on debt securities held by the Company for which a portion of other-than-temporary impairment was recognized in other comprehensive income for the years ended December 31, 2016 and 2015 is as follows:
(In thousands)
Trust preferred securities:
Balance, December 31, 2014
$
688
Additions for the credit component on debt securities in which an other-than-temporary impairment was previously recognized
Balance, December 31, 2015
688
Additions for the credit component on debt securities in which an other-than-temporary impairment was previously recognized
Balance, December 31, 2016
$
688
Note 4 — Loans
Loans consisted of the following at December 31, 2016 and 2015:
(In thousands)
2016
2015
Commercial real estate
$ 336,102 $ 285,356
Commercial
166,157 112,073
Residential real estate
76,850 92,392
Construction and land development
48,161 71,535
Consumer
6,172 1,855
633,442 563,211
Allowance for loan losses
(8,590) (7,905)
Deferred loan fees, net
(427) (377)
Net loans
$ 624,425 $ 554,929
F-18

Notes to Consolidated Financial Statements
The following tables set forth information regarding the allowance for loans and impaired loans by
portfolio segment as of and for the years ended December 31, 2016 and 2015:
(In thousands)
Commercial
Real Estate
Commercial
Residential
Real Estate
Construction
and Land
Development
Consumer
Unallocated
Total
December 31, 2016
Allowance for loan losses:
Beginning balance
$ 3,827 $ 2,138 $ 412 $ 1,236 $ 119 $ 173 $ 7,905
Charge-offs
(44) (44)
Recoveries
1 12 13 26
Provision (benefit)
676 374 (96) (354) 191 (88) 703
Ending balance
$ 4,503 $ 2,513 $ 328 $ 882 $ 279 $ 85 $ 8,590
Ending balance:
Individually evaluated for impairment
$ $ 46 $ $ $ $ $ 46
Ending balance:
Collectively evaluated for impairment
4,503 2,467 328 882 279 85 8,544
Total allowance for loan losses ending balance
$ 4,503 $ 2,513 $ 328 $ 882 $ 279 $ 85 $ 8,590
Loans:
Ending balance:
Individually evaluated for impairment
$ 1,956 $ 1,660 $ 422 $ $ $ $ 4,038
Ending balance:
Collectively evaluated for impairment
334,146 164,497 76,428 48,161 6,172 629,404
Total loans ending balance
$ 336,102 $ 166,157 $ 76,850 $ 48,161 $ 6,172 $ $ 633,442
F-19

Notes to Consolidated Financial Statements
(In thousands)
Commercial
Real Estate
Commercial
Residential
Real Estate
Construction
and Land
Development
Consumer
Unallocated
Total
December 31, 2015
Allowance for loan losses:
Beginning balance
$ 3,500 $ 1,751 $ 560 $ 872 $ 184 $ 357 $ 7,224
Charge-offs
(96) (65) (161)
Recoveries
20 6 11 37
Provision (benefit)
327 463 (154) 364 (11) (184) 805
Ending balance
$ 3,827 $ 2,138 $ 412 $ 1,236 $ 119 $ 173 $ 7,905
Ending balance:
Individually evaluated for impairment
$ $ 488 $ $ $ $ $ 488
Ending balance:
Collectively evaluated for impairment
3,827 1,650 412 1,236 119 173 7,417
Total allowance for loan losses ending balance
$ 3,827 $ 2,138 $ 412 $ 1,236 $ 119 $ 173 $ 7,905
Loans:
Ending balance:
Individually evaluated for impairment
$ 3,272 $ 1,755 $ 437 $ $ $ $ 5,464
Ending balance:
Collectively evaluated for impairment
282,084 110,318 91,955 71,535 1,855 557,747
Total loans ending balance
$ 285,356 $ 112,073 $ 92,392 $ 71,535 $ 1,855 $ $ 563,211
At December 31, 2016 and 2015, loans with an aggregate principal balance of  $250.7 million and $245.8 million, respectively, were pledged to secure possible borrowings from the Federal Reserve Bank.
Certain directors and executive officers of the Company and companies in which they have significant ownership interests were customers of the Bank during 2016. Total loans to such persons and their companies amounted to $7.5 million and $8.5 million at December 31, 2016 and 2015, respectively. During the years ended December 31, 2016 and 2015, $271,000 and $6,000 of advances and principal payments of $1.3 million and $1.2 million were made, respectively.
F-20

Notes to Consolidated Financial Statements
The following tables set forth information regarding non-accrual loans and past-due loans by portfolio segment at December 31, 2016 and 2015:
(In thousands)
30 – 59
Days
60 – 89
Days
90 Days
or More
Past Due
Total
Past
Due
Total
Current
Total
Loans
90 Days
or More
Past Due
and Accruing
Nonaccrual
Loans
December 31, 2016
Commercial real estate
$ $ $ 346 $ 346 $ 335,756 $ 336,102 $ $ 346
Commercial
29 29 166,128 166,157 933
Residential real estate
76,850 76,850 303
Construction and land development
48,161 48,161
Consumer
6,172 6,172
Total
$ 29 $ $ 346 $ 375 $ 633,067 $ 633,442 $ $ 1,582
December 31, 2015
Commercial real estate
$ $ $ $ $ 285,356 $ 285,356 $ $ 106
Commercial
112,073 112,073 1,147
Residential real estate
130 173 365 668 91,724 92,392 1,031
Construction and land development
71,535 71,535
Consumer
1 1 2 1,853 1,855
Total
$ 131 $ 174 $ 365 $ 670 $ 562,541 $ 563,211 $ $ 2,284
F-21

Notes to Consolidated Financial Statements
Information about the Company’s impaired loans by portfolio segment was as follows at December 31,
2016 and 2015:
(In thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
December 31, 2016
With no related allowance recorded:
Commercial real estate
$ 1,956 $ 1,956 $ $ 2,744 $ 188
Commercial
799 799 794 42
Residential real estate
422 422 429 20
Construction and land development
Consumer
Total impaired with no related allowance
$ 3,177 $ 3,177 $ $ 3,967 $ 250
With an allowance recorded:
Commercial real estate
$ $ $ $ $
Commercial
861 861 46 886
Residential real estate
Construction and land development
Consumer
Total impaired with an allowance recorded
$ 861 $ 861 $ 46 $ 886 $
Total
Commercial real estate
$ 1,956 $ 1,956 $ $ 2,744 $ 188
Commercial
1,660 1,660 46 1,680 42
Residential real estate
422 422 429 20
Construction and land development
Consumer
Total impaired loans
$ 4,038 $ 4,038 $ 46 $ 4,853 $ 250
December 31, 2015
With no related allowance recorded:
Commercial real estate
$ 3,272 $ 3,272 $ $ 3,788 $ 149
Commercial
661 661 611 20
Residential real estate
437 437 323 17
Construction and land development
Consumer
Total impaired with no related allowance
$ 4,370 $ 4,370 $ $ 4,722 $ 186
With an allowance recorded:
Commercial real estate
$ $ $ $ $
Commercial
1,094 1,094 488 901 2
Residential real estate
Construction and land development
Consumer
Total impaired with an allowance recorded
$ 1,094 $ 1,094 $ 488 $ 901 $ 2
Total
Commercial real estate
$ 3,272 $ 3,272 $ $ 3,788 $ 149
Commercial
1,755 1,755 488 1,512 22
Residential real estate
437 437 323 17
Construction and land development
Consumer
Total impaired loans
$ 5,464 $ 5,464 $ 488 $ 5,623 $ 188
F-22

Notes to Consolidated Financial Statements
The following summarizes troubled debt restructurings entered into during the years ended
December 31, 2016 and 2015:
(Dollars in thousands)
Number of
Contracts
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Year-Ended December 31, 2016
Troubled debt restructurings:
Commercial
1 $ 58 $ 58
1 $ 58 $ 58
Year-Ended December 31, 2015
Troubled debt restructurings:
Commercial real estate
2 $ 464 $ 464
Commercial
8 1,578 1,578
Residential real estate
2 226 226
12 $ 2,268 $ 2,268
None of the loans modified as troubled debt restructuring during 2016 and 2015 defaulted during the period after modification.
In 2016, we approved one troubled debt restructure totaling $58 thousand, with no specific reserve required based on an analysis of the borrower’s repayment ability and/or collateral coverage. This commercial loan was placed on an extended 13-month interest only period with re-amortization to follow based on a five-year term.
In 2015, we approved nine troubled debt restructures with no specific reserves required based on an 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. Two small commercial term loans were re-amortized under forbearance agreements with no reserve required due to 100% SBA guarantees. Finally, two residential real estate mortgages were modified to interest only payments and later were re-amortized over an extended term and maturity. We approved three troubled debt restructures that required a specific reserve consisting of a commercial loan term that was modified to defer principal payments. The Company classified this loan as doubtful and maintains a 50% reserve on the balance of the loan. Two commercial term loans were modified under forbearance agreements and a 15% reserve was applied, consisting of the non-SBA guaranteed portion of the loan balances.
At December 31, 2016 and 2015, there were no commitments to lend additional funds to borrowers whose loans were modified in troubled debt restructurings.
Credit Quality Information
The Company utilizes a seven grade internal loan 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.
F-23

Notes to Consolidated Financial Statements
Loans rated 5:   Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 6:   Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 7:   Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and land development, and commercial loans.
For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Subsequent risk rating downgrades are based upon the borrower’s payment activity. All other residential and consumer loans are not formally rated.
The following tables present the Company’s loans by risk rating and portfolio segment at December 31, 2016 and 2015:
(In thousands)
Commercial
Real Estate
Commercial
Residential
Real Estate
Construction
and Land
Development
Consumer
Total
December 31, 2016
Grade:
Pass
$ 319,712 $ 157,306 $ $ 48,161 $ $ 525,179
Special mention
4,471 1,668 6,139
Substandard
11,919 7,183 729 19,831
Not formally rated
76,121 6,172 82,293
Total
$ 336,102 $ 166,157 $ 76,850 $ 48,161 $ 6,172 $ 633,442
December 31, 2015
Grade:
Pass
$ 265,325 $ 106,677 $ $ 71,535 $ $ 443,537
Special mention
15,700 1,403 17,103
Substandard
4,331 3,083 1,329 8,743
Doubtful
910 910
Not formally rated
91,063 1,855 92,918
Total
$ 285,356 $ 112,073 $ 92,392 $ 71,535 $ 1,855 $ 563,211
The Bank has sold mortgage loans with servicing rights retained. The fair value of those servicing rights under GAAP is not material and has not been recognized in the 2016 and 2015 consolidated financial statements.
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $11.2 million and $10.4 million at December 31, 2016 and 2015, respectively.
F-24

Notes to Consolidated Financial Statements
Note 5 — Premises and Equipment
The following is a summary of premises and equipment at December 31, 2016 and 2015:
(In thousands)
2016
2015
Land
$ 2,424 $ 2,424
Buildings and leasehold improvements
9,241 9,191
Furniture and equipment
4,499 4,190
Leasehold improvements
4,234 2,911
Construction in progress
1,251
20,398 19,967
Accumulated depreciation and amortization
(8,811) (8,361)
Premises and equipment, net
$ 11,587 $ 11,606
Depreciation and amortization expense was $832,000 and $713,000 for the years ended December 31, 2016 and 2015, respectively.
Note 6 — Deposits
The following is a summary of deposit balances by type at December 31, 2016 and 2015:
(In thousands)
2016
2015
NOW and demand
$ 280,773 $ 238,462
Regular savings
111,016 106,208
Money market deposits
145,321 108,377
Total non-certificate accounts
537,110 453,047
Term certificates of  $100,000 or more
20,227 36,941
Term certificates less than $100,000
70,645 87,247
Total certificate accounts
90,872 124,188
Total deposits
$ 627,982 $ 577,235
The aggregate amounts of time deposits in denominations over $250,000 were $3.4 million and $3.4 million at December 31, 2016 and 2015, respectively.
At December 31, 2016 and 2015, the aggregate amount of brokered time deposits was $49.3 million and $63.8 million respectively. At December 31, 2016 and 2015, $49.3 million and $63.4 million, respectively, of brokered time deposits were included in time deposit accounts in denominations of less than $100,000 above.
At December 31, 2016 and 2015, the scheduled maturities for time deposits for each of the following five years are as follows:
(In thousands)
2016
2015
2016
$ $ 81,116
2017
69,775 27,746
2018
17,230 12,737
2019
1,414 679
2020
1,663 1,910
2021
790
Total
$ 90,872 $ 124,188
F-25

Notes to Consolidated Financial Statements
Deposits from related parties held by the Company at December 31, 2016 and 2015 amounted to $3.6 million and $3.1 million, respectively.
Note 7 — Federal Home Loan Bank Advances
Advances consist of funds borrowed from the FHLB. Maturities of advances from the FHLB for years ending after December 31, 2016 and 2015 are summarized as follows:
(In thousands)
2016
2015
2016
$ 49,112
2017
35,000 5,000
2018
5,000
2020
6,358 3,311
2021
Thereafter
3,500
Total
$ 49,858 $ 57,423
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 qualified mortgage-backed government securities.
In August of 2015, the Bank modified $3.5 million of its FHLB borrowings and extended the maturity. The Bank incurred a prepayment penalty of  $233,000. In accordance with ASC 470, the prepayment penalty is being amortized over the life of the newly modified borrowing.
At December 31, 2016, the interest rates on FHLB advances ranged from 0.72% to 3.99%. At December 31, 2016, the weighted average interest rate on FHLB advances was 1.36%.
Note 8 — Income Taxes
The components of income tax expense are as follows for the years ended December 31, 2016 and 2015:
(In thousands)
2016
2015
Current tax expense (benefit):
Federal
$ 2,780 $ 2,066
State
653 277
Net operating loss carryforward
(14) (14)
3,419 2,329
Deferred tax expense (benefit):
Federal
(302) (745)
State
(92) (221)
(394) (966)
Net income tax expense
$ 3,025 $ 1,363
F-26

Notes to Consolidated Financial Statements
The following is a summary of the differences between the statutory federal income tax rate and the
effective tax rates for the years ended December 31, 2016 and 2015:
2016
2015
Federal income tax at statutory rate
34.0% 34.0%
Increase (decrease) in tax resulting from:
State tax, net of federal tax benefit
4.6 3.5
Tax exempt income and dividends received deduction
(4.8) (9.5)
Gain on donated securities
(0.1) (1.6)
Other
(1.4) (0.1)
Effective tax rate
32.3% 26.3%
The following is a summary of the Company’s gross deferred tax assets and gross deferred tax liabilities at December 31, 2016 and 2015:
(In thousands)
2016
2015
Deferred tax assets:
Allowance for loan losses
$ 3,431 $ 3,157
Net operating loss carryforward
54 69
Employee benefit plans and share-based compensation plans
2,406 1,940
Deferred loan fees, net
174 154
Writedown of securities
235 242
Reserve for unfunded commitments
54 68
Charitable contribution carryover
297 597
Other
56 16
Gross deferred tax assets
6,707 6,243
Deferred tax liabilities:
Depreciation
(145) (57)
FHLB restructure fees
(67) (85)
Net unrealized holding gain on securities
(1,582) (1,045)
Gross deferred tax liabilities
(1,794) (1,187)
Net deferred tax asset
$ 4,913 $ 5,056
At December 31, 2016, the Company had federal net operating loss carryovers of  $160,000. The carryovers were transferred to the Company upon the merger with Amesbury Cooperative Bank during the year ended December 31, 2001. The losses will expire in 2020 and are subject to certain annual limitations which amount to $42,000 per year.
The Company reduces the deferred tax asset by a valuation allowance if, based on the weight of the available evidence, it is not “more likely than not” that some portion or all of the deferred tax assets will be realized. The Company assesses the realizability of its deferred tax assets by assessing the likelihood of the Company generating federal and state income tax, as applicable, in future periods in amounts sufficient to offset the deferred tax charges in the periods they are expected to reverse. Based on this assessment, management concluded that a valuation allowance was not required as of December 31, 2016 and 2015.
F-27

Notes to Consolidated Financial Statements
It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At December 31, 2016 and 2015, there was no material uncertain tax positions related to federal and state income tax matters. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2013 through December 31, 2015.
Note 9 — Employee Benefits & Share-Based Compensation Plans
401(k) Plan
The Company sponsors a 401(k) plan. All employees are eligible to join the 401(k) plan. However, participants in the 401(k) plan must complete one year of service to be eligible for safe harbor contributions and employer discretionary contributions. A Safe Harbor Plan was adopted by the Company effective January 1, 2007. Under the Safe Harbor Plan, the Company matches 100% of employee contributions up to 6% of compensation. In addition, the Company may make a discretionary contribution to the 401(k) plan determined on an annual basis. Employees may contribute up to 75% of their salary subject to certain limits based on federal tax laws. The expense recognized under the 401(k) plan was $401,000 and $336,000 for the years ended December 31, 2016 and 2015, respectively.
Supplemental Executive Retirement Plans
The Company has Supplemental Executive Retirement Agreements with certain executive officers. These agreements are designed to supplement the benefits available through the Company’s retirement plan. The liability for the retirement benefits amounted to $4.4 million and $3.5 million at December 31, 2016 and 2015, respectively, and is included in other liabilities. The expense recognized for these benefits was $947,000 and $895,000 for the years ended December 31, 2016 and 2015, respectively.
Employee Stock Ownership Plan
The Bank maintains the ESOP to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released per year through 2029 is 23,810.
The Company contributed funds to a subsidiary to enable it to grant a loan to the ESOP for the purchase of 357,152 shares of the Company’s stock at a price of  $10.00 per share. The loan obtained by the ESOP from the Company’s subsidiary to purchase Company stock is payable annually over 15 years at a rate per annum equal to the prime rate (3.75% at December 31, 2016). Loan payments are principally funded by cash contributions from the Company.
Shares held by the ESOP include the following:
December 31, 2016
December 31, 2015
Allocated
23,810
Committed to be allocated
23,810 23,810
Unallocated
309,532 333,342
Total
357,152 357,152
Shared-Based Compensation Plan
Under the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the “Equity Plan”), the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Plan, with the total shares reserved for options equaling 446,440. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the maximum term of each option is ten
F-28

Notes to Consolidated Financial Statements
years. The total number of shares reserved for restricted stock or restricted units is 178,575. The value of restricted stock grants is based on the grant date fair value of the related stock. Options and awards vest ratably over five years. The fair value of shares awarded is based on the market price at the date of grant. Stock option awards granted to date under the Equity Plan expire ten years after issue date.
Expense related to options and restricted stock granted to directors is recognized as directors’ fees within non-interest expense.
Stock Options
The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

Volatility is based on peer group volatility because the Company does not have a sufficient trading history.

Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, and the vesting period.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.
The fair value of options granted in 2016 is based on the following assumptions:
Date of Grant
November 17, 2016  ​
Options granted
384,268  ​
Vesting period (years)
5  ​
Expiration date
November 17, 2026  ​
Expected volatility
20.80%​
Expected life (years)
7.5  ​
Expected dividend yield
   0.00%​
Risk free interest rate
2.12%​
Fair value per option
$5.03  ​
A summary of the status of the Company’s stock option grants for the year ended December 31, 2016, is presented in the table below:
Stock Option
Awards
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(years)
Aggregate
Intrinsic
Value
Balance at January 1, 2016
$ $
Granted
384,268 17.40 9.88 192,134
Balance at December 31, 2016
384,268 $ 17.40 9.88 $ 192,134
Outstanding and expected to vest at December 31,
2016
384,268 $ 17.40 9.88 $ 192,134
Exercisable at December 31, 2016
Unrecognized compensation cost
$ 1,884,000
Weighted average remaining recognition period (years)
4.88
Total expense for the stock options was $47,000 for the year ended December 31, 2016. There was no stock-based compensation expense for the year ended December 31, 2015.
F-29

Notes to Consolidated Financial Statements
Restricted Stock
Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company. Any shares not issued because vesting requirements are not met will again be available for issuance under the plan. The fair market value of shares awarded, based on the market prices at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period.
The following table presents the activity in restricted stock awards under the Equity Plan for the year ended December 31, 2016:
Outstanding Restricted
Stock Awards
Weighted Average
Grant Price
Restricted stock awards at January 1, 2016
$
Granted
153,726 17.40
Restricted stock awards at Decemer 31, 2016
153,726 $ 17.40
Unrecognized compensation cost
$ 2,609,000
Weighted average remaining recognition period (years)
4.88
Total expense for the restricted stock awards was $66,000 for the year ended December 31, 2016. There was no stock-based compensation expense for the year ended December 31, 2015.
Long-Term Incentive Plan
The Bank awards compensation through a plan called The Provident Bank Long-Term Incentive Plan. The purpose of the plan is to provide deferred compensation to officers of the Bank and to provide performance incentives for such persons. Such deferred compensation is based upon the award of phantom stock, the value of which is based on the Bank’s ability to grow earnings and capital.
Compensation under the Plan is accrued over the vesting period.
The liability for the plan amounted to $1.4 million and $1.3 million at December 31, 2016 and 2015, respectively, and is included in other liabilities. Expenses relating to the plan amounted to $485,000 and $480,000 for the years ended December 31, 2016 and 2015, respectively.
Note 10 — Earnings Per Share
Earnings per share consisted of the following components for the year ended December 31, 2016. The Company was not publicly traded for all of 2015 and, as a result, earnings per share is not presented for 2015.
(Dollars in thousands)
Year Ended
December 31, 2016
Net Income attributable to common shareholders
$ 6,339
Average number of common shares outstanding
9,498,722
Less: unallocated ESOP shares
(322,338)
Average number of common shares outstanding to calculate basic earnings per common share
9,176,384
Effect of dilutive unvested restricted stock and stock option awards
Average number of common shares outstanding to calculate diluted earnings per common share
9,176,384
For the year ended December 31, 2016, 537,994 of stock grants were anti-dilutive and therefore excluded from the earnings per share calculation. Anti-dilutive shares are common stock equivalents with weighted average exercise prices in excess of the weighted average market value for the periods presented.
F-30

Notes to Consolidated Financial Statements
Note 11 — Regulatory Matters
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 Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to capital regulations adopted by the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that started phasing in on January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses.
The new regulations implemented changes to what is included in 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 December 31, 2016 and 2015, the Bank met the conditions to be classified as well capitalized under the regulatory framework for prompt corrective action.
F-31

Notes to Consolidated Financial Statements
The Bank’s actual capital amounts and ratios at December 31, 2016 and 2015 are summarized as follows:
Actual Capital
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2016
Total Capital (to Risk Weighted Assets) 
$ 107,731 15.88% $ 54,272 8.0% $ 67,840 10.0%
Tier 1 Capital (to Risk Weighted Assets)
97,750 14.41 40,704 6.0 54,272 8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)
97,750 14.41 30,528 4.5 44,096 6.5
Tier 1 Capital (to Average Assets)
97,750 12.59 31,058 4.0 38,822 5.0
December 31, 2015
Total Capital (to Risk Weighted Assets)
$ 104,032 17.06% $ 48,780 8.0% $ 60,975 10.0%
Tier 1 Capital (to Risk Weighted Assets)
95,370 15.64 36,585 6.0 48,780 8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)
95,370 15.64 27,439 4.5 39,634 6.5
Tier 1 Capital (to Average Assets)
95,370 13.42 28,435 4.0 35,544 5.0
Note 12 — Commitments and Contingent Liabilities
At December 31, 2016, the Company was obligated under non-cancelable operating leases for bank premises and equipment.
The total minimum rental due in future periods under these existing agreements is as follows at December 31, 2016:
(In thousands)
2017
$ 302
2018
302
2019
293
2020
245
2021
252
Years thereafter
2,110
Total minimum lease payments
$ 3,504
The total rental expense amounted to $322,000 and $279,000 for the years ended December 31, 2016 and 2015, respectively.
Note 13 — Financial Instruments
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
F-32

Notes to Consolidated Financial Statements
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include secured interests in real property, accounts receivable, inventory, property, plant and equipment and income producing properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 2016 and 2015, the maximum potential amount of the Company’s obligation was $5.2 million and $5.5 million, respectively, for financial and standby letters of credit. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.
Notional amounts of financial instrument with off-balance sheet credit risk are as follows at December 31, 2016 and 2015:
(In thousands)
2016
2015
Commitments to originate loans
$ 25,363 $ 15,592
Letters of credit
5,164 5,474
Unadvanced portions of loans
202,032 191,598
$ 232,559 $ 212,664
Note 14 — Significant Group Concentrations of Credit Risk
Most of the Company’s business activity is with customers located within Massachusetts and New Hampshire. There are no concentrations of credit to borrowers that have similar economic characteristics. The majority of the Company’s loan portfolio is comprised of loans collateralized by real estate located in Massachusetts and New Hampshire.
Note 15 — Fair Value Measurements
The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:
Basis of Fair Value Measurements

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

Level 2 — Observable inputs other than level 1 prices, such as quoted prices for similar assets; 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;
F-33

Notes to Consolidated Financial Statements

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.
The following summarizes financial instruments measured at fair value on a recurring basis at December 31, 2016 and 2015:
Fair Value Measurements at Reporting Date Using
(In thousands)
Total
Quoted Prices in
Active Markets for
Identical Assets
Level 1
Significant
Other Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
December 31, 2016
State and municipal
$ 50,580 $ $ 50,580 $
Corporate debt
1,031 1,031
Asset-backed securities
8,678 8,678
Mortgage-backed securities
41,914 41,914
Trust preferred securities
968 968
Marketable equity securities
14,696 14,696
Totals
$ 117,867 $ 14,696 $ 102,203 $ 968
December 31, 2015
U.S. Government and federal agency
$ 2,033 $ $ 2,033 $
State and municipal
3,682 3,682
Corporate debt
1,071 1,071
Asset-backed securities
9,624 9,624
Government mortgage-backed securities
52,812 52,812
Trust preferred securities
1,116 1,116
Marketable equity securities
10,646 10,646
Totals
$ 80,984 $ 10,646 $ 69,222 $ 1,116
F-34

Notes to Consolidated Financial Statements
The Company did not have any transfers of financial instruments measured at fair value on a recurring basis between Levels 1 and 2 of the fair value hierarchy during the years ended December 31, 2016 and 2015.
The following is a summary of activity for Level 3 financial instruments measured at fair value on a recurring basis at December 31, 2016 and 2015:
(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
128
Paydowns
(134)
Ending balance, December 31, 2015
$
1,116
Balance beginning January 1, 2016
$
1,116
Total gains or (losses) (realized/unrealized)
Included in earnings
Included in other comprehensive income
(148)
Paydowns
Ending balance, December 31, 2016
$ 968
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 December 31, 2016 and 2015:
Fair Value Measurements at Reporting Date Using:
(In thousands)
Total
Quoted Prices in
Active Markets for
Identical Assets
Level 1
Significant
Other Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
December 31, 2016
Impaired loans
$ 815 $ $ $ 815
December 31, 2015
Impaired loans
$ 606 $ $ $ 606
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 December 31, 2016 and 2015:
(In thousands)
Fair Value
Valuation Technique
Unobservable Input
Range
(Weighted
Average)
December 31, 2016
Impaired loans
$ 815
Real estate appraisals​
Discount for dated appraisals​
6 – 10%
December 31, 2015
Impaired loans
$ 606
Real estate appraisals​
Discount for dated appraisals​
6 – 10%
F-35

Notes to Consolidated Financial Statements
Note 16 — Disclosures About Fair Values of Financial Instruments
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
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 December 31, 2016 and 2015:
Carrying
Amount
Fair Value
(In thousands)
Level 1
Level 2
Level 3
Total
December 31, 2016
Financial assets:
Cash and cash equivalents
$ 10,705 $ 10,705 $ $ $ 10,705
Available-for-sale securities
117,867 14,696 102,203 968 117,867
Federal Home Loan Bank of Boston stock
2,787 2,787 2,787
Loans, net
624,425 632,278 632,278
Accrued interest receivable
2,320 2,320 2,320
Financial liabilities:
Deposits
627,982 628,060 628,060
Federal Home Loan Bank advances
49,858 49,901 49,901
December 31, 2015
Financial assets:
Cash and cash equivalents
$ 20,464 $ 20,464 $ $ $ 20,464
Available-for-sale securities
80,984 10,646 69,222 1,116 80,984
Held-to-maturity securities
44,623 46,474 46,474
Federal Home Loan Bank of Boston stock
3,310 3,310 3,310
Loans, net
554,929 561,937 561,937
Accrued interest receivable
2,251 2,251 2,251
Financial liabilities:
Deposits
577,235 577,316 577,316
Federal Home Loan Bank advances
57,423 57,774 57,774
The carrying amounts of financial instruments shown above are included in the consolidated balance sheets under the indicated captions. Accounting policies related to financial instruments are described in Note 2.
Note 17 — Small Business Lending Fund
On September 13, 2011, as part of the Small Business Lending Fund Program (“SBLF”) of the U. S. Treasury (“Treasury”), the Company issued and sold to the Treasury 17,145 shares of the Company’s Non-Cumulative Perpetual Preferred Stock, Series A, no par value, having liquidation preference of  $1,000 per preferred share (the “Series A Preferred Stock”).
The initial rate payable on SBLF capital is, at most, five percent, and the rate falls to one percent if a bank’s small business lending increases by ten percent or more. Banks that increase their lending by less than ten percent pay rates between two percent and four percent. If a bank’s lending does not increase in the first two years, however, the rate increases to seven percent, and after 4.5 years total, the rate for all banks increases to nine percent (if the bank has not already repaid the SBLF funding). The dividend will be
F-36

Notes to Consolidated Financial Statements
paid only when declared by the Company’s Board of Directors. The Series A Preferred Stock has no maturity date and ranks senior to Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Company’s dividend rate on SBLF capital at December 31, 2015 was 1.0%. SBLF dividends paid for the year ended December 31, 2015 amounted to $167,000.
On December 21, 2015, the Company redeemed the 17,145 shares of Series A Preferred Stock issued to the Treasury under the SBLF preferred stock program with a payment to the Treasury of  $17.1 million plus accrued dividends.
Note 18 — Reclassification
Certain amounts in the prior year have been reclassified to be consistent with the current year’s consolidated financial statement presentation, and had no effect on the net income reported in the consolidated income statement.
Note 19 — Condensed Financial Statements of Parent Only
Financial information pertaining only to Provident Bancorp, Inc. is as follows:
Provident Bancorp, Inc. — Parent Only Balance Sheet
(In thousands)
2016
2015
Assets
Cash and due from banks
$ 5,659 $ 961
Investment in common stock of The Provident Bank
100,426 97,128
Other assets
3,138 3,338
Total assets
$ 109,223 $ 101,427
Liabilities and Shareholders’ Equity
Accrued expenses
$ 73 $ 21
Shareholders’ equity
109,150 101,406
Total liabilities and shareholders’ equity
$ 109,223 $ 101,427
Provident Bancorp, Inc. — Parent Only Income Statement
Year Ended
December 31,
(In thousands)
2016
2015
Total income
$ 4,549 $ 54
Operating expenses
95 9
Income before income taxes and equity in undistributed net income of The Provident Bank
4,454 45
Applicable income tax provision
8
Income before equity in income of subsidiaries
4,446
Equity in undistributed net income of The Provident Bank
1,893 3,778
Net income
$   6,339 $   3,823
F-37

Notes to Consolidated Financial Statements
Provident Bancorp, Inc. — Parent Only Statement of Cash Flows
Twelve Months Ended
December 31,
(In thousands)
2016
2015
Cash flows from operating activities:
Net income
$ 6,339 $ 3,823
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries
(1,893) (3,778)
Contribution of stock to charitable foundation
1,900
Decrease (increase) in other assets
200 (3,338)
Increase (decrease) in other liabilities
52 (22)
Net cash provided by (used in) operating activities
4,698 (1,415)
Cash flows from investing activities:
Investment in The Provident Bank
(18,078)
Net cash used in investing activities
(18,078)
Cash flows from financing activities:
Proceeds from sale of common stock, net
37,625
Redemption of SBLF preferred stock
(17,145)
Preferred stock dividends
(167)
Net cash provided by (used) in financing activities
20,313
Net increase in cash and cash equivalents
4,698 820
Cash and cash equivalents at beginning of year
961 141
Cash and cash equivalents at end of year
$ 5,659 $ 961
Note 20 — Selected Quarterly Financial Data (unaudited)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(In thousands)
2016
2015
2016
2015
2016
2015
2016
2015
Interest and dividend income
$ 6,980 $ 6,074 $ 7,026 $ 6,252 $ 7,426 $ 6,448 $ 7,462 $ 6,678
Interest expense
697 547 681 550 713 567 694 510
Net interest and dividend income
6,283 5,527 6,345 5,702 6,713 5,881 6,768 6,168
Provision for loan losses
111 278 210 193 163 174 219 160
Gain on sale of securities, net
20 81 17 21 438 215 215
Other income
915 743 950 838 925 945 955 963
Total noninterest income
935 824 967 859 1,363 1,160 1,170 963
Total noninterest expense
4,924 4,667 5,080 4,680 5,212 6,871 5,261 4,875
Income tax expense (benefit)
696 393 659 459 940 (134) 730 645
Net income
$ 1,487 $ 1,013 $ 1,363 $ 1,229 $ 1,761 $ 130 $ 1,728 $ 1,451
Income (loss) per share:
Basic
$ 0.16 N/A $ 0.15 N/A $ 0.19 N/A $ 0.19 N/A
Diluted
$ 0.16 N/A $ 0.15 N/A $ 0.19 N/A $ 0.19 N/A
Weighted Average Shares:
Basic
9,167,364​
N/A​
9,173,317​
N/A​
9,179,269​
N/A​
9,185,285​
N/A​
Diluted
9,167,364​
N/A​
9,173,317​
N/A​
9,179,269​
N/A​
9,185,285​
N/A​
F-38