UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

x

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

For the quarterly period ended March 31, 2017

 

¨

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

For the transition period from _______________ to ______________________

 

Commission File No. 001-37504

 

 

Provident Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

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

 

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

 

(978) 834-8555

(Registrant’s telephone number)

 

N/A

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

 

 

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

YES x NO ¨

 

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

 

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

 

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

 

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

 

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

 

 

 

Provident Bancorp, Inc.

Form 10-Q

 

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

 

 

Part I. Financial Information

Item 1. Financial Statements

 

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

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

 

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

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

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

 

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

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

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

 

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

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

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

 

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

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

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

 

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

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

 

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

 

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

 

 

PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)

Basis of Presentation

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

 

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

 

(2)

Corporate Structure

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

 

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

 

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

 

 

(3)

Recent Accounting Pronouncements

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

(4)

Investment Securities

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

 

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

 

 

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

 

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

 

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, are as follows at March 31, 2017 and December 31, 2016:

 

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

 

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

 

 

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

 

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

 

(5)

Loans

A summary of loans is as follows:

 

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

 

 

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

 

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

 

 

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

 

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

 

 

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

 

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

 

 

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

 

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

 

 

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

 

Pre-

Post-

Modification

Modification

Number

Outstanding

Outstanding

of

Recorded

Recorded

(Dollars in thousands)

Contracts

Investment

Investment

March 31, 2017

Troubled debt restructurings:

Commercial

1

$

249

$

249

1

$

249

$

249

 

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

 

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

 

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

 

 

Credit Quality Information

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

 

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

 

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

 

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

 

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

 

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

 

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

 

For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Subsequent risk rating downgrades are based upon the borrower’s payment activity. All other residential and consumer loans are not formally rated.

 

(6) Federal Home Loan Bank Advances

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

 

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

 

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

 

 

(7)

Fair Value Measurements

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

 

Basis of Fair Value Measurements

·

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

·

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

·

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

 

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

 

Fair Values of Financial Instruments Measured on a Recurring Basis

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

 

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

 

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

 

  

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

 

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

 

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

 

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

 

 

  

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

 

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

 

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

 

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

 

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

 

  

(8)

Fair Value of Financial Instruments

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

 

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

 

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

 

  

(9)

Regulatory Capital

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

 

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to capital regulations adopted by the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that started phasing in on January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failure to maintain the capital conservation buffer limits the ability of the Bank and the Company to pay dividends, repurchases shares or pay discretionary bonuses.

 

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

 

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

 

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

 

  

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

 

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

 

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

 

(10)

Employee Stock Ownership Plan

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

 

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

 

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

 

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

 

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

 

  

(11)

Earnings Per Common Share

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

 

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

 

(12)

Share-Based Compensation

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

 

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

 

Stock Options

 

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

 

·

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

·

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

·

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

 

 

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

 

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

 

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

 

Restricted Stock

 

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

 

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

 

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

 

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

 

Item 2.

Management’s Discussion of Financial Condition and Results of Operations

 

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

 

  

Forward-Looking Statements

 

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

 

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

 

Critical Accounting Policies

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

 

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

 

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

 

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

 

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

 

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

Balance Sheet Analysis

 

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

 

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

 

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

 

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

 

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

 

  

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

 

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

 

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

 

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

 

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

 

  

Asset Quality.

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

 

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

 

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

 

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

 

  

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

 

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

 

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

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

 

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  

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

 

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

 

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

 

  

Average Balance sheet and Related Yields and Rates

 

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

 

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

 

(1)

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

(2)

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

(3)

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

 

  

Rate/Volume Analysis

 

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

 

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

 

  

Liquidity and Capital Resources

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2017. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended March 31, 2017, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

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

 

  

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

 

(a)

Not applicable.

 

(b)

Not applicable.

 

(c)

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

 

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

 

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

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

3.1

Amended and Restated Articles of Organization of Provident Bancorp, Inc.(1)

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

31.2

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

32

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

101

The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.

 

(1)

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

 

  

SIGNATURES

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

 

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