UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended June 30, 2018

 

¨

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x NO o

 

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

 

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

 

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

 

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

 

As of August 2, 2018, there were 9,628,496 shares of the Registrant’s common stock, no par value per share, outstanding.

 

 

 

Provident Bancorp, Inc.

Form 10-Q

 

		Page
Part I.	Financial Information
Item 1.	Interim Financial Statements
	Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017	2
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)	3
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)	4
	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2018 and 2017 (unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42
Part II.	Other Information
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43
Signatures		44

 

  

Part I.	Financial Information
Item 1.	Financial Statements

 

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

		At				At
		June 30,				December 31,
(Dollars in thousands)		2018				2017
		(unaudited)
Assets
Cash and due from banks		$	12,268			$	10,326
Short-term investments			35,537				37,363
Cash and cash equivalents			47,805				47,689
Investments in available-for-sale securities (at fair value)			55,322				61,429
Federal Home Loan Bank stock, at cost			2,156				1,854
Loans, net			770,105				742,138
Assets held-for-sale			-				3,286
Bank owned life insurance			25,883				25,540
Premises and equipment, net			14,338				10,981
Accrued interest receivable			2,494				2,345
Deferred tax asset, net			5,247				4,920
Other assets			2,090				2,083
Total assets		$	925,440			$	902,265
Liabilities and Equity
Deposits:
Noninterest-bearing		$	197,851			$	186,222
Interest-bearing			556,418				563,835
Total deposits			754,269				750,057
Federal Home Loan Bank advances			39,881				26,841
Other liabilities			11,302				9,590
Total liabilities			805,452				786,488
Shareholders' equity:
Preferred stock; authorized 50,000 shares: no shares issued and outstanding			-				-
Common stock, no par value: 30,000,000 shares authorized; 9,657,319 shares issued, 9,628,496 shares outstanding at June 30, 2018 and December 31, 2017			-				-
Additional paid-in capital			45,250				44,592
Retained earnings			78,459				74,047
Accumulated other comprehensive (loss) income			(389	)			589
Unearned compensation - ESOP			(2,738	)			(2,857	)
Treasury stock: 28,823 shares at June 30, 2018 and December 31, 2017			(594	)			(594	)
Total shareholders' equity			119,988				115,777
Total liabilities and shareholders' equity		$	925,440			$	902,265

 

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

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands, except per share data)		2018				2017				2018				2017
		(unaudited)
Interest and dividend income:
Interest and fees on loans		$	9,925			$	7,911			$	19,201			$	15,144
Interest and dividends on securities			410				902				845				1,775
Interest on interest-bearing deposits			42				3				84				9
Total interest and dividend income			10,377				8,816				20,130				16,928
Interest expense:
Interest on deposits			1,009				678				1,929				1,248
Interest on Federal Home Loan Bank advances			204				201				318				411
Total interest expense			1,213				879				2,247				1,659
Net interest and dividend income			9,164				7,937				17,883				15,269
Provision for loan losses			638				892				1,294				1,455
Net interest and dividend income after provision for loan losses			8,526				7,045				16,589				13,814
Noninterest income:
Customer service fees on deposit accounts			339				342				701				677
Service charges and fees - other			594				485				1,049				990
Gain on sale of securities, net			-				58				-				540
Bank owned life insurance income			172				150				343				300
Other income			13				35				38				64
Total noninterest income			1,118				1,070				2,131				2,571
Noninterest expense:
Salaries and employee benefits			4,269				3,731				8,433				7,413
Occupancy expense			417				450				867				921
Equipment expense			121				157				243				307
FDIC assessment			69				73				151				141
Data processing			193				176				397				366
Marketing expense			61				100				114				150
Professional fees			329				215				577				429
Directors' compensation			163				155				326				300
Other			789				818				1,679				1,469
Total noninterest expense			6,411				5,875				12,787				11,496
Income before income tax expense			3,233				2,240				5,933				4,889
Income tax expense			843				639				1,521				1,486
Net income		$	2,390			$	1,601			$	4,412			$	3,403
Earnings per share:
Basic		$	0.26			$	0.17			$	0.48			$	0.37
Diluted		$	0.26			$	0.17			$	0.47			$	0.37
Weighted Average Shares:
Basic			9,233,745				9,193,836				9,226,244				9,193,206
Diluted			9,302,425				9,198,286				9,294,317				9,193,206

 

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

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands)		2018				2017				2018				2017
Net income		$	2,390			$	1,601			$	4,412			$	3,403
Other comprehensive income (loss):
Unrealized holding (losses) gains			(92	)			1,605				(1,305	)			2,344
Reclassification adjustment for realized gains in net income			-				(58	)			-				(540	)
Unrealized (loss) gain			(92	)			1,547				(1,305	)			1,804
Income tax effect			(27	)			(577	)			327				(673	)
Net of tax amount			(119	)			970				(978	)			1,131
Total comprehensive income		$	2,271			$	2,571			$	3,434			$	4,534

 

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				(Loss) Income				ESOP				Stock				Total
Balance, December 31, 2017			9,628,496			$	44,592			$	74,047			$	589			$	(2,857	)		$	(594	)		$	115,777
Net income			-				-				4,412				-				-				-				4,412
Other comprehensive loss			-				-				-				(978	)			-				-				(978	)
Stock-based compensation expense			-				480				-				-				-				-				480
ESOP shares earned			-				178				-				-				119				-				297
Balance, June 30, 2018			9,628,496			$	45,250			$	78,459			$	(389	)		$	(2,738	)		$	(594	)		$	119,988
Balance, December 31, 2016			9,652,448			$	43,393			$	66,229			$	2,622			$	(3,095	)		$	-			$	109,149
Net income			-				-				3,403				-				-				-				3,403
Other comprehensive income			-				-				-				1,131				-				-				1,131
Stock-based compensation expense			-				460				-				-				-				-				460
Treasury stock acquired			(19,160	)			-				-				-				-				(383	)			(383	)
ESOP shares earned			-				123				-				-				119				-				242
Balance, June 30, 2017			9,633,288			$	43,976			$	69,632			$	3,753			$	(2,976	)		$	(383	)		$	114,002

 

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

 

  

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		June 30,
(In thousands)		2018				2017
Cash flows from operating activities:
Net income		$	4,412			$	3,403
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities premiums, net of accretion			147				398
ESOP expense			297				242
Gain on sale of securities, net			-				(540	)
Change in deferred loan fees, net			30				66
Provision for loan losses			1,294				1,455
Depreciation and amortization			370				420
Increase in accrued interest receivable			(149	)			(212	)
Share-based compensation expense			480				460
Increase in cash surrender value of life insurance			(343	)			(299	)
Increase in other assets			(7	)			(503	)
Increase (decrease) in other liabilities			1,712				(839	)
Net cash provided by operating activities			8,243				4,051
Cash flows from investing activities:
Purchases of available-for-sale securities			-				(12,490	)
Proceeds from sales of available-for-sale securities			-				1,621
Proceeds from pay downs, maturities and calls of available-for-sale securities			4,655				7,539
Purchase of Federal Home Loan Bank stock, net of redemptions			(302	)			(221	)
Loan originations and purchases, net of paydowns			(29,291	)			(79,181	)
Additions to premises and equipment			(294	)			(3,290	)
Additions to assets held-for-sale			(147	)			-
Net cash used in investing activities			(25,379	)			(86,022	)

 

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

 

  

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

 

		Six Months Ended
		June 30,
(In thousands)		2018				2017
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts			17,574				37,481
Net (decrease) increase in time deposits			(13,362	)			35,887
Proceeeds from advances from Federal Home Loan Bank			10,000				7,000
Net change in Federal Home Loan Bank short-term advances			3,040				3,217
Purchase of treasury stock			-				(383	)
Net cash provided by financing activities			17,252				83,202
Net  increase in cash and cash equivalents			116				1,231
Cash and cash equivalents at beginning of period			47,689				10,705
Cash and cash equivalents at end of period		$	47,805			$	11,936
Supplemental disclosures:
Interest paid		$	2,328			$	1,621
Income taxes paid			1,290				1,934
Assets held-for-sale transferred to premises and equipment			3,433				-

 

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 U.S. generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three- and six-month periods ended June 30, 2018 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. Certain amounts in 2017 have been reclassified to be consistent with the 2018 consolidated financial statement presentation, and had no effect on the net income reported in the consolidated statement of income. These financial statements should be read in conjunction with the annual financial statements and notes thereto included in the annual report on Form 10-K the Company filed with the Securities and Exchange Commission on March 15, 2018.

 

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.

 

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

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 – Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. In March 2016, the FASB also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09, which reframed the structure of the indicators of when an entity is acting as an agent and focused on evidence that an entity is acting as the principal or agent in a revenue transaction. ASU 2016-08 also eliminated two of the indicators (the entity’s consideration is in the form of a commission, and the entity is not exposed to credit risk) in making that determination. This amendment also clarifies that each indicator may be more or less relevant to the assessment depending on the terms and conditions of the contract. In May 2016, the FASB issued ASU 2016-12, an amendment to ASU 2014-09, which provided practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on transition, collectability, non-cash consideration and presentation of sales and other similar taxes. The amendments, collectively, should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption (modified retrospective approach).

 

This ASU was effective for the Company on January 1, 2018. Because the ASU does not apply to revenue associated with leases and financial instruments (including loans and securities), the Company concluded that the new guidance did not impact the elements of its consolidated statements of income most closely associated with leases and financial instruments (such as interest income, interest expense and securities gains). The Company completed its identification of all revenue streams included in its financial statements and has identified its deposit- related fees, service charges, debit and prepaid card interchange income and other fee income to be within the scope of the standard. The Company has also completed its review of the related contracts. The Company's overall assessment indicates that adoption of this ASU did not materially change its current method and timing of recognizing revenue for the identified revenue streams and therefore, the adoption of this ASU on January 1, 2018, did not have a significant impact to the Company's financial condition, results of operations and consolidated financial statements.

 

In January 2016, the FASB issued 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, those without readily determinable fair values, 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 was effective for the Company on January 1, 2018. The Company evaluated the impact of this pronouncement and divested its entire marketable equity securities portfolio in 2017. The Company’s investment in Federal Home Loan Bank Stock is not included in the scope of this pronouncement. Upon adoption, the fair value of the Company's loan portfolio is now presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial assets and liabilities that are not measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update did not have a material impact on the Company's consolidated financial statements.

 

  

In February 2016, the FASB issued 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 the Company on January 1, 2019, with early adoption permitted. In July 2018, the FASB issued 2018-11, which allows a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented or as a cumulative effect adjustment as of the date of adoption. Management is currently evaluating the impact of its pending adoption of this guidance on the Company’s financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale 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 the Company on January 1, 2020. 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.

 

In August 2016, the FASB issued 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 were effective for the Company on January 1, 2018. As the guidance only affects the classification within the statement of cash flows, the adoption of this guidance did not have a material impact on the Company’s financial statements.

 

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (subtopic 310-20): “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens 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 on January 1, 2019. 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 June 30, 2018 and December 31, 2017:

 

		Amortized				Gross				Gross
		Cost				Unrealized				Unrealized				Fair
(In thousands)		Basis				Gains				Losses				Value
June 30, 2018
State and municipal securities		$	20,172			$	305			$	167			$	20,310
Asset-backed securities			7,089				-				161				6,928
Government mortgage-backed securities			28,608				149				673				28,084
Total available-for-sale securities		$	55,869			$	454			$	1,001			$	55,322
December 31, 2017
State and municipal securities		$	20,726			$	745			$	17			$	21,454
Asset-backed securities			7,524				30				37				7,517
Government mortgage-backed securities			32,421				317				280				32,458
Total available-for-sale securities		$	60,671			$	1,092			$	334			$	61,429

 

The scheduled maturities of debt securities were as follows at June 30, 2018:

 

		Available-for-Sale
		Amortized				Fair
(In thousands)		Cost				Value
Due after one year through five years		$	699			$	709
Due after five years through ten years			2,117				2,155
Due after ten years			17,356				17,446
Government mortgage-backed securities			28,608				28,084
Asset-backed securities			7,089				6,928
		$	55,869			$	55,322

 

  

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or longer are as follows at June 30, 2018 and December 31, 2017:

 

		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In thousands)		Value				Losses				Value				Losses				Value				Losses
June 30, 2018
Temporarily impaired securities:
State and municipal securities		$	6,549			$	135			$	590			$	32			$	7,139			$	167
Asset-backed securities			5,688				118				1,240				43				6,928				161
Government mortgage-backed securities			11,418				174				11,795				499				23,213				673
Total temporarily impaired securities		$	23,655			$	427			$	13,625			$	574			$	37,280			$	1,001
December 31, 2017
Temporarily impaired securities:
State and municipal securities		$	-			$	-			$	611			$	17			$	611			$	17
Asset-backed securities			1,745				13				1,335				24				3,080				37
Government mortgage-backed securities			5,231				20				13,584				260				18,815				280
Total temporarily impaired securities		$	6,976			$	33			$	15,530			$	301			$	22,506			$	334

  

Government mortgage-backed securities, state and municipal securities and asset-backed securities: Management believes that no individual unrealized loss at June 30, 2018 represents an other-than-temporary impairment (OTTI) because the decline in fair value of these securities is primarily attributable to changes in market 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.

 

(5) Loans

A summary of loans is as follows:

 

		At								At
		June 30,								December 31,
(Dollars in thousands)		2018								2017
		Amount				Percent				Amount				Percent
Commercial real estate		$	370,083				47.35	%		$	371,510				49.35	%
Commercial			274,690				35.14	%			240,223				31.91	%
Residential real estate			62,813				8.04	%			67,724				9.00	%
Construction and land development			54,014				6.91	%			55,828				7.42	%
Consumer			20,010				2.56	%			17,455				2.32	%
			781,610				100.00	%			752,740				100.00	%
Allowance for loan losses			(10,630	)							(9,757	)
Deferred loan fees, net			(875	)							(845	)
Net loans		$	770,105							$	742,138

 

  

The following tables set forth information regarding the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2018 and 2017:

 

		For the three months ended June 30,
(In thousands)		Commercial Real Estate				Commercial				Residential Real Estate				Construction and Land Development				Consumer				Unallocated				Total
Allowance for loan losses:
Balance at March 31, 2018		$	4,607			$	3,668			$	292			$	939			$	678			$	52			$	10,236
Charge-offs			-				(31	)			-				-				(232	)			-				(263	)
Recoveries			-				-				-				-				19				-				19
Provision (benefit)			(501	)			875				(10	)			29				270				(25	)			638
Balance at June 30, 2018		$	4,106			$	4,512			$	282			$	968			$	735			$	27			$	10,630
Balance at March 31, 2017		$	4,513			$	2,780			$	320			$	1,041			$	375			$	110			$	9,139
Charge-offs			-				(61	)			-				-				(18	)			-				(79	)
Recoveries			-				-				-				-				-				-				-
Provision (benefit)			127				562				(2	)			100				115				(10	)			892
Balance at June 30, 2017		$	4,640			$	3,281			$	318			$	1,141			$	472			$	100			$	9,952

 

		For the six months ended June 30,
(In thousands)		Commercial Real Estate				Commercial				Residential Real Estate				Construction and Land Development				Consumer				Unallocated				Total
Allowance for loan losses:
Balance at December 31, 2017		$	4,483			$	3,280			$	300			$	965			$	649			$	80			$	9,757
Charge-offs			-				(51	)			-				-				(398	)			-				(449	)
Recoveries			-				1				-				-				27				-				28
Provision (benefit)			(377	)			1,282				(18	)			3				457				(53	)			1,294
Balance at June 30, 2018		$	4,106			$	4,512			$	282			$	968			$	735			$	27			$	10,630
Balance at December 31, 2016		$	4,503			$	2,513			$	328			$	882			$	279			$	85			$	8,590
Charge-offs			(6	)			(61	)			-				-				(26	)			-				(93	)
Recoveries			-				-				-				-				-				-				-
Provision (benefit)			143				829				(10	)			259				219				15				1,455
Balance at June 30, 2017		$	4,640			$	3,281			$	318			$	1,141			$	472			$	100			$	9,952

 

 

The following table sets forth information regarding the allowance for loan losses and related loan balances by segment at June 30, 2018 and December 31, 2017:

 

(In thousands)		Commercial Real Estate				Commercial				Residential Real Estate				Construction and Land Development				Consumer				Unallocated				Total
June 30, 2018
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment		$	-			$	315			$	-			$	-			$	-			$	-			$	315
Ending balance:
Collectively evaluated for impairment			4,106				4,197				282				968				735				27				10,315
Total allowance for loan  losses ending balance		$	4,106			$	4,512			$	282			$	968			$	735			$	27			$	10,630
Loans:
Ending balance:
Individually evaluated  for impairment		$	5,161			$	3,984			$	395			$	-			$	-							$	9,540
Ending balance:
Collectively evaluated for impairment			364,922				270,706				62,418				54,014				20,010								772,070
Total loans ending balance		$	370,083			$	274,690			$	62,813			$	54,014			$	20,010							$	781,610
December 31, 2017
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-			$	-			$	-
Ending balance:
Collectively evaluated for impairment			4,483				3,280				300				965				649				80				9,757
Total allowance for loan  losses ending balance		$	4,483			$	3,280			$	300			$	965			$	649			$	80			$	9,757
Loans:
Ending balance:
Individually evaluated  for impairment		$	8,623			$	3,202			$	404			$	-			$	-							$	12,229
Ending balance:
Collectively evaluated for impairment			362,887				237,021				67,320				55,828				17,455								740,511
Total loans ending balance		$	371,510			$	240,223			$	67,724			$	55,828			$	17,455							$	752,740

 

  

The following tables set forth information regarding non-accrual loans and loan delinquencies by portfolio segment at June 30, 2018 and December 31, 2017:

 

																										90 Days
										90 Days				Total												or More
		30 - 59				60 - 89				or More				Past				Total				Total				Past Due				Non-accrual
(In thousands)		Days				Days				Past Due				Due				Current				Loans				and Accruing				Loans
June 30, 2018
Commercial real estate		$	-			$	-			$	3,669			$	3,669			$	366,414			$	370,083			$	-			$	3,669
Commercial			10				92				-				102				274,588				274,690				-				2,500
Residential real estate			72				96				-				168				62,645				62,813				-				939
Construction and land development			-				-				-				-				54,014				54,014				-				-
Consumer			76				41				16				133				19,877				20,010				-				20
Total		$	158			$	229			$	3,685			$	4,072			$	777,538			$	781,610			$	-			$	7,128
December 31, 2017
Commercial real estate		$	-			$	3,669			$	-			$	3,669			$	367,841			$	371,510			$	-			$	7,102
Commercial			12				-				-				12				240,211				240,223				-				1,505
Residential real estate			699				178				81				958				66,766				67,724								364
Construction and land development			-				-				-				-				55,828				55,828				-				-
Consumer			63				45				60				168				17,287				17,455				-				62
Total		$	774			$	3,892			$	141			$	4,807			$	747,933			$	752,740			$	-			$	9,033

 

On April 3, 2018, the Bank conducted a foreclosure sale of certain collateral consisting of both real and personal property which secured four non-accruing loans originally made by the Bank having an aggregate principal outstanding balance of approximately $7.5 million of which $4.9 million is outstanding at the Bank with the remaining $2.6 million participated out to another institution. The Bank received $8.3 million in cash from this foreclosure sale. Certain subordinated lienholders are now disputing the priority of the Bank’s liens and the right of the Bank to retain approximately $2.1 million of the proceeds from this foreclosure sale, but have not yet filed a formal claim. Until the dispute is resolved, the Bank has deposited, and will continue to hold, the disputed proceeds (i.e., approximately $1.4 million including $543,000 that is participated out to another institution) in a suspense deposit account at the Bank. At this time, we cannot reasonably estimate a range of potential loss, if any, to the Bank, with respect to this matter.

 

  

Information about the Company’s impaired loans by portfolio segment was as follows at and for the six months ended June 30, 2018 and at and for the year ended December 31, 2017:

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
(In thousands)		Investment				Balance				Allowance				Investment				Recognized
June 30, 2018
With no related allowance recorded:
Commercial real estate		$	5,161			$	6,676			$	-			$	7,464			$	35
Commercial			3,284				3,284				-				4,286				117
Residential real estate			395				395				-				400				11
Construction and land development			-				-				-				-				-
Consumer			-				-				-				-				-
Total impaired with no related allowance			8,840				10,355				-				12,150				163
With an allowance recorded:
Commercial real estate			-				-				-				-				-
Commercial			700				700				315				700				-
Residential real estate			-				-				-				-				-
Construction and land development			-				-				-				-				-
Consumer			-				-				-				-				-
Total impaired with an allowance recorded			700				700				315				700				-
Total
Commercial real estate			5,161				6,676				-				7,464				35
Commercial			3,984				3,984				315				4,986				117
Residential real estate			395				395				-				400				11
Construction and land development			-				-				-				-				-
Consumer			-				-				-				-				-
Total impaired loans		$	9,540			$	11,055			$	315			$	12,850			$	163
December 31, 2017
With no related allowance recorded:
Commercial real estate		$	8,623			$	10,139			$	-			$	4,562			$	70
Commercial			3,202				3,202				-				2,054				123
Residential real estate			404				404				-				412				20
Construction and land development			-				-				-				-				-
Consumer			-				-				-				-				-
Total impaired with no related allowance			12,229				13,745				-				7,028				213
With an allowance recorded:
Commercial real estate			-				-				-				-				-
Commercial			-				-				-				-				-
Residential real estate			-				-				-				-				-
Construction and land development			-				-				-				-				-
Consumer			-				-				-				-				-
Total impaired with an allowance recorded			-				-				-				-				-
Total
Commercial real estate			8,623				10,139				-				4,562				70
Commercial			3,202				3,202				-				2,054				123
Residential real estate			404				404				-				412				20
Construction and land development			-				-				-				-				-
Consumer			-				-				-				-				-
Total impaired loans		$	12,229			$	13,745			$	-			$	7,028			$	213

 

 

There were no troubled debt restructurings during the six months ended June 30, 2018.

 

The following summarizes troubled debt restructurings entered into during the six months ended June 30, 2017:

 

(Dollars in thousands)		Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment
June 30, 2017
Troubled debt restructurings:
Commercial			1			$	249			$	249
			1			$	249			$	249

 

In the six months ended June 30, 2017, the Company approved one troubled debt restructure totaling $249,000, with no specific reserve required based on an analysis of the borrower’s 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 June 30, 2018 and December 31, 2017:

 

(In thousands)		Commercial Real Estate				Commercial				Residential Real Estate				Construction and Land Development				Consumer				Total
June 30, 2018
Grade:
Pass		$	358,177			$	252,074			$	-			$	54,014			$	-			$	664,265
Special mention			5,166				13,901				-				-				-				19,067
Substandard			6,740				8,715				624				-				-				16,079
Not formally rated			-				-				62,189				-				20,010				82,199
Total		$	370,083			$	274,690			$	62,813			$	54,014			$	20,010			$	781,610
December 31, 2017
Grade:
Pass		$	355,623			$	224,190			$	-			$	55,828			$	-			$	635,641
Special mention			6,852				9,155				-				-				-				16,007
Substandard			9,035				6,878				679				-				-				16,592
Not formally rated			-				-				67,045				-				17,455				84,500
Total		$	371,510			$	240,223			$	67,724			$	55,828			$	17,455			$	752,740

 

  

Credit Quality Information

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(6)

Deposits

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

 

		June 30,				December 31,
(In thousands)		2018				2017
NOW and demand		$	325,481			$	309,514
Regular savings			111,892				112,610
Money market deposits			228,060				225,735
Total non-certificate accounts			665,433				647,859
Certificate accounts of $250,000 or more			4,809				5,061
Certificate accounts less than $250,000			84,027				97,137
Total certificate accounts			88,836				102,198
Total deposits		$	754,269			$	750,057

 

  

(7) 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 real estate loans and other qualified assets.

 

Maturities of advances from the FHLB as of June 30, 2018 are summarized as follows:

 

(In thousands)
Fiscal Year-End		Dollar Amount
2018		$	10,000
2019			4,953
2020			11,428
2021			5,000
2023			8,500
Total		$	39,881

 

(8) 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).

 

An asset’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

Fair Values of Assets Measured on a Recurring Basis

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

 

 

The following summarizes financial instruments measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017:

 

		Fair Value Measurements at Reporting Date Using
						Quoted Prices in				Significant				Significant
						Active Markets for				Other Observable				Unobservable
						Identical Assets				Inputs				Inputs
(In thousands)		Total				Level 1				Level 2				Level 3
June 30, 2018
State and municipal securities		$	20,310			$	-			$	20,310			$	-
Asset-backed securities			6,928				-				6,928				-
Mortgage-backed securities			28,084				-				28,084				-
Totals		$	55,322			$	-			$	55,322			$	-
December 31, 2017
State and municipal securities		$	21,454			$	-			$	21,454			$	-
Asset-backed securities			7,517				-				7,517				-
Mortgage-backed securities			32,458				-				32,458				-
Totals		$	61,429			$	-			$	61,429			$	-

 

Fair Values of Assets Measured on a Non-Recurring Basis

 

The Company’s impaired loans are reported at the fair value of the underlying collateral, less estimated costs to sell, 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, and therefore classifies such loans as Level 3 because the discounts are a significant input that is not observable.

 

The following summarizes assets measured at fair value on a nonrecurring basis at June 30, 2018 and December 31, 2017:

 

		Fair Value Measurements at Reporting Date Using:
						Quoted Prices in				Significant				Significant
						Active Markets for				Other Observable				Unobservable
						Identical Assets				Inputs				Inputs
(In thousands)		Total				Level 1				Level 2				Level 3
June 30, 2018
Impaired loans		$	4,055			$	-			$	-			$	4,055
December 31, 2017
Impaired loan		$	3,670			$	-			$	-			$	3,670

 

  

The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at June 30, 2018 and December 31, 2017:

 

(In thousands)		Fair Value				Valuation Technique		Unobservable Input
June 30, 2018
Impaired loans		$	4,055			Real estate appraisals and business evaluation		Discount for dated appraisals and comparable company evaluations
December 31, 2017
Impaired loan		$	3,670			Real estate appraisals		Discount for dated appraisals

 

(9) Fair Value of Financial Instruments

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

 

The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at June 30, 2018 and December 31, 2017:

 

		Carrying				Fair Value
(In thousands)		Amount				Level 1				Level 2				Level 3				Total
June 30, 2018
Financial assets:
Cash and cash equivalents		$	47,805			$	47,805			$	-			$	-			$	47,805
Available-for-sale securities			55,322				-				55,322				-				55,322
Federal Home Loan Bank of Boston stock			2,156				2,156				-				-				2,156
Loans, net			770,105				-				-				762,322				762,322
Accrued interest receivable			2,494				-				2,494				-				2,494
Financial liabilities:
Deposits			754,269				-				-				754,127				754,127
Federal Home Loan Bank advances			39,881				-				39,574				-				39,574
December 31, 2017
Financial assets:
Cash and cash equivalents		$	47,689			$	47,689			$	-			$	-			$	47,689
Available-for-sale securities			61,429				-				61,429				-				61,429
Federal Home Loan Bank of Boston stock			1,854				1,854				-				-				1,854
Loans, net			742,138				-				-				745,637				745,637
Accrued interest receivable			2,345				-				2,345				-				2,345
Financial liabilities:
Deposits			750,057				-				-				749,898				749,898
Federal Home Loan Bank advances			26,841				-				26,655				-				26,655

 

 

(10) Regulatory Capital

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

 

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. At June 30, 2018, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer. 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.

 

As of June 30, 2018 and December 31, 2017, 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
June 30, 2018
Total Capital (to Risk Weighted Assets)		$	122,378				15.0	%		$	65,186			>			8.0	%		$	81,483			>			10.0	%
Tier 1 Capital (to Risk Weighted Assets)			112,188				13.8				48,890			>			6.0				65,186			>			8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)			112,188				13.8				36,667			>			4.5				52,964			>			6.5
Tier 1 Capital (to Average Assets)			112,188				12.6				35,663			>			4.0				44,578			>			5.0
December 31, 2017
Total Capital (to Risk Weighted Assets)		$	116,869				15.0	%		$	62,514			>			8.0	%		$	78,142			>			10.0	%
Tier 1 Capital (to Risk Weighted Assets)			107,112				13.7				46,885			>			6.0				62,514			>			8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)			107,112				13.7				35,164			>			4.5				50,792			>			6.5
Tier 1 Capital (to Average Assets)			107,112				11.8				36,299			>			4.0				45,374			>			5.0

  

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. A financial institution can elect to be subject to this new definition.

 

 

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 Board to adopt a stock repurchase program for up to 6.6% of its common stock. As of June 30, 2018, the Company had repurchased 28,823 shares of its stock at an average price of $20.59 per share, or 4.6% of the 625,015 shares authorized for repurchase under the Company’s repurchase program.

 

(11) 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 loaned funds 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 as of December 31 (4.50% at December 31, 2017). Loan payments are principally funded by cash contributions from the Bank.

 

		June 30, 2018				December 31, 2017
Allocated			77,382				47,620
Committed to be allocated			5,952				23,810
Unallocated			273,818				285,722
Total			357,152				357,152

 

The fair value of unallocated shares was approximately $7.2 million at June 30 2018.

 

Total compensation expense recognized in connection with the ESOP for the three months ended June 30, 2018 and 2017 was $147,000 and $128,000, respectively. Total compensation expense recognized for the six months ended June 30, 2018 and 2017 was $297,000 and $242,000, respectively.

 

(12) Earnings Per Common Share

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

 

  

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands, except per share amounts)		2018				2017				2018				2017
Net Income attributable to common shareholders		$	2,390			$	1,601			$	4,412			$	3,403
Average number of common shares issued			9,657,319				9,652,448				9,657,319				9,652,448
Less:
average unallocated ESOP shares			(282,918	)			(301,483	)			(283,833	)			(303,855	)
average unvested restricted stock			(111,833	)			(140,916	)			(118,419	)			(144,738	)
average treasury stock acquired			(28,823	)			(16,213	)			(28,823	)			(10,649	)
Average number of common shares outstanding to calculate basic earnings per common share			9,233,745				9,193,836				9,226,244				9,193,206
Effect of dilutive unvested restricted stock and stock option awards			68,680				4,450				68,073				-
Average number of common shares outstanding to calculate diluted earnings per common share			9,302,425				9,198,286				9,294,317				9,193,206
Earnings per common share:
Basic		$	0.26			$	0.17			$	0.48			$	0.37
Diluted		$	0.26			$	0.17			$	0.47			$	0.37

 

(13) Share-Based Compensation

Under the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the "Equity Plan"), the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Plan, with the total shares reserved for options equaling 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. Options and other awards vest ratably over five years.

 

Expense related to options and restricted stock granted to directors is recognized in directors’ compensation within non-interest expense.

 

Stock Options

 

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

 

·

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

·

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

·

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

 

 

A summary of the status of the Company’s stock option grants for the six months ended June 30, 2018, is presented in the table below:

 

		Stock Option Awards				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value
Outstanding at December 31, 2017			396,443			$	17.61
Granted			-
Outstanding at June 30, 2018			396,443			$	17.61				8.43			$	3,405,000
Outstanding and expected to vest at June 30, 2018			396,443			$	17.59				8.43			$	3,405,000
Vested and Exercisable at June 30, 2018			76,854			$	17.40				8.39			$	703,000
Unrecognized compensation cost		$	1,380,000
Weighted average remaining recognition period (years)			3.39

 

For the three months ended June 30, 2018 and 2017, total expense for the stock options was $101,000 and $96,000, respectively. For the six months ended June 30, 2018 and 2017, total expense for the stock options was $201,000 and $193,000, respectively.

 

Restricted Stock

 

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

 

The following table presents the activity in restricted stock awards under the Equity Plan for the six months ended June 30, 2018:

 

		Unvested Restricted Stock Awards				Weighted Average Grant Date Price
Unvested restricted stock awards at January 1, 2018			127,852			$	17.59
Granted			-				-
Vested			-				-
Unvested restricted stock awards at June 30 , 2018			127,852			$	17.59
Unrecognized compensation cost		$	1,907,000
Weighted average remaining recognition period (years)			3.39

 

For the three months ended June 30, 2018 and 2017, total expense for the restricted stock awards was $140,000 and $133,000, respectively. For the six months ended June 30, 2018 and 2017, total expense for the restricted stock awards was $279,000 and $267,000, respectively.

 

 

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

 

Management’s discussion and analysis of financial condition and results of operations at June 30, 2018 and December 31, 2017 and for the three and six months ended June 30, 2018 and 2017 is intended to assist in understanding our financial condition and results of operations. Operating results for the three and six month period ended June 30, 2018 may not be indicative of results for all of 2018 or any other period. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

 

Forward-Looking Statements

 

This document may contain certain forward-looking statements, such as statements of the Company’s or the Bank’s plans, objectives, expectations, estimates and intentions. Forward-looking statements may be identified by the use of words such as “expects,” “subject,” “believes,” “will,” “intends,” “may,” “will be,” “would” or similar expressions. Readers should not place undue reliance on any forward-looking statements, which reflect management’s analysis of factors only as of the date of which they are given. These statements are subject to change based on various important factors (some of which are beyond the Company’s or the Bank’s control) and actual results may differ materially. These factors include general economic conditions, including trends and levels of interest rates; the ability of our borrowers to repay their loans; the ability of the Company or the Bank to effectively manage its growth; real estate values in the market area; loan demand; competition; changes in accounting policies; changes in laws and regulations; our success in introducing new products or entering new markets; our ability to retain key employees; failures or breaches of our IT systems; and results of regulatory examinations, among other factors. 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 update any forward-looking statements after the date of this quarterly report.

 

Critical Accounting Policies

 

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

 

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

 

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

 

 

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

 

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

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction and land development, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the six months ended June 30, 2018 or during the twelve months ended December 31, 2017.

 

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 $925.4 million at June 30, 2018, an increase of $23.2 million, or 2.6%, from $902.3 million at December 31, 2017. The increase resulted primarily from an increase in net loans of $28.0 million. The increase was partially offset by a decrease in available-for-sale investment securities of $6.1 million.

 

Securities. Investments in available-for-sale securities decreased $6.1 million, or 9.9%, to $55.3 million at June 30, 2018 from $61.4 million at December 31, 2017. The decrease is primarily due to principal paydowns on government mortgage-backed securities and a change in the fair value of the securities.

 

Loans. At June 30, 2018, net loans were $770.1 million, or 83.2% of total assets, compared to $742.1 million, or 82.3% of total assets, at December 31, 2017. Increases in commercial loans of $34.5 million, or 14.3%, and in consumer loans of $2.6 million, or 14.6%, were partially offset by a decrease in residential real estate loans of $4.9 million, or 7.3%, construction and land development loans of $1.8 million, or 3.2%, and commercial real estate of $1.4 million, or 0.4%. Our commercial loan growth is attributed to adding commercial lenders and a continued focus on our niche lending of senior secured cash flow loans. Senior secured cash flow loans increased $20.5 million, or 49.7%, to $61.8 million at June 30, 2018 from $41.3 million at December 31, 2017. The consumer loan growth is primarily due to loan purchases via the BancAlliance Lending Club Program that the Bank entered into an agreement with in 2016.

 

 

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

 

		At								At
		June 30,								December 31,
(Dollars in thousands)		2018								2017
		Amount				Percent				Amount				Percent
Commercial real estate		$	370,083				47.35	%		$	371,510				49.35	%
Commercial			274,690				35.14	%			240,223				31.91	%
Residential real estate			62,813				8.04	%			67,724				9.00	%
Construction and land development			54,014				6.91	%			55,828				7.42	%
Consumer			20,010				2.56	%			17,455				2.32	%
			781,610				100.00	%			752,740				100.00	%
Allowance for loan losses			(10,630	)							(9,757	)
Deferred loan fees, net			(875	)							(845	)
Net loans		$	770,105							$	742,138

 

Assets Held-for-Sale. The Company purchased a building in Portsmouth, New Hampshire in January 2017 with the intention of using a majority of the space for banking operations. The cost of this building and the related improvements was $3.3 million as of December 31, 2017. During 2017, the Company entered into an agreement to sell the building for $3.3 million, with the building to be developed into a mixed used commercial building, and transferred the building into the held-for-sale category. During the first quarter of 2018, the Company transferred the assets back into the premises and equipment category as the Company terminated the agreement to sell the building, and entered into a new agreement with a third party to construct the commercial building, in which the Company will occupy space. The Company will then sell any unused units.

 

Deposits. Total deposits increased $4.2 million, or 0.6%, to $754.3 million at June 30, 2018 from $750.1 million at December 31, 2017. The primary reason for the increase in deposits was due to an increase of $16.0 million, or 5.2%, in NOW and demand deposits and an increase in money market deposits of $2.3 million, or 1.0%. The increases were partially offset by a decrease of $13.4 million, or 13.1%, in time deposits. The increase in the NOW and demand deposits occurred primarily in municipal deposits. Time deposits decreased primarily due to the roll-off of brokered certificates of deposit.

 

Borrowings. Borrowings at both June 30, 2018 and December 31, 2017 consisted entirely of Federal Home Loan Bank advances. Borrowings increased $13.0 million, or 48.6%, to $39.9 million at June 30, 2018 from $26.8 million at December 31, 2017. The increase was primarily due to funding loan growth.

 

Shareholders’ Equity. Total shareholders’ equity increased $4.2 million, or 3.6%, to $120.0 million at June 30, 2018, from $115.8 million at December 31, 2017. The increase was primarily due to year-to-date net income of $4.4 million, partially offset by decreases of $978,000 in year-to-date accumulated other comprehensive income, reflecting a decrease in the fair value of available-for-sale securities. Book value per share increased to $12.46 at June 30, 2018 from $12.02 at December 31, 2017.

 

  

Asset Quality.

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

 

		At				At
		June 30,				December 31,
(Dollars in thousands)		2018				2017
Non-accrual loans:
Real estate:
Commercial		$	3,669			$	7,102
Residential			939				364
Construction and land development			-				-
Commercial			2,500				1,505
Consumer			20				62
Total non-accrual loans			7,128				9,033
Accruing loans past due 90 days or more			-				-
Real estate owned			-				-
Total non-performing assets		$	7,128			$	9,033
Total loans (1)		$	780,735			$	751,895
Total assets		$	925,440			$	902,265
Total non-performing loans to total loans (1)			0.91	%			1.20	%
Total non-performing assets to total assets			0.77	%			1.00	%

 

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

 

The decrease in non-performing assets at June 30, 2018 compared to December 31, 2017 was primarily due to the Company’s foreclosure sale of certain collateral consisting of both real and personal property, which secured four non-accruing loans. On April 3, 2018, the Bank conducted a foreclosure sale of certain collateral consisting of both real and personal property which secured four non-accruing loans originally made by the Bank having an aggregate principal outstanding balance of approximately $7.5 million of which $4.9 million is outstanding at the Bank with the remaining $2.6 million participated out to another institution. The Bank received $8.3 million in cash from this foreclosure sale. Certain subordinated lienholders are now disputing the priority of the Bank’s liens and the right of the Bank to retain approximately $2.1 million of the proceeds from this foreclosure sale, but have not yet filed a formal claim. Until the dispute is resolved, the Bank has deposited, and will continue to hold, the disputed proceeds (i.e., approximately $1.4 million including $543,000 that is participated out to another institution) in a suspense deposit account at the Bank. At this time, we cannot reasonably estimate a range of potential loss, if any, to the Bank, with respect to this matter.

 

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

 

 

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 net non-accrual loans and charge-offs, 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:

 

		Six Months Ended June 30,
(Dollars in thousands)		2018				2017
Allowance at beginning of period		$	9,757			$	8,590
Provision for loan losses			1,294				1,455
Charge offs:
Real estate:
Commercial			-				6
Residential			-				-
Construction and land development			-				-
Commercial			51				61
Consumer			398				26
Total charge-offs			449				93
Recoveries:
Real estate:
Commercial			-				-
Residential			-				-
Construction and land development			-				-
Commercial			1				-
Consumer			27				-
Total recoveries			28				-
Net charge-offs			421				93
Allowance at end of period		$	10,630			$	9,952
Non-performing loans at end of period		$	7,128			$	4,234
Total loans outstanding at end of period (1)			780,735				712,037
Average loans outstanding during the period (1)			769,887				661,678
Allowance to non-performing loans			149.13	%			235.05	%
Allowance to total loans outstanding at end of period			1.36	%			1.40	%
Net charge-offs to average loans outstanding during the during the period (annualized)			0.11	%			0.03	%

 

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

 

 

Results of Operations for the Three Months Ended June 30, 2018 and 2017

 

General. Net income increased $789,000 to $2.4 million for the three months ended June 30, 2018 from $1.6 million for the three months ended June 30, 2017. The increase was related to an increase of $1.2 million in net interest and dividend income and a decrease of provision for loan losses of $254,000, partially offset by an increase in noninterest expense of $536,000.

 

Interest and Dividend Income. Interest and dividend income increased $1.6 million, or 17.7%, to $10.4 million for the three months ended June 30, 2018 from $8.8 million for the three months ended June 30, 2017. This increase was primarily attributable to an increase in interest and fees on loans, which increased $2.0 million, or 25.5%, to $9.9 million for the three months ended June 30, 2018 from $7.9 million for the three months ended June 30, 2017. The increase in interest and fees on loans was partially offset by a decrease in interest and dividends on securities, which decreased $492,000, or 54.5%, to $410,000 for the three months ended June 30, 2017 from $902,000 for the three months ended June 30, 2017.

 

The increase in interest income on loans was due to an increase in the average balance of loans of $95.8 million, or 14.2%, to $772.8 million for the three months ended June 30, 2018 from $676.9 million for the three months ended June 30, 2017. In addition, interest income increased due to the yield on loans increasing 47 basis points to 5.14% for the three months ended June 30, 2018 due to our continued focus on higher-yielding commercial lending. The decrease in interest and dividends on securities was due to the Company selling $30.6 million of state and municipal securities and divesting of all equity securities during the third and fourth quarters of 2017.

 

Interest Expense. Interest expense increased $334,000, or 38.0%, to $1.2 million for the three months ended June 30, 2018 from $879,000 for the three months ended June 30, 2017, caused by an increase in interest expense on deposits. Interest expense on deposits increased $331,000, or 48.8%, to $1.0 million for the three months ended June 30, 2018 from $678,000 for the three months ended June 30, 2017, due to an increase in the average rate paid on interest-bearing deposits of 22 basis points to 0.75% for the three months ended June 30, 2018 from 0.53% for the three months ended June 30, 2017. The increase in the average rate was primarily the result of increases in the average rate paid on money market accounts and certificates of deposit. The average rate paid on money market accounts and certificates of deposit increased due to changes in the market rate environment. Interest expense on deposits also increased due to an increase in the average balance of interest-bearing deposits of $27.2 million, or 5.3%, to $538.9 million for the three months ended June 30, 2018 from $511.8 million for the three months ended June 30, 2017. The increase resulted primarily from an increase in the average balance of money market accounts, which increased $63.1 million, or 40.5%.

 

Net Interest and Dividend Income. Net interest and dividend income increased $1.3 million, or 15.5%, to $9.2 million for the three months ended June 30, 2018 from $7.9 million for the three months ended June 30, 2017. The increase was due to both higher balances of earning assets and expanding margins. Our net interest rate spread increased 33 basis points to 4.09% for the three months ended June 30, 2018 from 3.76% for the three months ended June 30, 2017. Our net interest margin increased 41 basis points to 4.35% for the three months ended June 30, 2018 from 3.94% for the three months ended June 30, 2017.

 

  

Provision for Loan Losses. The provision for loan losses was $638,000 for the three months ended June 30, 2018 compared to $892,000 for the three months ended June 30, 2017. The provision recorded resulted in an allowance for loan losses of $10.6 million, or 1.36% of total loans at June 30, 2018, compared to $9.8 million, or 1.30% of total loans, at December 31, 2017 and $10.0 million, or 1.40% of total loans, at June 30, 2017. The changes in the provision and allowance for loan losses were based on management’s assessment of loan portfolio growth and composition trends, historical charge-off trends, levels of problem loans and other asset quality trends. Non-accrual loans as of June 30, 2018 were primarily comprised of two commercial and industrial relationships with a total carrying value of $2.3 million and one commercial real estate relationship with a carrying value of $3.7 million.

 

Noninterest Income. Noninterest income increased $48,000, or 4.5%, to $1.1 million for the three months ended June 30, 2018 and June 30, 2017. The increase was primarily caused by an increase of $109,000, or 22.5%, in service charges and fees partially offset by a decrease in the gain on sales of securities. Gains on sales of securities was zero for the three months ended June 30, 2018 compared to $58,000 for the three months ended June 30, 2017.

 

Noninterest Expense. Noninterest expense increased $536,000, or 9.1%, to $6.4 million for the three months ended June 30, 2018 from $5.9 million for the three months ended June 30, 2017. The largest increases were related to salaries and employee benefits expense, and professional fees. The increase in salary and employee benefits of $538,000, or 14.4%, to $4.3 million for the three months ended June 30, 2018 from $3.7 million for the three months ended June 30, 2017 was primarily related to hiring an additional number of lenders. The increase in professional fees of $114,000, or 53.0%, to $329,000 for the three months ended June 30, 2018 from $215,000 for the three months ended June 30, 2017 was primarily related to increased legal expenses related to certain subordinated lienholders that are disputing the priority of the Bank’s liens and the right of the Bank to retain proceeds from a foreclosure sale, discussed above.

 

Income Tax Provision. We recorded a provision for income taxes of $843,000 for the three months ended June 30, 2018, reflecting an effective tax rate of 26.1%, compared to a provision of $639,000 for the three months ended June 30, 2017, reflecting an effective tax rate of 28.5%. The changes in the income tax provision were primarily due to a reduction of the federal corporate income tax rate from 35% to 21%.

 

  

Average Balance Sheet and Related Yields and Rates

 

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

 

		For the Three Months Ended June 30,
		2018												2017
						Interest												Interest
		Average				Earned/				Yield/				Average				Earned/				Yield/
(Dollars in thousands)		Balance				Paid				Rate				Balance				Paid				Rate
Assets:
Interest-earning assets:
Loans		$	772,775			$	9,925				5.14	%		$	676,943			$	7,911				4.67	%
Interest-earning deposits			10,722				42				1.57	%			1,623				3				0.74	%
Investment securities			56,872				388				2.73	%			124,185				867				2.79	%
Federal Home Loan Bank stock			2,058				22				4.28	%			2,791				35				5.02	%
Total interest-earning assets			842,427				10,377				4.93	%			805,542				8,816				4.38	%
Non-interest earning assets			49,966												43,623
Total assets		$	892,393											$	849,165
Interest-bearing liabilities:
Savings accounts		$	110,986				56				0.20	%		$	114,111				50				0.18	%
Money market accounts			218,775				507				0.93	%			155,657				151				0.39	%
NOW accounts			114,174				146				0.51	%			112,072				167				0.60	%
Certificates of deposit			94,998				300				1.26	%			129,935				310				0.95	%
Total interest-bearing deposits			538,933				1,009				0.75	%			511,775				678				0.53	%
Federal Home Loan Bank advances			36,947				204				2.21	%			53,501				201				1.50	%
Total interest-bearing liabilities			575,880				1,213				0.84	%			565,276				879				0.62	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			186,719												163,297
Other noninterest-bearing liabilities			10,913												7,792
Total liabilities			773,512												736,365
Total equity			118,881												112,800
Total liabilities and equity		$	892,393											$	849,165
Net interest income						$	9,164											$	7,937
Interest rate spread (1)											4.09	%											3.76	%
Net interest-earning assets (2)		$	266,547											$	240,266
Net interest margin (3)											4.35	%											3.94	%
Average interest-earning assets to interest-bearing liabilities			146.29	%											142.50	%

 

(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 June 30, 2018
		Compared to the Three Months Ended June 30, 2017
		Increase (Decrease) Due to								Total
(In thousands)		Rate				Volume				Increase (Decrease)
Interest-earning assets:
Loans		$	829			$	1,185			$	2,014
Interest-earning deposits			6				33				39
Investment securities			(19	)			(460	)			(479	)
Federal Home Loan Bank stock			(5	)			(8	)			(13	)
Total interest-earning assets			811				750				1,561
Interest-bearing liabilities:
Savings accounts			7				(1	)			6
Money Market accounts			276				80				356
Now accounts			(24	)			3				(21	)
Certificates of deposit			86				(96	)			(10	)
Total interest-bearing deposits			344				(13	)			331
Federal Home Loan Bank advances			77				(74	)			3
Total interest-bearing liabilities			421				(87	)			334
Change in net interest income		$	390			$	837			$	1,227

 

  

Results of Operations for the Six Months Ended June 30, 2018 and 2017

 

General. Net income increased $1.0 million to $4.4 million for the six months ended June 30, 2018 from $3.4 million for the six months ended June 30, 2017. The increase was related to an increase of $2.6 million in net interest and dividend income, partially offset by a $440,000 decrease in noninterest income and an increase in noninterest expense of $1.3 million.

 

Interest and Dividend Income. Interest and dividend income increased $3.2 million, or 18.9%, to $20.1 million for the six months ended June 30, 2018 from $16.9 million for the six months ended June 30, 2017. This increase was primarily attributable to an increase in interest and fees on loans, which increased $4.1 million, or 26.8%, to $19.2 million for the six months ended June 30, 2018 from $15.1 million for the six months ended June 30, 2017. The increase in interest and fees on loans was partially offset by a decrease in interest and dividends on securities, which decreased $930,000, or 52.4%, to $845,000 for the six months ended June 30, 2018 from $1.8 million for the six months ended June 30, 2017.

 

The increase in interest income on loans was due to an increase in the average balance of loans of $108.2 million, or 16.4%, to $769.9 million for the six months ended June 30, 2018 from $661.7 million for the six months ended June 30, 2017. In addition, interest income increased due to the yield on loans increasing 41 basis points to 4.99% for the six months ended June 30, 2018 due to our continued focus on higher-yielding commercial lending. The decrease in interest and dividends on securities was due to the Company selling $30.6 million of state and municipal securities and divesting of all equity securities during the third and fourth quarters of 2017.

 

Interest Expense. Interest expense increased $588,000, or 35.4%, to $2.2 million for the six months ended June 30, 2018 from $1.7 million for the six months ended June 30, 2017, caused by an increase in interest expense on deposits partially offset by a decrease in interest expense on borrowings. Interest expense on deposits increased $681,000, or 54.6%, to $1.9 million for the six months ended June 30, 2018 from $1.2 million for the six months ended June 30, 2017, due to an increase in the average rate paid on interest-bearing deposits of 20 basis points to 0.70% for the six months ended June 30, 2018 from 0.50% for the six months ended June 30, 2017. The increase in the average rate was primarily the result of increases in the average rate paid on money market accounts and certificates of deposit. The average rate paid on money market accounts and certificates of deposit increased due to changes in the market rate environment. Interest expense on deposits also increased due to an increase in the average balance of interest-bearing deposits of $49.0 million, or 9.8%, to $547.6 million for the six months ended June 30, 2018 from $498.6 million for the six months ended June 30, 2017. The increase resulted primarily from an increase in the average balance of money market accounts, which increased $69.1 million, or 45.3%.

 

Interest expense on borrowings decreased $93,000, or 22.6%, to $318,000 for the six months ended June 30, 2018 from $411,000 for the six months ended June 30, 2017. The interest expense on borrowings decreased due to the decrease in the average outstanding balance of $27.6 million, or 48.0% to $29.9 million for the six months ended June 30, 2018. The decrease in the average outstanding balance was partially offset by a 70 basis point increase in the cost of borrowings to 2.13% for the six months ended June 30, 2018.

 

Net Interest and Dividend Income. Net interest and dividend income increased $2.6 million, or 17.1%, to $17.9 million for the six months ended June 30, 2018 from $15.3 million for the six months ended June 30, 2017. The increase was due to both higher balances of earning assets and expanding margins. Our net interest rate spread increased 32 basis points to 4.01% for the six months ended June 30, 2018 from 3.69% for the six months ended June 30, 2017. Our net interest margin increased 40 basis points to 4.26% for the six months ended June 30, 2018 from 3.86% for the six months ended June 30, 2017.

 

  

Provision for Loan Losses. The provision for loan losses was $1.3 million for the six months ended June 30, 2018 compared to $1.5 million for the six months ended June 30, 2017. The provision recorded resulted in an allowance for loan losses of $10.6 million, or 1.36% of total loans at June 30, 2018, compared to $9.8 million, or 1.30% of total loans, at December 31, 2017 and $10.0 million, or 1.40% of total loans, at June 30, 2017. The changes in the provision and allowance for loan losses were based on management’s assessment of loan portfolio growth and composition trends, historical charge-off trends, levels of problem loans and other asset quality trends. Non-accrual loans as of June 30, 2018 was primarily comprised of two commercial and industrial relationships with a total carrying value of $2.3 million and one commercial real estate relationship with a carrying value of $3.7 million.

 

Noninterest Income. Noninterest income decreased $440,000, or 17.1%, to $2.1 million for the six months ended June 30, 2018 from $2.6 million for the six months ended June 30, 2017. The decrease was primarily caused by a decrease in the gain on sales of securities. Gains on sales of securities was zero for the six months ended June 30, 2018 compared to $540,000 for the six months ended June 30, 2017.

 

Noninterest Expense. Noninterest expense increased $1.3 million, or 11.2%, to $12.8 million for the six months ended June 30, 2018 from $11.5 million for the six months ended June 30, 2017. The largest increases were related to salaries and employee benefits expense, professional fees, and other expense. The increase in salary and employee benefits of $1.0 million, or 13.8%, to $8.4 million for the six months ended June 30, 2018 from $7.4 million for the six months ended June 30, 2017 was primarily related to an increased number of lenders. The increase in professional fees of $148,000, or 34.5%, was primarily due to increased legal expenses related to certain subordinated lienholders that are disputing the priority of the Bank’s liens and the right of the Bank to retain proceeds from a foreclosure sale, discussed above. The increase in other expense of $210,000, or 14.3%, to $1.7 million for the six months ended June 30, 2018 from $1.5 million for the six months ended June 30, 2017 was primarily related to costs incurred working out nonperforming loans.

 

Income Tax Provision. We recorded a provision for income taxes of $1.5 million for the six months ended June 30, 2018, reflecting an effective tax rate of 25.6%, compared to a provision of $1.5 million for the six months ended June 30, 2017, reflecting an effective tax rate of 30.4%. The changes in the income tax provision were primarily due to a reduction of the federal corporate income tax rate from 35% to 21%.

 

 

Average Balance Sheet and Related Yields and Rates

 

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

 

		For the Six Months Ended June 30,
		2018												2017
						Interest												Interest
		Average				Earned/				Yield/				Average				Earned/				Yield/
(dollars in thousands)		Balance				Paid				Rate				Balance				Paid				Rate
Assets:
Interest-earning assets:
Loans		$	769,887			$	19,201				4.99	%		$	661,678			$	15,144				4.58	%
Interest-earning deposits			9,707				84				1.73	%			2,649				9				0.68	%
Investment securities			58,309				795				2.73	%			122,752				1,714				2.79	%
Federal Home Loan Bank stock			1,865				50				5.36	%			3,149				61				3.87	%
Total interest-earning assets			839,768				20,130				4.79	%			790,228				16,928				4.28	%
Non-interest earning assets			49,465												45,897
Total assets		$	889,233											$	836,125
Interest-bearing liabilities:
Savings accounts		$	114,664				126				0.22	%		$	116,192				109				0.19	%
Money market accounts			221,712				908				0.82	%			152,618				277				0.36	%
NOW accounts			112,549				300				0.53	%			113,294				334				0.59	%
Certificates of deposit			98,641				595				1.21	%			116,485				528				0.91	%
Total interest-bearing deposits			547,566				1,929				0.70	%			498,589				1,248				0.50	%
Federal Home Loan Bank advances			29,920				318				2.13	%			57,527				411				1.43	%
Total interest-bearing liabilities			577,486				2,247				0.78	%			556,116				1,659				0.60	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			183,801												157,442
Other noninterest-bearing liabilities			10,083												7,961
Total liabilities			771,370												721,519
Total equity			117,863												114,606
Total liabilities and equity		$	889,233											$	836,125
Net interest income						$	17,883											$	15,269
Interest rate spread (1)											4.01	%											3.69	%
Net interest-earning assets (2)		$	262,282											$	234,112
Net interest margin (3)											4.26	%											3.86	%
Average interest-earning assets to interest-bearing liabilities			145.42	%											142.10	%

 

(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 Six Months Ended June 30, 2018
		Compared to the Six Months Ended June 30, 2017
		Increase (Decrease) Due to								Total
(in thousands)		Rate				Volume				Increase (Decrease)
Interest-earning assets:
Loans		$	1,437			$	2,620			$	4,057
Interest-earning deposits			28				47				75
Investment securities			(39	)			(880	)			(919	)
Federal Home Loan Bank stock			19				(30	)			(11	)
Total interest-earning assets			1,444				1,758				3,202
Interest-bearing liabilities:
Savings accounts			18				(1	)			17
Money Market accounts			464				167				631
Now accounts			(32	)			(2	)			(34	)
Certificates of deposit			156				(89	)			67
Total interest-bearing deposits			607				74				681
Federal Home Loan Bank advances			152				(245	)			(93	)
Total interest-bearing liabilities			759				(171	)			588
Change in net interest income		$	685			$	1,929			$	2,614

 

  

Management of Market Risk

 

Net Interest Income Simulation. We analyze our sensitivity to changes in interest rates through a net interest income simulation model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period in the current interest rate environment. We then calculate what the net interest income would be for the same period under the assumption that interest rates increase 200 basis points from current market rates and under the assumption that interest rates decrease 100 basis points from current market rates, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

 

The following table presents the estimated changes in net interest income of The Provident Bank, calculated on a bank-only basis, that would result from changes in market interest rates over twelve-month periods beginning June 30, 2018.

 

		At June 30,
(Dollars in thousands)		2018
Changes in		Estimated
Interest Rates		Net Interest Income
(Basis Points)		Over Next 12 Months				Change
200		$	39,610				0.14	%
0			39,555				-
-100			38,859				(1.76	)%

 

Economic Value of Equity Simulation. We also analyze our sensitivity to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The EVE ratio represents the dollar amount of our EVE divided by the present value of our total assets for a given interest rate scenario. EVE attempts to quantify our economic value using a discounted cash flow methodology while the EVE ratio reflects that value as a form of capital ratio. We estimate what our EVE would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates, and under the assumption that interest rates decrease 100 basis points from current market rates.

 

The following table presents the estimated changes in EVE of The Provident Bank, calculated on a bank-only basis, that would result from changes in market interest rates as of June 30, 2018.

 

		At June 30,
(Dollars in thousands)		2018
Changes in		Economic
Interest Rates		Value of
(Basis Points)		Equity				Change
400		$	148,251				1.60	%
300			148,828				2.00	%
200			148,959				2.10	%
100			148,545				1.80	%
0			145,911				-
-100			135,712				(7.00	)%

 

  

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the tables presented above assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

 

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, FHLB advances, and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

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

 

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2018, cash and cash equivalents totaled $47.8 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $55.3 million at June 30, 2018.

 

At June 30, 2018, we had the ability to borrow a total of $208.0 million from the Federal Home Loan Bank of Boston. On that date, we had $39.9 million in advances outstanding. At June 30, 2018, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $200.7 million, none of which was outstanding as of that date.

 

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

 

At June 30, 2018 and December 31, 2017, we had $33.8 million and $18.6 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at June 30, 2018 and December 31, 2017, we had $160.8 million and $166.0 million in unadvanced funds to borrowers, respectively. We also had $2.4 million and $2.0 million in outstanding letters of credit at June 30, 2018 and December 31, 2017, respectively.

 

Certificates of deposit due within one year of June 30, 2018 totaled $77.6 million, or 10.3% 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. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

 

Our primary investing activities are the origination of loans and the purchase of securities. During the six months ended June 30, 2018, we originated $117.0 million of loans, all of which were intended to be held in our portfolio and we purchased $3.0 million in loans. We did not purchase any securities. During the six months ended June 30, 2017, we originated $135.2 million of loans, all of which were intended to be held in our portfolio. We also purchased $11.3 million in loans and $12.5 million in securities.

 

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increases in total deposits of $4.2 million and $73.4 million for the six months ended June 30, 2018 and 2017, 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 increased $13.0 million and $10.2 million during the six months ended June 30, 2018 and 2017, 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 June 30, 2018, The Provident Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 10 of the Notes to the Unaudited Consolidated Financial Statements for additional information.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operation”.

 

Item 4. Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2018. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended June 30, 2018, 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

 

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission.

 

  

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

 

(a)

Not applicable.

 

(b)

Not applicable.

 

(c)

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. For the three months ended June 30, 2018, there were no repurchases of Provident Bancorp, Inc. stock.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

3.1

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

3.2

By-Laws of Provident Bancorp, Inc. (1)

31.1

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

31.2

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

32

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

101

The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, 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: August 9, 2018	/s/ David P. Mansfield
	David P. Mansfield
	President and Chief Executive Officer
Date: August 9, 2018	/s/ Carol L. Houle
	Carol L. Houle
	Executive Vice President and Chief Financial Officer