UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

For the quarterly period ended March 31, 20202021

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

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

For the transition period from _______________ to ______________________

Commission File No. 001-39090

Provident Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland

84-4132422

Maryland

84-4132422

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

5 Market Street, Amesbury, Massachusetts

01913

(Address of Principal Executive Offices)

Zip Code

(978) 834-8555

(Registrant’s telephone number)

N/A

N/A

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

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock

PVBC

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.  YES  x  NO  o

YESxNO¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   YESxNO¨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

Large Accelerated Filer

¨

o

Smaller reporting company

x

Accelerated Filer

o

Non-accelerated Filer

x

Smaller Reporting Company

x

Emerging growth companyGrowth Company

x

o

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.xo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES¨oNOx

As of May 1, 2020,6, 2021, there were 19,476,24818,335,142 shares of the Registrant’s common stock, $0.01 par value per share, outstanding.



Provident Bancorp, Inc.

Form 10-Q

Part I.

Financial InformationPage

Part I.

Financial Information

Page

Item 1.

Interim Financial Statements

2

Consolidated Balance Sheets as of March 31, 20202021 (unaudited) and December 31, 2019 (unaudited)2020

2

Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020 and 2019 (unaudited)

3

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020 and 2019 (unaudited)

4

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2021 and 2020 and 2019 (unaudited)

5

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 and 2019 (unaudited)

6

Notes to Consolidated Financial Statements (unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

29

28

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

42

40

Item 4.

Controls and Procedures

42

40

Part II.

Other Information

41

Item 1.

Legal Proceedings

42

40

Item 1A.

Risk Factors

42 

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

40

Item 3.

Defaults upon Senior Securities

42

41

Item 4.

Mine Safety Disclosures

42

41

Item 5.

Other Information

42

41

Item 6.

Exhibits

Exhibits43

42

Signatures

44

43


Part I.Financial Information
Item 1.Financial Statements

Part I.Financial Information

Item 1.Financial Statements

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

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

At

At

March 31,

December 31,

2021

2020

(Dollars in thousands)

(unaudited)

Assets

Cash and due from banks

$

17,560

$

11,830

Short-term investments

115,313

71,989

Cash and cash equivalents

132,873

83,819

Debt securities available-for-sale (at fair value)

34,629

32,215

Federal Home Loan Bank stock, at cost

895

895

Loans, net of allowance for loan losses of $19,032 and $18,518 as of

March 31, 2021 and December 31, 2020, respectively

1,308,136

1,314,810

Bank owned life insurance

36,903

36,684

Premises and equipment, net

14,655

14,716

Accrued interest receivable

6,456

6,371

Right-of-use assets

4,219

4,258

Other assets

13,126

12,013

Total assets

$

1,551,892

$

1,505,781

Liabilities and Shareholders' Equity

Deposits:

Noninterest-bearing

$

431,028

$

383,079

Interest-bearing

854,196

854,349

Total deposits

1,285,224

1,237,428

Long-term borrowings

13,500

13,500

Operating lease liabilities

4,463

4,488

Other liabilities

14,563

14,509

Total liabilities

1,317,750

1,269,925

Shareholders' equity:

Preferred stock; authorized 50,000 shares:

0 shares issued and outstanding

Common stock, $0.01 par value, 100,000,000 shares authorized;

18,574,127 and 19,047,544 shares issued and outstanding

at March 31, 2021 and December 31, 2020, respectively

186

191

Additional paid-in capital

133,981

139,450

Retained earnings

108,273

104,508

Accumulated other comprehensive income

873

1,058

Unearned compensation - ESOP

(9,171)

(9,351)

Total shareholders' equity

234,142

235,856

Total liabilities and shareholders' equity

$

1,551,892

$

1,505,781

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


2


PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended

March 31,

2021

2020

(Dollars in thousands, except per share data)

(unaudited)

Interest and dividend income:

Interest and fees on loans

$

15,697

$

13,760

Interest and dividends on debt securities available-for-sale

169

258

Interest on short-term investments

23

71

Total interest and dividend income

15,889

14,089

Interest expense:

Interest on deposits

911

1,646

Interest on borrowings

70

371

Total interest expense

981

2,017

Net interest and dividend income

14,908

12,072

Provision for loan losses

753

3,099

Net interest and dividend income after provision for loan losses

14,155

8,973

Noninterest income:

Customer service fees on deposit accounts

379

352

Service charges and fees - other

350

460

Bank owned life insurance income

219

179

Other income

70

19

Total noninterest income

1,018

1,010

Noninterest expense:

Salaries and employee benefits

6,477

5,402

Occupancy expense

412

441

Equipment expense

122

137

Deposit insurance

106

31

Data processing

321

225

Marketing expense

37

64

Professional fees

431

386

Directors' compensation

254

194

Software depreciation and implementation

246

200

Write down of other assets and receivables

500

Other

807

726

Total noninterest expense

9,213

8,306

Income before income tax expense

5,960

1,677

Income tax expense

1,663

446

Net income

$

4,297

$

1,231

Earnings per share:

Basic

$

0.25

$

0.07

Diluted

$

0.24

$

0.07

Weighted Average Shares:

Basic

17,263,759

18,115,970

Diluted

17,558,160

18,261,282

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

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

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


3


PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

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


Three Months Ended

March 31,

2021

2020

(In thousands)

Net income

$

4,297

$

1,231

Other comprehensive income:

Unrealized holding (losses) gains arising during the period on debt securities available-for-sale

(244)

10

Unrealized gain

(244)

10

Income tax effect

59

(27)

Total other comprehensive loss

(185)

(17)

Comprehensive income

$

4,112

$

1,214

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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

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

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



4


PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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

Cash paid for warehouse asset purchase, net (1)

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

For the three months ended March 31, 2021 and 2020

Accumulated

Shares of

Additional

Other

Unearned

Common

Common

Paid-in

Retained

Comprehensive

Compensation

(In thousands, except share data)

Stock

Stock

Capital

Earnings

Income (Loss)

ESOP

Total

Balance, December 31, 2020

19,047,544 

$

191 

$

139,450 

$

104,508 

$

1,058 

$

(9,351)

$

235,856 

Net income

4,297 

4,297 

Dividends declared ($0.03 per share)

(532)

(532)

Other comprehensive loss

(185)

(185)

Stock-based compensation expense, net of forfeitures

604 

604 

Repurchase of common stock

(473,215)

(5)

(6,177)

(6,182)

Shares surrendered related to tax withholdings on restricted stock awards

(202)

(2)

(2)

ESOP shares earned

106 

180 

286 

Balance, March 31, 2021

18,574,127 

$

186 

$

133,981 

$

108,273 

$

873 

$

(9,171)

$

234,142 

Balance, December 31, 2019

19,473,818 

$

195 

$

146,174 

$

94,159 

$

458 

$

(10,053)

$

230,933 

Net income

1,231 

1,231 

Other comprehensive loss

(17)

(17)

Stock-based compensation expense

261 

261 

Restricted stock award grant forfeiture

2,430 

ESOP shares earned

65 

185 

250 

Balance, March 31, 2020

19,476,248 

$

195 

$

146,500 

$

95,390 

$

441 

$

(9,868)

$

232,658 

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

5



PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

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

(1) See Note 15 for warehouse asset purchase

Three Months Ended

March 31,

(In thousands)

2021

2020

Cash flows from operating activities:

Net income

$

4,297

$

1,231

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of securities premiums, net of accretion

51

78

ESOP expense

286

250

Change in deferred loan fees, net

864

494

Provision for loan losses

753

3,099

Depreciation and amortization

252

266

Increase in accrued interest receivable

(85)

(132)

Deferred tax benefit

(634)

Share-based compensation expense

604

261

Bank owned life insurance income

(219)

(179)

Principal repayments of operating lease obligations

(25)

(15)

(Increase) decrease in other assets

(419)

25

Increase (decrease) in other liabilities

54

(1,275)

Net cash provided by operating activities

5,779

4,103

Cash flows from investing activities:

Purchases of debt securities available-for-sale

(5,038)

Proceeds from pay downs, maturities and calls of debt securities available-for-sale

2,329

2,641

Purchase of Federal Home Loan Bank stock

(1,320)

Loan originations and purchases, net of paydowns

5,057

(106,917)

Cash paid for mortgage warehouse asset purchase, net

(66,962)

Additions to premises and equipment

(153)

(420)

Net cash used in investing activities

2,195

(172,978)

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



6


PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

Three Months Ended

March 31,

(In thousands)

2021

2020

Cash flows from financing activities:

Net increase in noninterest-bearing accounts

47,949

22,639

Net (decrease) increase in interest-bearing accounts

(153)

20,988

Repurchase of common stock

(6,182)

Cash dividends paid on common stock

(532)

Net change in short-term borrowings

100,012

Shares surrendered related to tax withholdings on restricted stock awards

(2)

Net cash provided by financing activities

41,080

143,639

Net increase (decrease) in cash and cash equivalents

49,054

(25,236)

Cash and cash equivalents at beginning of period

83,819

59,658

Cash and cash equivalents at end of period

$

132,873

$

34,422

Supplemental disclosures:

Interest paid

$

981

$

2,017

Income taxes paid

423

329

Reclassification of premises and equipment to other assets

3

Recognition of right-of-use assets

693

Recognition of operating lease liabilities

693

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


7


PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(1)Basis of Presentation

(1)    Basis of Presentation

The accompanying unaudited financial statements of Provident Bancorp, Inc., a Maryland corporation (the “Company”), were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of the financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month period ended March 31, 20202021 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year.Certain amounts in 20192020 have been reclassified to be consistent with the 20202021 consolidated financial statement presentation and had no effect on the net income reported in the consolidated statementstatements 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 (the “SEC”) on March 13, 2020.26, 2021.

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiary, The Provident Bank (the(“BankProv” or 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

(2)    Corporate Structure

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

The Bank, headquartered in Amesbury, Massachusetts, operates its business from seven7 banking offices located in Amesbury and Newburyport, Massachusetts and Portsmouth, Exeter, Bedford, and Seabrook, New Hampshire. The Bank also has four2 loan production offices in Boston, Hingham, and Dedham, Massachusetts and Ponte Vedra, Florida. The Bank provides a variety of financial services to individuals and small businesses. ItsOur primary deposit products are checking, savings and term certificate accounts and itsour primary lending products are commercial mortgages and commercial loans. BankProv is a commercial bank for corporate clients, specializing in offering adaptive and technology-first banking solutions to niche markets, including cryptocurrency, renewable energy, fin-tech and search fund lending.

(3)COVID-19

The outbreak(3)    COVID-19

Since the distribution of COVID-19 vaccinations began in December, significant progress has been made to combat the spread of the virus and as a result, there has been an uptick in economic activity, particularly those industries that had been most heavily impacted by the economic downturn caused by the COVID-19 pandemic. Despite the progress, COVID-19 has caused significant disruption in the U.S. economy and has adversely impacted a broad range of industries in which the Company’s customers operate andwhich could impair their ability to fulfill their financial obligations. The World Health Organization has declared COVID-19It is not possible to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed withknow the goalfull extent of decreasing the rate of new infections. The spreadthese impacts as of the outbreak has caused significant disruption indate of this filing, detailed below are potentially material items of which we are aware.

Congress, the U.S. economyPresident, and has disrupted banking and other financial activity in the areas in whichBoard of Governors of the Company operates.


The U.S. government and regulatory agenciesFederal Reserve System (the “Federal Reserve”) have taken several actions designed to provide support tocushion the U.S. economy.economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law onat the end of March 27, 2020 as a $2 trillion legislative package.2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. TheSection 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (TDR) for a limited period of time to account for the effects of COVID-19. Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was enacted on December 27, 2020, providing for a second round of PPP loans (“PPP-2”). Also on December 27, 2020, the Consolidated Appropriations Act (“CAA”) was signed into law. Section 541 of the CAA extends the provision in Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings”, to January 1, 2022. The Federal Reserve also includes extensive emergency funding for hospitalstook actions to mitigate the economic impact of the COVID-19 pandemic, including cutting the federal funds rate 150 basis points and providers.targeting a 0 to 25 basis point rate. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations. Also,

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the Economic Aid Act) amended the actionsPPP by extending the authority of the BoardSBA to guarantee loans and the ability of GovernorsPPP lenders to disburse PPP loans until March 31, 2021. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extends the Federal Reserve System (the “FRB”)PPP application deadline to combatMay 31, 2021, and provides the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect the Company’s net interest income and margins, and profitability.SBA additional time to process applications through June 30, 2021.

8

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


Financial position and results of operations

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

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


Allowance for loan losses

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

ValuationIn accordance with guidance issued by federal banking agencies, the Company is actively working with borrowers that may be unable to meet contractual obligations due to the effects of COVID-19 by providing modifications to allow for deferral of interest or principal and interest payments on an as-needed and case-by-case basis. In order to mitigate the risk associated with these modifications the Company has incorporated covenants that require borrowers to submit quarterly financial statements, prohibit them from distributing funds to any owner or stockholder (with the exception of payroll) and also prohibit them from making any payments on debt owed to subordinated debt holders for the duration of their modification. If borrowers are unable to return to their normal payment plan following their modification period, the Company could be required to increase its allowance for loan losses through an additional provision for loan losses charged to earnings.

Valuation

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

(4)Recent Accounting Pronouncements

9


(4)    Recent Accounting Pronouncements

In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2016-02, Leases (Topic 842).The amendments in this update require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. The Company adopted ASU 2016-02 on January 1, 2019 and on that date the Company’s assets and liabilities increased by $3.8 million (see Note 14).

In June 2016, the FASB issuedASU 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’sthe current “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debdebt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. On October 16, 2019, FASB approved a delay on the implementation until January 2023 for smaller reporting companies as defined by the SEC. The amendments in this update will be effective for the Company on January 1, 2023. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of its pending adoption of this guidance on the Company’s financial statements.


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

(5)Investment Securities

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This ASU simplifies the accounting for income taxes and is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The Company adopted the provision of ASU 2019-12 effective January 1, 2021 and the adoption did not have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), to ease the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. The provisions in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification would be considered "minor" so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting.

ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company is currently evaluating the effect that this ASU will have on the Company’s consolidated financial statements.

In October 2020, the FASB issued ASU No. 2020-08, Receivables (Topic 310) – Nonrefundable Fees and Other Costs (“ASU 2020-08”), to provide further clarification and update the previously issued guidance in ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). ASU 2017-08 shortened the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. The Company early adopted the provisions of ASU 2017-08, effective January 1, 2017. ASU 2017-08 requires that at each reporting period, to the extent that the amortized cost of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess premium should be amortized to the next call date. ASU 2020-08 is effective for fiscal years ending after December 15, 2020 and early adoption was not permitted. The provisions under ASU 2020-08 are required to be applied prospectively. The Company adopted the provision of ASU 2020-08 effective January 1, 2021 and the adoption did not have a material impact on the consolidated financial statements.

10


(5)    Investment Securities

The following summarizes the amortized cost and fair value of investment securities classified as available-for-sale and their approximate fair values at March 31, 20202021 and December 31, 2019:2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:

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

Amortized

Gross

Gross

Cost

Unrealized

Unrealized

Fair

(In thousands)

Basis

Gains

Losses

Value

March 31, 2021

State and municipal securities

$

9,872

$

538

$

$

10,410

Asset-backed securities

9,235

196

9,431

Government mortgage-backed securities

14,366

430

8

14,788

Total debt securities available-for-sale

$

33,473

$

1,164

$

8

$

34,629

December 31, 2020

State and municipal securities

$

10,211

$

683

$

$

10,894

Asset-backed securities

4,432

278

4,710

Government mortgage-backed securities

16,172

449

10

16,611

Total debt securities available-for-sale

$

30,815

$

1,410

$

10

$

32,215

The scheduled maturities of debt securities were as follows at March 31, 2020.2021 are summarized in the table below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

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

Available-for-Sale

Amortized

Fair

(In thousands)

Cost

Value

Due after one year through five years

$

591

$

636

Due after five years through ten years

912

917

Due after ten years

8,369

8,857

Government mortgage-backed securities

14,366

14,788

Asset-backed securities

9,235

9,431

$

33,473

$

34,629

There were no0 realized gains or losses on sales and calls during the three months ended March 31, 2020. During the three months ended2021 or March 31, 2019, gross realized gains on sales and calls were $216,000, and gross realized losses were $103,000.2020.

Securities with carrying amounts of $28.4$19.2 million and $30.6$21.3 million were pledged to secure available borrowings with the Federal Reserve Bank and Federal Home Loan Bank at March 31, 20202021 and December 31, 2019,2020, respectively.


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

11


The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or longer are as follows at March 31, 20202021 and December 31, 2019:2020:

  Less than 12 Months  12 Months or Longer  Total 
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
(In thousands) Value  Losses  Value  Losses  Value  Losses 
March 31, 2020                        
Temporarily impaired securities:                        
State and municipal securities $5,682  $145  $-  $-  $5,682  $145 
Government mortgage-backed securities  1,421   15   242   11   1,663   26 
Total temporarily impaired debt securities $7,103  $160  $242  $11  $7,345  $171 
                         
December 31, 2019                        
Temporarily impaired securities:                        
Asset-backed securities $606  $4  $-  $-  $606  $4 
Government mortgage-backed securities  5,207   8   5,418   59   10,625   67 
Total temporarily impaired debt securities $5,813  $12  $5,418  $59  $11,231  $71 

Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(In thousands)

Value

Losses

Value

Losses

Value

Losses

March 31, 2021

Temporarily impaired securities:

Government mortgage-backed securities

$

$

$

750

$

8

$

750

$

8

Total temporarily impaired debt securities

$

$

$

750

$

8

$

750

$

8

December 31, 2020

Temporarily impaired securities:

Government mortgage-backed securities

$

$

$

817

$

10

$

817

$

10

Total temporarily impaired debt securities

$

$

$

817

$

10

$

817

$

10

Government mortgage-backed and state and municipal securities: The gross unrealized losses on government mortgage-backed and state and municipal securities were primarily attributable to relative changes in interest rates since the time of purchase. Management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2020.2021.


(6)Loans

(6)    Loans

A summary of loans is as follows:

 At At 

 March 31, December 31, 

 2020 2019 

At

At

(Dollars in thousands) Amount Amount 

March 31,

December 31,

(In thousands)

2021

2020

Commercial real estate $415,792  $418,356 

$

435,034

$

438,949

Commercial  631,453   451,791 

Commercial (1)

585,352

565,976

Residential real estate  42,561   45,695 

29,901

32,785

Construction and land development  48,317   46,763 

33,778

28,927

Consumer  10,538   12,737 

4,136

5,547

Mortgage warehouse

244,066

265,379

  1,148,661   975,342 

1,332,267

1,337,563

Allowance for loan losses  (16,674)  (13,844)

(19,032)

(18,518)

Deferred loan fees, net  (2,705)  (2,212)

Deferred loan fees, net (2)

(5,099)

(4,235)

Net loans $1,129,282  $959,286 

$

1,308,136

$

1,314,810

(1)Includes $57.5 million and $41.8 million in PPP loans at March 31, 2021 and December 31, 2020, respectively.

(2)Includes $1.7 million and $933,000 in deferred fees related to PPP loans at March 31, 2021 and December 31, 2020, respectively.

12


The following tables set forth information regarding the activity in the allowance for loan losses by portfolio segment for the three months ended MachMarch 31, 20202021 and 2019:2020:

   For the three months ended March 31, 
               Construction             
   Commercial       Residential   and Land             
(In thousands)  Real Estate   Commercial   Real Estate   Development   Consumer   Unallocated   Total 
Allowance for loan losses:                            
                             
Balance at December 31, 2019 $6,104  $6,086  $254  $749  $650  $1  $13,844 
Charge-offs  -   (97)  -   -   (229)  -   (326)
Recoveries  -   7   4   -   46   -   57 
Provision (credit)  395   2,061   (45)  40   582   66   3,099 
Balance at March 31, 2020 $6,499  $8,057  $213  $789  $1,049  $67  $16,674 
                             
Balance at December 31, 2018 $4,152  $5,742  $251  $738  $710  $87  $11,680 
Charge-offs  -   (1,033)  -   -   (281)  -   (1,314)
Recoveries  -   10   -   -   19   -   29 
Provision (credit)  95   1,027   (11)  (4)  364   (9)  1,462 
Balance at March 31, 2019 $4,247  $5,746  $240  $734  $812  $78  $11,857 


(In thousands)

Commercial Real Estate

Commercial

Residential
Real
Estate

Construction and Land Development

Consumer

Mortgage Warehouse

Unallocated

Total

Allowance for loan losses:

Balance at December 31, 2020

$

6,095

$

10,543

$

184

$

447

$

586

$

663

$

$

18,518

Charge-offs

(150)

(43)

(156)

(349)

Recoveries

81

29

110

Provision (credit)

76

1,012

(29)

5

(14)

(297)

753

Balance at March 31, 2021

$

6,102

$

11,512

$

155

$

452

$

445

$

366

$

$

19,032

Balance at December 31, 2019

$

6,104

$

6,086

$

254

$

749

$

650

$

$

1

$

13,844

Charge-offs

(97)

(229)

(326)

Recoveries

7

4

46

57

Provision (credit)

395

1,765

(45)

40

582

296

66

3,099

Balance at March 31, 2020

$

6,499

$

7,761

$

213

$

789

$

1,049

$

296

$

67

$

16,674

The following table sets forth information regarding the allowance for loan losses and related loan balances by portfolio segment at March 31, 20202021 and December 31, 2019:2020:

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


(In thousands)

Commercial Real Estate

Commercial

Residential Real Estate

Construction and Land Development

Consumer

Mortgage Warehouse

Total

March 31, 2021

Allowance for loan losses:

Ending balance:

Individually evaluated

for impairment

$

$

3,410

$

$

$

$

$

3,410

Ending balance:

Collectively evaluated

for impairment

6,102

8,102

155

452

445

366

15,622

Total allowance for loan

losses ending balance

$

6,102

$

11,512

$

155

$

452

$

445

$

366

$

19,032

Loans (1):

Ending balance:

Individually evaluated

for impairment

$

20,886

$

6,713

$

161

$

$

$

$

27,760

Ending balance:

Collectively evaluated

for impairment

414,148

578,639

29,740

33,778

4,136

244,066

1,304,507

Total loans ending balance

$

435,034

$

585,352

$

29,901

$

33,778

$

4,136

$

244,066

$

1,332,267

(1)Balances represent gross loans. The difference between gross loans versus recorded investment, which would consist of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs, is not material.

13


(In thousands)

Commercial Real Estate

Commercial

Residential Real Estate

Construction and Land Development

Consumer

Mortgage Warehouse

Total

December 31, 2020

Allowance for loan losses:

Ending balance:

Individually evaluated

for impairment

$

$

2,024

$

$

$

$

$

2,024

Ending balance:

Collectively evaluated

for impairment

6,095

8,519

184

447

586

663

16,494

Total allowance for loan

losses ending balance

$

6,095

$

10,543

$

184

$

447

$

586

$

663

$

18,518

Loans (1):

Ending balance:

Individually evaluated

for impairment

$

21,039

$

4,458

$

162

$

$

$

$

25,659

Ending balance:

Collectively evaluated

for impairment

417,910

561,518

32,623

28,927

5,547

265,379

1,311,904

Total loans ending balance

$

438,949

$

565,976

$

32,785

$

28,927

$

5,547

$

265,379

$

1,337,563

(1)Balances represent gross loans. The difference between gross loans versus recorded investment, which would consist of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs, is not material.

14


The following tables set forth information regarding non-accrual loans and loan delinquencies by portfolio segment at March 31, 20202021 and December 31, 2019:2020:

                    90 Days    
        90 Days  Total        or More    
  30 - 59  60 - 89  or More  Past  Total  Total  Past Due  Non-accrual 
(In thousands) Days  Days  Past Due  Due  Current  Loans  and Accruing  Loans 
March 31, 2020                                
Commercial real estate $1,713  $-  $1,070  $2,783  $413,009  $415,792  $-  $21,199 
Commercial  51   -   384   435   631,018   631,453   -   2,754 
Residential real estate  410   12   633   1,055   41,506   42,561   -   732 
Construction and land development  -   -   165   165   48,152   48,317   -   165 
Consumer  99   90   84   273   10,265   10,538   -   84 
Total $2,273  $102  $2,336  $4,711  $1,143,950  $1,148,661  $-  $24,934 
                                 
December 31, 2019                                
Commercial real estate $473  $18,256  $1,368  $20,097  $398,259  $418,356  $-  $1,701 
Commercial  529   85   484   1,098   450,693   451,791   -   2,955 
Residential real estate  715   154   832   1,701   43,994   45,695       969 
Construction and land development  -   -   165   165   46,598   46,763   -   165 
Consumer  111   58   38   207   12,530   12,737   -   37 
Total $1,828  $18,553  $2,887  $23,268  $952,074  $975,342  $-  $5,827 


90 Days

90 Days

Total

or More

30 - 59

60 - 89

or More

Past

Total

Total

Past Due

Non-accrual

(In thousands)

Days

Days

Past Due

Due

Current

Loans

and Accruing

Loans

March 31, 2021

Commercial real estate

$

$

$

$

$

435,034

$

435,034

$

$

Commercial

53

247

300

585,052

585,352

6,469

Residential real estate

80

345

747

1,172

28,729

29,901

969

Construction and

land development

33,778

33,778

Consumer

4

26

16

46

4,090

4,136

17

Mortgage warehouse

244,066

244,066

Total

$

137

$

371

$

1,010

$

1,518

$

1,330,749

$

1,332,267

$

$

7,455

December 31, 2020

Commercial real estate

$

$

$

$

$

438,949

$

438,949

$

$

Commercial

4,358

291

4,649

561,327

565,976

4,198

Residential real estate

255

346

1,030

1,631

31,154

32,785

1,156

Construction and

land development

28,927

28,927

Consumer

61

21

64

146

5,401

5,547

65

Mortgage warehouse

265,379

265,379

Total

$

4,674

$

367

$

1,385

$

6,426

$

1,331,137

$

1,337,563

$

$

5,419

Information about

15


The following tables provide information with respect to the Company’s impaired loans by portfolio segment was as follows at and for the three months ended March 31, 2020 and at and for the year ended December 31, 2019:loans:

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


March 31, 2021

December 31, 2020

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

(In thousands)

Investment

Balance

Allowance

Investment

Balance

Allowance

With no related allowance recorded:

Commercial real estate

$

20,886

$

21,108

$

$

21,039

$

21,312

$

Commercial

473

512

434

441

Residential real estate

161

161

162

162

Construction and land development

Consumer

Mortgage warehouse

Total impaired with no related allowance

21,520

21,781

21,635

21,915

With an allowance recorded:

Commercial real estate

Commercial

6,240

6,910

3,410

4,024

4,605

2,024

Residential real estate

Construction and land development

Consumer

Mortgage warehouse

Total impaired with an allowance recorded

6,240

6,910

3,410

4,024

4,605

2,024

Total

Commercial real estate

20,886

21,108

21,039

21,312

Commercial

6,713

7,422

3,410

4,458

5,046

2,024

Residential real estate

161

161

162

162

Construction and land development

Consumer

Mortgage warehouse

Total impaired loans

$

27,760

$

28,691

$

3,410

$

25,659

$

26,520

$

2,024

16


Three Months Ended March 31,

2021

2020

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

(In thousands)

Investment

Recognized

Investment

Recognized

With no related allowance recorded:

Commercial real estate

$

20,961

$

183

$

2,041

$

19

Commercial

502

3

694

6

Residential real estate

162

2

165

3

Construction and land development

165

Consumer

Mortgage warehouse

Total impaired with no related allowance

21,625

188

3,065

28

With an allowance recorded:

Commercial real estate

20,403

211

Commercial

6,295

2

2,480

1

Residential real estate

Construction and land development

Consumer

Mortgage warehouse

Total impaired with an allowance recorded

6,295

2

22,883

212

Total

Commercial real estate

20,961

183

22,444

230

Commercial

6,797

5

3,174

7

Residential real estate

162

2

165

3

Construction and land development

165

Consumer

Mortgage warehouse

Total impaired loans

$

27,920

$

190

$

25,948

$

240

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

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

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

17


The following summarizes troubled debt restructuringstables summarize TDRs entered into during the three months ended March 31, 2021 and 2020:

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

In

Three Months Ended March 31,

2021

2020

(Dollars in thousands)

Number of Contracts

Pre-
Modification
Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment

Number of Contracts

Pre-
Modification
Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment

Troubled debt restructurings:

Commercial

3

$

1,868

$

1,868

7

$

18,646

$

20,146

3

$

1,868

$

1,868

7

$

18,646

$

20,146

During the three months ended March 31, 2021, the Company approved 3 TDRs all related to one commercial relationship. A troubled debt restructuring was completed to provide the borrower with a three month principal and interest deferral through April 2021. As of December 31, 2020, this loan was deemed impaired, placed on non-accrual status and specific reserves of $1.8 million were allocated. During the three months ended March 31, 2021 the specific reserves were reduced to $1.7 million due to a decrease in the loan balance. As of March 31, 2021, this commercial relationship remained on non-accrual status.

During the three months ended March 31, 2020, the Company approved seven troubled debt restructurings7 TDRs for one commercial real estate loan relationship totaling $20.1 million.The Bank analyzed the relationship and modified the relationship as follows:

·

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

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

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

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

In the three months ended March 31, 2019, the Company approved one troubled debt restructuring totaling $2.0 million. This commercial loan was placed on an extended 12-month interest-only period with re-amortizationpayments for three years at a reduced rate;

$2.1 million was restructured to follow. An impairment analysisamortize and pay out over a 10-year term at a reduced rate; and

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

Upon completion of the restructuring in the first quarter of 2020, the commercial relationship was placed on non-accrual status and a specific reserveafter demonstrating the ability to pay the loan under the restructured terms, it was taken off non-accrual status in the fourth quarter of $100,000 was allocated to this relationship.

For the three months ended March 31, 2020 and 2019 therespecific reserves of $1.2 million were no payment defaults on troubled debt restructured loans modified within the previous 12 months.

removed due to sufficient collateral. As of March 31, 2020,2021, these loans were paying in accordance with the restructured terms and no new specific reserves have been attributed to the relationship.

The total recorded investment in TDRs was $23.3 million at March 31, 2021 and December 31, 2020. As of March 31, 2021, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

The recorded investment inAdditionally, the Company is working with borrowers impacted by COVID-19 and providing modifications to allow for deferral of interest or principal and interest payments on an as-needed and case-by-case basis. These modifications are excluded from troubled debt restructurings was $24.2 millionrestructuring classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. As previously noted, loan modifications and $4.2 millionpayment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of TDR classification and will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the CARES Act or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures. Loan modifications made pursuant to the CARES Act or interagency guidance that were in payment deferral at March 31, 20202021 and December 31, 2019,2020 totaled approximately $44.4 million and $44.0 million, respectively. At March 31, 2021, there were 8 commercial real estate loans that amounted to $16.0 million, 26 commercial and industrial loans that amounted to $19.1 million, and 1 construction loan that amounted to $9.3 million that were in payment deferral pursuant to the CARES Act or interagency guidance. There were 0 consumer, residential or mortgage warehouse loans that were in payment deferral at March 31, 2021 based on modifications made pursuant to the CARES Act or interagency guidance. At December 31, 2020 there were 8 commercial real estate loans that amounted to $12.4 million, 28 commercial and industrial loans that amounted to $22.4 million, 1 construction and land development loan that amounted to $9.0 million, and 1 residential mortgage loan that amounted to $177,000 that were in payment deferral pursuant to the CARES Act or interagency guidance. There were no consumer or mortgage warehouse loans that were in payment deferral at December 31, 2020 based on modifications made pursuant to the CARES Act or interagency guidance.


18


The following tables present the Company’s loans by risk rating and portfolio segment at March 31, 20202021 and December 31, 2019:2020:

       Construction       

 Commercial     Residential  and Land       

(In thousands) Real Estate  Commercial  Real Estate  Development Consumer Total 

Commercial Real Estate

Commercial

Residential Real Estate

Construction
and Land
Development

Consumer

Mortgage Warehouse

Total

March 31, 2020                        

March 31, 2021

Grade:

Pass

$

399,075

$

551,157

$

$

32,740

$

$

244,066

$

1,227,038

Special mention

16,253

16,679

32,932

Substandard

19,706

13,211

962

1,038

34,917

Doubtful

4,305

4,305

Not formally rated

28,939

4,136

33,075

Total

$

435,034

$

585,352

$

29,901

$

33,778

$

4,136

$

244,066

$

1,332,267

December 31, 2020

Grade:                        

Pass $385,695  $613,350  $-  $48,152  $-  $1,047,197 

$

401,541

$

538,449

$

$

28,927

$

$

265,379

$

1,234,296

Special mention  8,444   17,359   -   -   -   25,803 

17,702

13,625

31,327

Substandard  21,653   744   1,141   165   -   23,703 

19,706

13,902

1,560

35,168

Not formally rated  -   -   41,420   -   10,538   51,958 

31,225

5,547

36,772

Total $415,792  $631,453  $42,561  $48,317  $10,538  $1,148,661 

$

438,949

$

565,976

$

32,785

$

28,927

$

5,547

$

265,379

$

1,337,563

                        
December 31, 2019                        
Grade:                        
Pass $396,217  $433,076  $-  $46,598  $-  $875,891 
Special mention  1,936   14,044   -   -   -   15,980 
Substandard  20,203   4,671   1,379   165   -   26,418 
Not formally rated  -   -   44,316   -   12,737   57,053 
Total $418,356  $451,791  $45,695  $46,763  $12,737  $975,342 

Credit Quality Information

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

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

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

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

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

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

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

On an annual basis, or more often if needed, the Company completes a credit recertification on all mortgage warehouse originators.

For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Ongoing monitoring is based upon the borrower’s payment activity.


(7)Deposits

Consumer loans are not formally rated.

19


(7)    Deposits

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

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

(8)Borrowings

March 31,

December 31,

(In thousands)

2021

2020

NOW and demand

$

584,684

$

554,095

Regular savings

155,399

151,341

Money market deposits

386,842

353,793

Total non-certificate accounts

1,126,925

1,059,229

Certificate accounts of $250,000 or more

5,186

5,167

Certificate accounts less than $250,000

153,113

173,032

Total certificate accounts

158,299

178,199

Total deposits

$

1,285,224

$

1,237,428

(8)    Borrowings

Advances consist of funds borrowed from the Federal Home Loan Bank (the “FHLB”) and the Federal Reserve Bank (the “FRB”) borrower-in-custody (“BIC”) program..Maturities of advances from the FHLB and FRB as of March 31, 20202021 are summarized as follows:

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

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

(In thousands)

Fiscal Year-End

2023

$

8,500

2025

5,000

Total

$

13,500

Borrowings from the FHLB, which aggregated $25.0$13.5 million at March 31, 2020,2021, are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by oneone- to fourfour- family properties, certain commercial loans and qualified mortgage-backed government securities. The interest rates on FHLB advances ranged from 1.53%1.21% to 3.01%, and the weighted average interest rate on FHLB advances was 2.45%2.11% at March 31, 2020.2021. All of the FHLB borrowings at March 31, 20202021 are long-term with an original maturity of more than one year.

19

(9)Fair Value Measurements

(9)    Fair Value Measurements

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

Basis of Fair Value Measurements

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

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

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


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.

The Company used the following methods and significant assumptions to estimate fair value:

Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate fair values.

20


Debt Securities Available-For-Sale: Fair values for investments are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or pricing models. See Note 15 for further details.

Loans receivable: Fair values are based on an exit price notion in which an orderly transaction would take place between market participants at the measurement date under current market conditions.

Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.

Deposit liabilities: The fair values disclosed for deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings: Fair values of Federal Reserve Bank (“FRB”) Discount Window and Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portions of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

Fair Values of Assets Measured on a Recurring Basis

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

The following summarizes financial instruments measured at fair value on a recurring basis at March 31, 20202021 and December 31, 2019:2020:

  Fair Value Measurements at Reporting Date Using 
     Quoted Prices in  Significant  Significant 
     Active Markets for  Other Observable  Unobservable 
     Identical Assets  Inputs  Inputs 
(In thousands) Total  Level 1  Level 2  Level 3 
March 31, 2020                
State and municipal securities $10,674  $               -  $10,674  $                    - 
Asset-backed securities  5,364   -   5,364   - 
Mortgage-backed securities  23,043   -   23,043   - 
Totals $39,081  $-  $39,081  $- 
                 
December 31, 2019                
State and municipal securities $11,206  $-  $11,206  $- 
Asset-backed securities  5,500   -   5,500   - 
Mortgage-backed securities  25,084   -   25,084   - 
Totals $41,790  $-  $41,790  $- 

Fair Value Measurements at Reporting Date Using

Significant

Significant

Other Observable

Unobservable

Inputs

Inputs

(In thousands)

Total

Level 1

Level 2

Level 3

March 31, 2021

State and municipal securities

$

10,410

$

$

10,410

$

Asset-backed securities

9,431

9,431

Mortgage-backed securities

14,788

14,788

Totals

$

34,629

$

$

34,629

$

December 31, 2020

State and municipal securities

$

10,894

$

$

10,894

$

Asset-backed securities

4,710

4,710

Mortgage-backed securities

16,611

16,611

Totals

$

32,215

$

$

32,215

$

Fair Values of Assets Measured on a Non-Recurring Basis

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

Certain impaired loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan

21


losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.


The following summarizes assets measured at fair value on a nonrecurring basis at March 31, 20202021 and December 31, 2019:2020:

 Fair Value Measurements at Reporting Date Using: 

Fair Value Measurements at Reporting Date Using:

   Quoted Prices in Significant Significant 

Quoted Prices in

Significant

Significant

   Active Markets for Other Observable Unobservable 

Active Markets for

Other Observable

Unobservable

   Identical Assets Inputs Inputs 

Identical Assets

Inputs

Inputs

(In thousands) Total  Level 1  Level 2  Level 3 

Total

Level 1

Level 2

Level 3

         
March 31, 2020                

March 31, 2021

Impaired loans                

Commercial real estate $131  $-  $-  $131 
Commercial  2,078   -   -   2,078 

$

2,830

$

$

$

2,830

Totals $2,209  $-  $-  $2,209 

$

2,830

$

$

$

2,830

                

December 31, 2019                

December 31, 2020

Impaired loans                

Commercial real estate $215  $-  $-  $215 
Commercial  1,805   -   -   1,805 

$

2,000

$

$

2,000

Totals $2,020  $-  $-  $2,020 

$

2,000

$

$

$

2,000

The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at March 31, 20202021 and December 31, 2019:2020:

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

(In thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

March 31, 2021

Impaired loans

Commercial

$

2,830

Business valuation

Comparable company evaluations

5% - 10%

December 31, 2020

Impaired loans

Commercial

$

2,000

Business valuation

Comparable company evaluations

The carrying amount of impaired commercial loans measured at fair value on a nonrecurring basis was $6.2 million and $4.0 million with specific reserves of $3.4 million and $2.0 million at March 31, 2021 and December 31, 2020, respectively.

Fair Values of Financial Instruments

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


22


The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at March 31, 20202021 and December 31, 2019:2020:

 Carrying  Fair Value 

Carrying

Fair Value

(In thousands) Amount  Level 1  Level 2  Level 3  Total 

Amount

Level 1

Level 2

Level 3

Total

           
March 31, 2020                    

March 31, 2021

Financial assets:                    

Cash and cash equivalents $34,422  $34,422  $-  $-  $34,422 

$

132,873

$

132,873

$

$

$

132,873

Available-for-sale securities  39,081   -   39,081   -   39,081 

Available-for-sale debt securities

34,629

34,629

34,629

Federal Home Loan Bank of Boston stock  2,736    N/A     N/A     N/A     N/A  

895

N/A

N/A

N/A

N/A

Loans, net  1,129,282   -   -   1,146,895   1,146,895 

1,308,136

1,316,830

1,316,830

Accrued interest receivable  3,236   -   3,236   -   3,236 

6,456

6,456

6,456

Financial liabilities:                    

Deposits  893,532   -   894,695   -   894,695 

1,285,224

1,285,513

1,285,513

Borrowings  125,010   -   125,736   -   125,736 

13,500

13,957

13,957

                    

December 31, 2019                    

December 31, 2020

Financial assets:                    

Cash and cash equivalents $59,658  $59,658  $-  $-  $59,658 

$

83,819

$

83,819

$

$

$

83,819

Available-for-sale securities  41,790   -   41,790   -   41,790 

Available-for-sale debt securities

32,215

32,215

32,215

Federal Home Loan Bank of Boston stock  1,416    N/A     N/A     N/A     N/A  

895

N/A

N/A

N/A

N/A

Loans, net  959,286   -   -   958,270   958,270 

1,314,810

1,321,143

1,321,143

Accrued interest receivable  2,854   -   2,854   -   2,854 

6,371

6,371

6,371

Financial liabilities:                    

Deposits  849,905   -   850,774   -   850,774 

1,237,428

1,237,867

1,237,867

Borrowings  24,998   -   25,351   -   25,351 

13,500

14,016

14,016

(10)Regulatory Capital

(10)    Regulatory Capital

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

The Bank is subject to capital regulations that require a Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. In order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk-based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. As of March 31, 20202021 and December 31, 2019,2020, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

Applicable regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. At March 31, 2020,2021, the Bank exceeded the regulatory requirement for the capital conservation buffer.


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

                To Be Well 
                Capitalized Under 
        For Capital  Prompt Corrective 
  Actual  Adequacy Purposes  Action Provisions 
(dollars in thousands) Amount  Ratio  Amount    Ratio  Amount    Ratio 
March 31, 2020                      
Total Capital (to Risk Weighted Assets) $185,020   15.35% $96,399  >  8.0% $120,498  >  10.0%
Tier 1 Capital (to Risk Weighted Assets)  169,938   14.10  $72,299  >  6.0   96,399  >  8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)  169,938   14.10  $54,224  >  4.5   78,324  >  6.5 
Tier 1 Capital (to Average Assets)  169,938   14.31  $47,509  >  4.0   59,386  >  5.0 
December 31, 2019                            
Total Capital (to Risk Weighted Assets) $181,135   17.62% $82,238  >  8.0% $102,798  >  10.0%
Tier 1 Capital (to Risk Weighted Assets)  168,273   16.37   61,679  >  6.0   82,238  >  8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)  168,273   16.37   46,259  >  4.5   66,819  >  6.5 
Tier 1 Capital (to Average Assets)  168,273   15.18   44,352  >  4.0   55,440  >  5.0 

Community Bank Leverage Ratio:- Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Growth Act”), which was enacted on May 24, 2018, directs the federal banking agencies to establish a community bank leverage ratio of tangible capital to average total consolidated assets of not less than 8% or more than 10%. In September 2019, the federal banking agencies adopted a final rule to implement Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, effective January 1, 2020, establishing a community bank leverage ratio (“CBLR”) framework for community banking organizations having total consolidated assets of less than $10 billion, having a leverage ratio of greater than 9%, and satisfying other criteria, such as limitations on the amount of off-balance sheet exposures and on trading assets and liabilities. A community banking organization that qualifies for and elects to use the community bank leverage ratioCBLR framework and that maintains a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the banking agencies’ generally applicable capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the Federal Deposit Insurance Act. The final rule includes a two-quarter grace period during which a qualifying banking organization that temporarily fails to meet any of the qualifying criteria, including the greater than 9% leverage ratio requirement, generally would still be deemed well-capitalized so long as the banking organization maintains a leverage ratio greater than 8%. At the end of the grace period, the banking organization must meet all qualifying criteria to remain in the community bank leverage ratio framework or otherwise must comply with and report under the generally applicable rule. The CARES Act temporarily lowered the community bank leverage ratio to 8%. through 2020. The CBLR requirement transitioned from 8% to 8.5% for calendar year 2021 and will transition to 9% beginning in 2022. As of March 31, 2020,2021, the Bank didhas not optopted into the alternativeCBLR framework.

23


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

To Be Well

Capitalized Under

For Capital

Prompt Corrective

Actual

Adequacy Purposes

Action Provisions

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

March 31, 2021

Total Capital (to Risk Weighted Assets)

$

204,328

15.17

%

$

107,741

>

8.0

%

$

134,676

>

10.0

%

Tier 1 Capital (to Risk Weighted Assets)

187,467

13.92

80,805

>

6.0

107,741

>

8.0

Common Equity Tier 1 Capital (to Risk Weighted Assets)

187,467

13.92

60,604

>

4.5

87,539

>

6.5

Tier 1 Capital (to Average Assets)

187,467

12.28

61,074

>

4.0

76,343

>

5.0

December 31, 2020

Total Capital (to Risk Weighted Assets)

$

199,377

14.60

%

$

109,273

>

8.0

%

$

136,591

>

10.0

%

Tier 1 Capital (to Risk Weighted Assets)

182,286

13.35

81,955

>

6.0

109,273

>

8.0

Common Equity Tier 1 Capital (to Risk Weighted Assets)

182,286

13.35

61,466

>

4.5

88,784

>

6.5

Tier 1 Capital (to Average Assets)

182,286

12.37

58,926

>

4.0

73,658

>

5.0

Liquidation Accounts

Upon the completion of Old Provident’sthe Company’s initial stock offering in 2015 a special “liquidation account” wasand the second step offering in 2019, liquidation accounts were established for the benefit of certain depositors of the Bank in an amountamounts equal to theto:

1.The percentage ownership interest in the equity of Old Providentthe Company prior to the initial stock offering held by persons other than the MHC as of the date of the latest balance sheet contained in the prospectus utilized in connection with the offering. The Company is not permitted to pay dividends on its capital stock if the Company’s shareholders’ equity would be reduced below the amount of the liquidation account. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account.

Upon the completion of the Conversion, special “liquidation accounts” for the benefit of certain depositors of 2.The Provident Bank in an amount equal to the MHC’s ownership interest in the retained earnings of the Company as of the date of the latest balance sheet contained in the 2019 prospectus plus the MHC’s net assets (excluding its ownership of the Company) were established by the.

The Company and the Bank. The Company and The Provident Bank are not permitted to pay dividends on their capital stock if the shareholders’ equity of the Company, or the shareholder’s equity of The Providentthe Bank, would be reduced below the amount of the respective liquidation accounts. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts.


(11)Employee Stock Ownership Plan

Old ProvidentOther Restrictions

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Federal and state banking regulations restrict the amount of dividends that may be paid in a year, without prior approval of regulatory agencies, to the net income of the Bank for the year plus the retained net income of the previous two years. For the three months ended March 31, 2021 net income of the Bank was $4.3 million and for the years ended December 31, 2020 and 2019, $12.1 million and $10.7 million, respectively, of retained earnings was available to pay dividends. For the three months ended March 31, 2020 net income of the Bank was $1.2 million and for the years ended December 31, 2019 and 2018, $10.7 million and $9.3 million, respectively, of retained earnings was available to pay dividends.

The Company may, at times, repurchase its own shares in the open market. Such transactions are subject to the Federal Reserve Board’s notice provisions for stock repurchases. In October 2020, the Company announcedits plan to repurchase 1,000,000 shares of its common stock. The repurchase program was adopted following the receipt of non-objection from the Federal Reserve Bank of Boston, and in compliance with applicable state and federal regulations. The Company completed the repurchase of 1,000,000 shares of its common stock under this repurchase program in February 2021. In March 2021, the Company announced its plan to repurchase 1,400,000 shares of its common stock. The repurchase program was adopted following the receipt of non-objection from the Federal Reserve Bank of Boston, and in compliance with applicable state and federal regulations. During the three months ended March 31, 2021, the Company had repurchased 473,215 shares of its outstanding common stock under these programs.

(11)    Employee Stock Ownership Plan

The Bank established an ESOP for its eligible employees effective January 1, 2015 to provide eligible employees the opportunity to own Old Providentcompany stock. The plan is a tax-qualified plan for the benefit of all CompanyBank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax law limits. The ESOP acquired 721,876a total of 1,538,868 shares in Old Provident’sbetween the initial and second-step stock offeringofferings with the proceeds of a loan totaling $3.6$11.8 million. The loan was payable annually over 15 years at a rate per annum equal to the prime rate. In conjunction with the Conversion, the Company refinanced the original loan to the ESOP with an additional $8.2 millionis payable over 15 years at a rate per annum equal to the prime rate (4.75%(3.25% as of December 31, 2019) to acquire an additional 816,992 shares at $10.00 per share, representing 8% of the shares sold in the Company’s second-step offering. After the Conversion, the unallocated shares had an average price of $8.20 per share.

24


2020). Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid. The number of shares committed to be released per year through 2033 is 89,757.

Shares held by the ESOP include the following:

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

March 31, 2021

December 31, 2020

Allocated

372,014

282,256

Committed to be allocated

22,439

89,758

Unallocated

1,144,415

1,166,854

Total

1,538,868

1,538,868

The fair value of unallocated shares was approximately $10.8$16.5 million at March 31, 2020.2021.

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

Total compensation expense recognized in connection with the ESOP for the three months ended March 31, 2021 and 2020 was $286,000 and 2019 was $250,000, and $136,000, respectively.

(12)Earnings Per Common Share

(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

March 31,

(Dollars in thousands, except per share amounts)

2021

2020

Net Income attributable to common shareholders

$

4,297

$

1,231

Average number of common shares issued

18,774,844

19,476,248

Less:

average unallocated ESOP shares

(1,151,892)

(1,241,654)

average unvested restricted stock

(359,193)

(118,624)

Average number of common shares outstanding

to calculate basic earnings per common share

17,263,759

18,115,970

Effect of dilutive unvested restricted stock and stock option awards

294,401

145,312

Average number of common shares outstanding

to calculate diluted earnings per common share

17,558,160

18,261,282

Earnings per common share:

Basic

$

0.25

$

0.07

Diluted

$

0.24

$

0.07

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

Share amounts related to periods prior toStock options for 902,505 and 69,998 shares of common stock were not considered in computing diluted earnings per common share for the datethree months ended March 31, 2021 and 2020, respectively, because they were antidilutive, meaning the exercise price for such options were higher than the average price for the Company for such period.

25


(13)    Share-Based Compensation

The shareholders of the Conversion (October 16, 2019) have been restatedCompany approved the Provident Bancorp, Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”) on November 23, 2020, which is in addition to give the retroactive recognition to the exchange ratio applied in the Conversion (2.0212-to-one).

(13)Share-Based Compensation

Under the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the "Equity Plan"“2016 Equity Plan”), (collectively called the “Equity Incentive Plans”). Under the Equity Incentive Plans 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,Incentive Plans, with the total902,344 and 1,021,239 shares reserved for options equaling 902,344.under the 2016 Equity Plan and 2020 Equity Plan, respectively. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the maximum term of each option is generally ten years. The total number of shares reserved for restricted stock or restricted units is 360,935.360,935 and 408,495 under the 2016 Equity Plan and 2020 Equity Plan, respectively. The value of restricted stock grants is based on the market price of the stock on grant date. Options and other awards vest ratably over three3 to five5 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.

Expected volatility is based on historical volatility because the Company’s common stock price.

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 fair value of options granted in 2020dividend yield assumption is based on the following assumptions:Company’s expectation of dividend payouts.

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.

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


A summary of the status of the Company’s stock option grants for the threenine months ended March 31, 2020,2021 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, 2020

1,644,731

$

10.25

Granted

Forfeited

Exercised

Outstanding at March 31, 2021

1,644,731

$

10.25

7.72

$

6,830,010

Outstanding and expected to vest

at March 31, 2021

1,644,731

$

10.25

7.72

$

6,830,010

Vested and Exercisable

at March 31, 2021

628,689

$

8.81

5.59

$

3,517,525

Unrecognized compensation cost

$

3,311,000

Weighted average remaining

recognition period (years)

4.14

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

For the three months ended March 31, 20202021 and 2019,2020, total expense for the stock options was $272,000 and $111,000, and $97,000, respectively.

Restricted Stock

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

26


The following table presents the activity in restricted stock awards under the Equity Plan for the three months ended March 31, 2020:2021:

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

Unvested Restricted Stock Awards

Weighted Average Grant Date Price

Unvested restricted stock awards at December 31, 2020

387,683

$

11.10

Granted

Forfeited

Vested

(810)

12.35

Unvested restricted stock awards at March 31, 2021

386,873

$

11.10

Unrecognized compensation cost

$

3,844,000

Weighted average remaining recognition period (years)

4.10

For the three months ended March 31, 20202021 and 2019,2020, total expense for the restricted stock awards was $332,000 and $150,000, and $168,000, respectively.


(14)Leases

(14)    Leases

The Company recognized right-of-use assets (“ROU”) totaling $4.4$4.2 million and $3.7$4.3 million at March 31, 2021 and December 31, 2020, respectively, and operating lease liabilities totaling $4.6 million and $3.9$4.5 million at March 31, 20202021 and December 31, 2019, respectively.2020. The lease liabilities recognized by the Company represent two2 leased branch locations and one1 loan production office.

RentLease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease components, such as fair market value adjustments, are expensed as incurred and no included in ROU assets and operating lease liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases has been straight lined foron a straight-line basis over the remaining lease term. For the three months ended March 31, 20202021 and 2019,2020, rent expense for the operating leases totaled $79,000 and $71,000, and $72,000, respectively. Variable lease components are expensed as incurred and are not included in the right-of-use assets and operating lease liabilities.

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

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

March 31,

December 31,

2021

2020

Weighted-average discount rate

3.55%

3.54%

Range of lease expiration dates

2 - 14.5 years

2 - 15 years

Range of lease renewal options

5 - 20 years

5 - 20 years

Weighted-average remaining lease term

27.5 years

27.6 years

The following table presents the undiscounted annual lease payments under the terms of the Company's operating leases at March 31, 2021 and December 31, 2020, including a reconciliation to the present value of operating lease liabilities recognized in the unaudited Consolidated Balance Sheets:

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

March 31,

December 31,

Fiscal Year-End

2021

2020

(In thousands)

(unaudited)

2021

$

193

$

258

2022

261

261

2023

264

264

2024

270

270

2025

280

280

Thereafter

6,325

6,325

Total lease payments

7,593

7,658

Less imputed interest

(3,130)

(3,170)

Total lease liabilities

$

4,463

$

4,488

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

(15)Asset Purchase

27

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



(15)    Revenue Recognition

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

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

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

(16)Revenue Recognition

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

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

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

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

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

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

Management’s discussion and analysis of financial condition and results of operations at March 31, 20202021 and December 31, 20192020 and for the three months ended March 31, 20202021 and 20192020 is intended to assist in understanding our financial condition and results of operations. Operating results for the three-month period ended March 31, 20202021 may not be indicative of results for all of 20202021 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 effects of any pandemic; 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.


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

The foregoing list of important factors is not exclusive. Readers should carefully review the factors described in other documents the Company files from time to time with the Securities and Exchange Commission,including Annual and Quarterly Reports on Forms 10-K and 10-Q, and Current Reports on Form 8-K.

Except as required by applicable law and regulation, the Company does not undertake — and specifically disclaims any obligation — to update any forward-looking statements after the date of this quarterly report.

28


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 provisionvaluation allowance for loan losses charged to earnings.probable incurred credit losses. 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 Management estimates the allowance forbalance required using past 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 historicalloss experience, the size and composition of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan portfolio, adverse situations that, may affect the borrower’s abilityin management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimatesloans that are susceptibleindividually classified as impaired when, based on current information and events, it is probable that the Company will be unable to significant revisioncollect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and are classified as more information becomes available.impaired.

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.

Mortgage warehouse loans are facility lines to non-bank mortgage origination companies for sale into secondary markets, which is typically within 15 days of loan closure. Due to their short-term nature, these loans are assessed at a lower credit risk and do not carry the same allocation as traditional loans.

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the followingall loan segments: residential real estate, commercial real estate, construction and land development, commercial and consumer.segments. 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 isfactors are adjusted forthe following qualitative factors: levels/trends in delinquencies;delinquencies and non-accruals; economic conditions, portfolio trends, in volumeportfolio concentrations, loan grading 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.management’s discretion. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the three months ended March 31, 20202021 or during the year ended December 31, 2019.


2020.

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.

29


Mortgage warehouse: Loans in this segment are primarily facility lines to non-bank mortgage origination companies. The underlying collateral of these loans are residential real estate loans. Loans are originated by the mortgage companies for sale into secondary markets, which is typically within 15 days of the loan closure. The primary source of repayment is the cash flow upon the sale of the loans. The credit risk associated with this type of lending is the risk that the mortgage companies are unable to sell the loans.

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

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 troubledTroubled debt restructurings are initially classifiedindividually evaluated for impairment and included in the separately identified impairment disclosures. TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified 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.

31

Balance Sheet Analysis

Assets. Total assets were $1.27$1.55 billion at March 31, 2020,2021, representing an increase of $144.8$46.1 million, or 12.9%3.1%, from $1.12$1.51 billion at December 31, 2019.2020. The increase resulted primarily from increases in net loanscash and cash equivalents of $170.0$49.1 million, and debt securities available-for-sale of $2.4 million, partially offset by decreasesa decrease in net loans of $6.7 million.

Cash and Cash Equivalents. Cash and cash equivalents increased $49.1 million, or 58.5%, to $132.9 million at March 31, 2021 from $83.8 million at December 31, 2020. The increase in cash and cash equivalents of $25.2 millionis primarily due to an increase in deposits and loan repayments.

Securities. Investments in debt securities available-for-sale investment securities of $2.7 million.

Cash and Cash Equivalents.Cash and cash equivalents decreased $25.2increased $2.4 million, or 42.3%7.5%, to $34.4$34.6 million at March 31, 20202021 from $59.7$32.2 million at December 31, 2019.2020. The decrease in cash and cash equivalentsincrease resulted primarily from the $67.0purchase of a $5.0 million in cash used to purchase the warehouse business line,asset-backed security offset by deposit growth and the increase in borrowings exceeding asset growth.principal paydowns on government mortgage-backed securities.

Loans. At March 31, 2020,2021, net loans were $1.13$1.308 billion, or 89.2%84.3% of total assets, compared to $959.3 million,$1.315 billion, or 85.5%87.3% of total assets, at December 31, 2019. Increases2020. Decreases in mortgage warehouse loans of $21.3 million, or 8.0%, commercial real estate loans of $3.9 million or 0.9%, residential real estate loans of $2.9 million, or 8.8% and consumer loans of $1.4 million, or 25.4% were partially offset by an increase in commercial loans of $179.7$19.4 million, or 39.8%3.4%, and an increase in construction and land development loans of $1.6$4.9 million, or 3.3%, were partially offset by decreases in commercial real estate loans of $2.6 million, or 0.6%, residential real estate loans of $3.1 million, or 6.9%, and consumer loans of $2.2 million, or 17.3%16.8%. Our commercial loan growth was primarily due to increases in SBA PPP loans and renewable energy loans. SBA PPP loans increased $15.7 million, or 37.5%, to $57.5 million at March 31, 2021 from $41.8 million at December 31, 2020 following the purchase and continuedSBA’s approval of a second round of PPP loans. Renewable energy loans increased $4.0 million, or 10.9%, to $41.2 million at March 31, 2021 from $37.2 million at December 31, 2020. The increase in commercial loan growth of the warehouse business line and a continued focus on our specialized enterprise value loans, partiallywas slightly offset by a decrease in renewable energy loan portfolio. On January 17, 2020, the Bank purchased the warehouse business line from People’s United Bank, N.A.our enterprise value portfolio, which we also refer to as search fund lending, merger and acquisition, re-capitalization, and shareholder/partner buyout loans. The warehouse business line increased $54.8decrease of $3.4 million in enterprise value loans, or 82.2%1.2%, to $121.5$282.7 million at March 31, 20202021 from $66.7 million at January 17, 2020. Enterprise value loans increased $22.4 million, or 12.6%, to $200.4 million at March 31, 2020 from $178.0$286.1 million at December 31, 2019. Renewable energy loans decreased $7.6 million, or 11.5%, to $58.5 million at March 31, 2020, from $66.1 million at December 31, 2019 due to early payoffs.was primarily the result of loan paydowns.

30


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

  At  At 
  March 31,  December 31, 
(Dollars in thousands) 2020  2019 
  Amount  Percent  Amount  Percent 
Commercial real estate $415,792   36.20% $418,356   42.89%
Commercial  631,453   54.97%  451,791   46.32%
Residential real estate  42,561 �� 3.70%  45,695   4.69%
Construction and land development  48,317   4.21%  46,763   4.79%
Consumer  10,538   0.92%  12,737   1.31%
   1,148,661   100.00%  975,342   100.00%
Allowance for loan losses  (16,674)      (13,844)    
Deferred loan fees, net  (2,705)      (2,212)    
Net loans $1,129,282      $959,286     

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

At

At

March 31,

December 31,

2021

2020

Amount

Percent

Amount

Percent

Commercial real estate

$

435,034

32.65%

$

438,949

32.82%

Commercial

585,352

43.94%

565,976

42.31%

Residential real estate

29,901

2.24%

32,785

2.46%

Construction and land development

33,778

2.54%

28,927

2.16%

Consumer

4,136

0.31%

5,547

0.41%

Mortgage warehouse

244,066

18.32%

265,379

19.84%

1,332,267

100.00%

1,337,563

100.00%

Allowance for loan losses

(19,032)

(18,518)

Deferred loan fees, net

(5,099)

(4,235)

Net loans

$

1,308,136

$

1,314,810

Deposits. Total deposits increased $43.6$47.8 million, or 5.1%3.9%, to $893.5 million$1.29 billion at March 31, 20202021 from $849.9 million$1.24 billion at December 31, 2019.2020. The primary reason for the increase in deposits was due to an increase of $58.9$33.1 million, or 62.4%9.3%, in timemoney market accounts, an increase of $30.6 million, or 5.5%, in NOW and demand deposits and an increase of $4.7$4.1 million, or 4.0%2.7%, in savings accounts, partially offset by a decrease in money market accounts of $15.9$19.9 million, or 5.9%11.2%, and NOW and demand deposits of $4.1 million, or 1.1%. The increase in time deposits was primarily due to increases in brokered certificates of deposit of $55.8 million, or 114.9%, and an increase of $2.8 million, or 32.8%, from Qwickrate, where we gather certificates of deposit nationwide by posting rates we will pay on these deposits. The increase in savings accounts was primarily due to municipal deposits. Money market deposits and NOW and demand deposits decreasedincreased primarily due to the decrease in some of our high rate relationships within these categories.

32

Borrowings. Borrowings at March 31, 2020 consisted of FHLB advances and FRB borrowingsfunds from the borrower-in-custody programorigination of PPP loans and at December 31, 2019 consisted of FHLB advances. Borrowings increased $100.0 million, or 400.1%, to $125.0deposit balances from new and expanded relationships with digital asset customers, which totaled $53.7 million at March 31, 2020 from $25.02021 compared to $30.9 million at December 31, 2019.2020. The increaseexpansion in our digital asset relationships are the direct result of initiatives by the Bank to expand our services and customer base in the cryptocurrency space. The Bank serves digital asset customers by providing robust fiat banking products for exchanges, brokers and institutional investors without providing custody solutions or storage of the cryptocurrency. These offerings to digital asset customers has enabled us to focus on growing our non-interest bearing demand deposits. Total non-interest bearing deposits to total deposits was primarily due33.5% as of March 31, 2021 compared to funding loan growth.31.0% as of December 31, 2020. With the successful increases in our digital assets, we were able to decrease time deposits by rolling off brokered certificates of deposit as they matured.

Shareholders’ Equity. Total shareholders’ equity increaseddecreased $1.7 million, or 0.7%, to $232.7$234.1 million at March 31, 2020,2021, from $230.9$235.9 million at December 31, 2019.2020. The increasedecrease was primarily due to year-to-datethe repurchase of common stock of $6.2 million, $532,000 from dividends paid and a decrease in other comprehensive income of $185,000, partially offset by net income of $1.2$4.3 million, stock-based compensation expense of $261,000,$604,000, and employee stock optionownership plan shares earned of $250,000.$286,000. Book value per share increased to $11.95$12.61 at March 31, 20202021 from $11.86$12.38 at December 31, 2019.2020.

31


Asset Quality.

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

  At  At 
  March 31,  December 31, 
(Dollars in thousands) 2020  2019 
Non-accrual loans:        
Real estate:        
Commercial $21,199  $1,701 
Residential  732   969 
Construction and land development  165   165 
Commercial  2,754   2,955 
Consumer  84   37 
 Total non-accrual loans  24,934   5,827 
         
Accruing loans past due 90 days or more  -   - 
Other real estate owned  -   - 
 Total non-performing assets $24,934  $5,827 
         
Total loans (1) $1,145,956  $973,130 
Total assets $1,266,555  $1,121,788 
Total non-performing loans to total loans (1)  2.18%  0.60%
Total non-performing assets to total assets  1.97%  0.52%

At

At

March 31,

December 31,

(Dollars in thousands)

2021

2020

Non-accrual loans:

Real estate:

Commercial

$

$

Residential

969

1,156

Construction and land development

Commercial

6,469

4,198

Consumer

17

65

Mortgage warehouse

Total non-accrual loans

7,455

5,419

Accruing loans past due 90 days or more

Other real estate owned

Total non-performing assets

$

7,455

$

5,419

Total loans (1)

$

1,327,168

$

1,333,328

Total assets

$

1,551,892

$

1,505,781

Total non-performing loans to total loans (1)

0.56%

0.41%

Total non-performing assets to total assets

0.48%

0.36%

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

Non-accrual loans as of March 31, 2020 consist2021 consisted primarily of onethree commercial real estaterelationships. Of the three commercial relationships, the largest relationship and one commercial relationship. The commercial real estate loan relationship with a total balance of $18.6totaled $2.4 million became impaired in 2019at March 31, 2021 and in 2020, a troubled debt restructure was completed. The loan was placed on non-accrual status untilduring the relationship can demonstrate the ability to pay the loan under the restructured terms.first quarter of 2021. The loanimpaired relationship was evaluated and specific reserves of $1.4$1.5 million were allocated in 2019 and remain as of March 31, 2020.

2021. The next largest commercial relationship totaling $1.9 million at March 31, 2021 was evaluated and specific reserves of $1.7 million were allocated. The third relationship totaling $1.6 million at March 31, 2021 was originated through the BancAlliance network. BancAlliance has a membership of approximately 200 community banks that together participate in middle market commercial and industrial loans as a way to diversify their commercial portfolio. The impaired loan relationship was evaluated and specific reserves of $131,000$114,000 were allocated as of March 31, 2020.2021.

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

The Company ishas established a modification program in accordance with applicable regulations to provide economic relief. In working with customers affected by COVID-19. As a resultour borrowers, the Company has provided up to six month payment deferrals. At the completion of the current economic crisis caused by the COVID-19 virus,payment deferral, the Company is engaging in more frequent communication with borrowershas allowed for deferral extensions on an as-needed and case-by-case basis. Under agency guidance and Section 4013 of the CARES Act, these modifications will not be classified as troubled debt restructurings and are not considered delinquent. As of March 31, 2021, 35 loans totaling $44.4 million, or 3.3% of total loans, remained modified, compared to better understand their situation and challenges faced. 38 loans totaling $43.1 million, or 3.2% of total loans at December 31, 2020.

32


The extent to which industries, or the tangential impact of those industries to other borrowers or industries are impacted, will likely be in direct proportion to the duration and depth of the COVID-19 pandemic. In determining “at-risk” industries we have used a threshold of 25% when comparing the value of COVID-19 modified loans to total loans within the industry. We hadidentified 6.4% of total commercial real estate loans, 1.9% of total commercial loans and 27.6% of total construction and land development loans as being at-risk at March 31, 2021. Modified loans in industries not considered at risk totaled $12.7 million at March 31, 2021. As of March 31, 2021 total balances within the at-risk industries are as follows:

Commercial Real Estate

Commercial

Construction and Land Development

Total

(Dollars in thousands)

Total Loans

Total Modified

Total Loans

Total Modified

Total Loans

Total Modified

Total Loans

Total Modified

Hotel/motel/inn

$

27,632

$

14,180

$

239

$

120

$

9,330

$

9,330

$

37,201

$

23,630

Non-essential retail - personal services

143

127

5,936

4,820

6,079

4,947

Non-essential retail - transit services

5,003

3,094

5,003

3,094

$

27,775

$

14,307

$

11,178

$

8,034

$

9,330

$

9,330

$

48,283

$

31,671

Congress, the President, and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was enacted on December 27, 2020, providing for a second round of PPP loans. Also on December 27, 2020, the Consolidated Appropriations Act passed on December 27, 2020 provided the option of postponing adoption of the standard until the earlier of the end of the national emergency declaration related to the COVID-19 pandemic or December 31, 2022. The Federal Reserve also took actions to mitigate the economic impact of the COVID-19 pandemic, including cutting the federal funds rate 150 basis points and targeting a 0 to 25 basis point rate. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the Economic Aid Act) amended the PPP by extending the authority of the SBA to guarantee loans and the ability of PPP lenders to disburse PPP loans until March 31, 2021. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extends the PPP application deadline to May 31, 2021, and provides the SBA additional time to process applications through June 30, 2021. During the first round of the PPP, the Company originated $78.0 million in PPP loans. As of March 31, 2021, the following industry types consideredCompany has originated an additional $42.7 million under the second round of the PPP. The Company continues to be “at-risk” of significant impactwork with customers who received PPP loans on applying for loan forgiveness, and as of March 31, 2020:

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

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

The Company has established a modification program2021, of the $120.7 million in accordance with regulations to provide economic relief. In working with our borrowers, the Company has provided up to six month payment deferrals. Under the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for the COVID-19 modifications. Loans that were modified due to COVID-19 will not be classified as troubled debt restructurings. As of May 7, 2020, we have approved loan modifications for approximately 127 commercial real estate loans totaling $142.2 million and 154 commercial business loans totaling $135.9 million.


The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) program called the Paycheck Protection Program (“PPP”). An eligible business can apply for a PPP loan up to a greater of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP if employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.issued, only $57.5 million remained outstanding.

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

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


33


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

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

Three Months Ended

March 31,

(Dollars in thousands)

2021

2020

Allowance at beginning of period

$

18,518

$

13,844

Provision for loan losses

753

3,099

Charge offs:

Real estate:

Commercial

150

Residential

Construction and land development

Commercial

43

97

Consumer

156

229

Total charge-offs

349

326

Recoveries:

Real estate:

Commercial

81

Residential

4

Construction and land development

Commercial

7

Consumer

29

46

Total recoveries

110

57

Net charge-offs

239

269

Allowance at end of period

$

19,032

$

16,674

Non-performing loans at end of period

$

7,455

$

24,934

Total loans outstanding at end of period (1)

1,327,168

1,145,956

Average loans outstanding during the period (1)

1,317,638

1,068,525

Allowance to non-performing loans

255.29%

66.87%

Allowance to total loans outstanding at end of period

1.43%

1.46%

Net charge-offs to average loans outstanding during the period (annualized)

0.07%

0.10%

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

During the three months ended March 31, 2020, total net charge-offs were $269,0002021, the provision for loan losses was $753,000 compared to net charge-offs of $1.3$3.1 million for the same period in 2019. Charge-offs2020. The decrease in the provision is primarily attributable to the impact COVID-19 had on the first quarter 2020 primarily resulted from one BancAlliance relationship and purchased consumer loans. The Bank accepted a short-sale that resulted in a charge-off of $97,000 on a $490,000 loan relationship that was originated through the BancAlliance network. As of March 31, 2020, the Bank has five BancAlliance loan relationships remaining totaling $6.7 million. Out of the five relationships, three totaling $3.3 million are pass rated and two totaling $3.4 million are substandard. One of the substandard relationships totaling $1.9 million is on non-accrual and deemed impaired. We have allocated specific reserves totaling $131,000 for this relationship. Our last BancAlliance loan origination was in February 2017, and at this time we are not anticipating originating any new loans through this network.provision.

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


Results of Operations for the Three Months Ended March 31, 20202021 and 20192020

General. Net income decreased $987,000,increased $3.1 million, or 44.5%249.1%, to $4.3 million for the three months ended March 31, 2021 from $1.2 million for the three months ended March 31, 2020 from $2.22020. The increase was primarily related to an increase of $2.8 million in net interest and dividend income and a decrease in the provision for loan losses of $2.3 million, partially offset by an increase in income tax expense of $1.2 million and an increase in noninterest expense of $907,000.

Interest and Dividend Income. Interest and dividend income increased $1.8 million, or 12.8%, to $15.9 million for the three months ended March 31, 2019. The decrease was primarily related to an increase of $1.6 million in noninterest expense, and an increase in provision for loan losses of $1.6 million, partially offset by an increase in net interest and dividend income of $1.9 million.

Interest and Dividend Income. Interest and dividend income increased $2.0 million, or 16.2%, to2021 from $14.1 million for the three months ended March 31, 2020 from $12.1 million for the three months ended March 31, 2019.2020. This increase was primarily attributable to an increase in interest and fees on loans, which increased $2.1$1.9 million, or 17.6%14.1%, to $15.7 million for the three months ended March 31, 2021 from $13.8 million for the three months ended March 31, 2020, from $11.7 million for the three months ended March 31, 2019, partially offset by a decrease in interest and dividends on securities of $146,000,$89,000, or 36.1%34.5%, to $258,000$169,000 for the three months ended March 31, 20202021 from $404,000$258,000 for the three months ended March 31, 2019.2020.

34


The increase in interest income on loans was due to an increase in the average balance of loans of $203.3$249.1 million, or 23.5%23.3%, to $1.1$1.32 billion for the three months ended March 31, 2020,2021, from $865.2 million$1.07 billion for the three months ended March 31, 2019.2020. The increase in interest income is also attributable to the accretion of fee income related to the forgiveness of SBA PPP loans. The amount of income recognized from the forgiveness totaled $625,000 for the three months ended March 31, 2021. There was no income recognized from the forgiveness of PPP loans for the three months ended March 31, 2020. The increase was partially offset by a decrease in loan yields of 2638 basis points to 5.15% as of4.77% for the three months ended March 31, 2020.2021 due to a decrease in market interest rates, and an increase in mortgage warehouse loan balances, which have a lower rate.

The decrease in interest and dividends on securities was due to a decrease in the average balance of investment securities of $10.1$12.0 million, or 18.6%27.0%, to $32.2 million for the three months ended Mach 31, 2021 from $44.2 million for the three months ended March 31, 20202020. In addition, interest and dividend income on securities decreased due to the yield on securities decreasing 151 basis points due to a decrease in market interest rates.

Interest Expense. Interest expense decreased $1.0 million, or 51.4%, to $981,000 for the three months ended March 31, 2021 from $54.3$2.0 million for the three months ended March 31, 2019. In addition,2020. The decrease was caused by decreases in interest expense on deposits and dividend income decreased due to the yield on securities decreasing 64 basis points.

Interest Expense.borrowings. Interest expense increased $46,000,on borrowings decreased$301,000, or 2.3%81.1%, and was $2.0 millionto $70,000 for each of the three months ended March 31, 2020 and 2019.2021 from $371,000 for the three months March 31, 2021 due to a decrease in the average balance of borrowings of $65.4 million, or 82.9%, to $13.5 million for the three months ended March 31, 2021 from $78.9 million for the three months ended March 31, 2020. The increasedecrease in average balance was causedpartially offset by an increase in interest expense on deposits, partially offset by a decrease in the interest expense on borrowings. cost of borrowings of 19 basis points to 2.07% for the three months ended March 31, 2021 from 1.88% for the three months ended March 31, 2020.

Interest expense on deposits increased $209,000,decreased $735,000, or 14.5%44.7%, to $911,000 for the three months ended March 31, 2021 from $1.6 million for the three months ended March 31, 2020 from $1.4 million2020. This was due primarily to the cost of interest-bearing deposits decreasing 61 basis points to 0.43% for the three months ended March 31, 2019. This2021 from 1.04% for the three months ended March 31, 2020. The decrease in cost was due primarily topartially offset by an increase in the average balance of interest-bearing deposits of $65.5$211.0 million, or 11.5%33.2%, to $846.1 million for the three months ended March 31, 2021 from $635.1 million for the three months ended March 31, 2020 from $569.6 million for the three months ended March 31, 2019.2020. The increase resulted primarily from an increase in the average balance ofcertificates of deposit, which increased $30.0$32.6 million, or 28.8%24.3%, NOW accounts, which increased $29.0 million, or 23.3%, and money market accounts, which increased $24.1$119.2 million, or 10.4%46.6%.

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

Net Interest and Dividend Income. Net interest and dividend income increased by $1.9$2.8 million, or 18.8%23.5%, to $12.1$14.9 million for the three months ended March 31, 20202021 from $10.2$12.1 million for the three months ended MarchMach 31, 2019.2020. The growth in net interest and dividend income this quarter over the prior year’s first quarter was primarily the result of an increase in our average interest earning assets of $208.0$330.2 million, or 22.5%29.2%, offset by an increase in average interest-bearing liabilities of $145.7 million, or 20.4% and a decrease in net interest margin of 19 basis points to 4.08%.

Provision for Loan Losses. The provision for loan losses was $753,000 for the three months ended March 31, 2021 compared to $3.1 million for the three months ended March 31, 2020, compared to $1.5which was a decrease of $2.3 million, for the three months ended March 31, 2019.or 75.7%. The changes in the provision were based on management’s assessment of economic conditions, including the impact of the COVID-19 pandemic, loan portfolio growth and composition changes, historical charge-off trends, levels of problem loans and other asset quality trends. DuringThe decreased provision was further reduced by decreasing loan balances during the three months ended March 31, 2020, we had $269,000 infirst quarter of 2021. These decreases were offset by increases inspecific reserves resulting from loan net charge-offs. The Company has reviewed certain qualitative factors in lightimpairments occurring after the first quarter of significant economic deterioration due to COVID-19. As businesses remain shut down, the Company continues to work with borrowers and offer relief in the form of short-term payment deferrals as well as originating PPP loans through the SBA. There remains significant uncertainty of the full impact of COVID-19 as there is no set timeline as to when our customers can return to operations. In reviewing the modifications performed as of March 31, 2020 and having an understanding as to the demand of modifications that are currently being considered, increased provisions of approximately $800,000 were recognized due to the probability of incurred losses that COVID-19 could have on our commercial customers.2020.


The provision recorded resulted in an allowance for loan losses of $19.0 million, or 1.43% of total loans, at March 31, 2021, compared to $18.5 million, or 1.39% of total loans, at December 31, 2020, and $16.7 million, or 1.46% of total loans, at March 31, 2020, compared to $13.8 million, or 1.42% of total loans, at December 31, 2019, and $11.9 million, or 1.36% of2020. Included in total loans at March 31, 2019.2021 was $57.5 million in PPP loans originated as part of the CARES Act that we believe have no credit risk due to a government guarantee; therefore, we have not provided an allowance for losses for these loans. Excluding PPP loans, the allowance to total loans as of March 31, 2021 was 1.50%. As of March 31, 2021, there was $244.1 million in outstanding mortgage warehouse loans. These loans are assessed at a lower credit risk and do not carry the same allocation as a traditional commercial loan. As of March 31, 2021, $366,000 in reserves were allocated to the mortgage warehouse loans. Non-accrual loans as of March 31, 20202021 consisted primarily of onethree commercial relationship and one commercial real estate relationship.relationships. Impairment was evaluated and specific reserves of $1.9$3.4 million were allocated to impaired loans as of March 31, 2020.2021.

Noninterest Income. Noninterest income decreased $36,000,increased $8,000, or 3.4%0.8%, and was $1.0 million for each of the three months ended March 31, 20202021 and 2019.2020. The decreaseincrease was primarily due to a decreasean increase in the gains on salesother income of securities$51,000, or 268.4%, and an increase in bank owned life insurance income of $113,000,$40,000, or 100.0%22.3%, partially offset by an increasea decrease in other service charges and fees of $48,000,$110,000, or 11.7%,23.9%. Other income increased primarily due to a one-time incentive payment on a service contract. Bank owned life insurance income increased due to the purchase of additional policies in 2020. Other service charges and an increase of $23,000, or 7.0%,fees decreased primarily due to higher average deposit balances, which resulted in customer service fees on deposit accounts.decreased overdraft fees.

35


Noninterest Expense. Noninterest expense increased $1.6$907,000, or 10.9%, to $9.2 million or 23.1%,for the three months ended March 31, 2021 compared to $8.3 million for the three months ended March 31, 2020 compared to $6.7 million for the three months ended March 31, 2019.2020. The increase was primarily due to an increase in salaries and employee benefits expense, write-down of a notes receivable,deposit insurance expenses, data processing fees and other expense,expenses, partially offset by a decrease in occupancy expense.write downs of other assets and receivables. The increase in salary and employee benefits of $1.1 million, or 25.5%19.9%, for the three months ended March 31, 2020 in salary and employee benefits was primarily due to a higher number ofsales and operations positions2021 when compared to the same period in2019, the addition of staff from the warehouse business line purchase, and our ESOP expense. The warehouse business line purchase increased salary and employee benefits by $171,000. ESOP expense increased $114,000 2020 was primarily due to stock based compensation expense and a higher number of sales and operations positions. Deposit insurance expenses increased $75,000, or 241.9%, primarily due to one-time credits that were recognized in the acquisitionfirst quarter of additional shares from our stock offering2020 that resulted in October 2019.Aa lower expense. Data processing fees increased $96,000 or 42.7%, primarily due to new contracts for deposit services. These increases were offset by a decrease in write downs of other assets and receivables of $500,000. In the first quarter of 2020, a write-down of a notes receivable balance was completed after the Company evaluated the collectability and determined that $500,000 iswas uncollectible.Other expense increased $103,000, or 15.2%, due to increased telecommunication expenses and loan workout expenses.Occupancy expense decreased $203,000, or 31.5%, primarily due to the acceleration of our leasehold improvements amortization related to the closure of our Hampton, New Hampshire branch in 2019.

Income Tax Provision. We recorded a provision for income taxes of $1.7 million for the three months ended March 31, 2021, reflecting an effective tax rate of 27.9%, compared to a provision of $446,000 for the three months ended March 31, 2020, reflecting an effective tax rate of 26.6%, compared to a provision of $778,000 for the three months ended March 31, 2019, reflecting an effective tax rate of 26.0%.

36



Average Balance Sheet and Related Yields and Rates

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

  For the Three Months Ended March 31, 
  2020  2019 
     Interest        Interest    
  Average  Earned/  Yield/  Average  Earned/  Yield/ 
  Balance  Paid  Rate  Balance  Paid  Rate 
(Dollars in thousands)                        
Assets:                        
Interest-earning assets:                        
Loans $1,068,525  $13,760   5.15% $865,239  $11,699   5.41%
Short-term investments  19,176   71   1.48%  4,356   26   2.39%
Investment securities  41,031   237   2.31%  50,780   373   2.94%
Federal Home Loan Bank stock  3,161   21   2.66%  3,533   31   3.51%
Total interest-earning assets  1,131,893   14,089   4.98%  923,908   12,129   5.25%
Non-interest earning assets  57,183           63,362         
                         
Total assets $1,189,076          $987,270         
                         
                         
Interest-bearing liabilities:                        
Savings accounts $121,106   105   0.35% $118,032   108   0.37%
Money market accounts  255,883   705   1.10%  231,766   699   1.21%
NOW accounts  124,286   155   0.50%  115,977   116   0.40%
Certificates of deposit  133,819   681   2.04%  103,862   514   1.98%
Total interest-bearing deposits  635,094   1,646   1.04%  569,637   1,437   1.01%
Borrowings  78,869   371   1.88%  80,483   534   2.65%
Total interest-bearing liabilities  713,963   2,017   1.13%  650,120   1,971   1.21%
Noninterest-bearing liabilities:                        
Noninterest-bearing deposits  226,440           189,544         
Other noninterest-bearing liabilities  15,731           16,256         
Total liabilities  956,134           855,920         
Total equity  232,942           131,350         
Total liabilities and equity $1,189,076          $987,270         
                         
Net interest income     $12,072          $10,158     
Interest rate spread (1)          3.85%          4.04%
Net interest-earning assets (2) $417,930          $273,788         
Net interest margin (3)          4.27%          4.40%
                        
Average interest-earning assets to interest-bearing liabilities  158.54%          142.11%        

(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


For the Three Months Ended March 31,

2021

2020

Interest

Interest

Average

Earned/

Yield/

Average

Earned/

Yield/

(Dollars in thousands)

Balance

Paid

Rate (5)

Balance

Paid

Rate (5)

Assets:

Interest-earning assets:

Loans (1)

$

1,317,638

$

15,697

4.77%

$

1,068,525

$

13,760

5.15%

Short-term investments

112,198

23

0.08%

19,176

71

1.48%

Debt securities available-for-sale

31,344

166

2.12%

41,031

237

2.31%

Federal Home Loan Bank stock

895

3

1.34%

3,161

21

2.66%

Total interest-earning assets

1,462,075

15,889

4.35%

1,131,893

14,089

4.98%

Non-interest earning assets

66,157

57,183

Total assets

$

1,528,232

$

1,189,076

Liabilities and shareholders' equity:

Interest-bearing liabilities:

Savings accounts

$

151,375

$

55

0.15%

$

121,106

$

105

0.35%

Money market accounts

375,078

477

0.51%

255,883

705

1.10%

NOW accounts

153,294

98

0.26%

124,286

155

0.50%

Certificates of deposit

166,388

281

0.68%

133,819

681

2.04%

Total interest-bearing deposits

846,135

911

0.43%

635,094

1,646

1.04%

Borrowings

13,500

70

2.07%

78,869

371

1.88%

Total interest-bearing liabilities

859,635

981

0.46%

713,963

2,017

1.13%

Noninterest-bearing liabilities:

Noninterest-bearing deposits

412,350

226,440

Other noninterest-bearing liabilities

17,987

15,731

Total liabilities

1,289,972

956,134

Total equity

238,260

232,942

Total liabilities and

equity

$

1,528,232

$

1,189,076

Net interest income

$

14,908

$

12,072

Interest rate spread (2)

3.89%

3.85%

Net interest-earning assets (3)

$

602,440

$

417,930

Net interest margin (4)

4.08%

4.27%

Average interest-earning assets to

interest-bearing liabilities

170.08%

158.54%

(1)Interest earned/paid on loans includes fee income related to SBA loan forgiveness of $625,000 for the three months ended March 31, 2021. There was no fee income related to SBA loan forgiveness for the three months ended March 31, 2020. Interest earned/paid on loans also includes mortgage warehouse loan origination fee income of $388,000 and $54,000 for the three months ended March 31, 2021 and March 31, 2020, respectively.

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

(3)Net interest-earning assets represent total interest earning assets less total interest-bearing liabilities.

(4)Net interest margin represents net interest income divided by average total interest-earning assets.

(5)Annualized.

37


Rate/Volume Analysis

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

  For the Three Months Ended March 31, 2020 
  Compared to the Three Months Ended March 31, 2019 
  Increase (Decrease) Due to  Total 
  Rate  Volume  Increase (Decrease) 
(In thousands)         
Interest-earning assets:            
Loans $(579) $2,640  $2,061 
Short-term investments  (13)  58   45 
Investment securities  (72)  (64)  (136)
Federal Home Loan Bank stock  (7)  (3)  (10)
             
Total interest-earning assets  (671)  2,631   1,960 
             
Interest-bearing liabilities:            
Savings accounts  (6)  3   (3)
Money market accounts  (63)  69   6 
NOW accounts  30   9   39 
Certificates of deposit  15   152   167 
             
Total interest-bearing deposits  (24)  233   209 
             
Borrowings  (152)  (11)  (163)
             
Total interest-bearing liabilities  (176)  222   46 
             
Change in net interest income $(495) $2,409  $1,914 

For the Three Months Ended March 31, 2021

Compared to the Three Months Ended March 31, 2020

Increase (Decrease) Due to

Total

Rate

Volume

Increase
(Decrease)

(In thousands)

Interest-earning assets:

Loans

$

(1,089)

$

3,026

$

1,937

Short-term investments

(120)

72

(48)

Investment securities

(19)

(52)

(71)

Federal Home Loan Bank stock

(7)

(11)

(18)

Total interest-earning assets

(1,235)

3,035

1,800

Interest-bearing liabilities:

Savings accounts

(72)

22

(50)

Money market accounts

(475)

247

(228)

NOW accounts

(87)

30

(57)

Certificates of deposit

(536)

136

(400)

Total interest-bearing deposits

(1,170)

435

(735)

Borrowings

34

(335)

(301)

Total interest-bearing liabilities

(1,136)

100

(1,036)

Change in net interest income

$

(99)

$

2,935

$

2,836

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 Bank, calculated on a bank-only basis, that would result from changes in market interest rates over twelve-month periods beginningMarch 31, 20202021.

At

March 31,

 At March 31, 

2021

(Dollars in thousands) 2020 

Estimated
Net Interest Income
Over Next 12 Months

Change

Changes in
Interest Rates
(Basis Points)
 Estimated
Net Interest Income
Over Next 12 Months
 Change 

200 $50,536   (0.80%)

$

55,191

2.60%

0  50,963   - 

53,813

-100  50,935   (0.10%)

53,789

38


Economic Value of Equity Simulation.We also analyze the sensitivity of our financial condition 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 Bank, calculated on a bank-only basis, that would result from changes in market interest rates as ofMarch 31, 20202021.

  At March 31, 
(Dollars in thousands) 2020 
Changes in Economic    
Interest Rates Value of    
(Basis Points) Equity  Change 
400 $160,467   2.80%
300  160,603   2.80%
200  160,147   2.50%
100  159,847   2.40%
0  156,169   - 
-100  130,839   (16.20%)

At

March 31,

2021

(Dollars in thousands)

Economic
Value of
Equity

Change

Changes in Interest Rates (Basis Points)

400

$

304,722

9.90%

300

299,256

7.90%

200

292,720

5.60%

100

286,803

3.40%

0

277,246

-100

244,158

(11.90)%

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 March 31, 2020,2021, cash and cash equivalents totaled $34.4$132.9 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $39.1$34.6 million at March 31, 2020.2021.

At March 31, 2020,2021, we had the ability to borrow a total of $197.4$157.0 million from the Federal Home Loan Bank of Boston. On that date, we had $25.0$13.5 million in advances outstanding. At March 31, 2020,2021, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $243.2$227.8 million, none of which $100.0 million was outstanding as of that date.

We have no material commitments or demands that are likely to affect our liquidity other than as 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.

39


We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. At March 31, 20202021 and December 31, 2019,2020, we had $38.4$40.3 million and $29.4$31.9 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at March 31, 20202021 and December 31, 2019,2020, we had $276.5$233.5 million and $201.9$202.0 million in unadvanced funds to borrowers, respectively. We also had $1.2$1.6 million and $1.5$1.7 million in outstanding letters of credit at March 31, 20202021 and December 31, 2019,2020, respectively.

Certificates of deposit due within one year of March 31, 2020 totaled $121.3 million, or 13.6% of total deposits. If theseA significant decrease in deposits do not remain with us, we will be requiredcould result in the Company having to seek other sources of funds, including otherbrokered certificates of deposit, QwickRate deposits, 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.pay. We believe, however, based on past experience that a significant portion of our certificates of depositdeposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of securities. During the three months endedIncluded in our deposit balance at March 31, 2020, we originated $133.72021 is $53.7 million in deposits associated with digital asset deposit customers. These deposit balances are used to fund the daily business operations of loans, allthe customers. Due to the nature of which were intendedthese deposits the Bank has determined that these deposits are non-volatile and therefore do not present liquidity issues or need to be held in our portfolio, and purchased United Bank’s legacy ResX Warehouse Lending portfolioexcluded from People’s United Bank, N.A totaling $66.7 million. We did not purchase or sell any securities.During the three months endedMarch 31, 2019, we originated $56.0 million of loans, all of which were intended to be held in our portfolio, and did not purchase any loans.We purchased $13.7 million and sold $13.5 million in securities.liquid capital.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a net increase in total deposits of $43.6 million and $7.2 million for the three months ended March 31, 2020 and 2019, 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. Borrowings increased $100.0 million and $11.9 million during the three months ended March 31, 2020 and 2019, respectively.

The Bank is subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks and the FDIC. At March 31, 2020, the 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.

In October 2019, the Company successfully completed its second-step mutual-to-stock conversion that raised approximately $92 million in net capital. The Company down streamed 50% of the capital raised to the Bank. Based on the additional capital, the Company feels that it has sufficient capital to withstand an extended economic recession brought by the COVID-19. However, regulatory capital could be adversely impacted by further credit losses. With only 50% being down streamed to the Bank, the Company has adequate cash to cover dividend payments in the near term. The Company is prohibited from repurchasing its stock for a period of one year subsequent to the second-step conversion. The Company will not apply for early permission to buy back its stock and will re-evaluate after the one-year period.

The Company maintains access to multiple sources of liquidity. We have utilized wholesale funding markets and have remained open but with rates that have been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’sCompany's net interest margin. If an extended recession causes large numbers of the Company’scompany's deposit customers to withdraw their funds, the Companycompany might become moremor reliant on volatile or more expensive sources of funding.


The Bank is subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. At March 31, 2021, the 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 Operations”.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2020.2021. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2020,2021, 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

Not applicable.

Item 1A. Risk Factors

Not applicable to a smaller reporting company.

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

(a)Not applicable.

(b)Not applicable.

(c)None.

(a)Not applicable.

(b)Not applicable.

40


(c)On October 19, 2020, the Company announced a stock repurchase program under which it would repurchase up to 1,000,000 shares of its common stock, or approximately 5.2% of the then-outstanding shares. The repurchase program was completed in February 2021. On March 12, 2021, the Company announced that its Board of Directors had adopted a stock repurchase program under which it would repurchase up to 1,400,000 shares of its common stock, or approximately 7.5% of the current outstanding shares. The repurchase program has no expiration date.The Company’s repurchases of common stock for the first quarter of 2021, under both repurchase programs were as follows:

Period

Total
Number of
Shares
Purchased

Average Price
Paid
per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or
Programs

January 1, 2021 - January 31, 2021

89,353

$

11.72

89,151

186,108

February 1, 2021 - February 28, 2021

186,108

$

12.29

186,108

March 1, 2021 - March 31, 2021

197,956

$

14.25

197,956

1,202,044

Total

473,417

$

13.00

473,215

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.



41


Item 6. Exhibits

3.1

Articles of Incorporation of Provident Bancorp, Inc. (1)

3.2

3.2

Bylaws of Provident Bancorp, Inc. (1)

3.3

Amendment to Bylaws (2)

31.1

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

31.2

31.2

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

32

32

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

101

101

The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2020,2021, formatted in Inline Extensible Business Reporting Language (XBRL)(iXBRL): (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.

104

Cover Page Interactive Data File (formatted as iXBRL and contained in exhibit 101).

________________

(1)Incorporated by reference to the Company’s Registration Statement on Form S-1 (file no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019.

(2)Incorporated by reference to the Company’s Current Report on Form 8-K (file no. 001-39090), filed with the Securities and Exchange Commission on March 29, 2021.


42


(1)Incorporated by reference to the Company’s Registration Statement on Form S-1 (file no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019.


SIGNATURES

SIGNATURES

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

PROVIDENT BANCORP, INC.

Date:   May 11, 202013, 2021

/s/ David P. Mansfield

David P. Mansfield

President and Chief Executive Officer

Date:   May 11, 202013, 2021

/s/ Carol L. Houle

Carol L. Houle

Executive Vice President and Chief Financial Officer


43