UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
March 31, 2018
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to ______________________
Commission File No. 001-37504
Provident Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts | 45-3231576 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) | |
5 Market Street, Amesbury, Massachusetts | 01913 | |
(Address of Principal Executive Offices) | Zip Code |
(978) 834-8555
(Registrant’s telephone number)
(978) 834-8555 | |
(Registrant’s telephone number) | |
N/A | |
(Former name, former address, and former fiscal year if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
YESx NO¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESx NO¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | ||||
Non-accelerated filer (Do not check if a smaller reporting company) | |||||
Smaller reporting company | |||||
Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo¨ NOx
As of November 8, 2017,May 03, 2018, there were 9,627,9889,628,496 shares of the Registrant’s common stock, no par value per share, outstanding.
Form 10-Q
Part I. | Financial Information |
Item 1. | Financial Statements |
CONSOLIDATED BALANCE SHEETS
At | At | |||||||
September 30, | December 31, | |||||||
(Dollars in thousands) | 2017 | 2016 | ||||||
(unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 8,720 | $ | 7,939 | ||||
Interest-bearing demand deposits with other banks | 8,827 | 2,637 | ||||||
Money market mutual funds | 30 | 129 | ||||||
Cash and cash equivalents | 17,577 | 10,705 | ||||||
Investments in available-for-sale securities (at fair value) | 109,684 | 117,867 | ||||||
Federal Home Loan Bank stock, at cost | 3,737 | 2,787 | ||||||
Loans, net | 748,537 | 624,425 | ||||||
Bank owned life insurance | 25,362 | 19,395 | ||||||
Premises and equipment, net | 11,156 | 11,587 | ||||||
Assets held-for-sale | 3,213 | - | ||||||
Accrued interest receivable | 2,635 | 2,320 | ||||||
Deferred tax asset, net | 4,808 | 4,913 | ||||||
Other assets | 1,870 | 1,544 | ||||||
Total assets | $ | 928,579 | $ | 795,543 | ||||
Liabilities and Equity | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 170,089 | $ | 158,075 | ||||
Interest-bearing | 555,184 | 469,907 | ||||||
Total deposits | 725,273 | 627,982 | ||||||
Federal Home Loan Bank advances | 78,365 | 49,858 | ||||||
Other liabilities | 8,887 | 8,554 | ||||||
Total liabilities | 812,525 | 686,394 | ||||||
Shareholders' equity: | ||||||||
Preferred stock; authorized 50,000 shares: no shares issued and outstanding | - | - | ||||||
Common stock, no par value: 30,000,000 shares authorized; 9,652,448 shares issued, 9,627,988 shares outstanding at September 30, 2017 and 9,652,448 issued and outstanding at December 31, 2016 | - | - | ||||||
Additional paid-in capital | 44,274 | 43,393 | ||||||
Retained earnings | 72,403 | 66,229 | ||||||
Accumulated other comprehensive income | 2,786 | 2,622 | ||||||
Unearned compensation - ESOP | (2,917 | ) | (3,095 | ) | ||||
Treasury stock: 24,460 shares at September 30, 2017 | (492 | ) | - | |||||
Total shareholders' equity | 116,054 | 109,149 | ||||||
Total liabilities and shareholders' equity | $ | 928,579 | $ | 795,543 |
At | At | |||||||
March 31, | December 31, | |||||||
(Dollars in thousands) | 2018 | 2017 | ||||||
(unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 8,809 | $ | 10,326 | ||||
Interest-bearing demand deposits with other banks | 13,511 | 37,363 | ||||||
Cash and cash equivalents | 22,320 | 47,689 | ||||||
Investments in available-for-sale securities (at fair value) | 57,790 | 61,429 | ||||||
Federal Home Loan Bank stock, at cost | 2,166 | 1,854 | ||||||
Loans, net | 759,882 | 742,138 | ||||||
Assets held-for-sale | - | 3,286 | ||||||
Bank owned life insurance | 25,711 | 25,540 | ||||||
Premises and equipment, net | 14,287 | 10,981 | ||||||
Accrued interest receivable | 2,270 | 2,345 | ||||||
Deferred tax asset, net | 5,274 | 4,920 | ||||||
Other assets | 1,472 | 2,083 | ||||||
Total assets | $ | 891,172 | $ | 902,265 | ||||
Liabilities and Equity | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 181,368 | $ | 186,222 | ||||
Interest-bearing | 538,337 | 563,835 | ||||||
Total deposits | 719,705 | 750,057 | ||||||
Federal Home Loan Bank advances | 45,211 | 26,841 | ||||||
Other liabilities | 8,926 | 9,590 | ||||||
Total liabilities | 773,842 | 786,488 | ||||||
Shareholders' equity: | ||||||||
Preferred stock; authorized 50,000 shares: no shares issued and outstanding | - | - | ||||||
Common stock, no par value: 30,000,000 shares authorized; 9,657,319 shares issued, 9,628,496 shares outstanding at March 31, 2018 and December 31, 2017 | - | - | ||||||
Additional paid-in capital | 44,923 | 44,592 | ||||||
Retained earnings | 76,069 | 74,047 | ||||||
Accumulated other comprehensive (loss) income | (270 | ) | 589 | |||||
Unearned compensation - ESOP | (2,798 | ) | (2,857 | ) | ||||
Treasury stock: 28,823 shares at March 31 ,2018 and December 31, 2017 | (594 | ) | (594 | ) | ||||
Total shareholders' equity | 117,330 | 115,777 | ||||||
Total liabilities and shareholders' equity | $ | 891,172 | $ | 902,265 |
The accompanying notes are an integral part of the consolidated financial statements.
2 |
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||
Interest and dividend income: | ||||||||||||||||||||||||
Interest and fees on loans | $ | 8,403 | $ | 6,611 | $ | 23,547 | $ | 18,861 | $ | 9,276 | $ | 7,233 | ||||||||||||
Interest and dividends on securities | 822 | 807 | 2,597 | 2,549 | 435 | 873 | ||||||||||||||||||
Interest on interest-bearing deposits | 14 | 8 | 23 | 22 | 42 | 6 | ||||||||||||||||||
Total interest and dividend income | 9,239 | 7,426 | 26,167 | 21,432 | 9,753 | 8,112 | ||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Interest on deposits | 783 | 539 | 2,031 | 1,623 | 920 | 570 | ||||||||||||||||||
Interest on Federal Home Loan Bank advances | 222 | 174 | 633 | 468 | 114 | 211 | ||||||||||||||||||
Total interest expense | 1,005 | 713 | 2,664 | 2,091 | 1,034 | 781 | ||||||||||||||||||
Net interest and dividend income | 8,234 | 6,713 | 23,503 | 19,341 | 8,719 | 7,331 | ||||||||||||||||||
Provision for loan losses | 1,012 | 163 | 2,467 | 484 | 656 | 563 | ||||||||||||||||||
Net interest and dividend income after provision for loan losses | 7,222 | 6,550 | 21,036 | 18,857 | 8,063 | 6,768 | ||||||||||||||||||
Noninterest income: | ||||||||||||||||||||||||
Customer service fees on deposit accounts | 380 | 339 | 1,064 | 936 | 364 | 338 | ||||||||||||||||||
Service charges and fees - other | 488 | 427 | 1,471 | 1,293 | 453 | 502 | ||||||||||||||||||
Gain on sale of securities, net | 1,851 | 438 | 2,391 | 475 | - | 482 | ||||||||||||||||||
Bank owned life insurance income | 167 | 147 | 467 | 460 | 171 | 150 | ||||||||||||||||||
Other income | 11 | 12 | 75 | 101 | 25 | 30 | ||||||||||||||||||
Total noninterest income | 2,897 | 1,363 | 5,468 | 3,265 | 1,013 | 1,502 | ||||||||||||||||||
Noninterest expense: | ||||||||||||||||||||||||
Salaries and employee benefits | 3,943 | 3,219 | 11,346 | 9,500 | 4,158 | 3,676 | ||||||||||||||||||
Occupancy expense | 411 | 412 | 1,332 | 1,194 | 450 | 471 | ||||||||||||||||||
Equipment expense | 149 | 162 | 456 | 471 | 122 | 150 | ||||||||||||||||||
FDIC assessment | 75 | 103 | 216 | 293 | 82 | 68 | ||||||||||||||||||
Data processing | 177 | 163 | 543 | 491 | 204 | 190 | ||||||||||||||||||
Marketing expense | 81 | 70 | 231 | 178 | 53 | 50 | ||||||||||||||||||
Professional fees | 227 | 299 | 656 | 876 | 248 | 214 | ||||||||||||||||||
Directors' compensation | 133 | 81 | 433 | 226 | 163 | 145 | ||||||||||||||||||
Other | 718 | 703 | 2,197 | 1,987 | 896 | 657 | ||||||||||||||||||
Total noninterest expense | 5,914 | 5,212 | 17,410 | 15,216 | 6,376 | 5,621 | ||||||||||||||||||
Income before income tax expense | 4,205 | 2,701 | 9,094 | 6,906 | 2,700 | 2,649 | ||||||||||||||||||
Income tax expense | 1,434 | 940 | 2,920 | 2,295 | 678 | 847 | ||||||||||||||||||
Net income | $ | 2,771 | $ | 1,761 | $ | 6,174 | $ | 4,611 | $ | 2,022 | $ | 1,802 | ||||||||||||
Income per share: | ||||||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||
Basic | $ | 0.30 | $ | 0.19 | $ | 0.67 | $ | 0.50 | $ | 0.22 | $ | 0.20 | ||||||||||||
Diluted | $ | 0.30 | $ | 0.19 | $ | 0.67 | $ | 0.50 | $ | 0.22 | $ | 0.20 | ||||||||||||
Weighted Average Shares: | ||||||||||||||||||||||||
Basic | 9,201,634 | 9,179,269 | 9,196,046 | 9,173,331 | 9,219,865 | 9,192,568 | ||||||||||||||||||
Diluted | 9,213,056 | 9,179,269 | 9,196,046 | 9,173,331 | 9,295,003 | 9,192,568 |
The accompanying notes are an integral part of the consolidated financial statements.
3 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||||
Net income | $ | 2,771 | $ | 1,761 | $ | 6,174 | $ | 4,611 | $ | 2,022 | $ | 1,802 | ||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Change in net unrealized holding gains (losses) | 315 | (296 | ) | 2,660 | 1,575 | |||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Unrealized holding (losses) gains | (1,213 | ) | 740 | |||||||||||||||||||||
Reclassification adjustment for realized gains in net income | (1,851 | ) | (438 | ) | (2,391 | ) | (475 | ) | - | (482 | ) | |||||||||||||
Net change in unrealized (loss) gain | (1,536 | ) | (734 | ) | 269 | 1,100 | ||||||||||||||||||
Unrealized (loss) gain | (1,213 | ) | 258 | |||||||||||||||||||||
Income tax effect | 569 | 290 | (105 | ) | (376 | ) | 354 | (97 | ) | |||||||||||||||
Net of tax amount | (967 | ) | (444 | ) | 164 | 724 | (859 | ) | 161 | |||||||||||||||
Change in net unrealized holding gains on securities transferred from held-to-maturity to available-for-sale | - | - | - | 2,239 | ||||||||||||||||||||
Income tax effect | - | - | - | (894 | ) | |||||||||||||||||||
Net of tax amount | - | - | - | 1,345 | ||||||||||||||||||||
Other comprehensive (loss) income | (967 | ) | (444 | ) | 164 | 2,069 | ||||||||||||||||||
Total comprehensive income | $ | 1,804 | $ | 1,317 | $ | 6,338 | $ | 6,680 | $ | 1,163 | $ | 1,963 |
The accompanying notes are an integral part of the consolidated financial statements.
4 |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares of | Additional | Other | Unearned | Shares of | Additional | Other | Unearned | |||||||||||||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Compensation | Treasury | Common | Paid-in | Retained | Comprehensive | Compensation | Treasury | |||||||||||||||||||||||||||||||||||||||||||||
(In thousands, except share data) | Stock | Capital | Earnings | Income | ESOP | Stock | Total | Stock | Capital | Earnings | (Loss) Income | ESOP | Stock | Total | ||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2017 | 9,628,496 | $ | 44,592 | $ | 74,047 | $ | 589 | $ | (2,857 | ) | $ | (594 | ) | $ | 115,777 | |||||||||||||||||||||||||||||||||||||||||
Net income | - | - | 2,022 | - | - | - | 2,022 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | (859 | ) | - | - | (859 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | - | 240 | - | - | - | - | 240 | |||||||||||||||||||||||||||||||||||||||||||||||||
ESOP shares earned | - | 91 | - | - | 59 | - | 150 | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2018 | 9,628,496 | $ | 44,923 | $ | 76,069 | $ | (270 | ) | $ | (2,798 | ) | $ | (594 | ) | $ | 117,330 | ||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2016 | 9,652,448 | $ | 43,393 | $ | 66,229 | $ | 2,622 | $ | (3,095 | ) | $ | - | $ | 109,149 | 9,652,448 | $ | 43,393 | $ | 66,229 | $ | 2,622 | $ | (3,095 | ) | $ | - | $ | 109,149 | ||||||||||||||||||||||||||||
Net income | - | - | 6,174 | - | - | - | 6,174 | - | - | 1,802 | - | - | - | 1,802 | ||||||||||||||||||||||||||||||||||||||||||
Net change in other comprehensive income | - | - | - | 164 | - | - | 164 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | 161 | - | - | 161 | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | - | 691 | - | - | - | - | 691 | - | 231 | - | - | - | - | 231 | ||||||||||||||||||||||||||||||||||||||||||
Treasury stock acquired | (24,460 | ) | - | - | - | - | (492 | ) | (492 | ) | (11,460 | ) | - | - | - | - | (222 | ) | (222 | ) | ||||||||||||||||||||||||||||||||||||
ESOP shares earned | - | 190 | - | - | 178 | - | 368 | - | 55 | - | - | 59 | - | 114 | ||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2017 | 9,627,988 | $ | 44,274 | $ | 72,403 | $ | 2,786 | $ | (2,917 | ) | $ | (492 | ) | $ | 116,054 | |||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2015 | 9,498,722 | $ | 43,159 | $ | 59,890 | $ | 1,690 | $ | (3,333 | ) | $ | - | $ | 101,406 | ||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | 4,611 | - | - | - | 4,611 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net change in other comprehensive income | - | - | - | 2,069 | - | - | 2,069 | |||||||||||||||||||||||||||||||||||||||||||||||||
ESOP shares earned | - | 78 | - | - | 179 | - | 257 | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2016 | 9,498,722 | $ | 43,237 | $ | 64,501 | $ | 3,759 | $ | (3,154 | ) | $ | - | $ | 108,343 | ||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2017 | 9,640,988 | $ | 43,679 | $ | 68,031 | $ | 2,783 | $ | (3,036 | ) | $ | (222 | ) | $ | 111,235 |
The accompanying notes are an integral part of the consolidated financial statements.
5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | March 30, | |||||||||||||||
(In thousands) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 6,174 | $ | 4,611 | $ | 2,022 | $ | 1,802 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Amortization of securities premiums, net of accretion | 618 | 627 | 67 | 192 | ||||||||||||
ESOP expense | 368 | 257 | 150 | 114 | ||||||||||||
Gain on sale of securities, net | (2,391 | ) | (475 | ) | - | (482 | ) | |||||||||
Change in deferred loan fees, net | 382 | (76 | ) | (27 | ) | 71 | ||||||||||
Provision for loan losses | 2,467 | 484 | 656 | 563 | ||||||||||||
Depreciation and amortization | 626 | 628 | 185 | 208 | ||||||||||||
Loss on disposals of premise and equipment | 2 | - | ||||||||||||||
(Increase) decrease in accrued interest receivable | (315 | ) | 233 | |||||||||||||
Increase in taxes receivable | (299 | ) | (67 | ) | ||||||||||||
Decrease (increase) in accrued interest receivable | 75 | (13 | ) | |||||||||||||
Share-based compensation expense | 691 | - | 240 | 231 | ||||||||||||
Increase in cash surrender value of life insurance | (467 | ) | (459 | ) | (171 | ) | (150 | ) | ||||||||
(Increase) decrease in other assets | (27 | ) | 67 | |||||||||||||
Increase in other liabilities | 333 | 737 | ||||||||||||||
Decrease (increase) in other assets | 611 | (295 | ) | |||||||||||||
Decrease in other liabilities | (664 | ) | (315 | ) | ||||||||||||
Net cash provided by operating activities | 8,162 | 6,567 | 3,144 | 1,926 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of available-for-sale securities | (13,120 | ) | (1,386 | ) | - | (11,318 | ) | |||||||||
Proceeds from sales of available-for-sale securities | 11,915 | 2,912 | - | 1,555 | ||||||||||||
Proceeds from pay downs, maturities and calls of available-for-sale securities | 11,430 | 11,586 | 2,359 | 4,346 | ||||||||||||
Proceeds from pay downs, maturities and calls of held-to-maturity securities | - | 220 | ||||||||||||||
(Purchase) redemption of Federal Home Loan Bank stock | (950 | ) | 843 | |||||||||||||
Purchase of Federal Home Loan Bank stock | (312 | ) | (1,107 | ) | ||||||||||||
Loan originations and purchases, net of paydowns | (127,011 | ) | (34,869 | ) | (18,373 | ) | (27,083 | ) | ||||||||
Recoveries of loans previously charged off | 50 | 26 | ||||||||||||||
Purchase of bank owned life insurance | (5,500 | ) | - | |||||||||||||
Additions to premises and equipment | (3,410 | ) | (704 | ) | (58 | ) | (3,082 | ) | ||||||||
Additions to assets held-for-sale | (147 | ) | - | |||||||||||||
Net cash used in investing activities | (126,596 | ) | (21,372 | ) | (16,531 | ) | (36,689 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
6 |
PROVIDENT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | March 30, | |||||||||||||||
(In thousands) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Net increase in demand deposits, NOW and savings accounts | 55,621 | 60,202 | ||||||||||||||
Net increase (decrease) in time deposits | 41,670 | (27,106 | ) | |||||||||||||
Proceeds from advances from Federal Home Loan Bank | 7,000 | 11,500 | ||||||||||||||
Net (decrease) increase in demand deposits, NOW and savings accounts | (22,826 | ) | 6,911 | |||||||||||||
Net (decrease) increase in time deposits | (7,526 | ) | 45,704 | |||||||||||||
Proceeeds from advances from Federal Home Loan Bank | - | 7,000 | ||||||||||||||
Net change in Federal Home Loan Bank short-term advances | 21,507 | (27,465 | ) | 18,370 | (23,988 | ) | ||||||||||
Purchase of treasury stock | (492 | ) | - | - | (222 | ) | ||||||||||
Net cash provided by financing activities | 125,306 | 17,131 | ||||||||||||||
Net cash (used in) provided by financing activities | (11,982 | ) | 35,405 | |||||||||||||
Net increase in cash and cash equivalents | 6,872 | 2,326 | ||||||||||||||
Net (decrease) increase in cash and cash equivalents | (25,369 | ) | 642 | |||||||||||||
Cash and cash equivalents at beginning of period | 10,705 | 20,464 | 47,689 | 10,705 | ||||||||||||
Cash and cash equivalents at end of period | $ | 17,577 | $ | 22,790 | $ | 22,320 | $ | 11,347 | ||||||||
Supplemental disclosures: | ||||||||||||||||
Interest paid | $ | 2,653 | $ | 2,095 | $ | 1,098 | $ | 788 | ||||||||
Income taxes paid | 3,219 | 2,362 | 642 | 100 | ||||||||||||
Fixed assets transferred to assets held-for-sale | 3,213 | - | ||||||||||||||
Held-to-maturity securities transferred to available-for-sale | - | 44,240 | ||||||||||||||
Assets held-for-sale transferred to premises and equipment | 3,433 | - |
The accompanying notes are an integral part of the consolidated financial statements.
7 |
Notes to Consolidated Financial Statements
(Unaudited)
(1) | Basis of Presentation |
The accompanying unaudited financial statements of Provident Bancorp, Inc., a Massachusetts corporation (the “Company”), were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of the financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three- and nine-month periodsthree-month period ended September 30, 2017March 31, 2018 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year.Certain amounts in 20162017 have been reclassified to be consistent with the 20172018 consolidated financial statement presentation, and had no effect on the net income reported in the consolidated statement of income.These financial statements should be read in conjunction with the annual financial statements and notes thereto included in the annual report on Form 10-K the Company filed with the Securities and Exchange Commission on March 16, 2017.15, 2018.
The consolidated financial statements include the accounts of Provident Bancorp, Inc., its wholly owned subsidiary, The Provident Bank (the “Bank”), and the Bank’s wholly owned subsidiaries, Provident Security Corporation and 5 Market Street Security Corporation. Provident Security Corporation and 5 Market Street Security Corporation were established to buy, sell, and hold investments for their own account. All significant inter-company balances and transactions have been eliminated in consolidation.
(2) | Corporate Structure |
On July 15, 2015, the Company issued 4,274,425 shares of common stock to the public at $10.00 per share, including 357,152 shares purchased by The Provident Bank Employee Stock Ownership Plan. In addition, the Company issued 5,034,323 shares to Provident Bancorp, the Company’s mutual holding company (the “MHC”), and 189,974 shares to The Provident Community Charitable Organization, Inc., a charitable foundation that was formed in connection with the stock offering and is dedicated to supporting charitable organizations operating in the Bank’s local community.
Expenses incurred related to the offering were $1.5 million, and were recorded against offering proceeds.
Upon the completion of the stock offering, a special “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to the percentage ownership interest in the equity of the Company to be held by persons other than the MHC as of the date of the latest balance sheet contained in the prospectus utilized in connection with the offering. The Company is not permitted to pay dividends on its capital stock if the Company’s shareholders’ equity would be reduced below the amount of the liquidation account. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account.
8 |
(3) | Recent Accounting Pronouncements |
In May 2014, the Financial Accounting Standards Board (FASB) issuedAccounting Standards Update (ASU) No. 2014-09 – Revenue from Contracts with Customers (Topic 606).TheThis ASU establishes a single comprehensive model forsupersedes the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue when it transfersfor the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled and will supersede nearly all existingin exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. In March 2016, the FASB also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09, which reframed the structure of the indicators of when an entity is acting as an agent and focused on evidence that an entity is acting as the principal or agent in a revenue transaction. ASU 2016-08 also eliminated two of the indicators (the entity’s consideration is in the form of a commission, and the entity is not exposed to clarify and converge revenue recognition principles under US GAAP and International Financial Reporting Standards (IFRS). The most significant potential impactcredit risk) in making that determination. This amendment also clarifies that each indicator may be more or less relevant to banking entities relates to less prescriptive derecognition requirementsthe assessment depending on the saleterms and conditions of other real estate owned (OREO) property.the contract. In August 2015,May 2016, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral2016-12, an amendment to ASU 2014-09, which provided practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on transition, collectability, non-cash consideration and presentation of sales and other similar taxes. The amendments, collectively, should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the Effective Date. The amendments in ASU 2015-14 defer the effective date of adoption (modified retrospective approach).
This ASU 2014-09 for all entities by one year. Accordingly, the amendments arewas effective for annualthe Company on January 1, 2018. Because the ASU does not apply to revenue associated with leases and interim periods beginning after December 15, 2017. Early adoption was permitted for annualfinancial instruments (including loans and interim reporting periods beginning after December 15, 2016. An entity may elect either a full retrospective or a modified retrospective application.securities), the Company concluded that the new guidance did not impact the elements of its consolidated statements of income most closely associated with leases and financial instruments (such as interest income, interest expense and securities gains). The Company completed its identification of all revenue streams included in its financial statements and has identified its deposit- related fees, service charges, debit and prepaid card interchange income and other fee income to be within the scope of the standard. The Company has also completed its review of the related contracts. The Company's overall assessment indicates that adoption of this ASU did not elect to early adopt this ASU. The Company does not expectmaterially change its current method and timing of recognizing revenue for the applicationidentified revenue streams and therefore, the adoption of this guidance willASU on January 1, 2018, did not have a materialsignificant impact onto the Company's financial condition, results of operations and consolidated financial statements.
In January 2016, the FASB issuedASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.”The ASU has been issued to improve the recognition and measurement of financial instruments by requiring 1) equity investments (except those accounted for under the equity method of accounting, those without readily determinable fair values, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 3) the use of the exit price notion when measuring fair value of financial instruments for disclosure purposes; and 4) separate presentation by the reporting organization in other comprehensive income for the portion of the total change in the fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The standard iswas effective for the Company beginning on January 1, 2018. The Company holds a portfolio of marketable equity securities; depending on the size and composition of the portfolio at the adoption date,evaluated the impact of this pronouncement and divested its entire marketable equity securities portfolio in 2017. The Company’s investment in Federal Home Loan Bank Stock is not included in the ASU could bescope of this pronouncement. Upon adoption, the fair value of the Company's loan portfolio is now presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial assets and liabilities that are not measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update did not have a material toimpact on the Company’sCompany's consolidated financial statements.
9 |
In February 2016, the FASB issuedASU 2016-02, Leases (Topic 842).The amendments in this update require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. The guidance will be effective for the Company on January 1, 2019, with early adoption permitted. Adoption will require a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.
In March 2016, the FASB issuedASU 2016-09, Compensation Stock – Compensation (Topic 718): “Improvements to Employee Share Based Payment Accounting.”This ASU changes how companies account for certain aspects of share based payments to employees. Specifically, some of the requirements under the amendments include: (1) excess tax benefits and/or tax deficiencies, determined as the difference between compensation cost recognized for financial reporting purposes and the deduction for tax, be recognized in the income statement as income tax expense or benefit in the period in which they occur, removing historical equity treatment; (2) excess tax benefits are no longer separately classified as a financing activity but rather should be classified with other income tax cash flows as an operating activity on the statement of cash flows; (3) cash paid by an employer when withholding shares for tax withholding purposes should be classified as a financing activity. Additionally, regarding forfeitures, this guidance permits a company to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. The amendments in this update were effective for the Company on January 1, 2017. The adoption of this ASU did not have a material impact on the Company’s financial statements.
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’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The amendments in this update will be effective for the Company on January 1, 2020. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of its pending adoption of this guidance on the Company’s financial statements.
In August 2016, the FASB issuedASU No. 2016-15, Statement of Cash Flows (Topic 230): “Classification of Certain Cash Receipts and Cash Payments.”This ASU changes how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The amendments address the classification of the following eight items in the statement of cash flows: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the Predominance Principle. The amendments in this update arewere effective for the Company on January 1, 2018. As the guidance only affects the classification within the statement of cash flows, the Company does not expect the applicationadoption of this guidance willdid not have a material impact on the Company’s financial statements.
In March 2017, the FASB issuedASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (subtopic 310-20): “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments will be effective for the Company on January 1, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.
10 |
(4) | Investment Securities |
The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at September 30, 2017March 31, 2018 and December 31, 2016:2017:
Amortized | Gross | Gross | ||||||||||||||
Cost | Unrealized | Unrealized | Fair | |||||||||||||
(In thousands) | Basis | Gains | Losses | Value | ||||||||||||
September 30, 2017 | ||||||||||||||||
State and municipal | $ | 51,871 | $ | 1,611 | $ | 15 | $ | 53,467 | ||||||||
Asset-backed securities | 7,682 | 38 | 15 | 7,705 | ||||||||||||
Government mortgage-backed securities | 34,459 | 440 | 159 | 34,740 | ||||||||||||
Trust preferred securities | 1,351 | - | 145 | 1,206 | ||||||||||||
Marketable equity securities | 9,878 | 2,918 | 200 | 12,596 | ||||||||||||
105,241 | 5,007 | 534 | 109,714 | |||||||||||||
Money market mutual funds included in cash and cash equivalents | (30 | ) | - | - | (30 | ) | ||||||||||
Total available-for-sale securities | $ | 105,211 | $ | 5,007 | $ | 534 | $ | 109,684 | ||||||||
December 31, 2016 | ||||||||||||||||
State and municipal | $ | 49,367 | $ | 1,281 | $ | 68 | $ | 50,580 | ||||||||
Corporate debt | 1,000 | 31 | - | 1,031 | ||||||||||||
Asset-backed securities | 8,747 | - | 69 | 8,678 | ||||||||||||
Government mortgage-backed securities | 41,818 | 435 | 339 | 41,914 | ||||||||||||
Trust preferred securities | 1,368 | - | 400 | 968 | ||||||||||||
Marketable equity securities | 11,492 | 3,551 | 218 | 14,825 | ||||||||||||
113,792 | 5,298 | 1,094 | 117,996 | |||||||||||||
Money market mutual funds included in cash and cash equivalents | (129 | ) | - | - | (129 | ) | ||||||||||
Total available-for-sale securities | $ | 113,663 | $ | 5,298 | $ | 1,094 | $ | 117,867 |
Amortized | Gross | Gross | ||||||||||||||
Cost | Unrealized | Unrealized | Fair | |||||||||||||
(In thousands) | Basis | Gains | Losses | Value | ||||||||||||
March 31, 2018 | ||||||||||||||||
State and municipal securities | $ | 20,199 | $ | 304 | $ | 200 | $ | 20,303 | ||||||||
Asset-backed securities | 7,327 | - | 129 | 7,198 | ||||||||||||
Government mortgage-backed securities | 30,719 | 196 | 626 | 30,289 | ||||||||||||
Total available-for-sale securities | $ | 58,245 | $ | 500 | $ | 955 | $ | 57,790 | ||||||||
December 31, 2017 | ||||||||||||||||
State and municipal securities | $ | 20,726 | $ | 745 | $ | 17 | $ | 21,454 | ||||||||
Asset-backed securities | 7,524 | 30 | 37 | 7,517 | ||||||||||||
Government mortgage-backed securities | 32,421 | 317 | 280 | 32,458 | ||||||||||||
Total available-for-sale securities | $ | 60,671 | $ | 1,092 | $ | 334 | $ | 61,429 |
The scheduled maturities of debt securities were as follows at September 30, 2017:March 31, 2018:
Available-for-Sale | Available-for-Sale | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(In thousands) | Cost | Value | Cost | Value | ||||||||||||
Due within one year | $ | 1,347 | $ | 1,367 | ||||||||||||
Due after one year through five years | 1,387 | 1,419 | $ | 419 | $ | 427 | ||||||||||
Due after five years through ten years | 8,635 | 8,934 | 2,396 | 2,441 | ||||||||||||
Due after ten years | 41,853 | 42,953 | 17,384 | 17,435 | ||||||||||||
Government mortgage-backed securities | 34,459 | 34,740 | 30,719 | 30,289 | ||||||||||||
Asset-backed securities | 7,682 | 7,705 | 7,327 | 7,198 | ||||||||||||
$ | 95,363 | $ | 97,118 | $ | 58,245 | $ | 57,790 |
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 September 30, 2017March 31, 2018 and December 31, 2016:2017:
Less than 12 Months | 12 Months or Longer | Total | Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||
(In thousands) | Value | Losses | Value | Losses | Value | Losses | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Temporarily impaired securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
State and municipal | $ | 1,552 | $ | 12 | $ | 160 | $ | 3 | $ | 1,712 | $ | 15 | ||||||||||||||||||||||||||||||||||||
State and municipal securities | $ | 7,790 | $ | 170 | $ | 595 | $ | 30 | $ | 8,385 | $ | 200 | ||||||||||||||||||||||||||||||||||||
Asset-backed securities | 2,775 | 11 | 329 | 4 | 3,104 | 15 | 5,948 | 96 | 1,250 | 33 | 7,198 | 129 | ||||||||||||||||||||||||||||||||||||
Government mortgage-backed securities | 12,998 | 92 | 3,046 | 67 | 16,044 | 159 | 10,206 | 149 | 12,757 | 477 | 22,963 | 626 | ||||||||||||||||||||||||||||||||||||
Trust preferred securities | 15 | 29 | 1,191 | 116 | 1,206 | 145 | ||||||||||||||||||||||||||||||||||||||||||
Marketable equity securities | 913 | 72 | 947 | 128 | 1,860 | 200 | ||||||||||||||||||||||||||||||||||||||||||
Total temporarily impaired securities | $ | 18,253 | $ | 216 | $ | 5,673 | $ | 318 | $ | 23,926 | $ | 534 | $ | 23,944 | $ | 415 | $ | 14,602 | $ | 540 | $ | 38,546 | $ | 955 | ||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
Temporarily impaired securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
State and municipal | $ | 6,413 | $ | 63 | $ | 160 | $ | 5 | $ | 6,573 | $ | 68 | ||||||||||||||||||||||||||||||||||||
State and municipal securities | $ | - | $ | - | $ | 611 | $ | 17 | $ | 611 | $ | 17 | ||||||||||||||||||||||||||||||||||||
Asset-backed securities | 8,104 | 60 | 574 | 9 | 8,678 | 69 | 1,745 | 13 | 1,335 | 24 | 3,080 | 37 | ||||||||||||||||||||||||||||||||||||
Government mortgage-backed securities | 20,868 | 247 | 2,770 | 92 | 23,638 | 339 | 5,231 | 20 | 13,584 | 260 | 18,815 | 280 | ||||||||||||||||||||||||||||||||||||
Trust preferred securities | 26 | 18 | 942 | 382 | 968 | 400 | ||||||||||||||||||||||||||||||||||||||||||
Marketable equity securities | 1,942 | 104 | 768 | 114 | 2,710 | 218 | ||||||||||||||||||||||||||||||||||||||||||
Total temporarily impaired securities | $ | 37,353 | $ | 492 | $ | 5,214 | $ | 602 | $ | 42,567 | $ | 1,094 | $ | 6,976 | $ | 33 | $ | 15,530 | $ | 301 | $ | 22,506 | $ | 334 |
Government mortgage-backed securities, state and municipal securities and asset-backed securities: Management believes that no individual unrealized loss at September 30, 2017March 31, 2018 represents an other-than-temporarily impairment (OTTI) because the decline in fair value of these securities is primarily attributable to changes in interest rates and not credit quality, and because the Company has the intent and ability to hold these investments until market price recovery or maturity.
Marketable equity securities: Management continuously monitors equity securities for impairment by reviewing the financial condition of the issuer, company-specific events, industry developments, and general economic conditions. Management reviews corporate financial reports, credit agency reports and other publicly available information. Based on these reviews, none of these securities are considered to be other-than-temporarily impaired.
Trust preferred securities: Management monitors its pooled trust preferred securities for possible other-than-temporary impairment on a quarterly basis. This review includes an analysis of collateral reports, cash flows, stress default levels and financial ratios of the underlying issuers. Management utilizes a third party to compile this data and perform other-than-temporary impairment cash flow testing. Critical assumptions that go into the other-than-temporary impairment cash flow testing are prepayment speeds, default rates of the underlying issuers and discount margins. The result of the third-party other-than-temporary impairment cash flow testing indicated no other-than-temporary impairment as of September 30, 2017.
(5) | Loans |
A summary of loans is as follows:
At | At | At | At | |||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
Commercial real estate | $ | 386,062 | 50.78 | % | $ | 336,102 | 53.07 | % | $ | 372,955 | 48.38 | % | $ | 371,510 | 49.35 | % | ||||||||||||||||
Commercial | 232,511 | 30.58 | % | 166,157 | 26.23 | % | 259,994 | 33.72 | % | 240,223 | 31.91 | % | ||||||||||||||||||||
Residential real estate | 70,960 | 9.33 | % | 76,850 | 12.13 | % | 65,777 | 8.53 | % | 67,724 | 9.00 | % | ||||||||||||||||||||
Construction and land development | 55,915 | 7.35 | % | 48,161 | 7.60 | % | 53,875 | 6.99 | % | 55,828 | 7.42 | % | ||||||||||||||||||||
Consumer | 14,830 | 1.95 | % | 6,172 | 0.97 | % | 18,335 | 2.38 | % | 17,455 | 2.32 | % | ||||||||||||||||||||
760,278 | 100.00 | % | 633,442 | 100.00 | % | 770,936 | 100.00 | % | 752,740 | 100.00 | % | |||||||||||||||||||||
Allowance for loan losses | (10,932 | ) | (8,590 | ) | (10,236 | ) | (9,757 | ) | ||||||||||||||||||||||||
Deferred loan fees, net | (809 | ) | (427 | ) | (818 | ) | (845 | ) | ||||||||||||||||||||||||
Net loans | $ | 748,537 | $ | 624,425 | $ | 759,882 | $ | 742,138 |
The following tables set forth information regarding the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2017March 31, 2018 and 2016:2017:
For the three months ended September 30, | ||||||||||||||||||||||||||||
(In thousands) | Commercial Real Estate | Commercial | Residential Real Estate | Construction and Land Development | Consumer | Unallocated | Total | |||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Balance at June 30, 2017 | $ | 4,640 | $ | 3,281 | $ | 318 | $ | 1,141 | $ | 472 | $ | 100 | $ | 9,952 | ||||||||||||||
Charge-offs | - | (2 | ) | - | - | (80 | ) | - | (82 | ) | ||||||||||||||||||
Recoveries | - | 45 | - | - | 5 | - | 50 | |||||||||||||||||||||
Provision (benefit) | 1,029 | 60 | (22 | ) | (177 | ) | 172 | (50 | ) | 1,012 | ||||||||||||||||||
Balance at September 30, 2017 | $ | 5,669 | $ | 3,384 | $ | 296 | $ | 964 | $ | 569 | $ | 50 | $ | 10,932 | ||||||||||||||
Balance at June 30, 2016 | $ | 4,001 | $ | 2,297 | $ | 364 | $ | 1,286 | $ | 102 | $ | 181 | $ | 8,231 | ||||||||||||||
Charge-offs | - | - | - | - | (11 | ) | - | (11 | ) | |||||||||||||||||||
Recoveries | - | - | - | - | 3 | - | 3 | |||||||||||||||||||||
Provision (benefit) | 168 | 101 | (12 | ) | (189 | ) | 6 | 89 | 163 | |||||||||||||||||||
Balance at September 30, 2016 | $ | 4,169 | $ | 2,398 | $ | 352 | $ | 1,097 | $ | 100 | $ | 270 | $ | 8,386 |
For the three months ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For the nine months ended September 30, | Commercial | Residential | and Land | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Commercial Real Estate | Commercial | Residential Real Estate | Construction and Land Development | Consumer | Unallocated | Total | Real Estate | Commercial | Real Estate | Development | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 4,483 | $ | 3,280 | $ | 300 | $ | 965 | $ | 649 | $ | 80 | $ | 9,757 | ||||||||||||||||||||||||||||||||||||||||||
Charge-offs | - | (20 | ) | - | - | (166 | ) | - | (186 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Recoveries | - | 1 | - | - | 8 | - | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||
Provision (benefit) | 124 | 407 | (8 | ) | (26 | ) | 187 | (28 | ) | 656 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2018 | $ | 4,607 | $ | 3,668 | $ | 292 | $ | 939 | $ | 678 | $ | 52 | $ | 10,236 | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 4,503 | $ | 2,513 | $ | 328 | $ | 882 | $ | 279 | $ | 85 | $ | 8,590 | $ | 4,503 | $ | 2,513 | $ | 328 | $ | 882 | $ | 279 | $ | 85 | $ | 8,590 | ||||||||||||||||||||||||||||
Charge-offs | (6 | ) | (63 | ) | - | - | (106 | ) | - | (175 | ) | (6 | ) | - | - | - | (8 | ) | - | (14 | ) | |||||||||||||||||||||||||||||||||||
Recoveries | - | 45 | - | - | 5 | - | 50 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Provision (benefit) | 1,172 | 889 | (32 | ) | 82 | 391 | (35 | ) | 2,467 | 16 | 267 | (8 | ) | 159 | 104 | 25 | 563 | |||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2017 | $ | 5,669 | $ | 3,384 | $ | 296 | $ | 964 | $ | 569 | $ | 50 | $ | 10,932 | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2015 | $ | 3,827 | $ | 2,138 | $ | 412 | $ | 1,236 | $ | 119 | $ | 173 | $ | 7,905 | ||||||||||||||||||||||||||||||||||||||||||
Charge-offs | - | - | - | - | (29 | ) | - | (29 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Recoveries | - | 1 | 12 | - | 13 | - | 26 | |||||||||||||||||||||||||||||||||||||||||||||||||
Provision (benefit) | 342 | 259 | (72 | ) | (139 | ) | (3 | ) | 97 | 484 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2016 | $ | 4,169 | $ | 2,398 | $ | 352 | $ | 1,097 | $ | 100 | $ | 270 | $ | 8,386 | ||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2017 | $ | 4,513 | $ | 2,780 | $ | 320 | $ | 1,041 | $ | 375 | $ | 110 | $ | 9,139 |
The following table sets forth information regarding the allowance for loan losses and related loan balances by segment at September 30, 2017March 31, 2018 and December 31, 2016:2017:
Construction | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Residential | and Land | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Commercial Real Estate | Commercial | Residential Real Estate | Construction and Land Development | Consumer | Unallocated | Total | Real Estate | Commercial | Real Estate | Development | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 809 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 809 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 4,860 | 3,384 | 296 | 964 | 569 | 50 | 10,123 | 4,607 | 3,668 | 292 | 939 | 678 | 52 | 10,236 | ||||||||||||||||||||||||||||||||||||||||||
Total allowance for loan losses ending balance | $ | 5,669 | $ | 3,384 | $ | 296 | $ | 964 | $ | 569 | $ | 50 | $ | 10,932 | $ | 4,607 | $ | 3,668 | $ | 292 | $ | 939 | $ | 678 | $ | 52 | $ | 10,236 | ||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 6,738 | $ | 1,761 | $ | 408 | $ | - | $ | - | $ | - | $ | 8,907 | $ | 8,610 | $ | 3,209 | $ | 400 | $ | - | $ | - | $ | - | $ | 12,219 | ||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 379,324 | 230,750 | 70,552 | 55,915 | 14,830 | - | 751,371 | 364,345 | 256,785 | 65,377 | 53,875 | 18,335 | - | 758,717 | ||||||||||||||||||||||||||||||||||||||||||
Total loans ending balance | $ | 386,062 | $ | 232,511 | $ | 70,960 | $ | 55,915 | $ | 14,830 | $ | - | $ | 760,278 | $ | 372,955 | $ | 259,994 | $ | 65,777 | $ | 53,875 | $ | 18,335 | $ | - | $ | 770,936 | ||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | 46 | $ | - | $ | - | $ | - | $ | - | $ | 46 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 4,503 | 2,467 | 328 | 882 | 279 | 85 | 8,544 | 4,483 | 3,280 | 300 | 965 | 649 | 80 | 9,757 | ||||||||||||||||||||||||||||||||||||||||||
Total allowance for loan losses ending balance | $ | 4,503 | $ | 2,513 | $ | 328 | $ | 882 | $ | 279 | $ | 85 | $ | 8,590 | $ | 4,483 | $ | 3,280 | $ | 300 | $ | 965 | $ | 649 | $ | 80 | $ | 9,757 | ||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,956 | $ | 1,660 | $ | 422 | $ | - | $ | - | $ | - | $ | 4,038 | $ | 8,623 | $ | 3,202 | $ | 404 | $ | - | $ | - | $ | - | $ | 12,229 | ||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 334,146 | 164,497 | 76,428 | 48,161 | 6,172 | - | 629,404 | 362,887 | 237,021 | 67,320 | 55,828 | 17,455 | - | 740,511 | ||||||||||||||||||||||||||||||||||||||||||
Total loans ending balance | $ | 336,102 | $ | 166,157 | $ | 76,850 | $ | 48,161 | $ | 6,172 | $ | - | $ | 633,442 | $ | 371,510 | $ | 240,223 | $ | 67,724 | $ | 55,828 | $ | 17,455 | $ | - | $ | 752,740 |
The following tables set forth information regarding non-accrual loans and loan delinquencies by portfolio segment at September 30, 2017March 31, 2018 and December 31, 2016:2017:
90 Days | 90 Days | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
90 Days | Total | or More | 90 Days | Total | or More | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30 - 59 | 60 - 89 | or More | Past | Total | Total | Past Due | Non-accrual | 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 | Days | Days | Past Due | Due | Current | Loans | and Accruing | Loans | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | $ | - | $ | - | $ | - | $ | - | $ | 386,062 | $ | 386,062 | $ | - | $ | 5,185 | $ | 820 | $ | 3,577 | $ | 3,670 | $ | 8,067 | $ | 364,888 | $ | 372,955 | $ | - | $ | 7,102 | ||||||||||||||||||||||||||||||||
Commercial | 3 | - | - | 3 | 232,508 | 232,511 | - | 68 | 235 | 2,906 | - | 3,141 | 256,853 | 259,994 | - | 1,501 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | - | 117 | 156 | 273 | 70,687 | 70,960 | - | 361 | 549 | 101 | - | 650 | 65,127 | 65,777 | - | 920 | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | 55,915 | 55,915 | - | - | - | - | - | - | 53,875 | 53,875 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 57 | 10 | 33 | 100 | 14,730 | 14,830 | - | 33 | 70 | 85 | 58 | 213 | 18,122 | 18,335 | - | 61 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 60 | $ | 127 | $ | 189 | $ | 376 | $ | 759,902 | $ | 760,278 | $ | - | $ | 5,647 | $ | 1,674 | $ | 6,669 | $ | 3,728 | $ | 12,071 | $ | 758,865 | $ | 770,936 | $ | - | $ | 9,584 | ||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | $ | - | $ | - | $ | 346 | $ | 346 | $ | 335,756 | $ | 336,102 | $ | - | $ | 346 | $ | - | $ | 3,669 | $ | - | $ | 3,669 | $ | 367,841 | $ | 371,510 | $ | - | $ | 7,102 | ||||||||||||||||||||||||||||||||
Commercial | 29 | - | - | 29 | 166,128 | 166,157 | - | 933 | 12 | - | - | 12 | 240,211 | 240,223 | - | 1,505 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | - | - | - | - | 76,850 | 76,850 | 303 | 699 | 178 | 81 | 958 | 66,766 | 67,724 | 364 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | 48,161 | 48,161 | - | - | - | - | - | - | 55,828 | 55,828 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | - | - | - | - | 6,172 | 6,172 | - | - | 63 | 45 | 60 | 168 | 17,287 | 17,455 | - | 62 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 29 | $ | - | $ | 346 | $ | 375 | $ | 633,067 | $ | 633,442 | $ | - | $ | 1,582 | $ | 774 | $ | 3,892 | $ | 141 | $ | 4,807 | $ | 747,933 | $ | 752,740 | $ | - | $ | 9,033 |
Information about the Company’s impaired loans by portfolio segment was as follows at and for the period ended September 30, 2017March 31, 2018 and at and for the year ended December 31, 2016:2017:
Unpaid | Average | Interest | Unpaid | Average | Interest | |||||||||||||||||||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | Recorded | Principal | Related | Recorded | Income | |||||||||||||||||||||||||||||||
(In thousands) | Investment | Balance | Allowance | Investment | Recognized | Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | $ | 1,553 | $ | 1,553 | $ | - | $ | 1,584 | $ | 52 | $ | 8,610 | $ | 10,125 | $ | - | $ | 8,616 | $ | 24 | ||||||||||||||||||||
Commercial | 1,761 | 1,761 | - | 1,767 | 57 | 3,209 | 3,209 | - | 3,206 | 52 | ||||||||||||||||||||||||||||||
Residential real estate | 408 | 408 | - | 415 | 16 | 400 | 400 | - | 402 | 4 | ||||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total impaired with no related allowance | 3,722 | 3,722 | - | 3,766 | 125 | 12,219 | 13,734 | - | 12,224 | 80 | ||||||||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 5,185 | 5,185 | 809 | 1,963 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Commercial | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Residential real estate | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total impaired with an allowance recorded | 5,185 | 5,185 | 809 | 1,963 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 6,738 | 6,738 | 809 | 3,547 | 52 | 8,610 | 10,125 | - | 8,616 | 24 | ||||||||||||||||||||||||||||||
Commercial | 1,761 | 1,761 | - | 1,767 | 57 | 3,209 | 3,209 | - | 3,206 | 52 | ||||||||||||||||||||||||||||||
Residential real estate | 408 | 408 | - | 415 | 16 | 400 | 400 | - | 402 | 4 | ||||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total impaired loans | $ | 8,907 | $ | 8,907 | $ | 809 | $ | 5,729 | $ | 125 | $ | 12,219 | $ | 13,734 | $ | - | $ | 12,224 | $ | 80 | ||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | $ | 1,956 | $ | 1,956 | $ | - | $ | 2,744 | $ | 188 | $ | 8,623 | $ | 10,139 | $ | - | $ | 4,562 | $ | 70 | ||||||||||||||||||||
Commercial | 799 | 799 | - | 794 | 42 | 3,202 | 3,202 | - | 2,054 | 123 | ||||||||||||||||||||||||||||||
Residential real estate | 422 | 422 | - | 429 | 20 | 404 | 404 | - | 412 | 20 | ||||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total impaired with no related allowance | 3,177 | 3,177 | - | 3,967 | 250 | 12,229 | 13,745 | - | 7,028 | 213 | ||||||||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Commercial | 861 | 861 | 46 | 886 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Residential real estate | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total impaired with an allowance recorded | 861 | 861 | 46 | 886 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 1,956 | 1,956 | - | 2,744 | 188 | 8,623 | 10,139 | - | 4,562 | 70 | ||||||||||||||||||||||||||||||
Commercial | 1,660 | 1,660 | 46 | 1,680 | 42 | 3,202 | 3,202 | - | 2,054 | 123 | ||||||||||||||||||||||||||||||
Residential real estate | 422 | 422 | - | 429 | 20 | 404 | 404 | - | 412 | 20 | ||||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total impaired loans | $ | 4,038 | $ | 4,038 | $ | 46 | $ | 4,853 | $ | 250 | $ | 12,229 | $ | 13,745 | $ | - | $ | 7,028 | $ | 213 |
There were no troubled debt restructurings during the three months ended March 31, 2018.
The following summarizes troubled debt restructurings entered into during the ninethree months ended September 30,March 31, 2017:
Number | Pre- Modification Outstanding | Post- Modification Outstanding | ||||||||||||||||||||||
of | Recorded | Recorded | ||||||||||||||||||||||
(Dollars in thousands) | Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | Contracts | Investment | Investment | ||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||
March 31, 2017 | ||||||||||||||||||||||||
Troubled debt restructurings: | ||||||||||||||||||||||||
Commercial | 1 | $ | 249 | $ | 249 | 1 | $ | 249 | $ | 249 | ||||||||||||||
1 | $ | 249 | $ | 249 | 1 | $ | 249 | $ | 249 | |||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||
Troubled debt restructurings: | ||||||||||||||||||||||||
Commercial | 1 | $ | 58 | $ | 58 | |||||||||||||||||||
1 | $ | 58 | $ | 58 |
In the three months ended March 31 2017, the Company approved one troubled debt restructure totaling $249,000, with no specific reserve required based on an analysis of the borrower’s collateral coverage. The term of this commercial loan was extended to a three-year term.
The following tables present the Company’s loans by risk rating and portfolio segment at September 30, 2017March 31, 2018 and December 31, 2016:2017:
Construction | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Residential | and Land | ||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Commercial Real Estate | Commercial | Residential Real Estate | Construction and Land Development | Consumer | Total | Real Estate | Commercial | Real Estate | Development | Consumer | Total | ||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 368,586 | $ | 216,388 | $ | - | $ | 55,915 | $ | - | $ | 640,889 | $ | 355,967 | $ | 236,485 | $ | - | $ | 53,875 | $ | - | $ | 646,327 | ||||||||||||||||||||||||
Special mention | 7,218 | 9,105 | - | - | - | 16,323 | 6,791 | 11,219 | - | - | - | 18,010 | ||||||||||||||||||||||||||||||||||||
Substandard | 10,258 | 7,018 | 421 | - | - | 17,697 | 10,197 | 12,290 | 633 | - | - | 23,120 | ||||||||||||||||||||||||||||||||||||
Not formally rated | - | - | 70,539 | - | 14,830 | 85,369 | - | - | 65,144 | - | 18,335 | 83,479 | ||||||||||||||||||||||||||||||||||||
Total | $ | 386,062 | $ | 232,511 | $ | 70,960 | $ | 55,915 | $ | 14,830 | $ | 760,278 | $ | 372,955 | $ | 259,994 | $ | 65,777 | $ | 53,875 | $ | 18,335 | $ | 770,936 | ||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 319,712 | $ | 157,306 | $ | - | $ | 48,161 | $ | - | $ | 525,179 | $ | 355,623 | $ | 224,190 | $ | - | $ | 55,828 | $ | - | $ | 635,641 | ||||||||||||||||||||||||
Special mention | 4,471 | 1,668 | - | - | - | 6,139 | 6,852 | 9,155 | - | - | - | 16,007 | ||||||||||||||||||||||||||||||||||||
Substandard | 11,919 | 7,183 | 729 | - | - | 19,831 | 9,035 | 6,878 | 679 | - | - | 16,592 | ||||||||||||||||||||||||||||||||||||
Not formally rated | - | - | 76,121 | - | 6,172 | 82,293 | - | - | 67,045 | - | 17,455 | 84,500 | ||||||||||||||||||||||||||||||||||||
Total | $ | 336,102 | $ | 166,157 | $ | 76,850 | $ | 48,161 | $ | 6,172 | $ | 633,442 | $ | 371,510 | $ | 240,223 | $ | 67,724 | $ | 55,828 | $ | 17,455 | $ | 752,740 |
Credit Quality Information
The Company utilizes a seven grade internal loan risk rating system for commercial real estate, construction and land development, and commercial loans as follows:
Loans rated 1-3: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 7: Loans in this category are considered uncollectible loss“loss” and of such little value that their continuance as loans is not warranted.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and land development, and commercial loans.
For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Subsequent risk rating downgrades are based upon the borrower’s payment activity.
(6) | Deposits |
A summary of deposit balances, by type is as follows:
March 31, | December 31, | |||||||
(In thousands) | 2018 | 2017 | ||||||
NOW and demand | $ | 289,868 | $ | 309,514 | ||||
Regular savings | 115,144 | 112,610 | ||||||
Money market deposits | 220,020 | 225,735 | ||||||
Total non-certificate accounts | 625,032 | 647,859 | ||||||
Certificate accounts of $250,000 or more | 5,785 | 5,061 | ||||||
Certificate accounts less than $250,000 | 88,888 | 97,137 | ||||||
Total certificate accounts | 94,673 | 102,198 | ||||||
Total deposits | $ | 719,705 | $ | 750,057 |
18 |
(7) | Federal Home Loan Bank Advances |
Borrowings from the Federal Home Loan Bank (the “FHLB”) are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain commercial real estate loans and other qualified assets.
Maturities of advances from the FHLB as of September 30, 2017March 31, 2018 are summarized as follows:
(In thousands) | ||||
Fiscal Year-End | Dollar Amount | |||
2017 | $ | 51,545 | ||
2018 | 12,000 | |||
2019 | 4,927 | |||
2020 | 6,393 | |||
Thereafter | 3,500 | |||
Total | $ | 78,365 |
(In thousands) | ||||
Fiscal Year-End | Dollar Amount | |||
2018 | $ | 30,350 | ||
2019 | 4,945 | |||
2020 | 6,416 | |||
2023 | 3,500 | |||
Total | $ | 45,211 |
Fair Value Measurements |
The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:
Basis of Fair Value Measurements
· | Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
· | Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; |
· | Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
A financial instrument’sAn asset’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Fair Values of Financial InstrumentsAssets Measured on a Recurring Basis
The Company’s investments in U.S. Government and federal agency, state and municipal, corporate debt, asset-backed and government mortgage-backed available-for-sale securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these investments, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.
The Company classifies its investments in trust preferred securities as Level 3 securities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.
The Company classified its investments in marketable equity securities as Level 1 securities. Such securities are classified as Level 1 securities because fair values are obtained through quoted market prices for identical securities in active exchange markets.
The following summarizes financial instruments measured at fair value on a recurring basis at September 30, 2017March 31, 2018 and December 31, 2016:2017:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||
Active Markets for | Other Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(In thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
September 30, 2017 | ||||||||||||||||
State and municipal | $ | 53,467 | $ | - | $ | 53,467 | $ | - | ||||||||
Asset-backed securities | 7,705 | - | 7,705 | - | ||||||||||||
Mortgage-backed securities | 34,740 | - | 34,740 | - | ||||||||||||
Trust preferred securities | 1,206 | - | - | 1,206 | ||||||||||||
Marketable equity securities | 12,566 | 12,566 | - | - | ||||||||||||
Totals | $ | 109,684 | $ | 12,566 | $ | 95,912 | $ | 1,206 | ||||||||
December 31, 2016 | ||||||||||||||||
State and municipal | $ | 50,580 | $ | - | $ | 50,580 | $ | - | ||||||||
Corporate debt | 1,031 | - | 1,031 | - | ||||||||||||
Asset-backed securities | 8,678 | - | 8,678 | - | ||||||||||||
Mortgage-backed securities | 41,914 | - | 41,914 | - | ||||||||||||
Trust preferred securities | 968 | - | - | 968 | ||||||||||||
Marketable equity securities | 14,696 | 14,696 | - | - | ||||||||||||
Totals | $ | 117,867 | $ | 14,696 | $ | 102,203 | $ | 968 |
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, 2018 | ||||||||||||||||
State and municipal securities | $ | 20,303 | $ | - | $ | 20,303 | $ | - | ||||||||
Asset-backed securities | 7,198 | - | 7,198 | - | ||||||||||||
Mortgage-backed securities | 30,289 | - | 30,289 | - | ||||||||||||
Totals | $ | 57,790 | $ | - | $ | 57,790 | $ | - | ||||||||
December 31, 2017 | ||||||||||||||||
State and municipal securities | $ | 21,454 | $ | - | $ | 21,454 | $ | - | ||||||||
Asset-backed securities | 7,517 | - | 7,517 | - | ||||||||||||
Mortgage-backed securities | 32,458 | - | 32,458 | - | ||||||||||||
Totals | $ | 61,429 | $ | - | $ | 61,429 | $ | - |
The following is a summary of activity for Level 3 financial instruments measured at fair value on a recurring basis for the nine-month periods ended September 30, 2017 and 2016.
(In thousands) | Available-for- Sale Securities | |||
Balance beginning January 1, 2017 | $ | 968 | ||
Total gains or (losses) (realized/unrealized) | ||||
Included in earnings | - | |||
Included in other comprehensive income | 255 | |||
Paydowns | (17 | ) | ||
Ending balance, September 30, 2017 | $ | 1,206 | ||
Balance beginning January 1, 2016 | $ | 1,116 | ||
Total gains or (losses) (realized/unrealized) | ||||
Included in earnings | - | |||
Included in other comprehensive income | (105 | ) | ||
Paydowns | - | |||
Ending balance, September 30, 2016 | $ | 1,011 |
Fair Values of Financial InstrumentsAssets Measured on a Non-Recurring Basis
The Company’s impaired loans are reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party. However, the Company generally discounts appraisals to arrive at fair value, therefore classifies such loans as Level 3 because the discounts are a significant input that is not observable.
The following summarizes financial instrumentsassets measured at fair value on a nonrecurring basis at September 30, 2017March 31, 2018 and December 31, 2016:2017:
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 | ||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||
Impaired loan | $ | 4,376 | $ | - | $ | - | $ | 4,376 | $ | 3,670 | $ | - | $ | - | $ | 3,670 | ||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||
Impaired loan | $ | 815 | $ | - | $ | - | $ | 815 | $ | 3,670 | $ | - | $ | - | $ | 3,670 |
20 |
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 September 30, 2017March 31, 2018 and December 31, 2016:2017:
(In thousands) | Fair Value | Valuation Technique | Unobservable Input | |||||
September 30, 2017 | ||||||||
Impaired loan | $ | 4,376 | Business valuation | Comparable company valuations | ||||
December 31, 2016 | ||||||||
Impaired loan | $ | 815 | Business valuation | Comparable company valuations |
(In thousands) | Fair Value | Valuation Technique | Unobservable Input | |||||
March 31, 2018 | ||||||||
Impaired loan | $ | 3,670 | Real estate appraisals | Discount for dated appraisals | ||||
December 31, 2017 | ||||||||
Impaired loan | $ | 3,670 | Real estate appraisals | Discount for dated appraisals |
Fair Value of Financial Instruments |
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at September 30, 2017March 31, 2018 and December 31, 2016:2017:
Carrying | Fair Value | Carrying | Fair Value | |||||||||||||||||||||||||||||||||||||
(In thousands) | Amount | Level 1 | Level 2 | Level 3 | Total | Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 17,577 | $ | 17,577 | $ | - | $ | - | $ | 17,577 | ||||||||||||||||||||||||||||||
Available-for-sale securities | 109,684 | 12,566 | 95,912 | 1,206 | 109,684 | |||||||||||||||||||||||||||||||||||
Federal Home Loan Bank of Boston stock | 3,737 | 3,737 | - | - | 3,737 | |||||||||||||||||||||||||||||||||||
Loans, net | 748,537 | - | - | 758,964 | 758,964 | |||||||||||||||||||||||||||||||||||
Assets held-for-sale | 3,213 | - | 3,213 | - | 3,213 | |||||||||||||||||||||||||||||||||||
Accrued interest receivable | 2,635 | - | 2,635 | - | 2,635 | |||||||||||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||||||
Deposits | 725,273 | - | - | 725,170 | 725,170 | |||||||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | 78,365 | - | 78,343 | - | 78,343 | |||||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 10,705 | $ | 10,705 | $ | - | $ | - | $ | 10,705 | $ | 22,320 | $ | 22,320 | $ | - | $ | - | $ | 22,320 | ||||||||||||||||||||
Available-for-sale securities | 117,867 | 14,696 | 102,203 | 968 | 117,867 | 57,790 | - | 57,790 | - | 57,790 | ||||||||||||||||||||||||||||||
Federal Home Loan Bank of Boston stock | 2,787 | 2,787 | - | - | 2,787 | 2,166 | 2,166 | - | - | 2,166 | ||||||||||||||||||||||||||||||
Loans, net | 624,425 | - | - | 632,278 | 632,278 | 759,882 | - | - | 751,501 | 751,501 | ||||||||||||||||||||||||||||||
Accrued interest receivable | 2,320 | - | 2,320 | - | 2,320 | 2,270 | - | 2,270 | - | 2,270 | ||||||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||||||
Deposits | 627,982 | - | - | 628,060 | 628,060 | 719,705 | - | - | 719,605 | 719,605 | ||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | 49,858 | - | 49,901 | - | 49,901 | 45,211 | - | 44,849 | - | 44,849 | ||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 47,689 | $ | 47,689 | $ | - | $ | - | $ | 47,689 | ||||||||||||||||||||||||||||||
Available-for-sale securities | 61,429 | - | 61,429 | - | 61,429 | |||||||||||||||||||||||||||||||||||
Federal Home Loan Bank of Boston stock | 1,854 | 1,854 | - | - | 1,854 | |||||||||||||||||||||||||||||||||||
Loans, net | 742,138 | - | - | 745,637 | 745,637 | |||||||||||||||||||||||||||||||||||
Accrued interest receivable | 2,345 | - | 2,345 | - | 2,345 | |||||||||||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||||||
Deposits | 750,057 | - | - | 749,898 | 749,898 | |||||||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | 26,841 | - | 26,655 | - | 26,655 |
Regulatory Capital |
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to capital regulations adopted by the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that started phasing in on January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failureAt March 31, 2018, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer. Failure to maintain the capital conservation buffer limits the ability of the Bank and the Company to pay dividends, repurchases shares or pay discretionary bonuses.
As of September 30, 2017March 31, 2018 and December 31, 2016,2017, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.
The Bank’s actual capital amounts and ratios are presented in the following table.
To Be Well | To Be Well | |||||||||||||||||||||||||||||||||||||||||||||||||||
Capitalized Under | Capitalized Under | |||||||||||||||||||||||||||||||||||||||||||||||||||
For Capital | Prompt Corrective | For Capital | Prompt Corrective | |||||||||||||||||||||||||||||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | Actual | Adequacy Purposes | Action Provisions | |||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 116,289 | 15.2 | % | $ | 64,500 | > | 8.0 | % | $ | 80,626 | > | 10.0 | % | $ | 119,362 | 15.0 | % | $ | 63,651 | > | 8.0 | % | $ | 79,564 | > | 10.0 | % | ||||||||||||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | 104,978 | 13.7 | 48,375 | > | 6.0 | 64,500 | > | 8.0 | 109,413 | 13.8 | 47,738 | > | 6.0 | 63,651 | > | 8.0 | ||||||||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 104,978 | 13.7 | 36,282 | > | 4.5 | 52,407 | > | 6.5 | 109,413 | 13.8 | 35,804 | > | 4.5 | 51,716 | > | 6.5 | ||||||||||||||||||||||||||||||||||||
Tier 1 Capital (to Average Assets) | 104,978 | 12.4 | 35,529 | > | 4.0 | 44,411 | > | 5.0 | 109,413 | 12.4 | 35,418 | > | 4.0 | 44,273 | > | 5.0 | ||||||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 107,731 | 15.9 | % | $ | 54,272 | > | 8.0 | % | $ | 67,840 | > | 10.0 | % | $ | 116,869 | 15.0 | % | $ | 62,514 | > | 8.0 | % | $ | 78,142 | > | 10.0 | % | ||||||||||||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | 97,750 | 14.4 | 40,704 | > | 6.0 | 54,272 | > | 8.0 | 107,112 | 13.7 | 46,885 | > | 6.0 | 62,514 | > | 8.0 | ||||||||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 97,750 | 14.4 | 30,528 | > | 4.5 | 44,096 | > | 6.5 | 107,112 | 13.7 | 35,164 | > | 4.5 | 50,792 | > | 6.5 | ||||||||||||||||||||||||||||||||||||
Tier 1 Capital (to Average Assets) | 97,750 | 12.6 | 31,058 | > | 4.0 | 38,822 | > | 5.0 | 107,112 | 11.8 | 36,299 | > | 4.0 | 45,374 | > | 5.0 |
The Company may use capital management tools such as cash dividends and common share repurchases. Massachusetts regulations restrict repurchases for the first three years following the stock offering except where compelling and valid business reasons are established to the satisfaction of the Massachusetts Commissioner of Banks, and except to fund stock benefit plans. The Company is also subject to the Federal Reserve Board’s notice provisions for stock repurchases. In January 2017, the Company received a non-objection from the Federal Reserve Board to adopt a stock repurchase program for up to 6.6% of its common stock. As of September 30, 2017,March 31, 2018, the Company had repurchased 24,46028,823 shares of its stock at an average price of $20.07$20.59 per share, or 3.9%4.6% of the 625,015 shares authorized for repurchase under the Company’s repurchase program.
22 |
Employee Stock Ownership Plan |
The Bank maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of Bank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released per year through 2029 is 23,810.
The Company contributed funds to a subsidiary to loan to the ESOP to purchase 357,152 shares of the Company’s common stock at a price of $10.00 per share. The loan is payable annually over 15 years at a rate per annum equal to the Prime Rate as of December 31 (3.75%(4.50% at December 31, 2016)2017). Loan payments are principally funded by cash contributions from the Bank.
September 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Allocated | 47,620 | 23,810 | 71,430 | 47,620 | ||||||||||||
Committed to be allocated | 17,858 | 23,810 | 5,952 | 23,810 | ||||||||||||
Unallocated | 291,674 | 309,532 | 279,770 | 285,722 | ||||||||||||
Total | 357,152 | 357,152 | 357,152 | 357,152 |
The fair value of unallocated shares was approximately $6.8$7.4 million at September 30, 2017.March 31 2018.
Total compensation expense recognized in connection with the ESOP for the three months ended September 30,March 31, 2018 and 2017 was $150,000 and September 30, 2016 was $126,000 and $95,000,$114,000, respectively. Total compensation expense recognized for the nine months ended September 30, 2017 and September 30, 2016 was $368,000 and $257,000, respectively.
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 | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||
(Dollars in thousands, except per share amounts) | 2018 | 2017 | ||||||||||||||||||||||
Net Income attributable to common shareholders | $ | 2,771 | $ | 1,761 | $ | 6,174 | $ | 4,611 | $ | 2,022 | $ | 1,802 | ||||||||||||
Average number of common shares issued | 9,652,448 | 9,498,722 | 9,652,448 | 9,498,722 | 9,657,319 | 9,652,448 | ||||||||||||||||||
Less: | ||||||||||||||||||||||||
average unallocated ESOP shares | (296,398 | ) | (319,453 | ) | (301,342 | ) | (325,391 | ) | (286,226 | ) | (306,254 | ) | ||||||||||||
average unvested restricted stock | (133,258 | ) | - | (140,869 | ) | - | (122,405 | ) | (148,602 | ) | ||||||||||||||
average treasury stock acquired | (21,158 | ) | - | (14,191 | ) | - | (28,823 | ) | (5,024 | ) | ||||||||||||||
Average number of common shares outstanding to calculate basic earnings per common share | 9,201,634 | 9,179,269 | 9,196,046 | 9,173,331 | ||||||||||||||||||||
Average number of common shares outstanding | 9,219,865 | 9,192,568 | ||||||||||||||||||||||
to calculate basic earnings per common share | ||||||||||||||||||||||||
Effect of dilutive unvested restricted stock and stock option awards | 11,422 | - | - | - | 75,138 | - | ||||||||||||||||||
Average number of common shares outstanding to calculate diluted earnings per common share | 9,213,056 | 9,179,269 | 9,196,046 | 9,173,331 | ||||||||||||||||||||
Average number of common shares outstanding | 9,295,003 | 9,192,568 | ||||||||||||||||||||||
to calculate diluted earnings per common share | ||||||||||||||||||||||||
Earnings per common share: | ||||||||||||||||||||||||
Basic | $ | 0.30 | $ | 0.19 | $ | 0.67 | $ | 0.50 | $ | 0.22 | $ | 0.20 | ||||||||||||
Diluted | $ | 0.30 | $ | 0.19 | $ | 0.67 | $ | 0.50 | $ | 0.22 | $ | 0.20 |
23 |
Share-Based Compensation |
Under the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the "Equity Plan"), the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Plan, with the total shares reserved for options equaling 446,440. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the term of each option is generally ten years. The total number of shares reserved for restricted stock or restricted units is 178,575. Options and other awards vest ratably over five years.
Expense related to options and restricted stock granted to directors is recognized in directors’ compensation within non-interest expense.
Stock Options
The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:
· | Volatility is based on peer group volatility because the Company does not have a sufficient trading history. |
· | Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, and the vesting period. |
· | The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option. |
A summary of the status of the Company’s stock option grants for the ninethree months ended September 30, 2017,March 31, 2018, is presented in the table below:
Stock Option Awards | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
Balance at December 31, 2016 | 384,268 | $ | 17.40 | |||||||||||||
Granted | - | - | ||||||||||||||
Balance at September 30, 2017 | 384,268 | $ | 17.40 | 9.13 | $ | 1,364,151 | ||||||||||
Outstanding and expected to vest at September 30, 2017 | 384,268 | $ | 17.40 | 9.13 | $ | 1,364,151 | ||||||||||
Exercisable at September 30, 2017 | - | - | - | - | ||||||||||||
Unrecognized compensation cost | $ | 1,594,000 | ||||||||||||||
Weighted average remaining recognition period (years) | 4.13 |
Stock Option Awards | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic | |||||||||||||
Outstanding at December 31, 2017 | 396,443 | $ | 17.61 | |||||||||||||
Granted | - | - | ||||||||||||||
Outstanding at March 31, 2018 | 396,443 | $ | 17.61 | 8.68 | $ | 3,544,000 | ||||||||||
Outstanding and expected to vest at March 31, 2018 | 396,443 | $ | 17.59 | 8.68 | $ | 3,544,000 | ||||||||||
Vested and Exercisable at March 31, 2018 | 76,854 | 17.40 | 8.64 | $ | 703,000 | |||||||||||
Unrecognized compensation cost | $ | 1,481,000 | ||||||||||||||
Weighted average remaining recognition period (years) | 3.68 |
For the three and nine months ended September 30,March 31, 2018 and 2017, total expense for the stock options was $101,000 and $97,000, and $290,000, respectively. There was no stock-based compensation expense for the three and nine months ended September 30, 2016.
24 |
Restricted Stock
Shares issued upon the granting of restricted stock may be either authorized but unissued shares or reacquired shares held by the Company. Any shares forfeited because vesting requirements are not met will again be available for issuance under the Equity Plan. The fair market value of shares awarded, based on the market prices at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period.
The following table presents the activity in restricted stock awards under the Equity Plan for the ninethree months September 30, 2017:March 31, 2018:
Outstanding Restricted Stock Awards | Weighted Average Grant Price | Unvested Restricted Stock Awards | Weighted Average Grant Date Price | |||||||||||||
Restricted stock awards at December 31, 2016 | 153,726 | $ | 17.40 | |||||||||||||
Unvested restricted stock awards at January 1, 2018 | 127,852 | $ | 17.59 | |||||||||||||
Granted | - | - | - | - | ||||||||||||
Restricted stock awards at September 30, 2017 | 153,726 | $ | 17.40 | |||||||||||||
Vested | - | - | ||||||||||||||
Unvested restricted stock awards at March 31 , 2018 | 127,852 | $ | 17.59 | |||||||||||||
Unrecognized compensation cost | $ | 2,208,000 | $ | 2,046,000 | ||||||||||||
Weighted average remaining recognition period (years) | 4.13 | 3.68 |
For the three and nine months ended September 30,March 31, 2018 and 2017, total expense for the restricted stock awards was $139,000 and $134,000, and $401,000, respectively. There was no stock-based compensation expense for the three and nine months ended September 30, 2016.
(14) | Subsequent Event |
On April 3, 2018, the Bank conducted a foreclosure sale of certain collateral consisting of both real and personal property which secured four non-accruing loans originally made by the Bank having an aggregate principal outstanding balance of approximately $7.5 million of which $4.9 million is outstanding at the Bank with the remaining $2.6 million participated out to another institution. The Bank received $8.3 million in cash from this foreclosure sale. Certain subordinated lienholders are now disputing the priority of the Bank’s liens and the right of the Bank to retain approximately $2.1 million of the proceeds from this foreclosure sale, but have not yet filed a formal claim. Until the dispute is resolved, the Bank has deposited, and will continue to hold, the disputed proceeds (i.e., approximately $2.1 million which includes $543,000 that is participated out to another institution) in a suspense deposit account at the Bank. At this time, we cannot reasonably estimate a range of potential loss, if any, to the Bank, with respect to this matter.
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 September 30, 2017March 31, 2018 and December 31, 20162017 and for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 is intended to assist in understanding our financial condition and results of operations. Operating results for the three and nine month periodsthree-month period ended September 30, 2017March 31, 2018 may not be indicative of results for all of 20172018 or any other period. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.
Forward-Looking Statements
This document may contain certain forward-looking statements, such as statements of the Company’s or the Bank’s plans, objectives, expectations, estimates and intentions. Forward-looking statements may be identified by the use of words such as “expects,” “subject,” “believes,” “will,” “intends,” “may,” “will be,” “would” or similar expressions. Readers should not place undue reliance on any forward-looking statements, which reflect management’s analysis of factors only as of the date of which they are given. These statements are subject to change based on various important factors (some of which are beyond the Company’s or the Bank’s control) and actual results may differ materially. These factors include general economic conditions, including trends and levels of interest rates; the ability of our borrowers to repay their loans; the ability of the Company or the Bank to effectively manage its growth; real estate values in the market area; loan demand; competition; changes in accounting policies; changes in laws and regulations; our success in introducing new products or entering new markets; our ability to retain key employees; failures or breaches of our IT systems; and results of regulatory examinations, among other factors. The foregoing list of important factors is not exclusive. Readers should carefully review the factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Current Reports on Form 8-K.
Except as required by applicable law and regulation, the Company does not undertake — and specifically disclaims any obligation — to update any forward-looking statements after the date of this quarterly report.
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Critical Accounting Policies
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:
Allowance for Loan Losses.The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of loans in light of historical experience, the size and composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The Company classifies a loan as impaired when, based on current information and events, it is probable that it will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment disclosures.
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction and land development, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the ninethree months ended September 30, 2017March 31, 2018 or during the twelve months ended December 31, 2016.2017.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate: We generally do not originate loans with a loan-to-value ratio greater than 80% and do not grant subprime loans. Loans with loan to value ratios greater than 80% require the purchase of private mortgage insurance. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
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Commercial real estate: Loans in this segment are primarily income-producing properties throughout Massachusetts and New Hampshire. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management periodically obtains rent rolls and continually monitors the cash flows of these loans.
Construction and land development: Loans in this segment primarily include speculative and pre-sold real estate development loans for which payment is derived from sale of the property and a conversion of the construction loans to permanent loans for which payment is then derived from cash flows of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
Commercial: Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.
Consumer: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.
We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.
An unallocated component can be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
Stock-based Compensation Plans. The Company measures and recognizes compensation cost relating to stock-based payment transactions based on the grant-date fair value of the equity instruments issued. Stock-based compensation is recognized over the period the employee is required to provide services for the award. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options granted. The determination of fair value involves a number of significant estimates, which require a number of assumptions to determine the model inputs. The fair value of restricted stock is recorded based on the grant date value of the equity instrument issued.
Income Taxes. The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount expected to be realized.
The Company examines its significant income tax positions quarterly to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.
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Balance Sheet Analysis
Assets. Total assets were $928.6$891.2 million at September 30, 2017, an increaseMarch 31, 2018, a decrease of $133.0$11.1 million, or 16.7%1.2%, from $795.5$902.3 million at December 31, 2016.2017. The increasedecrease resulted primarily from increasesdecreases in net loans of $124.1 million, cash and cash equivalents of $6.9 million, bank owned life insurance of $6.0$25.4 million, and assets held-for-saleavailable-for-sale investment securities of $3.2$3.6 million. These increasesdecreases were partially offset by an increase in net loans of $17.7 million.
Cash and Cash Equivalents.Cash and cash equivalents decreased $25.4 million, or 53.2%, to $22.3 million at March 31, 2018 from $47.7 million at December 31, 2017. The decrease is primarily due to utilizing funds for loan growth and a decrease in available-for-sale investment securities of $8.2 million.deposits, offset by an increase in borrowed funds.
Loans. At September 30, 2017,March 31, 2018, net loans were $748.5$759.9 million, or 80.6%85.3% of total assets, compared to $624.4$742.1 million, or 78.5%82.3% of total assets, at December 31, 2016. An increase2017. Increases in commercial loans of $66.4$19.8 million, or 39.9%8.2%, an increase in commercial real estate loans of $50.0$1.4 million, or 14.9%, an increase in construction and land development loans of $7.8 million, or 16.1%0.4%, and an increase in consumer loans of $8.7 million,$880,000, or 140.3%5.0%, were partially offset by a decrease in construction and land development loans of $2.0 million, or 3.5%, and residential real estate loans of $5.9$1.9 million, or 7.7%2.9%. Our commercial loan growth is attributed to adding lenders and a continued assessment of other opportunities in our expanded market area. The consumer loan growth is primarily due to loan purchases.purchases via the BancAlliance Lending Club Program that the Bank entered into an agreement with in 2016.
The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
At | At | At | At | |||||||||||||||||||||||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
Commercial real estate | $ | 386,062 | 50.78 | % | $ | 336,102 | 53.07 | % | $ | 372,955 | 48.38 | % | $ | 371,510 | 49.35 | % | ||||||||||||||||
Commercial | 232,511 | 30.58 | % | 166,157 | 26.23 | % | 259,994 | 33.72 | % | 240,223 | 31.91 | % | ||||||||||||||||||||
Residential real estate | 70,960 | 9.33 | % | 76,850 | 12.13 | % | 65,777 | 8.53 | % | 67,724 | 9.00 | % | ||||||||||||||||||||
Construction and land development | 55,915 | 7.35 | % | 48,161 | 7.60 | % | 53,875 | 6.99 | % | 55,828 | 7.42 | % | ||||||||||||||||||||
Consumer | 14,830 | 1.95 | % | 6,172 | 0.97 | % | 18,335 | 2.38 | % | 17,455 | 2.32 | % | ||||||||||||||||||||
760,278 | 100.00 | % | 633,442 | 100.00 | % | 770,936 | 100.00 | % | 752,740 | 100.00 | % | |||||||||||||||||||||
Allowance for loan losses | (10,932 | ) | (8,590 | ) | (10,236 | ) | (9,757 | ) | ||||||||||||||||||||||||
Deferred loan fees, net | (809 | ) | (427 | ) | (818 | ) | (845 | ) | ||||||||||||||||||||||||
Net loans | $ | 748,537 | $ | 624,425 | $ | 759,882 | $ | 742,138 |
Assets held-for-sale.Held-for-Sale.Assets held-for-sale increased to $3.2 million at September 30, 2017 from zero at December 31, 2016. AThe Company purchased a building in Portsmouth, New Hampshire was purchased by the Bank in January 2017.2017 with the intention of using a majority of the space for banking operations. The cost of this building and the related improvements is $3.2was $3.3 million as of September 30,December 31, 2017. The Bank hasDuring 2017, the Company entered into an agreement to sell the building for $3.3 million, with the building to be developed into a mixed used commercial building, for $3.2 million.and transferred the building into the held-for-sale category. During the first quarter of 2018, the Company transferred the assets back into the premises and equipment category as the Company terminated the agreement to sell the building, and entered into a new agreement with a third party to construct the commercial building, in which the Company will occupy space. The Company intends to buy back a portion of the building to provide space for future additional employees as we grow.will then sell any unused units.
Deposits. Total deposits increased $97.3decreased $30.4 million, or 15.5%4.0%, to $725.3$719.7 million at September 30, 2017March 31, 2018 from $628.0$750.1 million at December 31, 2016. 2017.The primary reason for the decrease in deposits was due to a decrease of $19.6 million, or 6.3%, in NOW and demand deposits, a decrease of $7.5 million, or 7.4%, time deposits, and a decrease in money market deposits of $5.7 million, or 2.5%. The decrease in the NOW and demand deposits is primarily from municipal deposits. We expect these deposits to increase wasin the June 30, 2018 quarter. Time deposits decreased primarily due to an increase in time depositsthe roll-off of $41.7 million, an increase in money market accounts of $50.8 million, and an increase in savings accounts of $6.5 million. Increases in time deposits were primarily due to increases in brokered certificates of deposit of $32.4 million and an increase of $11.1 million in QwickRate certificates of deposit, where we gather certificates of deposit nationwide by posting online rates we will pay on these deposits. The increase in money market accounts is primarily due to targeting larger deposit relationships at premium pricing.CDs.
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Borrowings. Borrowings at both September 30, 2017March 31, 2018 and December 31, 20162017 consisted entirely of Federal Home Loan Bank advances. Borrowings increased $28.5$18.4 million, or 57.2%68.4%, to $78.4$45.2 million at September 30, 2017March 31, 2018 from $49.9$26.8 million at December 31, 2016.2017. The increase was primarily due to fund loan growth.the decrease in deposits.
Shareholders’ Equity. Total shareholders’ equity increased $6.9$1.6 million, or 6.3%1.3%, to $116.1$117.3 million at September 30, 2017,March 31, 2018, from $109.1$115.8 million at December 31, 2016.2017. The increase was primarily due to year-to-date net income of $6.2$2.0 million; increasespartially offset by decreases of $164,000$859,000 in year-to-date accumulated other comprehensive income, reflecting an increasea decrease in the fair value of available-for-sale securities, and a $691,000 increase in additional paid-in capital related to stock based compensation; partially offset by common stock repurchases totaling $492,000.securities. Book value per share increased to $12.05$12.19 at September 30, 2017March 31, 2018 from $11.31$12.02 at December 31, 2016.2017.
Asset Quality.
The following table sets forth information regarding our non-performing assets at the dates indicated.
At | At | At | At | |||||||||||||
September 30, | December 31, | March 31, | December 31, | |||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Non-accrual loans: | ||||||||||||||||
Real estate: | ||||||||||||||||
Commercial | $ | 5,185 | $ | 346 | $ | 7,102 | $ | 7,102 | ||||||||
Residential | 361 | 303 | 920 | 364 | ||||||||||||
Construction and land development | - | - | - | - | ||||||||||||
Commercial | 68 | 933 | 1,501 | 1,505 | ||||||||||||
Consumer | 33 | - | 61 | 62 | ||||||||||||
Total non-accrual loans | 5,647 | 1,582 | 9,584 | 9,033 | ||||||||||||
Accruing loans past due 90 days or more | - | - | - | - | ||||||||||||
Real estate owned | - | - | - | - | ||||||||||||
Total non-performing assets | $ | 5,647 | $ | 1,582 | $ | 9,584 | $ | 9,033 | ||||||||
Total loans (1) | $ | 759,469 | $ | 633,015 | $ | 770,118 | $ | 751,895 | ||||||||
Total assets | $ | 928,579 | $ | 795,543 | $ | 891,172 | $ | 902,265 | ||||||||
Total non-performing loans to total loans (1) | 0.74 | % | 0.25 | % | 1.24 | % | 1.20 | % | ||||||||
Total non-performing assets to total assets | 0.61 | % | 0.20 | % | 1.08 | % | 1.00 | % |
(1) Loans are presented before the allowance for loan losses but include deferred fees/costs
The increase in non-performing assets at September 30, 2017March 31, 2018 compared to December 31, 20162017 was primarily due to an increase of $556,000 in non-accrual one- to four-family loans. The Company has cooperative relationships with the additionvast majority of one commercialits nonperforming loan customers. Substantially all non-performing loans are collateralized by real estate lending relationship, consistingand the repayment is largely dependent on the return of twosuch loans totaling $5.2 million. Although we have continued to receive payments due underperforming status or the termsliquidation of the underlying real estate collateral. The Company pursues the resolution of all non-performing loans we placedthrough collections, restructures, voluntary liquidation of collateral by the loans on non-accrualborrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, dueincluding restructuring the loan, are unsuccessful, the Company will initiate appropriate legal action seeking to the financial performanceacquire property by deed in lieu of the borrower. Based on management’s most recent evaluation, the Bank has assigned a specific reserve of $809,000 as of September 30, 2017foreclosure or through foreclosure, or to this lending relationship.
liquidate business assets.
Allowance for Loan Losses. The allowance for loan losses is maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of the consolidated balance sheet reporting dates. The allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio size and composition, amount of and trend regarding delinquent net non-accrual loans and charge-offs, national and local business conditions, loss experience and an overall evaluation of the quality of the underlying collateral.
The following table sets forth activity in our allowance for loan losses for the periods indicated:
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
(Dollars in thousands) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Allowance at beginning of period | $ | 8,590 | $ | 7,905 | $ | 9,757 | $ | 8,590 | ||||||||
Provision for loan losses | 2,467 | 484 | 656 | 563 | ||||||||||||
Charge offs: | ||||||||||||||||
Real estate: | ||||||||||||||||
Commercial | 6 | - | - | 6 | ||||||||||||
Residential | - | - | - | - | ||||||||||||
Construction and land development | - | - | - | - | ||||||||||||
Commercial | 63 | - | 20 | - | ||||||||||||
Consumer | 106 | 29 | 166 | 8 | ||||||||||||
Total charge-offs | 175 | 29 | 186 | 14 | ||||||||||||
Recoveries: | ||||||||||||||||
Real estate: | ||||||||||||||||
Commercial | - | - | - | - | ||||||||||||
Residential | - | 12 | - | - | ||||||||||||
Construction and land development | - | - | - | - | ||||||||||||
Commercial | 45 | 1 | 1 | - | ||||||||||||
Consumer | 5 | 13 | 8 | - | ||||||||||||
Total recoveries | 50 | 26 | 9 | - | ||||||||||||
Net charge-offs | 125 | 3 | 177 | 14 | ||||||||||||
Allowance at end of period | $ | 10,932 | $ | 8,386 | $ | 10,236 | $ | 9,139 | ||||||||
Non-performing loans at end of period | $ | 5,647 | $ | 1,420 | $ | 9,584 | $ | 1,379 | ||||||||
Total loans outstanding at end of period (1) | 759,469 | 597,750 | 770,118 | 660,013 | ||||||||||||
Average loans outstanding during the period (1) | 681,034 | 574,655 | 766,968 | 646,136 | ||||||||||||
Allowance to non-performing loans | 193.59 | % | 590.56 | % | 106.80 | % | 662.73 | % | ||||||||
Allowance to total loans outstanding at end of period | 1.44 | % | 1.40 | % | 1.33 | % | 1.38 | % | ||||||||
Net charge-offs to average loans outstanding during the during the period (annualized) | 0.02 | % | 0.00 | % | 0.09 | % | 0.01 | % |
(1) Loans are presented before the allowance for loan losses but include deferred fees/costs
Results of Operations for the Three Months Ended September 30,March 31, 2018 and 2017 and 2016
General. Net income increased $1.0 million$220,000 to $2.8$2.0 million for the three months ended September 30, 2017March 31, 2018 from $1.8 million for the three months ended September 30, 2016.March 31, 2017. The increase was related to an increase of $1.5$1.4 million in net interest and dividend income, andpartially offset by a $1.5 million increase$489,000 decrease in noninterest income partially offset by an increase in provision for loan losses of $849,000 and an increase in noninterest expense of $702,000.$755,000. In addition, the provision for income taxes decreased by $169,000 due to the decrease in the federal tax rate from 35% to 21%.
Interest and Dividend Income. Interest and dividend income which includes Federal Home Loan Bank stock dividends, increased $1.8$1.6 million, or 24.4%20.2%, to $9.2$9.8 million for the three months ended September 30, 2017March 31, 2018 from $7.4$8.1 million for the three months ended September 30, 2016.March 31, 2017. This increase was primarily attributable to an increase in interest and fees on loans, which increased $1.8$2.0 million, or 27.1%28.2%, to $8.4$9.3 million for the three months ended September 30, 2017March 31, 2018 from $6.6$7.2 million for the three months ended September 30, 2016.March 31, 2017. The increase in interest and fees on loans was partially offset by a decrease in interest and dividends on securities, which decreased $438,000, or 50.2%, to $435,000 for the three months ended March 31, 2017 from $873,000 for the three months ended March 31, 2017.
The increase in interest income on loans was due to an increase in the average balance of loans of $129.8$120.8 million, or 22.0%18.7%, to $719.1$767.0 million for the three months ended September 30, 2017March 31, 2018 from $589.3$646.1 million for the three months ended September 30, 2016.March 31, 2017. Interest income increased to a lesser extent due to the yield on loans increasing 1836 basis points to 4.67%4.84% for the three months ended September 30, 2017March 31, 2018 due to our continued focus on higher-yielding commercial lending. The decrease in interest and dividends on securities was due to the Company selling $30.6 million of state and municipal securities and divesting of all equity securities during the third and fourth quarters of 2017.
Interest Expense. Interest expense increased $292,000,$253,000, or 41.0%32.4%, to $1.0 million for the three months ended September 30, 2017March 31, 2018 from $713,000$781,000 for the three months ended September 30, 2016,March 31, 2017, caused by an increase in interest expense on deposits andpartially offset by a decrease in interest expense on borrowings. Interest expense on deposits increased $244,000,$350,000, or 45.3%61.4%, to $783,000$920,000 for the three months ended September 30, 2017March 31, 2018 from $539,000$570,000 for the three months ended September 30, 2016,March 31, 2017, due to an increase in the average rate paid on interest-bearing deposits of 1019 basis points to 0.58%0.66% for the three months ended September 30, 2017March 31, 2018 from 0.48%0.47% for the three months ended September 30, 2016.March 31, 2017. The increase in the average rate was primarily the result of increases in the average rate paid on money market accounts and certificates of deposit. The average rate paid on money market accounts and certificates of deposit increased due to changes in the rate environment. Interest expense on deposits also increased due to an increase in the average balance of interest-bearing deposits of $93.2$71.0 million, or 20.8%14.6%, to $542.2$556.3 million for the three months ended September 30, 2017March 31, 2018 from $449.0$485.3 million for the three months ended September 30, 2016.March 31, 2017. The increase resulted primarily from an increase in the average balance of money market accounts, which increased $62.6$75.1 million, or 52.9%, and an increase in the average balance of certificates of deposit, which increased $24.2 million, or 23.9%50.2%.
Interest expense on borrowings increased $48,000,decreased $97,000, or 27.6%46.0%, to $222,000$114,000 for the three months ended September 30, 2017March 31, 2018 from $174,000$211,000 for the three months ended September 30, 2016.March 31, 2017. The interest expense on borrowings increaseddecreased due to the increasedecrease in average outstanding balance of $21.9$38.8 million, or 61.8%63.0% to $57.4$22.8 million for the three months ended September 30, 2017.March 31, 2018. The increasedecrease in the average outstanding balance was partially offset by a 4163 basis point decreaseincrease in the cost of borrowings to 1.55%2.0% for the three months ended September 30, 2017. The average balance in borrowings increased during the three months ended September 30, 2017 to support funding loan growth.March 31, 2018.
Net Interest and Dividend Income. Net interest and dividend income increased $1.5$1.4 million, or 22.7%18.9%, to $8.2$8.7 million for the three months ended September 30, 2017March 31, 2018 from $6.7$7.3 million for the three months ended September 30, 2016.March 31, 2017. The increase was due to both higher balances of earning assets and expanding margins. Our net interest rate spread increased 1733 basis points to 3.70%3.95% for the three months ended September 30, 2017March 31, 2018 from 3.53%3.62% for the three months ended September 30, 2016.March 31, 2017. Our net interest margin increased 1738 basis points to 3.89%4.17% for the three months ended September 30, 2017March 31, 2018 from 3.72%3.79% for the three months ended September 30, 2016.March 31, 2017.
Provision for Loan Losses. The provision for loan losses was $1.0 million$656,000 for the three months ended September 30, 2017March 31, 2018 compared to $163,000$563,000 for the three months ended September 30, 2016.March 31, 2017. The provision recorded resulted in an allowance for loan losses of $10.9$10.2 million, or 1.44%1.33% of total loans at September 30, 2017,March 31, 2018, compared to $8.6$9.8 million, or 1.36%1.30% of total loans, at December 31, 20162017 and $8.4$9.1 million, or 1.40%1.38% of total loans, at September 30, 2016.March 31, 2017. The changes in the provision and allowance for loan losses were based on management’s assessment of loan portfolio growth and composition trends, historical charge-off trends, levels of problem loans and other asset quality trends. The non-accrualNon-accrual loans as of September 30, 2017March 31, 2018 was primarily composed of one commercial real estate lending relationship totaling $5.2two loan relationships with a carrying value of $8.5 million. Based on management’s most recent evaluation, the Bank has assigned a specific reserve of $809,000 to this lending relationship as of September 30, 2017.
Noninterest Income. Noninterest income increased $1.5 million,decreased $489,000, or 112.5%32.6%, to $2.9$1.0 million for the three months ended September 30, 2017March 31, 2018 from $1.4$1.5 million for the three months ended September 30, 2016.March 31, 2017. The increasedecrease was primarily caused by an increasea decrease in the gain on sales of securities and an increase in income from service fees.securities. Gains on sales of securities increased $1.4 million, or 322.6%, to $1.9was zero for the three months ended September 30, 2017 from $438,000March 31, 2018 compared to $482,000 for the three months ended September 30, 2016. Effective January 2018, the Company is adoptingASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.”This standard will require us to measure our equity investments at fair value with changes in fair value recognized in net income. In order to reduce the potential quarterly volatility, the Company may divest more equity securities. As of September 30, 2017,the Company’s marketable equity securities portfolio had a total fair value of $12.6 million including a net unrealized gain of $2.7 million. Income from service charges increased $61,000, or 14.3%, to $488,000 for the three months ended September 30, 2017 from $427,000 for the three months ended September 30, 2016. Service fees increased due to an increase in loans.March 31, 2017.
Noninterest Expense. Noninterest expense increased $702,000,$755,000, or 13.5%13.4%, to $5.9$6.4 million for the three months ended September 30, 2017March 31, 2018 from $5.2$5.6 million for the three months ended September 30, 2016.March 31, 2017. The largest increases were related to the salaries and employee benefits expense, and directors’ compensation.other expense. The increase in salary and employee benefits of $724,000,$482,000, or 22.5%13.1%, to $3.9$4.2 million for the three months ended September 30, 2017March 31, 2018 from $3.2$3.7 million for the three months ended September 30, 2016March 31, 2017 was primarily related to an increased employee base and stock-based compensation expense in 2017 compared to no stock based compensation expense in the prior period.number of lenders. The increase in directors’ feesother expense of $52,000,$239,000, or 64.2%36.4%, to $133,000$896,000 for the three months ended September 30, 2017March 31, 2018 from $81,000$657,000 for the three months ended September 30, 2016March 31, 2017 was primarily related to costs incurred working out nonperforming loans and an increase in directors’ stock-based compensationcontributions expense. The noninterest expense increases were partially offset by decreases in professional fees and the FDIC assessment expense. The decrease in professional fees of $72,000, or 24.1%, to $227,000 for the three months ended September 30, 2017 from $299,000 for the three months ended September 30, 2016 was due to one-time services incurred in 2016 for the development of equity compensation plans. The decrease in the FDIC assessment expense was $28,000, or 27.2%, to $75,000 for the three months ended September 30, 2017 from $103,000 for the three months ended September 30, 2016. The decrease was related to a change in the FDIC reserve calculation.
Income Tax Provision. We recorded a provision for income taxes of $1.4 million$678,000 for the three months ended September 30,March 31, 2018, reflecting an effective tax rate of 25.1%, compared to a provision of $847,000 for the three months ended March 31, 2017, reflecting an effective tax rate of 34.1%, compared to a provision of $940,000 for the three months ended September 30, 2016, reflecting an effective tax rate of 34.8%32.0%. The changes in the income tax provision were primarily due to a reduction of the purchasefederal corporate income tax rate from 35% to 21%.
Subsequent Event. On April 3, 2018, the Bank conducted a foreclosure sale of tax creditscertain collateral consisting of both real and personal property which secured four non-accruing loans originally made by the Bank having an aggregate principal outstanding balance of approximately $7.5 million of which $4.9 million is outstanding at the Bank with the remaining $2.6 million participated out to another institution. The Bank received $8.3 million in 2017. Our effective tax ratescash from this foreclosure sale. Certain subordinated lienholders are below statutory federalnow disputing the priority of the Bank’s liens and state rates due primarilythe right of the Bank to tax-exempt income relatedretain approximately $2.1 million of the proceeds from this foreclosure sale, but have not yet filed a formal claim. Until the dispute is resolved, the Bank has deposited, and will continue to investmentshold, the disputed proceeds (i.e., approximately $2.1 million which includes $543,000 that is participated out to another institution) in bank owned life insurance and municipal securities.a suspense deposit account at the Bank. At this time, we cannot reasonably estimate a range of potential loss, if any, to the Bank, with respect to this matter.
Average Balance Sheet and Related Yields and Rates
The following tables set forth the average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the amount of tax free interest-earning assets is immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
For the Three Months Ended September 30, | For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||
Interest | Interest | Interest | Interest | |||||||||||||||||||||||||||||||||||||||||||||
Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | |||||||||||||||||||||||||||||||||||||
Balance | Paid | Rate | Balance | Paid | Rate | Balance | Paid | Rate | Balance | Paid | Rate | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans | $ | 719,116 | $ | 8,403 | 4.67 | % | $ | 589,335 | $ | 6,611 | 4.49 | % | $ | 766,968 | $ | 9,276 | 4.84 | % | $ | 646,136 | $ | 7,233 | 4.48 | % | ||||||||||||||||||||||||
Interest-earning deposits | 4,897 | 14 | 1.14 | % | 7,864 | 8 | 0.41 | % | 8,680 | 42 | 1.94 | % | 3,686 | 6 | 0.65 | % | ||||||||||||||||||||||||||||||||
Investment securities | 118,672 | 793 | 2.67 | % | 121,596 | 785 | 2.58 | % | 59,761 | 408 | 2.73 | % | 121,303 | 848 | 2.80 | % | ||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 3,028 | 29 | 3.83 | % | 2,369 | 22 | 3.71 | % | 1,670 | 27 | 6.47 | % | 3,511 | 25 | 2.85 | % | ||||||||||||||||||||||||||||||||
Total interest-earning assets | 845,713 | 9,239 | 4.37 | % | 721,164 | 7,426 | 4.12 | % | 837,079 | 9,753 | 4.66 | % | 774,636 | 8,112 | 4.19 | % | ||||||||||||||||||||||||||||||||
Non-interest earning assets | 45,951 | 38,970 | 49,958 | 48,499 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 891,664 | $ | 760,134 | $ | 887,037 | $ | 823,135 | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Savings accounts | $ | 117,049 | 51 | 0.17 | % | $ | 116,685 | 55 | 0.19 | % | $ | 118,382 | 70 | 0.24 | % | $ | 118,296 | 59 | 0.20 | % | ||||||||||||||||||||||||||||
Money market accounts | 181,064 | 234 | 0.52 | % | 118,439 | 88 | 0.30 | % | 224,681 | 401 | 0.71 | % | 149,545 | 126 | 0.34 | % | ||||||||||||||||||||||||||||||||
NOW accounts | 118,469 | 172 | 0.58 | % | 112,446 | 171 | 0.61 | % | 110,907 | 154 | 0.56 | % | 114,529 | 168 | 0.59 | % | ||||||||||||||||||||||||||||||||
Certificates of deposit | 125,645 | 326 | 1.04 | % | 101,426 | 225 | 0.89 | % | 102,325 | 295 | 1.15 | % | 102,884 | 217 | 0.84 | % | ||||||||||||||||||||||||||||||||
Total interest-bearing deposits | 542,227 | 783 | 0.58 | % | 448,996 | 539 | 0.48 | % | 556,295 | 920 | 0.66 | % | 485,254 | 570 | 0.47 | % | ||||||||||||||||||||||||||||||||
Federal Home Loan Bank advances | 57,446 | 222 | 1.55 | % | 35,512 | 174 | 1.96 | % | 22,814 | 114 | 2.00 | % | 61,597 | 211 | 1.37 | % | ||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 599,673 | 1,005 | 0.67 | % | 484,508 | 713 | 0.59 | % | 579,109 | 1,034 | 0.71 | % | 546,851 | 781 | 0.57 | % | ||||||||||||||||||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | 168,129 | 160,070 | 180,850 | 151,522 | ||||||||||||||||||||||||||||||||||||||||||||
Other noninterest-bearing liabilities | 8,230 | 7,504 | 9,244 | 8,330 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 776,032 | 652,082 | 769,203 | 706,703 | ||||||||||||||||||||||||||||||||||||||||||||
Total equity | 115,632 | 108,052 | 116,834 | 116,432 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 891,664 | $ | 760,134 | $ | 886,037 | $ | 823,135 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 8,234 | $ | 6,713 | $ | 8,719 | $ | 7,331 | ||||||||||||||||||||||||||||||||||||||||
Interest rate spread (1) | 3.70 | % | 3.53 | % | 3.95 | % | 3.62 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest-earning assets (2) | $ | 246,040 | $ | 236,656 | $ | 257,970 | $ | 227,785 | ||||||||||||||||||||||||||||||||||||||||
Net interest margin (3) | 3.89 | % | 3.72 | % | 4.17 | % | 3.79 | % | ||||||||||||||||||||||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 141.03 | % | 148.84 | % | 144.55 | % | 141.65 | % |
(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
(1) | Net interest rate spread represents the difference between the weighted average yield on interest-bearing assets and the weighted average rate of interest-bearing liabilities. |
(2) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(3) | Net interest margin represents net interest income divided by average total interest-earning assets |
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effect attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
For the Three Months Ended September 30, 2017 | For the Three Months Ended March 31, 2018 | |||||||||||||||||||||||
Compared to the Three Months Ended September 30, 2016 | Compared to the Three Months Ended March 31, 2017 | |||||||||||||||||||||||
Increase (Decrease) Due to | Total | Increase (Decrease) Due to | Total | |||||||||||||||||||||
Rate | Volume | Increase (Decrease) | Rate | Volume | Increase (Decrease) | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 285 | $ | 1,507 | $ | 1,792 | $ | 614 | $ | 1,429 | $ | 2,043 | ||||||||||||
Interest-earning deposits | 10 | (4 | ) | 6 | 21 | 15 | 36 | |||||||||||||||||
Investment securities | 27 | (19 | ) | 8 | (19 | ) | (421 | ) | (440 | ) | ||||||||||||||
Federal Home Loan Bank stock | 1 | 6 | 7 | 20 | (18 | ) | 2 | |||||||||||||||||
Total interest-earning assets | 323 | 1,490 | 1,813 | 636 | 1,005 | 1,641 | ||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings accounts | (4 | ) | 0 | (4 | ) | 11 | 0 | 11 | ||||||||||||||||
Money Market accounts | 85 | 61 | 146 | 190 | 85 | 275 | ||||||||||||||||||
Now accounts | (8 | ) | 9 | 1 | (9 | ) | (5 | ) | (14 | ) | ||||||||||||||
Certificates of deposit | 42 | 59 | 101 | 79 | (1 | ) | 78 | |||||||||||||||||
Total interest-bearing deposits | 115 | 129 | 244 | 271 | 79 | 350 | ||||||||||||||||||
Federal Home Loan Bank advances | (43 | ) | 91 | 48 | 71 | (168 | ) | (97 | ) | |||||||||||||||
Total interest-bearing liabilities | 72 | 220 | 292 | 342 | (89 | ) | 253 | |||||||||||||||||
Change in net interest income | $ | 251 | $ | 1,270 | $ | 1,521 | $ | 294 | $ | 1,094 | $ | 1,388 |
ResultsManagement of Operations for the Nine Months Ended September 30, 2017 and 2016
Market Risk
General. Net income increased $1.6 million to $6.2 million for the nine months ended September 30, 2017 from $4.6 million for the nine months ended September 30, 2016. The increase was related to an increase of $4.2 million in net interest income and a $2.2 million increase in noninterest income, partially offset by an increase in provision for loan losses of $2.0 million and an increase in noninterest expense of $2.2 million.
Interest and Dividend Income. Interest and dividend income, which includes Federal Home Loan Bank stock dividends, increased $4.7 million, or 22.1%, to $26.2 million for the nine months ended September 30, 2017 from $21.4 million for the nine months ended September 30, 2016. This increase was primarily attributable to an increase in interest and fees on loans, which increased $4.7 million, or 24.8%, to $23.5 million for the nine months ended September 30, 2017 from $18.9 million for the nine months ended September 30, 2016.
The increase in interest income on loans was due to an increase in the average balance of loans of $106.4 million, or 18.5%, to $681.0 million for the nine months ended September 30, 2017 from $574.7 million for the nine months ended September 30, 2016. Interest income increased to a lesser extent due to a higher yield on loans, which increased 23 basis points to 4.61% for the nine months ended September 30, 2017 due to our continued focus on higher-yielding commercial lending.
Interest Expense. Interest expense increased $573,000, or 27.4%, to $2.7 million for the nine months ended September 30, 2017 from $2.1 million for the nine months ended September 30, 2016, caused by an increase in interest expense on deposits and on borrowings. Interest expense on deposits increased $408,000, or 25.1%, to $2.0 million for the nine months ended September 30, 2017 from $1.6 million for the nine months ended September 30, 2016, due to an increase in average rate paid on interest-bearing deposits by four basis points to 0.53% for the nine months ended September 30, 2017 from 0.49% for the nine months ended September 30, 2016. The increase in the average rate was primarily the result of increases in the average rate paid on money market accounts and certificates of deposit. The average rate paid on money market accounts and certificates of deposit increased due to changes in the rate environment. Interest expense also increased due to higher average balances of interest-bearing deposits, which increased $67.8 million, or 15.2%, to $513.3 million for the nine months ended September 30, 2017 from $445.5 million for the nine months ended September 30, 2016. The increase resulted primarily from an increase in the average balance of money market accounts, which increased $50.3 million, or 44.9%.
Interest expense on borrowings increased $165,000, or 35.3%, to $633,000 for the nine months ended September 30, 2017 from $468,000 for the nine months ended September 30, 2016. The interest expense on borrowings increased due to the increase in average outstanding balance of $22.4 million, or 63.9% to $57.5 million for the nine months ended September 30, 2017. The increase in the average outstanding balance was partially offset by the decrease in the average rate paid of 31 basis points to 1.47% for the nine months ended September 30, 2017 due to restructuring borrowings at a lower interest rate. The average balance of borrowings increased during the nine months ended September 30, 2017 to support funding loan growth.
Net Interest and Dividend Income Simulation.. We analyze our sensitivity to changes in interest rates through a net interest income simulation model. Net interest and dividend income increased $4.2 million, or 21.5%, to $23.5 million for the nine months ended September 30, 2017 from $19.3 million for the nine months ended September 30, 2016. The increase was due to both higher balances of earning assets and expanding margins. Our net interest rate spread increased 23 basis points to 3.69% for the nine months ended September 30, 2017 from 3.46% for the nine months ended September 30, 2016. Our net interest margin increased 23 basis points to 3.87% for the nine months ended September 30, 2017 from 3.64% for the nine months ended September 30, 2016.
Provision for Loan Losses. The provision for loan losses was $2.5 million for the nine months ended September 30, 2017 compared to $484,000 for the nine months ended September 30, 2016. The provision recorded resulted in an allowance for loan losses of $10.9 million, or 1.44% of total loans at September 30, 2017, compared to $8.6 million, or 1.36% of total loans, at December 31, 2016 and $8.4 million, or 1.40% of total loans, at September 30, 2016. The changes in the provision and allowance for loan losses were based on management’s assessment of loan portfolio growth and composition trends, historical charge-off trends, levels of problem loans and other asset quality trends. The non-accrual loans as of September 30, 2017 was primarily composed of one commercial real estate relationship totaling $5.2 million. Based on management’s most recent evaluation, the Bank has assigned a specific reserve of $809,000 to this lending relationship as of September 30, 2017.
Noninterest Income. Noninterest income increased $2.2 million, or 67.5%, to $5.5 million for the nine months ended September 30, 2017 from $3.3 million for the nine months ended September 30, 2016. The increase was primarily caused by an increase in the gain on sales of marketable equity securities and an increase in income from service fees. Gains on sales of securities increased $1.9 million to $2.4 million for the nine months ended September 30, 2017 from $475,000 for the nine months ended September 30, 2016. Effective January 2018, the Company is adoptingASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.”This standard will require us to measure our equity investments at fair value with changes in fair value recognized in net income. In order to reduce the potential quarterly volatility, the Company may divest more equity securities.Income from service fees increased $178,000, or 13.8%, to $1.5 million for the nine months ended September 30, 2017 from $1.3 million for the nine months ended September 30, 2016. Service fees increased due to an increase in loans.
Noninterest Expense. Noninterest expense increased $2.2 million, or 14.4%, to $17.4 million for the nine months ended September 30, 2017 from $15.2 million for the nine months ended September 30, 2016. The largest increases were related to salaries and employee benefits expense, marketing expense, and directors’ compensation. The increase in salary and employee benefits of $1.8 million, or 19.4%, to $11.3 million for the nine months ended September 30, 2017 from $9.5 million for the nine months ended September 30, 2016 was primarily related to an increased employee base and an increase in stock-based compensation expense in 2017 compared to 2016. Marketing expenses increased $53,000, or 29.8%, to $231,000 for the nine months ended September 30, 2017 from $178,000 for the nine months ended September 30, 2016. The primary reason the marketing expense increased was due to strategic target marketing within the Company’s footprint. The increase in directors’ compensation of $207,000, or 91.6%, to $433,000 for the nine months ended September 30, 2017 from $226,000 for the nine months ended September 30, 2016 was primarily related to stock-based compensation expense incurred in 2017 compared to no expense in 2016. The noninterest expense increases were partially offset by decreases in professional fees and the FDIC assessment expense. The decrease in professional fees of $220,000, or 25.1%, to $656,000 for the nine months ended September 30, 2017 from $876,000 for the nine months ended September 30, 2016 was due to one-time services incurred in 2016 for the development of equity compensation plans. The decrease in the FDIC assessment expense was $77,000, or 26.3%, to $216,000 for the nine months ended September 30, 2017 from $293,000 for the nine months ended September 30, 2016. The decrease was related to a change in the FDIC reserve calculation.
Income Tax Provision. We recorded a provision for income taxes of $2.9 million for the nine months ended September 30, 2017, reflecting an effective tax rate of 32.1%, compared to a provision of $2.3 million for the nine months ended September 30, 2016, reflecting an effective tax rate of 33.2%. The changes in the income tax provision were primarily due to the purchase of tax credits in 2017. Our effective tax rates are below statutory federal and state rates due primarily to tax-exempt income related to investments in bank owned life insurance and municipal securities.
Average Balance Sheet and Related Yields and Rates
The following tables set forth the average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the amount of tax free interest-earning assets is immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
For the Nine Months Ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | |||||||||||||||||||
Balance | Paid | Rate | Balance | Paid | Rate | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 681,034 | $ | 23,547 | 4.61 | % | $ | 574,655 | $ | 18,861 | 4.38 | % | ||||||||||||
Interest-earning deposits | 3,406 | 23 | 0.90 | % | 7,260 | 22 | 0.40 | % | ||||||||||||||||
Investment securities | 121,377 | 2,507 | 2.75 | % | 123,230 | 2,481 | 2.68 | % | ||||||||||||||||
Federal Home Loan Bank stock | 3,108 | 90 | 3.86 | % | 2,607 | 68 | 3.48 | % | ||||||||||||||||
Total interest-earning assets | 808,925 | 26,167 | 4.31 | % | 707,752 | 21,432 | 4.04 | % | ||||||||||||||||
Non-interest earning assets | 45,916 | 39,368 | ||||||||||||||||||||||
Total assets | $ | 854,841 | $ | 747,120 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings accounts | $ | 116,481 | 160 | 0.18 | % | $ | 109,936 | 140 | 0.17 | % | ||||||||||||||
Money market accounts | 162,204 | 511 | 0.42 | % | 111,912 | 229 | 0.27 | % | ||||||||||||||||
NOW accounts | 115,038 | 506 | 0.59 | % | 110,492 | 490 | 0.59 | % | ||||||||||||||||
Certificates of deposit | 119,571 | 854 | 0.95 | % | 113,134 | 764 | 0.90 | % | ||||||||||||||||
Total interest-bearing deposits | 513,294 | 2,031 | 0.53 | % | 445,474 | 1,623 | 0.49 | % | ||||||||||||||||
Federal Home Loan Bank advances | 57,500 | 633 | 1.47 | % | 35,082 | 468 | 1.78 | % | ||||||||||||||||
Total interest-bearing liabilities | 570,794 | 2,664 | 0.62 | % | 480,556 | 2,091 | 0.58 | % | ||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||
Noninterest-bearing deposits | 161,043 | 154,379 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 8,052 | 7,063 | ||||||||||||||||||||||
Total liabilities | 739,889 | 641,998 | ||||||||||||||||||||||
Total equity | 114,952 | 105,122 | ||||||||||||||||||||||
Total liabilities and equity | $ | 854,841 | $ | 747,120 | ||||||||||||||||||||
Net interest income | $ | 23,503 | $ | 19,341 | ||||||||||||||||||||
Interest rate spread (1) | 3.69 | % | 3.46 | % | ||||||||||||||||||||
Net interest-earning assets (2) | $ | 238,131 | $ | 227,196 | ||||||||||||||||||||
Net interest margin (3) | 3.87 | % | 3.64 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 141.72 | % | 147.28 | % |
(1) Net interest rate spread represents the difference between the weighted average yieldinterest income we earn on interest-bearingour interest-earning assets, such as loans and securities, and the weighted average rate ofinterest we pay on our interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin representsliabilities, such as deposits and borrowings. We estimate what our net interest income divided by average total interest-earning assets
Rate/Volume Analysiswould 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 ratesincrease 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 ratesrepresenting immediate and permanent, parallel shifts in the yield curve.
The following table sets forthpresents the effects of changing rates and volumes on ourestimated changes in net interest income.income of The rate column shows the effects attributableProvident Bank, calculated on a bank-only basis, that would result from changes in market interest rates over twelve-month periods beginning March 31, 2018.
At March 31, | ||||||||
(Dollars in thousands) | 2018 | |||||||
Changes in | Estimated | |||||||
Interest Rates | Net Interest Income | |||||||
(Basis Points) | Over Next 12 Months | Change | ||||||
200 | $ | 37,855 | (0.04 | )% | ||||
0 | 37,869 | - | ||||||
-100 | 36,886 | (2.60 | )% |
Economic Value of Equity Simulation.We also analyze our sensitivity to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The EVE ratio represents the dollar amount of our EVE divided by the present value of our total assets for a given interest rate (changesscenario. 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 rate multiplied by prior volume). 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 thatinterest rates decrease 100 basis points from current market rates.
The volume column showsfollowing table presents the effect attributable toestimated changes in volume (changes in volume multiplied by prior rate).EVE of The total column represents the sum of the prior columns. For purposes of this table, changes attributable toProvident Bank, calculated on a bank-only basis, that would result from 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.market interest rates as of March 31, 2018.
For the Nine Months Ended September 30, 2017 | ||||||||||||
Compared to the Nine Months Ended September 30, 2016 | ||||||||||||
Increase (Decrease) Due to | Total | |||||||||||
Rate | Volume | Increase (Decrease) | ||||||||||
(in thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | 1,050 | $ | 3,636 | $ | 4,686 | ||||||
Interest-earning deposits | 17 | (16 | ) | 1 | ||||||||
Investment securities | 64 | (38 | ) | 26 | ||||||||
Federal Home Loan Bank stock | 8 | 14 | 22 | |||||||||
Total interest-earning assets | 1,139 | 2,596 | 4,735 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Savings accounts | 11 | 9 | 20 | |||||||||
Money Market Accounts | 154 | 128 | 282 | |||||||||
Now Accounts | (4 | ) | 20 | 16 | ||||||||
Certificates of deposit | 45 | 45 | 90 | |||||||||
Total interest-bearing deposits | 206 | 201 | 408 | |||||||||
Federal Home Loan Bank advances | (93 | ) | 258 | 165 | ||||||||
Total interest-bearing liabilities | 113 | 459 | 573 | |||||||||
Change in net interest income | $ | 1,026 | $ | 2,137 | $ | 4,162 |
At March 31, | ||||||||
(Dollars in thousands) | 2018 | |||||||
Changes in | Economic | |||||||
Interest Rates | Value of | |||||||
(Basis Points) | Equity | Change | ||||||
400 | $ | 139,898 | (1.00 | )% | ||||
300 | 140,688 | (0.10 | )% | |||||
200 | 141,637 | 0.60 | % | |||||
100 | 142,270 | 1.00 | % | |||||
0 | 140,812 | - | ||||||
-100 | 129,130 | (8.30 | )% |
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 Contentsour 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 September 30, 2017,March 31, 2018, cash and cash equivalents totaled $17.6$22.3 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $109.7$57.8 million at September 30, 2017.March 31, 2018.
At September 30, 2017,March 31, 2018, we had the ability to borrow a total of $195.8$194.1 million from the Federal Home Loan Bank of Boston. On that date, we had $78.4$45.2 million in advances outstanding. At September 30, 2017,March 31, 2018, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $178.6$194.3 million, none of which was outstanding as of that date.
We have no material commitments or demands that are likely to affect our liquidity other than set forth below. In the event loan demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of Boston or obtain additional funds through brokered certificates of deposit.
At September 30, 2017March 31, 2018 and December 31, 2016,2017, we had $14.7$11.2 million and $25.4$18.6 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at September 30, 2017March 31, 2018 and December 31, 2016,2017, we had $164.8$172.2 million and $202.0$166.0 million in unadvanced funds to borrowers, respectively. We also had $2.7$1.9 million and $5.2$2.0 million in outstanding letters of credit at September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
Certificates of deposit due within one year of September 30, 2017March 31, 2018 totaled $110.4$82.9 million, or 15.2%11.5% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
36 |
Our primary investing activities are the origination of loans and the purchase of securities. During the ninethree months ended September 30, 2017,March 31, 2018, we originated $208.5 million of loans, all of which were intended to be held in our portfolio. We also purchased $13.1 million in loans and $13.1 million in securities.During the nine months ended September 30, 2016, we originated $141.4$58.9 million of loans, all of which were intended to be held in our portfolio and we purchased $1.0 million in loans. We did not purchase any loans.securities.During the three months ended March 31, 2017, we originated $56.5 million of loans, all of which were intended to be held in our portfolio.We also purchased $1.4$4.4 million in securities during the nine months ended September 30, 2016.loans and $11.3 million in securities.
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increasesdecrease in total deposits of $97.3$30.4 million and $33.1a net increase of $52.6 million for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Federal Home Loan Bank advances increased $28.5$18.4 million and decreased $16.0$17.0 million during the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively.
The Provident Bank is subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. At September 30, 2017,March 31, 2018, The Provident Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 9 of the Notes to the Unaudited Consolidated Financial Statements for additional information.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable, as the Company is a smaller reporting company.See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operation”.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2017.March 31, 2018. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2017,March 31, 2018, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
Not applicable,There have been no material changes to the risk factors disclosed in the Company’s Annual Report on form 10-K for the year ended December 31, 2017, as filed with the Company is a smaller reporting company.Securities and Exchange Commission.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | Not applicable. |
(b) | Not applicable. |
(c) | The Company’s repurchases of common stock for the three months ended |
Total Number of | Maximum Number of | |||||||||||||||
Total | Shares Purchased as | Shares that May Yet | ||||||||||||||
Number of | Average Price | Part of Publicly | Be Purchased Under | |||||||||||||
Shares | Paid | Announced Plans or | the Plans or | |||||||||||||
Period | Purchased | per Share | Programs | Programs (1) | ||||||||||||
July 1, 2017 through July 31, 2017 | - | $ | - | - | 605,855 | |||||||||||
August 1, 2017 through August 31, 2017 | 800 | 20.25 | 800 | 605,055 | ||||||||||||
September 1, 2017 through September 30, 2017 | 4,500 | 20.61 | 4,500 | 600,555 | ||||||||||||
Total | 5,300 | $ | 20.55 | 5,300 |
Total Number of | Maximum Number of | |||||||||||||||
Total | Shares Purchased as | Shares that May Yet | ||||||||||||||
Number of | Average Price | Part of Publicly | Be Purchased Under | |||||||||||||
Shares | Paid | Announced Plans or | the Plans or | |||||||||||||
Period | Purchased | per Share | Programs | Programs (1) | ||||||||||||
January 1, 2018 - January 31, 2018 | - | $ | - | - | 605,855 | |||||||||||
February 1, 2018 -Febraury 28, 2018 | - | - | - | 605,855 | ||||||||||||
March 1, 2018 - March 31, 2018 | - | - | - | 605,855 | ||||||||||||
Total | - | $ | - | - |
(1) On January 26, 2017, the Company announced a repurchase program under which it would repurchase up to 6.6% of the then-outstanding shares of the Company’s common stock (625,015 shares) from time to time, depending on market conditions. The repurchase program would continue until it is completed or terminated by the Company’s Board of Directors.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
3.1 | Amended and Restated Articles of Organization of Provident Bancorp, Inc. (1) |
3.2 | By-Laws of Provident Bancorp, Inc. (1) |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 | The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended |
(1) | Incorporated by reference to the Company’s Registration Statement on Form S-1 (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13, 2015. |
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 10, 2018 | /s/ David P. Mansfield | |
David P. Mansfield | |||
President and Chief Executive Officer | |||
Date: | May 10, 2018 | /s/ Carol L. Houle | |
Carol L. Houle | |||
Executive Vice President and Chief Financial Officer |