UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended JuneSeptember 30, 2018

 

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

 

For the transition period from _______________ to ______________________

 

Commission File No. 001-37504

 

Provident Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Massachusetts45-3231576
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification Number)

5 Market Street, Amesbury, Massachusetts01913
(Address of Principal Executive Offices)Zip Code

 

(978) 834-8555

(Registrant’s telephone number)

 

N/A

N/A

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

 

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 NOo

 

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 NOo

 

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

 

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

 

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

 

As of AugustNovember 2, 2018, there were 9,628,4969,634,368 shares of the Registrant’s common stock, no par value per share, outstanding.

 

 

 

 

 

 

Provident Bancorp, Inc.

Form 10-Q

 

Part I.Page
Part I.Financial InformationPage
   
Item 1.Interim Financial Statements 
   
 Consolidated Balance Sheets as of JuneSeptember 30, 2018 (unaudited) and December 31, 20172
 
 Consolidated Statements of Income for the Three and SixNine Months Ended JuneSeptember 30, 2018 and 2017 (unaudited)3
 
 Consolidated Statements of Comprehensive Income for the Three and SixNine Months Ended JuneSeptember 30, 2018 and 2017 (unaudited)4
  
 Consolidated Statements of Changes in Shareholders’ Equity for the SixNine Months Ended JuneSeptember 30, 2018 and 2017 (unaudited)5
  
 Consolidated Statements of Cash Flows for the SixNine Months Ended JuneSeptember 30, 2018 and 2017 (unaudited)6
   
 Notes to Consolidated Financial Statements (unaudited)8
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operation26
 
Item 3.Quantitative and Qualitative Disclosures about Market Risk42
   
Item 4.Controls and Procedures42
   
Part II.Other Information 
   
Item 1.Legal Proceedings42
   
Item 1A.Risk Factors42
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds43
   
Item 3.Defaults upon Senior Securities43
   
Item 4.Mine Safety Disclosures43
   
Item 5.Other Information43
   
Item 6.Exhibits43
   
Signatures44

 

1

 

 

Part I.Financial Information
Item 1.Financial Statements

 

PROVIDENT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

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

  At  At 
  September 30,  December 31, 
(Dollars in thousands) 2018  2017 
   (unaudited)     
Assets       
Cash and due from banks $9,899  $10,326 
Short-term investments  16,089   37,363 
Cash and cash equivalents  25,988   47,689 
Investments in available-for-sale securities (at fair value)  52,476   61,429 
Federal Home Loan Bank stock, at cost  1,925   1,854 
Loans, net  783,292   742,138 
Assets held-for-sale  -   3,286 
Bank owned life insurance  26,055   25,540 
Premises and equipment, net  14,943   10,981 
Accrued interest receivable  2,584   2,345 
Deferred tax asset, net  5,347   4,920 
Other assets  2,561   2,083 
Total assets $915,171  $902,265 
         
Liabilities and Equity        
Deposits:        
   Noninterest-bearing $195,641  $186,222 
Interest-bearing  555,829   563,835 
Total deposits  751,470   750,057 
Federal Home Loan Bank advances  29,902   26,841 
Other liabilities  11,663   9,590 
Total liabilities  793,035   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;        
     9,662,181 shares issued, 9,634,368 shares        
     outstanding at September 30, 2018 and 9,657,319 shares        
     issued, 9,628,496 shares outstanding at December 31, 2017  -   - 
Additional paid-in capital  45,572   44,592 
Retained earnings  80,516   74,047 
Accumulated other comprehensive (loss) income  (700)  589 
Unearned compensation - ESOP  (2,679)  (2,857)
Treasury stock: 27,813 and 28,823 shares        
     at September 30, 2018 and December 31, 2017, respecitvely  (573)  (594)
Total shareholders' equity  122,136   115,777 
Total liabilities and shareholders' equity $915,171  $902,265 

 

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

 

 2 

 

 

PROVIDENT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
(Dollars in thousands, except per share data) 2018  2017  2018  2017 
  (unaudited) 
Interest and dividend income:  
Interest and fees on loans $10,219  $8,403  $29,420  $23,547 
Interest and dividends on securities  411   822   1,256   2,597 
Interest on short-term investments  203   14   287   23 
Total interest and dividend income  10,833   9,239   30,963   26,167 
Interest expense:                
Interest on deposits  1,225   783   3,154   2,031 
Interest on Federal Home Loan Bank advances  204   222   522   633 
Total interest expense  1,429   1,005   3,676   2,664 
Net interest and dividend income  9,404   8,234   27,287   23,503 
Provision for loan losses  1,421   1,012   2,715   2,467 
Net interest and dividend income after provision for loan losses  7,983   7,222   24,572   21,036 
Noninterest income:                
Customer service fees on deposit accounts  380   376   1,081   1,053 
Service charges and fees - other  502   492   1,551   1,481 
Gain on sale of securities, net  -   1,851   -   2,391 
Bank owned life insurance income  172   167   515   468 
Other income  5   11   43   75 
 Total noninterest income  1,059   2,897   3,190   5,468 
Noninterest expense:                
Salaries and employee benefits  4,150   3,948   12,583   11,361 
Occupancy expense  456   411   1,323   1,332 
Equipment expense  118   149   361   456 
FDIC assessment  75   75   226   216 
Data processing  200   177   597   543 
Marketing expense  54   81   168   231 
Professional fees  274   227   851   656 
Directors' compensation  141   133   467   433 
Other  755   713   2,434   2,182 
Total noninterest expense  6,223   5,914   19,010   17,410 
Income before income tax expense  2,819   4,205   8,752   9,094 
Income tax expense  741   1,434   2,262   2,920 
 Net income $2,078  $2,771  $6,490  $6,174 
                 
Earnings per share:                
Basic $0.22  $0.30  $0.70  $0.67 
Diluted $0.22  $0.30  $0.70  $0.67 
                 
Weighted Average Shares:                
Basic  9,247,367   9,201,634   9,233,760   9,196,046 
Diluted  9,355,410   9,213,056   9,309,712   9,196,046 

 

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

 

 3 

 

 

PROVIDENT BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

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

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
(In thousands) 2018  2017  2018  2017 
             
Net income $2,078  $2,771  $6,490  $6,174 
Other comprehensive income (loss):                
Unrealized holding (losses) gains  (411)  315   (1,717)  2,660 
Reclassification adjustment for realized gains in net income  -   (1,851)  -   (2,391)
Unrealized (loss) gain  (411)  (1,536)  (1,717)  269 
Income tax effect  100   569   428   (105)
Net of tax amount  (311)  (967)  (1,289)  164 
Total comprehensive income $1,767  $1,804  $5,201  $6,338 

 

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

 

 4 

 

 

PROVIDENT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

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

           Accumulated          
  Shares of  Additional     Other  Unearned       
  Common  Paid-in  Retained  Comprehensive  Compensation  Treasury    
(In  thousands, except share data) Stock  Capital  Earnings  (Loss) Income  ESOP  Stock  Total 
                      
Balance, December 31, 2017  9,628,496  $44,592  $74,047  $589  $(2,857) $(594) $115,777 
Net income  -   -   6,490   -   -   -   6,490 
Other comprehensive loss  -   -   -   (1,289)  -   -   (1,289)
Stock-based compensation expense  -   695   -   -   -   -   695 
Restricted stock award grants  4,862   -   -   -   -   -   - 
Exercise of stock options  1,010   -   (21)  -   -   21   - 
ESOP shares earned  -   285   -   -   178   -   463 
Balance, September 30, 2018  9,634,368  $45,572  $80,516  $(700) $(2,679) $(573) $122,136 
                             
Balance, December 31, 2016  9,652,448  $43,393  $66,229  $2,622  $(3,095) $-  $109,149 
Net income  -   -   6,174   -   -   -   6,174 
Other comprehensive income  -   -   -   164   -   -   164 
Stock-based compensation expense  -   691   -   -   -   -   691 
Treasury stock acquired  (24,460)  -   -   -   -   (492)  (492)
ESOP shares earned  -   190   -   -   178   -   368 
Balance, September 30, 2017  9,627,988  $44,274  $72,403  $2,786  $(2,917) $(492) $116,054 

 

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

 

 5 

 

 

PROVIDENT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 Six Months Ended  Nine Months Ended 
 June 30,  September 30, 
(In thousands) 2018 2017  2018  2017 
        
Cash flows from operating activities:                
Net income $4,412  $3,403  $6,490  $6,174 
Adjustments to reconcile net income to net cash provided by operating activities:                
Amortization of securities premiums, net of accretion  147   398   215   618 
ESOP expense  297   242   463   368 
Gain on sale of securities, net  -   (540)  -   (2,391)
Change in deferred loan fees, net  30   66   101   382 
Provision for loan losses  1,294   1,455   2,715   2,467 
Depreciation and amortization  370   420   550   626 
Increase in accrued interest receivable  (149)  (212)  (239)  (315)
Share-based compensation expense  480   460   695   691 
Increase in cash surrender value of life insurance  (343)  (299)  (515)  (467)
Increase in other assets  (7)  (503)  (478)  (324)
Increase (decrease) in other liabilities  1,712   (839)
Increase in other liabilities  2,073   333 
Net cash provided by operating activities  8,243   4,051   12,070   8,162 
                
Cash flows from investing activities:                
Purchases of available-for-sale securities  -   (12,490)  -   (13,120)
Proceeds from sales of available-for-sale securities  -   1,621   -   11,915 
Proceeds from pay downs, maturities and calls of available-for-sale securities  4,655   7,539   7,022   11,430 
Purchase of Federal Home Loan Bank stock, net of redemptions  (302)  (221)  (71)  (950)
Loan originations and purchases, net of paydowns  (29,291)  (79,181)  (43,970)  (126,961)
Additions to premises and equipment  (294)  (3,290)  (1,079)  (3,410)
Purchase of bank owned life insurance  -   (5,500)
Additions to assets held-for-sale  (147)  -   (147)  - 
Net cash used in investing activities  (25,379)  (86,022)  (38,245)  (126,596)

 

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

 

 6 

 

 

PROVIDENT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

 

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

  Nine Months Ended 
  September 30, 
(In thousands) 2018  2017 
         
Cash flows from financing activities:        
Net increase in demand deposits, NOW and savings accounts  12,189   55,621 
Net (decrease) increase in time deposits  (10,776)  41,670 
Proceeeds from advances from Federal Home Loan Bank  10,000   7,000 
Net change in Federal Home Loan Bank short-term advances  (6,939)  21,507 
Purchase of treasury stock  -   (492)
Net cash provided by financing activities  4,474   125,306 
         
Net (decrease) increase in cash and cash equivalents  (21,701)  6,872 
Cash and cash equivalents at beginning of period  47,689   10,705 
Cash and cash equivalents at end of period $25,988  $17,577 
         
Supplemental disclosures:        
Interest paid $3,716  $2,653 
Income taxes paid  2,520   3,219 
Assets held-for-sale transferred to premises and equipment  3,433   - 
Fixed assets transferred to assets held-for-sale  -   3,213 

 

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

 

 7 

 

 

PROVIDENT BANCORP, INC.
Notes to Consolidated Financial Statements

PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)Basis of Presentation

The accompanying unaudited financial statements of Provident Bancorp, Inc., a Massachusetts corporation (the “Company”), were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of the financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three- and six-monthnine-month periods ended JuneSeptember 30, 2018 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year.Certain amounts in 2017 have been reclassified to be consistent with the 2018 consolidated financial statement presentation, and had no effect on the net income reported in the consolidated statement of income.These financial statements should be read in conjunction with the annual financial statements and notes thereto included in the annual report on Form 10-K the Company filed with the Securities and Exchange Commission on March 15, 2018.

 

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

 

(2)Corporate Structure

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

 

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

 

 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).This ASU supersedes the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. In March 2016, the FASB also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09, which reframed the structure of the indicators of when an entity is acting as an agent and focused on evidence that an entity is acting as the principal or agent in a revenue transaction. ASU 2016-08 also eliminated two of the indicators (the entity’s consideration is in the form of a commission, and the entity is not exposed to credit risk) in making that determination. This amendment also clarifies that each indicator may be more or less relevant to the assessment depending on the terms and conditions of the contract. In May 2016, the FASB issued ASU 2016-12, an amendment to ASU 2014-09, which provided practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on transition, collectability, non-cash consideration and presentation of sales and other similar taxes. The amendments, collectively, should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption (modified retrospective approach).

 

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

 

In January 2016, the FASB 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 was effective for the Company on January 1, 2018. The Company evaluated the impact of this pronouncement and divested its entire marketable equity securities portfolio in 2017. The Company’s investment in Federal Home Loan Bank Stock is not included in the scope of this pronouncement. Upon adoption, the fair value of the Company's loan portfolio is now presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial assets and liabilities that are not measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update did not have a material impact on the Company's consolidated financial statements.

 

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

 

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

 

In March 2017, the FASB 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.

 

In August 2018, the FASB issuedASU No. 2018-13, Fair Value Measurement (Topic 820): “Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU will be effective for the Company on January 1, 2020. As the guidance only revises disclosure requirements, the adoption of this guidance did not 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 JuneSeptember 30, 2018 and December 31, 2017:

 

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

  Amortized  Gross  Gross    
  Cost  Unrealized  Unrealized  Fair 
(In thousands) Basis  Gains  Losses  Value 
    
September 30, 2018                
State and municipal securities $20,145  $207  $313  $20,039 
Asset-backed securities  6,754   -   209   6,545 
Government mortgage-backed securities  26,535   136   779   25,892 
Total available-for-sale securities $53,434  $343  $1,301  $52,476 
                 
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 JuneSeptember 30, 2018:

 

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

  Available-for-Sale 
  Amortized  Fair 
(In thousands) Cost  Value 
       
Due in one year or less $95  $95 
Due after one year through five years  604   610 
Due after five years through ten years  2,118   2,144 
Due after ten years  17,328   17,190 
Government mortgage-backed securities  26,535   25,892 
Asset-backed securities  6,754   6,545 
  $53,434  $52,476 

 

 11 

 

 

TheThe 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 JuneSeptember 30, 2018 and December 31, 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 
                           
June 30, 2018                        
September 30, 2018                        
Temporarily impaired securities:                                                
State and municipal securities $6,549  $135  $590  $32  $7,139  $167  $11,352  $277  $584  $36  $11,936  $313 
Asset-backed securities  5,688   118   1,240   43   6,928   161   4,051   121   2,494   88   6,545   209 
Government mortgage-backed securities  11,418   174   11,795   499   23,213   673   7,750   208   12,042   571   19,792   779 
Total temporarily impaired securities $23,655  $427  $13,625  $574  $37,280  $1,001  $23,153  $606  $15,120  $695  $38,273  $1,301 
                                                
December 31, 2017                                                
Temporarily impaired securities:                                                
State and municipal securities $-  $-  $611  $17  $611  $17  $-  $-  $611  $17  $611  $17 
Asset-backed securities  1,745   13   1,335   24   3,080   37   1,745   13   1,335   24   3,080   37 
Government mortgage-backed securities  5,231   20   13,584   260   18,815   280   5,231   20   13,584   260   18,815   280 
Total temporarily impaired securities $6,976  $33  $15,530  $301  $22,506  $334  $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 JuneSeptember 30, 2018 represents an other-than-temporary impairment (OTTI) because the decline in fair value of these securities is primarily attributable to changes in market interest rates and not credit quality, and because the Company has the intent and ability to hold these investments until market price recovery or maturity.

 

(5) Loans

A summary of loans is as follows:

 

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

  At  At 
  September 30,  December 31, 
(Dollars in thousands) 2018  2017 
  Amount  Percent  Amount  Percent 
Commercial real estate $361,765   45.48% $371,510   49.35%
Commercial  300,584   37.79%  240,223   31.91%
Residential real estate  60,034   7.55%  67,724   9.00%
Construction and land development  52,870   6.64%  55,828   7.42%
Consumer  20,119   2.53%  17,455   2.32%
   795,372   100.00%  752,740   100.00%
Allowance for loan losses  (11,134)      (9,757)    
Deferred loan fees, net  (946)      (845)    
Net loans $783,292      $742,138     

 

 12 

 

 

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

 

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

 

 For the six months ended June 30,  For the three months ended September 30, 
(In thousands) Commercial
Real Estate
 Commercial Residential
Real Estate
 Construction
and Land
Development
 Consumer Unallocated Total  Commercial Real Estate  Commercial  Residential Real Estate  Construction and Land Development  Consumer  Unallocated  Total 
                            
Allowance for loan losses:                            
                            
Balance at June 30, 2018 $4,106  $4,512  $282  $968  $735  $27  $10,630 
Charge-offs  (790)  (50)  -   -   (128)  -   (968)
Recoveries  -   26   2   -   23   -   51 
Provision (credit)  969   272   (22)  25   200   (23)  1,421 
Balance at September 30, 2018 $4,285  $4,760  $262  $993  $830  $4  $11,134 
                            
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 (credit)  1,029   60   (22)  (177)  172   (50)  1,012 
Balance at September 30, 2017 $5,669  $3,384  $296  $964  $569  $50  $10,932 
                            
  For the nine 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 December 31, 2017 $4,483  $3,280  $300  $965  $649  $80  $9,757  $4,483  $3,280  $300  $965  $649  $80  $9,757 
Charge-offs  -   (51)  -   -   (398)  -   (449)  (790)  (101)  -   -   (526)  -   (1,417)
Recoveries  -   1   -   -   27   -   28   -   27   2   -   50   -   79 
Provision (benefit)  (377)  1,282   (18)  3   457   (53)  1,294 
Balance at June 30, 2018 $4,106  $4,512  $282  $968  $735  $27  $10,630 
Provision (credit)  592   1,554   (40)  28   657   (76)  2,715 
Balance at September 30, 2018 $4,285  $4,760  $262  $993  $830  $4  $11,134 
                                                        
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)  (61)  -   -   (26)  -   (93)  (6)  (63)  -   -   (106)  -   (175)
Recoveries  -   -   -   -   -   -   -   -   45   -   -   5   -   50 
Provision (benefit)  143   829   (10)  259   219   15   1,455 
Balance at June 30, 2017 $4,640  $3,281  $318  $1,141  $472  $100  $9,952 
Provision (credit)  1,172   889   (32)  82   391   (35)  2,467 
Balance at September 30, 2017 $5,669  $3,384  $296  $964  $569  $50  $10,932 

 

 13 

 

 

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

 

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

(In thousands) Commercial Real Estate  Commercial  Residential Real Estate  Construction and Land Development  Consumer  Unallocated  Total 
                             
September 30, 2018                            
Allowance for loan losses:                            
Ending balance:                            
Individually evaluated                            
for impairment $-  $765  $-  $-  $-  $-  $765 
Ending balance:                            
Collectively evaluated                            
for impairment  4,285   3,995   262   993   830   4   10,369 
Total allowance for loan                            
losses ending balance $4,285  $4,760  $262  $993  $830  $4  $11,134 
                             
Loans:                            
Ending balance:                            
Individually evaluated                            
for impairment $4,342  $4,070  $392  $-  $-      $8,804 
Ending balance:                            
Collectively evaluated                            
for impairment  357,423   296,514   59,642   52,870   20,119       786,568 
Total loans ending balance $361,765  $300,584  $60,034  $52,870  $20,119      $795,372 
                             
December 31, 2017                            
Allowance for loan losses:                            
Ending balance:                            
Individually evaluated                            
for impairment $-  $-  $-  $-  $-  $-  $- 
Ending balance:                            
Collectively evaluated                            
for impairment  4,483   3,280   300   965   649   80   9,757 
Total allowance for loan                            
losses ending balance $4,483  $3,280  $300  $965  $649  $80  $9,757 
                             
Loans:                            
Ending balance:                            
Individually evaluated                            
for impairment $8,623  $3,202  $404  $-  $-      $12,229 
Ending balance:                            
Collectively evaluated                            
for impairment  362,887   237,021   67,320   55,828   17,455       740,511 
Total loans ending balance $371,510  $240,223  $67,724  $55,828  $17,455      $752,740 

 

 14 

 

 

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

 

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

                    90 Days    
        90 Days  Total        or More    
  30 - 59  60 - 89  or More  Past  Total  Total  Past Due  Non-accrual 
(In thousands) Days  Days  Past Due  Due  Current  Loans  and Accruing  Loans 
                         
September 30, 2018                                
Commercial real estate $-  $519  $2,879  $3,398  $358,367  $361,765  $-  $2,879 
Commercial  248   2,731   248   3,227   297,357   300,584   -   3,552 
Residential real estate  565   131   -   696   59,338   60,034   -   855 
Construction and                                
 land development  -   -   -   -   52,870   52,870   -   - 
Consumer  62   71   65   198   19,921   20,119   -   68 
Total $875  $3,452  $3,192  $7,519  $787,853  $795,372  $-  $7,354 
                                 
December 31, 2017                                
Commercial real estate $-  $3,669  $-  $3,669  $367,841  $371,510  $-  $7,102 
Commercial  12   -   -   12   240,211   240,223   -   1,505 
Residential real estate  699   178   81   958   66,766   67,724       364 
Construction and                                
 land development  -   -   -   -   55,828   55,828   -   - 
Consumer  63   45   60   168   17,287   17,455   -   62 
Total $774  $3,892  $141  $4,807  $747,933  $752,740  $-  $9,033 

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

 

 15 

 

 

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

 

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

     Unpaid     Average  Interest 
  Recorded  Principal  Related  Recorded  Income 
(In thousands) Investment  Balance  Allowance  Investment  Recognized 
                
September 30, 2018               
With no related allowance recorded:                    
Commercial real estate $4,342  $6,645  $-  $6,684  $51 
Commercial  2,474   2,474   -   3,328   30 
Residential real estate  392   392   -   398   15 
Construction and land development  -   -   -   -   - 
Consumer  -   -   -   -   - 
 Total impaired with no related allowance  7,208   9,511   -   10,410   96 
                     
With an allowance recorded:                    
Commercial real estate  -   -   -   -   - 
Commercial  1,596   1,596   765   1,599   52 
Residential real estate  -   -   -   -   - 
Construction and land development  -   -   -   -   - 
Consumer  -   -   -   -   - 
Total impaired with an allowance recorded  1,596   1,596   765   1,599   52 
                     
Total                    
Commercial real estate  4,342   6,645   -   6,684   51 
Commercial  4,070   4,070   765   4,927   82 
Residential real estate  392   392   -   398   15 
Construction and land development  -   -   -   -   - 
Consumer  -   -   -   -   - 
Total impaired loans $8,804  $11,107  $765  $12,009  $148 
                     
December 31, 2017                    
With no related allowance recorded:                    
Commercial real estate $8,623  $10,139  $-  $4,562  $70 
Commercial  3,202   3,202   -   2,054   123 
Residential real estate  404   404   -   412   20 
Construction and land development  -   -   -   -   - 
Consumer  -   -   -   -   - 
 Total impaired with no related allowance  12,229   13,745   -   7,028   213 
                     
With an allowance recorded:                    
Commercial real estate  -   -   -   -   - 
Commercial  -   -   -   -   - 
Residential real estate  -   -   -   -   - 
Construction and land development  -   -   -   -   - 
Consumer  -   -   -   -   - 
Total impaired with an allowance recorded  -   -   -   -   - 
                     
Total                    
Commercial real estate  8,623   10,139   -   4,562   70 
Commercial  3,202   3,202   -   2,054   123 
Residential real estate  404   404   -   412   20 
Construction and land development  -   -   -   -   - 
Consumer  -   -   -   -   - 
Total impaired loans $12,229  $13,745  $-  $7,028  $213 

 

 16 

 

 

There were no troubled debt restructurings during the sixnine months ended JuneSeptember 30, 2018.

 

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

 

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

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

 

In the sixnine months ended JuneSeptember 30, 2017, the Company approved one troubled debt restructure totaling $249,000, with no specific reserve required based on an analysis of the borrower’s collateral coverage. The term of this commercial loan was extended to a three-year term.

 

The following tables present the Company’s loans by risk rating and portfolio segment at JuneSeptember 30, 2018 and December 31, 2017:

 

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

(In thousands) Commercial Real Estate  Commercial  Residential Real Estate  Construction
and Land
Development
  Consumer  Total 
                   
September 30, 2018                        
Grade:                        
 Pass $350,705  $279,072  $-  $52,870  $-  $682,647 
 Special mention  6,248   11,748   -   -   -   17,996 
 Substandard  4,812   8,168   579   -   -   13,559 
 Doubtful  -   1,596   -   -   -   1,596 
 Not formally rated  -   -   59,455   -   20,119   79,574 
Total $361,765  $300,584  $60,034  $52,870  $20,119  $795,372 
                         
December 31, 2017                        
Grade:                        
 Pass $355,623  $224,190  $-  $55,828  $-  $635,641 
 Special mention  6,852   9,155   -   -   -   16,007 
 Substandard  9,035   6,878   679   -   -   16,592 
 Not formally rated  -   -   67,045   -   17,455   84,500 
Total $371,510  $240,223  $67,724  $55,828  $17,455  $752,740 

 

 17 

 

 

Credit Quality Information

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(6)Deposits

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

 

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

  September 30,  December 31, 
(In thousands) 2018  2017 
    
NOW and demand $318,962  $309,514 
Regular savings  116,692   112,610 
Money market deposits  224,394   225,735 
Total non-certificate accounts  660,048   647,859 
         
Certificate accounts of $250,000 or more  14,096   5,061 
Certificate accounts less than $250,000  77,326   97,137 
Total certificate accounts  91,422   102,198 
Total deposits $751,470  $750,057 

 

 18 

 

 

(7) Federal Home Loan Bank Advances

(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 JuneSeptember 30, 2018 are summarized as follows:

 

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

 

(In thousands)   
Fiscal Year-End Dollar Amount 
2019  4,962 
2020  11,440 
2021  5,000 
2023  8,500 
Total $29,902 

(8)Fair Value Measurements

(8)Fair Value Measurements

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

 

Basis of Fair Value Measurements

·Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
·Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;
·Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

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

 

Fair Values of Assets Measured on a Recurring Basis

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

 

 19 

 

 

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

 

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

 

  Fair 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, 2018                
State and municipal securities $20,039  $-  $20,039  $- 
Asset-backed securities  6,545   -   6,545   - 
Mortgage-backed securities  25,892   -   25,892   - 
Totals $52,476  $-  $52,476  $- 
                 
December 31, 2017                
State and municipal securities $21,454  $-  $21,454  $- 
Asset-backed securities  7,517   -   7,517   - 
Mortgage-backed securities  32,458   -   32,458   - 
Totals $61,429  $-  $61,429  $- 

Fair Values of Assets Measured on a Non-Recurring Basis

 

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

 

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

 

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

  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, 2018                
Impaired loans $3,710  $-  $-  $3,710 
                 
December 31, 2017                
Impaired loan $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 JuneSeptember 30, 2018 and December 31, 2017:

 

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

(In thousands) Fair Value  Valuation Technique Unobservable Input
         
September 30, 2018        
Impaired loans $3,710  Real estate appraisals and business evaluation Discount for dated appraisals and comparable company evaluations
December 31, 2017        
Impaired loan $3,670  Real estate appraisals Discount for dated appraisals

 

(9)Fair Value of Financial Instruments

(9)Fair Value of Financial Instruments

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

 

The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at JuneSeptember 30, 2018 and December 31, 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 
                      
June 30, 2018                    
September 30, 2018                    
Financial assets:                                        
Cash and cash equivalents $47,805  $47,805  $-  $-  $47,805  $25,988  $25,988  $-  $-  $25,988 
Available-for-sale securities  55,322   -   55,322   -   55,322   52,476   -   52,476   -   52,476 
Federal Home Loan Bank of Boston stock  2,156   2,156   -   -   2,156   1,925   1,925   -   -   1,925 
Loans, net  770,105   -   -   762,322   762,322   783,292   -   -   774,229   774,229 
Accrued interest receivable  2,494   -   2,494   -   2,494   2,584   -   2,584   -   2,584 
Financial liabilities:                                        
Deposits  754,269   -   -   754,127   754,127   751,470   -   -   751,427   751,427 
Federal Home Loan Bank advances  39,881   -   39,574   -   39,574   29,902   -   29,499   -   29,499 
                                        
December 31, 2017                                        
Financial assets:                                        
Cash and cash equivalents $47,689  $47,689  $-  $-  $47,689  $47,689  $47,689  $-  $-  $47,689 
Available-for-sale securities  61,429   -   61,429   -   61,429   61,429   -   61,429   -   61,429 
Federal Home Loan Bank of Boston stock  1,854   1,854   -   -   1,854   1,854   1,854   -   -   1,854 
Loans, net  742,138   -   -   745,637   745,637   742,138   -   -   745,637   745,637 
Accrued interest receivable  2,345   -   2,345   -   2,345   2,345   -   2,345   -   2,345 
Financial liabilities:                                        
Deposits  750,057   -   -   749,898   749,898   750,057   -   -   749,898   749,898 
Federal Home Loan Bank advances  26,841   -   26,655   -   26,655   26,841   -   26,655   -   26,655 

 

 21 

 

 

(10)Regulatory Capital

(10)Regulatory Capital

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

 

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to capital regulations adopted by the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that started phasing in on January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. At JuneSeptember 30, 2018, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer. Failure to maintain the capital conservation buffer limits the ability of the Bank and the Company to pay dividends, repurchases shares or pay discretionary bonuses.

 

As of JuneSeptember 30, 2018 and December 31, 2017, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

 

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

 

                To Be Well 
                Capitalized Under 
        For Capital  Prompt Corrective 
  Actual  Adequacy Purposes  Action Provisions 
(dollars in thousands) Amount  Ratio  Amount    Ratio  Amount    Ratio 
June 30, 2018                            
Total Capital (to Risk Weighted Assets) $122,378   15.0% $65,186  >  8.0% $81,483  >  10.0%
Tier 1 Capital (to Risk Weighted Assets)  112,188   13.8   48,890  >  6.0   65,186  >  8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)  112,188   13.8   36,667  >  4.5   52,964  >  6.5 
Tier 1 Capital (to Average Assets)  112,188   12.6   35,663  >  4.0   44,578  >  5.0 
December 31, 2017                            
Total Capital (to Risk Weighted Assets) $116,869   15.0% $62,514  >  8.0% $78,142  >  10.0%
Tier 1 Capital (to Risk Weighted Assets)  107,112   13.7   46,885  >  6.0   62,514  >  8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)  107,112   13.7   35,164  >  4.5   50,792  >  6.5 
Tier 1 Capital (to Average Assets)  107,112   11.8   36,299  >  4.0   45,374  >  5.0 

                To Be Well 
                Capitalized Under 
        For Capital  Prompt Corrective 
  Actual  Adequacy Purposes  Action Provisions 
(dollars in thousands) Amount  Ratio  Amount    Ratio  Amount    Ratio 
                       
September 30, 2018                      
Total Capital (to Risk Weighted Assets) $125,071   15.0% $66,636  >  8.0% $83,294  >  10.0%
Tier 1 Capital (to Risk Weighted Assets)  114,651   13.8   49,977  >  6.0   66,636  >  8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)  114,651   13.8   37,482  >  4.5   54,141  >  6.5 
Tier 1 Capital (to Average Assets)  114,651   12.4   36,916  >  4.0   46,146  >  5.0 
December 31, 2017                            
Total Capital (to Risk Weighted Assets) $116,869   15.0% $62,514  >  8.0% $78,142  >  10.0%
Tier 1 Capital (to Risk Weighted Assets)  107,112   13.7   46,885  >  6.0   62,514  >  8.0 
Common Equity Tier 1 Capital (to Risk Weighted Assets)  107,112   13.7   35,164  >  4.5   50,792  >  6.5 
Tier 1 Capital (to Average Assets)  107,112   11.8   36,299  >  4.0   45,374  >  5.0 

 

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

 

 22 

 

 

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 JuneSeptember 30, 2018, the Company had repurchased 28,823 shares of its stock at an average price of $20.59 per share, or 4.6% of the 625,015 shares authorized for repurchase under the Company’s repurchase program.

 

(11)Employee Stock Ownership Plan

(11)Employee Stock Ownership Plan

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

 

The Company loaned funds to the ESOP to purchase 357,152 shares of the Company’s common stock at a price of $10.00 per share. The loan is payable annually over 15 years at a rate per annum equal to the Prime Rate as of December 31 (4.50% at December 31, 2017). Loan payments are principally funded by cash contributions from the Bank.

 

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

  September 30, 2018  December 31, 2017 
Allocated  83,334   47,620 
Committed to be allocated  5,952   23,810 
Unallocated  267,866   285,722 
Total  357,152   357,152 

 

The fair value of unallocated shares was approximately $7.2$7.8 million at JuneSeptember 30, 2018.

 

Total compensation expense recognized in connection with the ESOP for the three months ended JuneSeptember 30, 2018 and 2017 was $147,000$166,000 and $128,000,$127,000, respectively. Total compensation expense recognized for the sixnine months ended JuneSeptember 30, 2018 and 2017 was $297,000$463,000 and $242,000,$368,000, respectively.

 

(12)Earnings Per Common Share

(12)Earnings Per Common Share

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

 

 23 

 

 

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

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
(Dollars in thousands, except per share amounts) 2018  2017  2018  2017 
                 
Net Income attributable to common shareholders $2,078  $2,771  $6,490  $6,174 
                 
Average number of common shares issued  9,660,543   9,652,448   9,658,405   9,652,448 
Less:                
average unallocated ESOP shares  (274,452)  (296,398)  (280,274)  (301,342)
average unvested restricted stock  (110,230)  (133,258)  (115,659)  (140,869)
average treasury stock acquired  (28,494)  (21,158)  (28,712)  (14,191)
Average number of common shares outstanding  9,247,367   9,201,634   9,233,760   9,196,046 
 to calculate basic earnings per common share                
                 
Effect of dilutive unvested restricted stock and stock option awards  108,043   11,422   75,952   - 
Average number of common shares outstanding  9,355,410   9,213,056   9,309,712   9,196,046 
 to calculate diluted earnings per common share                
                 
Earnings per common share:                
Basic $0.22  $0.30  $0.70  $0.67 
Diluted $0.22  $0.30  $0.70  $0.67 

 

(13)Share-Based Compensation

(13)Share-Based Compensation

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

 

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

 

Stock Options

 

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

 

·Volatility is based on peer group volatility because the Company does not have a sufficient trading history.
·Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, and the vesting period.
·The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

 

 24 

 

 

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

 

  Stock Option
Awards
  Weighted
Average
Exercise
Price
  

Weighted Average
Remaining
Contractual Term

(years)

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

  Stock Option Awards  Weighted Average Exercise Price  Weighted Average Remaining Contractual Term (years)  Aggregate Intrinsic Value 
Outstanding at December 31, 2017  396,443  $17.61         
Granted  12,170   27.20         
Forfeited  (9,740)  17.40         
Exercised  (2,435)  17.40         
Outstanding at September 30, 2018  396,438  $17.89   8.24  $4,496,000 
Outstanding and expected to vest at September 30, 2018  396,438  $17.89   8.24  $4,496,000 
Vested and Exercisable at September 30, 2018  74,419  $17.40   8.13  $681,000 
Unrecognized compensation cost $1,343,000             
Weighted average remaining recognition period (years)  3.13             

 

For the three months ended JuneSeptember 30, 2018 and 2017, total expense for the stock options was $101,000$94,000 and $96,000,$97,000, respectively. For the sixnine months ended JuneSeptember 30, 2018 and 2017, total expense for the stock options was $201,000$295,000 and $193,000,$290,000, respectively.

 

Restricted Stock

 

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

 

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

 

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

  Unvested Restricted Stock Awards  Weighted Average Grant Date Price 
Unvested restricted stock awards at December 31, 2017  127,852  $17.59 
Granted  4,862   27.20 
Forfeited  (3,896)  17.40 
Unvested restricted stock awards at September 30 , 2018  128,818  $17.89 
Unrecognized compensation cost $1,851,000     
Weighted average remaining recognition period (years)  3.13     

 

For the three months ended JuneSeptember 30, 2018 and 2017, total expense for the restricted stock awards was $140,000$121,000 and $133,000,$134,000, respectively. For the sixnine months ended JuneSeptember 30, 2018 and 2017, total expense for the restricted stock awards was $279,000$400,000 and $267,000,$401,000, respectively.

 

 25 

 

(14)Commitments and Contingencies

U.S. Small Bus. Admin. v. The Provident Bank, No. 1:18-cv-00746 (D.N.H.) (filed Aug. 23, 2018)

As previously disclosed,on April 3, 2018,the Bank conducted a foreclosure sale of certain real and personal property which secured four non-accruing loans originally made by the Bank.  The aggregate outstanding principal balance of these loans was approximately $7.5 million, of which (a) approximately $4.9 million was due and owing to the Bank and (b) approximately $2.6 million was due and owing to another financial institution who purchased participation interests in certain of these loans (the “Participant”). The Bank received $8.3 in proceeds from this foreclosure sale. The U.S. Small Business Administration (SBA) which also made a secured loan to the same obligors has sincedisputed the Bank’s retention of and claimed priority to a portion of the proceeds generated from this foreclosure sale, alleging a breach of contract and seeking monetary damages in the approximate amount of $2.0 million. The Bank has partially denied liability, and in addition to its defenses, has asserted a counterclaim against the SBA and its assignee, Granite State Economic Development Corporation, seeking equitable reformation of the contract at issue on the basis of a mutual mistake of fact. This case is in the preliminary pretrial stage. Pending the outcome of this lawsuit, and as previously disclosed, the Bank has segregated into a separate deposit account the entire amount in dispute, consisting of $1.4 million that would be retained by the Bank, and$543,000 that would be provided to the participating institution. Management does not believe that the ultimate resolution of this matter will have a significant impact on the Bank’s financial condition or the results of operations.

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

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

 

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

 

Forward-Looking Statements

 

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

 

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

 

Critical Accounting Policies

 

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

 

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

 

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

 

 26 

 

 

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 sixnine months ended JuneSeptember 30, 2018 or during the twelve monthsyear ended December 31, 2017.

 

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

 

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

 

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

 

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

 

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

 

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

 

 27 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Balance Sheet Analysis

Assets. Total assets were $925.4$915.2 million at JuneSeptember 30, 2018, an increase of $23.2$12.9 million, or 2.6%1.4%, from $902.3 million at December 31, 2017. The increase resulted primarily from an increase in net loans of $28.0$41.2 million. The increase was partially offset by a decrease in cash and cash equivalents of $21.7 million and available-for-sale investment securities of $6.1$9.0 million.

 

Cash and Cash Equivalents.Cash and cash equivalents decreased $21.7 million, or 45.5%, to $26.0 million at September 30, 2018 from $47.7 million at December 31, 2017. The decrease is primarily due to utilizing funds for loan growth.

Securities.Investments in available-for-sale securities decreased $6.1$9.0 million, or 9.9%14.6%, to $55.3$52.5 million at JuneSeptember 30, 2018 from $61.4 million at December 31, 2017. The decrease is primarily due to principal paydowns on government mortgage-backed securities and a change in the fair value of the securities.

 

Loans. At JuneSeptember 30, 2018, net loans were $770.1$783.3 million, or 83.2%85.6% of total assets, compared to $742.1 million, or 82.3% of total assets, at December 31, 2017. Increases in commercial loans of $34.5$60.4 million, or 14.3%25.1%, and in consumer loans of $2.6$2.7 million, or 14.6%15.3%, were partially offset by a decreasedecreases in residential real estate loans of $4.9$7.7 million, or 7.3%11.4%, construction and land development loans of $1.8$3.0 million, or 3.2%5.3%, and commercial real estate of $1.4$9.7 million, or 0.4%2.6%. Our commercial loan growth is attributed to adding commercial lenders and a continued focus on our niche lending of senior secured cash flow loans. Senior secured cash flow loans increased $20.5$61.3 million, or 49.7%148.5%, to $61.8$102.6 million at JuneSeptember 30, 2018 from $41.3 million at December 31, 2017. The consumer loan growth is primarily due to loan purchases viathrough the BancAlliance Lending Club Program that the Bank entered into an agreement with in 2016.

 

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

 

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

  At  At 
  September 30,  December 31, 
(Dollars in thousands) 2018  2017 
  Amount  Percent  Amount  Percent 
Commercial real estate $361,765   45.48% $371,510   49.35%
Commercial  300,584   37.79%  240,223   31.91%
Residential real estate  60,034   7.55%  67,724   9.00%
Construction and land development  52,870   6.64%  55,828   7.42%
Consumer  20,119   2.53%  17,455   2.32%
   795,372   100.00%  752,740   100.00%
Allowance for loan losses  (11,134)      (9,757)    
Deferred loan fees, net  (946)      (845)    
Net loans $783,292      $742,138     

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

 

Deposits. Total deposits increased $4.2$1.4 million, or 0.6%0.2%, to $754.3$751.5 million at JuneSeptember 30, 2018 from $750.1 million at December 31, 2017.The primary reason for the increase in deposits was due to an increase of $16.0$9.4 million, or 5.2%3.1%, in NOW and demand deposits and an increase in money marketsavings deposits of $2.3$4.1 million, or 1.0%3.6%. The increases were partially offset by a decrease of $13.4$10.8 million, or 13.1%10.5%, in time deposits. The increase in the NOW and demand deposits and savings deposits occurred primarily in municipal deposits.due to new account relationships. Time deposits decreased primarily due to the roll-off of brokered certificates of deposit.

 

Borrowings. Borrowings at both JuneSeptember 30, 2018 and December 31, 2017 consisted entirely of Federal Home Loan Bank advances. Borrowings increased $13.0$3.1 million, or 48.6%11.4%, to $39.9$29.9 million at JuneSeptember 30, 2018 from $26.8 million at December 31, 2017. The increase was primarily due to funding loan growth.

 

Shareholders’ Equity. Total shareholders’ equity increased $4.2$6.4 million, or 3.6%5.5%, to $120.0$122.1 million at JuneSeptember 30, 2018, from $115.8 million at December 31, 2017. The increase was primarily due to year-to-date net income of $4.4$6.5 million, stock-based compensation expense of $695,000, and ESOP shares earned of $463,000, partially offset by decreases of $978,000$1.3 million in year-to-date accumulated other comprehensive income, reflecting a decrease in the fair value of available-for-sale securities. Book value per share increased to $12.46$12.68 at JuneSeptember 30, 2018 from $12.02 at December 31, 2017.

 29 

 

 

Asset Quality.

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

 

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

  At  At 
  September 30,  December 31, 
(Dollars in thousands) 2018  2017 
         
Non-accrual loans:        
Real estate:        
Commercial $2,879  $7,102 
Residential  855   364 
Construction and land development  -   - 
Commercial  3,552   1,505 
Consumer  68   62 
Total non-accrual loans  7,354   9,033 
         
Accruing loans past due 90 days or more  -   - 
Real estate owned  -   - 
Total non-performing assets $7,354  $9,033 
         
Total loans (1) $794,426  $751,895 
Total assets $915,171  $902,265 
Total non-performing loans to total loans (1)  0.93%  1.20%
Total non-performing assets to total assets  0.80%  1.00%

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

 

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

The decrease in non-performing assets at JuneSeptember 30, 2018 compared to December 31, 2017 was primarily due to the Company’s foreclosure sale of certain collateral consisting of both real and personal property, which secured four non-accruing loans. On April 3, 2018, the Bank conducted a foreclosure sale of certain collateral consisting of both real and personal property which secured four non-accruing loans originally made by the Bank having anBank.  The aggregate outstanding principal outstanding balance of these loans was approximately $7.5 million, of which (a) approximately $4.9 million is outstanding atwas due and owing to the Bank with the remainingand (b) approximately $2.6 million participated outwas due and owing to another institution.financial institution who purchased participation interests in certain of these loans (the “Participant”). The Bank received $8.3 million in cashproceeds from this foreclosure sale. Certain subordinated lienholders are now disputingThe U.S. Small Business Administration (SBA) which also made a secured loan to the same obligors has sincedisputed the Bank’s retention of and claimed priority to a portion of the Bank’s liens and the right of the Bank to retain approximately $2.1 million of the proceeds generated from this foreclosure sale, but have not yet filedalleging a formal claim. Untilbreach of contract and seeking monetary damages in the disputeapproximate amount of $2.0 million. The Bank has partially denied liability, and in addition to its defenses, has asserted a counterclaim against the SBA and its assignee, Granite State Economic Development Corporation, seeking equitable reformation of the contract at issue on the basis of a mutual mistake of fact. This case is resolved,in the preliminary pretrial stage. Pending the outcome of this lawsuit, and as previously disclosed, the Bank has deposited, and will continue to hold,segregated into a separate deposit account the disputed proceeds (i.e., approximatelyentire amount in dispute, consisting of $1.4 million including $543,000 that is participated out to another institution) in a suspense deposit account atwould be retained by the Bank. At this time, we cannot reasonably estimate a range of potential loss, if any,Bank, and$543,000 that would be provided to the Bank, with respect toparticipating institution. Management does not believe that the ultimate resolution of this matter.matter will have a significant impact on the Bank’s financial condition or the results of operations.

 

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

 30 

 

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

 

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

 

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

  Nine Months Ended September 30, 
(Dollars in thousands) 2018  2017 
         
Allowance at beginning of period $9,757  $8,590 
Provision for loan losses  2,715   2,467 
Charge offs:        
Real estate:        
Commercial  790   6 
Residential  -   - 
Construction and land development  -   - 
Commercial  101   63 
Consumer  526   106 
Total charge-offs  1,417   175 
         
Recoveries:        
Real estate:        
Commercial  -   - 
Residential  2   - 
Construction and land development  -   - 
Commercial  27   45 
Consumer  50   5 
Total recoveries  79   50 
         
Net charge-offs  1,338   125 
         
Allowance at end of period $11,134  $10,932 
         
Non-performing loans at end of period $7,354  $5,647 
Total loans outstanding at end of period (1)  794,426   759,469 
Average loans outstanding during the period (1)  772,839   681,034 
         
Allowance to non-performing loans  151.40%  193.59%
Allowance to total loans outstanding at end of period  1.40%  1.44%
Net charge-offs to average loans outstanding during the        
during the period (annualized)  0.23%  0.02%

 

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

 

 31 

 

 

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

 

General. Net income increased $789,000decreased $693,000 to $2.4$2.1 million for the three months ended JuneSeptember 30, 2018 from $1.6$2.8 million for the three months ended JuneSeptember 30, 2017. The increasedecrease was related to a decrease of $1.8 million in noninterest income and an increase in provision for loan losses of $1.2 million$409,000, partially offset by an increase in net interest and dividend income of $1.2 million and a decrease of provision for loan losses of $254,000, partially offset by an increase in noninterestincome tax expense of $536,000.$693,000.

 

Interest and Dividend Income. Interest and dividend income increased $1.6 million, or 17.7%17.3%, to $10.4$10.8 million for the three months ended JuneSeptember 30, 2018 from $8.8$9.2 million for the three months ended JuneSeptember 30, 2017. This increase was primarily attributable to an increase in interest and fees on loans, which increased $2.0$1.8 million, or 25.5%21.6%, to $9.9$10.2 million for the three months ended JuneSeptember 30, 2018 from $7.9$8.4 million for the three months ended JuneSeptember 30, 2017. The increase in interest and fees on loans was partially offset by a decrease in interest and dividends on securities, which decreased $492,000,$411,000, or 54.5%50.0%, to $410,000$411,000 for the three months ended JuneSeptember 30, 2017 from $902,000$822,000 for the three months ended JuneSeptember 30, 2017.

 

The increase in interest income on loans was due to an increase in the average balance of loans of $95.8$59.5 million, or 14.2%8.3%, to $772.8$778.6 million for the three months ended JuneSeptember 30, 2018 from $676.9$719.1 million for the three months ended JuneSeptember 30, 2017. In addition, interest income increased due to the yield on loans increasing 4758 basis points to 5.14%5.25% for the three months ended JuneSeptember 30, 2018 due to our continued focus on higher-yielding commercial lending. The decrease in interest and dividends on securities was due to the Company selling $30.6 million of state and municipal securities and divesting of all equity securities during the third and fourth quarters of 2017.

 

Interest Expense. Interest expense increased $334,000,$424,000, or 38.0%42.2%, to $1.2$1.4 million for the three months ended JuneSeptember 30, 2018 from $879,000$1.0 million for the three months ended JuneSeptember 30, 2017, caused by an increase in interest expense on deposits. Interest expense on deposits increased $331,000,$442,000, or 48.8%56.4%, to $1.0$1.2 million for the three months ended JuneSeptember 30, 2018 from $678,000$783,000 for the three months ended JuneSeptember 30, 2017, due to an increase in the average rate paid on interest-bearing deposits of 2228 basis points to 0.75%0.86% for the three months ended JuneSeptember 30, 2018 from 0.53%0.58% for the three months ended JuneSeptember 30, 2017. The increase in the average rate was primarily the result of increases in the average rate paid on money market accounts and certificates of deposit. The average rate paid on money market accounts and certificates of deposit increased due to changes in the market rate environment. Interest expense on deposits also increased due to an increase in the average balance of interest-bearing deposits of $27.2$25.1 million, or 5.3%4.6%, to $538.9$567.4 million for the three months ended JuneSeptember 30, 2018 from $511.8$542.2 million for the three months ended JuneSeptember 30, 2017. The increase resulted primarily from an increase in the average balance of money market accounts, which increased $63.1$50.8 million, or 40.5%28.1%.

 

Net Interest and Dividend Income. Net interest and dividend income increased $1.3$1.2 million, or 15.5%14.2%, to $9.2$9.4 million for the three months ended JuneSeptember 30, 2018 from $7.9$8.2 million for the three months ended JuneSeptember 30, 2017. The increase was due to both higher balances of earninginterest-earning assets and expanding margins. Our net interest rate spread increased 3330 basis points to 4.09%4.00% for the three months ended JuneSeptember 30, 2018 from 3.76%3.70% for the three months ended JuneSeptember 30, 2017. Our net interest margin increased 4142 basis points to 4.35%4.31% for the three months ended JuneSeptember 30, 2018 from 3.94%3.89% for the three months ended JuneSeptember 30, 2017.

 32 

 

Provision for Loan Losses. The provision for loan losses was $638,000$1.4 million for the three months ended JuneSeptember 30, 2018 compared to $892,000$1.0 million for the three months ended JuneSeptember 30, 2017. The provision recorded resulted in an allowance for loan losses of $10.6$11.1 million, or 1.36%1.40% of total loans at JuneSeptember 30, 2018, compared to $9.8 million, or 1.30% of total loans, at December 31, 2017 and $10.0$10.9 million, or 1.40%1.44% of total loans, at JuneSeptember 30, 2017. The changes in the provision and allowance for loan losses were based on management’s assessment of loan portfolio growth and composition trends, historical charge-off trends, levels of problem loans and other asset quality trends. Non-accrual loans as of JuneSeptember 30, 2018 were primarily comprised oftwothree commercial and industrial relationships with a total carrying value of $2.3$3.1 million and one commercial real estaterelationship with a carrying value of $3.7$2.9 million.

 

Noninterest Income. Noninterest income increased $48,000,decreased $1.8 million, or 4.5%63.4%, to $1.1 million for the three months ended JuneSeptember 30, 2018 and Junefrom $2.9 million for the three months ended September 30, 2017. The increasedecrease was primarily caused by an increase of $109,000, or 22.5%, in service charges and fees partially offset by a decrease in the gain on sales of securities. GainsGain on sales of securities was zero for the three months ended JuneSeptember 30, 2018 compared to $58,000$1.9 million for the three months ended JuneSeptember 30, 2017.

 

Noninterest Expense. Noninterest expense increased $536,000,$309,000, or 9.1%5.2%, to $6.4$6.2 million for the three months ended JuneSeptember 30, 2018 from $5.9 million for the three months ended JuneSeptember 30, 2017. The largest increases were related to salaries and employee benefits expense, professional fees, and professional fees.occupancy expense. The increase in salary and employee benefits of $538,000,$202,000, or 14.4%5.1%, to $4.3$4.2 million for the three months ended JuneSeptember 30, 2018 from $3.7$3.9 million for the three months ended JuneSeptember 30, 2017 was primarily related to hiring an additional number of lenders. The increase in professional fees of $114,000,$47,000, or 53.0%20.7%, to $329,000$274,000 for the three months ended JuneSeptember 30, 2018 from $215,000$227,000 for the three months ended JuneSeptember 30, 2017 was primarily related to increased legal expenses related to certain subordinated lienholders that are disputing the priority of the Bank’s liens and the right of the Bank to retain proceeds from a foreclosure sale, discussed above.in Note 14 to the interim financial statements. The increase in occupancy expense of $45,000, or 10.9%, to $456,000 for the three months ended September 30, 2018 from $411,000 for the three months ended September 30, 2017 was primarily related to one-time building maintenance expenses.

 

Income Tax Provision. We recorded a provision for income taxes of $843,000$741,000 for the three months ended JuneSeptember 30, 2018, reflecting an effective tax rate of 26.1%26.3%, compared to a provision of $639,000$1.4 million for the three months ended JuneSeptember 30, 2017, reflecting an effective tax rate of 28.5%34.1%. The changes in the income tax provision were primarily due to a reduction of the federal corporate income tax rate from 35% to 21%. effective beginning in 2018.

 

 33 

 

 

Average Balance Sheet and Related Yields and Rates

 

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

 

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

 

  For the Three Months Ended September 30, 
  2018  2017 
     Interest        Interest    
  Average  Earned/  Yield/  Average  Earned/  Yield/ 
  Balance  Paid  Rate  Balance  Paid  Rate 
(Dollars in thousands)                  
                   
Assets:                  
Interest-earning assets:                        
  Loans $778,646  $10,219   5.25% $719,116  $8,403   4.67%
  Short-term investments  38,307   203   2.12%  4,897   14   1.14%
  Investment securities  54,405   381   2.80%  118,672   793   2.67%
  Federal Home Loan Bank stock  1,945   30   6.17%  3,028   29   3.83%
           Total interest-earning assets  873,303   10,833   4.96%  845,713   9,239   4.37%
Non-interest earning assets  49,289           45,951         
                         
           Total assets $922,592          $891,664         
                         
                         
Interest-bearing liabilities:                        
      Savings accounts $123,178   97   0.31% $117,049   51   0.17%
      Money market accounts  231,896   630   1.09%  181,064   234   0.52%
      NOW accounts  119,821   150   0.50%  118,469   172   0.58%
       Certificates of deposit  92,475   348   1.51%  125,645   326   1.04%
         Total interest-bearing deposits  567,370   1,225   0.86%  542,227   783   0.58%
      Federal Home Loan Bank advances  30,467   204   2.68%  57,446   222   1.55%
          Total interest-bearing liabilities  597,837   1,429   0.96%  599,673   1,005   0.67%
Noninterest-bearing liabilities:                        
      Noninterest-bearing deposits  191,802           168,129        ��
      Other noninterest-bearing liabilities  11,162           8,230         
          Total liabilities  800,801           776,032         
Total equity  121,791           115,632         
          Total liabilities and                        
            equity $922,592          $891,664         
                         
Net interest income     $9,404          $8,234     
Interest rate spread (1)          4.00%          3.70%
Net interest-earning assets (2) $275,466          $246,040         
Net interest margin (3)          4.31%          3.89%
Average interest-earning assets to                        
   interest-bearing liabilities  146.08%          141.03%        

(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

 

 34 

 

 

Rate/Volume Analysis

 

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

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

  For the Three Months Ended September 30, 2018 
  Compared to the Three Months Ended September 30, 2017 
  Increase (Decrease) Due to  Total 
  Rate  Volume  Increase (Decrease) 
(In thousands)         
             
Interest-earning assets:            
Loans $1,086  $730  $1,816 
Interest-earning deposits  21   168   189 
Investment securities  36   (448)  (412)
Federal Home Loan Bank stock  14   (13)  1 
             
Total interest-earning assets  1,157   437   1,594 
             
Interest-bearing liabilities:            
Savings accounts  43   3   46 
Money Market accounts  316   80   396 
Now accounts  (24)  2   (22)
Certificates of deposit  122   (100)  22 
             
Total interest-bearing deposits  457   (15)  442 
             
Federal Home Loan Bank advances  116   (134)  (18)
             
Total interest-bearing liabilities  573   (149)  424 
             
Change in net interest income $584  $586  $1,170 

 

 35 

 

 

Results of Operations for the SixNine Months Ended JuneSeptember 30, 2018 and 2017

 

General. Net income increased $1.0 million$316,000 to $4.4$6.5 million for the sixnine months ended JuneSeptember 30, 2018 from $3.4$6.2 million for the sixnine months ended JuneSeptember 30, 2017. The increase was related to an increase of $2.6$3.8 million in net interest and dividend income and a decrease in income tax expense of $658,000, partially offset by a $440,000$2.3 million decrease in noninterest income and an increase in noninterest expense of $1.3$1.6 million.

 

Interest and Dividend Income. Interest and dividend income increased $3.2$4.8 million, or 18.9%18.3%, to $20.1$31.0 million for the sixnine months ended JuneSeptember 30, 2018 from $16.9$26.2 million for the sixnine months ended JuneSeptember 30, 2017. This increase was primarily attributable to an increase in interest and fees on loans, which increased $4.1$5.9 million, or 26.8%24.9%, to $19.2$29.4 million for the sixnine months ended JuneSeptember 30, 2018 from $15.1$23.5 million for the sixnine months ended JuneSeptember 30, 2017. The increase in interest and fees on loans was partially offset by a decrease in interest and dividends on securities, which decreased $930,000,$1.3 million, or 52.4%51.6%, to $845,000$1.3 million for the sixnine months ended JuneSeptember 30, 2018 from $1.8$2.6 million for the sixnine months ended JuneSeptember 30, 2017.

 

The increase in interest income on loans was due to an increase in the average balance of loans of $108.2$91.8 million, or 16.4%13.5%, to $769.9$772.8 million for the sixnine months ended JuneSeptember 30, 2018 from $661.7$681.0 million for the sixnine months ended JuneSeptember 30, 2017. In addition, interest income increased due to the yield on loans increasing 4147 basis points to 4.99%5.08% for the sixnine months ended JuneSeptember 30, 2018 due to our continued focus on higher-yielding commercial lending. The decrease in interest and dividends on securities was due to the Company selling $30.6 million of state and municipal securities and divesting of all equity securities during the third and fourth quarters of 2017.

 

Interest Expense. Interest expense increased $588,000,$1.0 million, or 35.4%38.0%, to $2.2$3.7 million for the sixnine months ended JuneSeptember 30, 2018 from $1.7$2.7 million for the sixnine months ended JuneSeptember 30, 2017, caused by an increase in interest expense on deposits, partially offset by a decrease in interest expense on borrowings. Interest expense on deposits increased $681,000,$1.1 million, or 54.6%55.3%, to $1.9$3.2 million for the sixnine months ended JuneSeptember 30, 2018 from $1.2$2.0 million for the sixnine months ended JuneSeptember 30, 2017, due to an increase in the average rate paid on interest-bearing deposits of 2023 basis points to 0.70%0.76% for the sixnine months ended JuneSeptember 30, 2018 from 0.50%0.53% for the sixnine months ended JuneSeptember 30, 2017. The increase in the average rate was primarily the result of increases in the average rate paid on money market accounts and certificates of deposit. The average rate paid on money market accounts and certificates of deposit increased due to changes in the market rate environment. Interest expense on deposits also increased due to an increase in the average balance of interest-bearing deposits of $49.0$40.9 million, or 9.8%8.0%, to $547.6$554.2 million for the sixnine months ended JuneSeptember 30, 2018 from $498.6$513.3 million for the sixnine months ended JuneSeptember 30, 2017. The increase resulted primarily from an increase in the average balance of money market accounts, which increased $69.1$62.9 million, or 45.3%38.8%.

 

Interest expense on borrowings decreased $93,000,$111,000, or 22.6%17.5%, to $318,000$522,000 for the sixnine months ended JuneSeptember 30, 2018 from $411,000$633,000 for the sixnine months ended JuneSeptember 30, 2017. The interest expense on borrowings decreased due to the decrease in the average outstanding balance of $27.6$27.4 million, or 48.0%47.6% to $29.9$30.1 million for the sixnine months ended JuneSeptember 30, 2018. The decrease in the average outstanding balance was partially offset by a 7084 basis point increase in the cost of borrowings to 2.13%2.31% for the sixnine months ended JuneSeptember 30, 2018.

 

Net Interest and Dividend Income. Net interest and dividend income increased $2.6$3.8 million, or 17.1%16.1%, to $17.9$27.3 million for the sixnine months ended JuneSeptember 30, 2018 from $15.3$23.5 million for the sixnine months ended JuneSeptember 30, 2017. The increase was due to both higher balances of earninginterest-earning assets and expanding margins. Our net interest rate spread increased 32 basis points to 4.01% for the sixnine months ended JuneSeptember 30, 2018 from 3.69% for the sixnine months ended JuneSeptember 30, 2017. Our net interest margin increased 40 basis points to 4.26%4.27% for the sixnine months ended JuneSeptember 30, 2018 from 3.86%3.87% for the sixnine months ended JuneSeptember 30, 2017.

 36 

 

Provision for Loan Losses. The provision for loan losses was $1.3$2.7 million for the sixnine months ended JuneSeptember 30, 2018 compared to $1.5$2.5 million for the sixnine months ended JuneSeptember 30, 2017. The provision recorded resulted in an allowance for loan losses of $10.6$11.1 million, or 1.36%1.40% of total loans at JuneSeptember 30, 2018, compared to $9.8 million, or 1.30% of total loans, at December 31, 2017 and $10.0$10.9 million, or 1.40%1.44% of total loans, at JuneSeptember 30, 2017. The changes in the provision and allowance for loan losses were based on management’s assessment of loan portfolio growth and composition trends, historical charge-off trends, levels of problem loans and other asset quality trends. Non-accrual loans as of JuneSeptember 30, 2018 waswere primarily comprised oftwothree commercial and industrial relationships with a total carrying value of $2.3$3.1 million and one commercial real estaterelationship with a carrying value of $3.7$2.9 million.

 

Noninterest Income. Noninterest income decreased $440,000,$2.3 million, or 17.1%41.7%, to $2.1$3.2 million for the sixnine months ended JuneSeptember 30, 2018 from $2.6$5.5 million for the sixnine months ended JuneSeptember 30, 2017. The decrease was primarily caused by a decrease in the gain on sales of securities. GainsGain on sales of securities was zero for the sixnine months ended JuneSeptember 30, 2018 compared to $540,000$2.4 million for the sixnine months ended JuneSeptember 30, 2017.

 

Noninterest Expense. Noninterest expense increased $1.3$1.6 million, or 11.2%9.2%, to $12.8$19.0 million for the sixnine months ended JuneSeptember 30, 2018 from $11.5$17.4 million for the sixnine months ended JuneSeptember 30, 2017. The largest increases were related to salaries and employee benefits expense, professional fees, and other expense. The increase in salary and employee benefits of $1.0$1.2 million, or 13.8%10.8%, to $8.4$12.6 million for the sixnine months ended JuneSeptember 30, 2018 from $7.4$11.4 million for the sixnine months ended JuneSeptember 30, 2017 was primarily related to an increased number of lenders. The increase in professional fees of $148,000,$195,000, or 34.5%29.7%, was primarily due to increased legal expenses related tocertain subordinated lienholders that are disputing the priority of the Bank’s liens and the right of the Bank to retain proceeds from a foreclosure sale, discussed abovein Note 14 to the interim financial statements. The increase in other expense of $210,000,$252,000, or 14.3%11.5%, to $1.7$2.4 million for the sixnine months ended JuneSeptember 30, 2018 from $1.5$2.2 million for the sixnine months ended JuneSeptember 30, 2017 was primarily related to costs incurred working out nonperformingnon-performing loans.

 

Income Tax Provision. We recorded a provision for income taxes of $1.5$2.3 million for the sixnine months ended JuneSeptember 30, 2018, reflecting an effective tax rate of 25.6%25.8%, compared to a provision of $1.5$2.9 million for the sixnine months ended JuneSeptember 30, 2017, reflecting an effective tax rate of 30.4%32.1%. The changes in the income tax provision were primarily due to a reduction of the federal corporate income tax rate from 35% to 21%. effective beginning in 2018.

 

 37 

 

 

Average Balance Sheet and Related Yields and Rates

 

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

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

 

  For the Nine Months Ended September 30, 
  2018  2017 
     Interest        Interest    
  Average  Earned/  Yield/  Average  Earned/  Yield/ 
  Balance  Paid  Rate  Balance  Paid  Rate 
(dollars in thousands)                  
                   
Assets:                  
Interest-earning assets:                        
  Loans $772,839  $29,420   5.08% $681,034  $23,547   4.61%
  Short-term investments  19,345   287   1.98%  3,406   23   0.90%
  Investment securities  56,993   1,176   2.75%  121,377   2,507   2.75%
  Federal Home Loan Bank stock  1,892   80   5.64%  3,108   90   3.86%
           Total interest-earning assets  851,069   30,963   4.85%  808,925   26,167   4.31%
Non-interest earning assets  49,406           45,916         
                         
           Total assets $900,475          $854,841         
                         
                         
Interest-bearing liabilities:                        
      Savings accounts $117,533   224   0.25% $116,481   160   0.18%
      Money market accounts  225,144   1,537   0.91%  162,204   511   0.42%
      NOW accounts  115,000   450   0.52%  115,038   506   0.59%
       Certificates of deposit  96,563   943   1.30%  119,571   854   0.95%
         Total interest-bearing deposits  554,240   3,154   0.76%  513,294   2,031   0.53%
      Federal Home Loan Bank advances  30,104   522   2.31%  57,500   633   1.47%
          Total interest-bearing liabilities  584,344   3,676   0.84%  570,794   2,664   0.62%
Noninterest-bearing liabilities:                        
      Noninterest-bearing deposits  186,497           161,043         
      Other noninterest-bearing liabilities  10,447           8,052         
          Total liabilities  781,288           739,889         
Total equity  119,187           114,952         
          Total liabilities and                        
            equity $900,475          $854,841         
                         
Net interest income     $27,287          $23,503     
Interest rate spread (1)          4.01%          3.69%
Net interest-earning assets (2) $266,725          $238,131         
Net interest margin (3)          4.27%          3.87%
Average interest-earning assets to                        
   interest-bearing liabilities  145.65%          141.72%        

(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

 

 38 

 

 

Rate/Volume Analysis

 

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

 

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

  For the Nine Months Ended September 30, 2018 
  Compared to the Nine Months Ended September 30, 2017 
  Increase (Decrease) Due to  Total 
  Rate  Volume  Increase (Decrease) 
(in thousands)         
             
Interest-earning assets:            
Loans $2,516  $3,357  $5,873 
Interest-earning deposits  54   210   264 
Investment securities  (2)  (1,329)  (1,331)
Federal Home Loan Bank stock  33   (43)  (10)
             
Total interest-earning assets  2,599   2,197   4,796 
             
Interest-bearing liabilities:            
Savings accounts  63   1   64 
Money Market Accounts  770   256   1,026 
Now Accounts  (56)  (0)  (56)
Certificates of deposit  274   (185)  89 
             
Total interest-bearing deposits  1,051   72   1,123 
             
Federal Home Loan Bank advances  269   (380)  (111)
             
Total interest-bearing liabilities  1,320   (308)  1,012 
             
Change in net interest income $1,280  $2,504  $3,784 

 

 39 

 

 

Management of Market Risk

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

 

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

 

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

   At September 30, 
(Dollars in thousands)  2018 
Changes in  Estimated    
Interest Rates   Net Interest Income     
(Basis Points)   Over Next 12 Months   Change 
200  $40,454   (0.70%)
0   40,737   - 
-200   39,845   (2.19%)

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

 

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

 

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

   At September 30, 
(Dollars in thousands)  2018 
Changes in  Economic    
Interest Rates  Value of    
(Basis Points)  Equity  Change 
     
400  $147,454   (1.60%)
300   149,051   (0.50%)
200   150,282   0.30%
100   151,199   0.90%
0   149,831   - 
-100   144,344   (3.70%)
-200   130,461   (12.90%)

 

 40 

 

 

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

 

Liquidity and Capital Resources

 

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

 

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

 

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At JuneSeptember 30, 2018, cash and cash equivalents totaled $47.8$26.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $55.3$52.5 million at JuneSeptember 30, 2018.

 

At JuneSeptember 30, 2018, we had the ability to borrow a total of $208.0$195.4 million from the Federal Home Loan Bank of Boston. On that date, we had $39.9$29.9 million in advances outstanding. At JuneSeptember 30, 2018, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $200.7$198.3 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 JuneSeptember 30, 2018 and December 31, 2017, we had $33.8$29.2 million and $18.6 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at JuneSeptember 30, 2018 and December 31, 2017, we had $160.8$185.2 million and $166.0 million in unadvanced funds to borrowers, respectively. We also had $2.4$1.7 million and $2.0 million in outstanding letters of credit at JuneSeptember 30, 2018 and December 31, 2017, respectively.

 

Certificates of deposit due within one year of JuneSeptember 30, 2018 totaled $77.6$66.0 million, or 10.3%8.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit. 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.

 

41

Our primary investing activities are the origination of loans and the purchase of securities. During the sixnine months ended JuneSeptember 30, 2018, we originated $117.0$195.7 million of loans, all of which were intended to be held in our portfolio and we purchased $3.0 million in loans. We did not purchase any securities.During the sixnine months ended JuneSeptember 30, 2017, we originated $135.2$208.5 million of loans, all of which were intended to be held in our portfolio.We also purchased $11.3$13.1 million in loans and $12.5$13.1 million in securities.

41

 

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increases in total deposits of $4.2$1.4 million and $73.4$97.3 million for the sixnine months ended JuneSeptember 30, 2018 and 2017, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Federal Home Loan Bank advances increased $13.0$3.1 million and $10.2$28.5 million during the sixnine months ended JuneSeptember 30, 2018 and 2017, respectively.

 

The Provident Bank is subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. At JuneSeptember 30, 2018, The Provident Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 10 of the Notes to the Unaudited Consolidated Financial Statements for additional information.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

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

 

During the quarter ended JuneSeptember 30, 2018, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

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

 

 42 

 

 

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

 

(a)Not applicable.

 

(b)Not applicable.

 

(c)On January 26, 2017, the Company announced a repurchase program under which it would repurchase up to 6.6% of the then-outstanding shares of the Company’s common stock (625,015 shares) from time to time, depending on market conditions. The repurchase program wouldwill continue until it is completed or terminated by the Company’s Board of Directors. For the three months ended JuneSeptember 30, 2018, there were no repurchases of Provident Bancorp, Inc. stock. 

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

3.1Amended and Restated Articles of Organization of Provident Bancorp, Inc. (1)
3.2By-Laws of Provident Bancorp, Inc. (1)
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended JuneSeptember 30, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.

 

_________________

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

 

 43 

 

 

SIGNATURES

SIGNATURES

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

 

 PROVIDENT BANCORP, INC.
Date:November 8, 2018/s/ David P. Mansfield
David P. Mansfield
President and Chief Executive Officer
 
   
Date: August 9, 2018/s/ David P. Mansfield
David P. Mansfield
President and Chief Executive Officer
Date: August 9,November 8, 2018/s/ Carol L. Houle
 
 Carol L. Houle
 
 Executive Vice President and Chief Financial Officer

 

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