UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to ______________________
Commission File No. 001-37504
Provident Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts | 45-3231576 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) | |
5 Market Street, Amesbury, Massachusetts | 01913 | |
(Address of Principal Executive Offices) | Zip Code |
(978) 834-8555
(Registrant’s telephone number)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
YESx NO¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YESx NO¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES¨ NOx
As of May 10, 2016, there were 9,498,722 shares of the Registrant’s common stock, no par value per share, issued and outstanding.
Form 10-Q
1 |
Part I. | Financial Information |
Item 1. | Financial Statements |
CONSOLIDATED BALANCE SHEETS
At | At | |||||||
March 31, | December 31, | |||||||
(In thousands) | 2016 | 2015 | ||||||
(unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 11,013 | $ | 7,302 | ||||
Interest-bearing demand deposits with other banks | 4,586 | 12,865 | ||||||
Money market mutual funds | 380 | 297 | ||||||
Cash and cash equivalents | 15,979 | 20,464 | ||||||
Investments in available-for-sale securities (at fair value) | 79,243 | 80,984 | ||||||
Investments in held-to-maturity securities (fair values of $46,281 as of March 31, 2016 and $46,474 as of December 31, 2015) | 44,282 | 44,623 | ||||||
Federal Home Loan Bank stock, at cost | 2,387 | 3,310 | ||||||
Loans, net | 555,463 | 554,929 | ||||||
Bank owned life insurance | 18,959 | 18,793 | ||||||
Premises and equipment, net | 12,081 | 11,606 | ||||||
Accrued interest receivable | 2,220 | 2,251 | ||||||
Deferred tax asset, net | 4,738 | 5,056 | ||||||
Other assets | 1,220 | 1,381 | ||||||
Total assets | $ | 736,572 | $ | 743,397 | ||||
Liabilities and Equity | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 150,206 | $ | 153,093 | ||||
Interest-bearing | 446,163 | 424,142 | ||||||
Total deposits | 596,369 | 577,235 | ||||||
Federal Home Loan Bank advances | 29,435 | 57,423 | ||||||
Other liabilities | 7,293 | 7,333 | ||||||
Total liabilities | 633,097 | 641,991 | ||||||
Shareholders' equity: | ||||||||
Preferred stock; authorized 50,000 shares: senior non-cumulative perpetual, Series A, no par, 0 shares issued and outstanding; liquidation value $1,000 per share | - | - | ||||||
Common stock, no par value: 30,000,000 shares authorized; 9,498,722 shares issued and outstanding | - | - | ||||||
Additional paid-in capital | 43,177 | 43,159 | ||||||
Retained earnings | 61,377 | 59,890 | ||||||
Accumulated other comprehensive income | 2,195 | 1,690 | ||||||
Unearned compensation - ESOP | (3,274 | ) | (3,333 | ) | ||||
Total shareholders' equity | 103,475 | 101,406 | ||||||
Total liabilities and shareholders' equity | $ | 736,572 | $ | 743,397 |
The accompanying notes are an integral part of the consolidated financial statements.
2 |
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands, except per share data) | 2016 | 2015 | ||||||
(unaudited) | ||||||||
Interest and dividend income: | ||||||||
Interest and fees on loans | $ | 6,091 | $ | 5,243 | ||||
Interest and dividends on securities | 881 | 829 | ||||||
Interest on interest-bearing deposits | 8 | 1 | ||||||
Total interest and dividend income | 6,980 | 6,073 | ||||||
Interest expense: | ||||||||
Interest on deposits | 555 | 406 | ||||||
Interest on Federal Home Loan Bank advances | 142 | 141 | ||||||
Total interest expense | 697 | 547 | ||||||
Net interest and dividend income | 6,283 | 5,526 | ||||||
Provision for loan losses | 111 | 278 | ||||||
Net interest and dividend income after provision for loan losses | 6,172 | 5,248 | ||||||
Noninterest income: | ||||||||
Customer service fees on deposit accounts | 406 | 329 | ||||||
Service charges and fees - other | 418 | 381 | ||||||
Gain on sales, calls and donated securities, net | 20 | 81 | ||||||
Other income | 91 | 33 | ||||||
Total noninterest income | 935 | 824 | ||||||
Noninterest expense: | ||||||||
Salaries and employee benefits | 3,122 | 2,869 | ||||||
Occupancy expense | 365 | 393 | ||||||
Equipment expense | 145 | 133 | ||||||
FDIC assessment | 94 | 94 | ||||||
Data processing | 163 | 139 | ||||||
Marketing expense | 57 | 57 | ||||||
Professional fees | 265 | 217 | ||||||
Other | 713 | 764 | ||||||
Total noninterest expense | 4,924 | 4,666 | ||||||
Income before income tax expense | 2,183 | 1,406 | ||||||
Income tax expense | 696 | 394 | ||||||
Net income | $ | 1,487 | $ | 1,012 | ||||
Net Income attributable to common shareholders | $ | 1,487 | $ | 968 | ||||
Income per share: | ||||||||
Basic | $ | 0.16 | N/A | |||||
Diluted | $ | 0.16 | N/A | |||||
Weighted Average Shares: | ||||||||
Basic | 9,167,364 | N/A | ||||||
Diluted | 9,167,364 | N/A |
The accompanying notes are an integral part of the consolidated financial statements.
3 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Net income | $ | 1,487 | $ | 1,012 | ||||
Other comprehensive income before tax: | ||||||||
Unrealized gains (losses) on securities: | ||||||||
Change in net unrealized holding gains arising during the period | 843 | 563 | ||||||
Less: Reclassification adjustment for realized gains in net income | (20 | ) | (81 | ) | ||||
Other comprehensive income before tax | 823 | 482 | ||||||
Income tax expense | (318 | ) | (188 | ) | ||||
Other comprehensive income, net of tax | 505 | 294 | ||||||
Total comprehensive income | $ | 1,992 | $ | 1,306 |
The accompanying notes are an integral part of the consolidated financial statements.
4 |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Shares of | Additional | Other | Unearned | |||||||||||||||||||||||||
Common | Preferred | Paid-in | Retained | Comprehensive | Compensation | |||||||||||||||||||||||
(In thousands, except share data) | Stock | Stock | Capital | Earnings | Income | ESOP | Total | |||||||||||||||||||||
Balance, December 31, 2014 | 275,000 | $ | 17,145 | $ | 275 | $ | 55,959 | $ | 2,412 | $ | - | $ | 75,791 | |||||||||||||||
Net income | - | - | - | 1,012 | - | - | 1,012 | |||||||||||||||||||||
Net change in other comprehensive income | - | - | - | - | 294 | - | 294 | |||||||||||||||||||||
Preferred stock dividends | - | - | - | (44 | ) | - | - | (44 | ) | |||||||||||||||||||
Balance, March 31, 2015 | 275,000 | $ | 17,145 | $ | 275 | $ | 56,927 | $ | 2,706 | $ | - | $ | 77,053 | |||||||||||||||
Balance, December 31, 2015 | 9,498,722 | $ | - | $ | 43,159 | $ | 59,890 | $ | 1,690 | $ | (3,333 | ) | $ | 101,406 | ||||||||||||||
Net income | - | - | - | 1,487 | - | - | 1,487 | |||||||||||||||||||||
Net change in other comprehensive income | - | - | - | - | 505 | - | 505 | |||||||||||||||||||||
ESOP shares earned | - | - | 18 | - | - | 59 | 77 | |||||||||||||||||||||
Balance, March 31, 2016 | 9,498,722 | $ | - | $ | 43,177 | $ | 61,377 | $ | 2,195 | $ | (3,274 | ) | $ | 103,475 |
The accompanying notes are an integral part of the consolidated financial statements.
5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,487 | $ | 1,012 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Amortization of securities premiums, net of accretion | 201 | 216 | ||||||
ESOP expense | 77 | - | ||||||
Gain on sales, calls and donations of securities, net | (20 | ) | (81 | ) | ||||
Change in deferred loan fees, net | 23 | (14 | ) | |||||
Provision for loan losses | 111 | 278 | ||||||
Depreciation and amortization | 207 | 181 | ||||||
(Increase) decrease in accrued interest receivable | 31 | (9 | ) | |||||
Decrease in taxes receivable | - | 392 | ||||||
Increase in taxes payable | 7 | - | ||||||
Increase in cash surrender value of life insurance | (166 | ) | (96 | ) | ||||
Decrease (increase) in other assets | 154 | (575 | ) | |||||
Decrease in other liabilities | (40 | ) | (1,125 | ) | ||||
Net cash provided by operating activities | 2,072 | 179 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of available-for-sale securities | - | (287 | ) | |||||
Proceeds from sales of available-for-sale securities | 24 | 211 | ||||||
Proceeds from pay downs, maturities and calls of available-for-sale securities | 2,480 | 2,682 | ||||||
Proceeds from pay downs, maturities and calls of held-to-maturity securities | 220 | - | ||||||
Purchase of Federal Home Loan Bank Stock | (195 | ) | - | |||||
Redemption of Federal Home Loan Bank Stock | 1,118 | - | ||||||
Loan originations and principal collections, net | (410 | ) | 460 | |||||
Recoveries of loans previously charged off | 14 | 2 | ||||||
Loans purchased | (272 | ) | - | |||||
Additions to premises and equipment | (682 | ) | (20 | ) | ||||
Net cash provided by investing activities | 2,297 | 3,048 |
The accompanying notes are an integral part of the consolidated financial statements.
6 |
PROVIDENT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Cash flows from financing activities: | ||||||||
Net increase in demand deposits, NOW and savings accounts | 23,192 | 21 | ||||||
Net (decrease) increase in time deposits | (4,058 | ) | 1,248 | |||||
Net change in Federal Home Loan Bank short-term advances | (27,988 | ) | 2,400 | |||||
Preferred stock dividends | - | (44 | ) | |||||
Net cash (used in) provided by financing activities | (8,854 | ) | 3,625 | |||||
Net (decrease) increase in cash and cash equivalents | (4,485 | ) | 6,852 | |||||
Cash and cash equivalents at beginning of year | 20,464 | 9,558 | ||||||
Cash and cash equivalents at end of year | $ | 15,979 | $ | 16,410 | ||||
Supplemental disclosures: | ||||||||
Interest paid | $ | 687 | $ | 558 | ||||
Income taxes paid | 82 | 2 |
The accompanying notes are an integral part of the consolidated financial statements.
7 |
Notes to Consolidated Financial Statements
(Unaudited)
(1) | Basis of Presentation |
The accompanying unaudited financial statements of Provident Bancorp, Inc., a Massachusetts corporation (the “Company”), were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of the financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. 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 30, 2016. 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 was established to buy, sell, and hold investments for its own account, and 5 Market Street Security Corporation, an inactive corporation, was established to buy, sell, and hold investments for its own account. All significant inter-company balances and transactions have been eliminated in consolidation. These consolidated financial statements consider events that occurred through the date the consolidated financial statements were issued.
(2) | Corporate Structure |
On March 10, 2015, the Board of Directors of the Company adopted a plan of stock issuance (the “Plan”) pursuant to which the Company sold shares of common stock, representing a minority ownership of the estimated pro forma market value of the Company.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 Inc., 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. A total of 9,498,722 shares of common stock were outstanding following the completion of the stock offering.
Expenses incurred related to the offering were $1.5 million, and were recorded against offering proceeds.
Upon the completion of the stock offering, a special “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to the percentage ownership interest in the equity of the Company to be held by persons other than the MHC as of the date of the latest balance sheet contained in the prospectus utilized in connection with the offering. The Company is not permitted to pay dividends on its capital stock if the Company’s shareholders’ equity would be reduced below the amount of the liquidation account. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account.
(3) | Recent Accounting Pronouncements |
ASU No. 2014-09 – Revenue from Contracts with Customers (Topic 606).The ASU establishes a single comprehensive model for an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, and will supersede nearly all existing revenue recognition guidance, to clarify and converge revenue recognition principles under US GAAP and IFRS. The update outlines five steps to recognizing revenue: (i) identify the contracts with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations; (v) recognize revenue when each performance obligation is satisfied. The update requires more comprehensive disclosures, relating to quantitative and qualitative information for amounts, timing, the nature and uncertainty of revenue,
8 |
and cash flows arising from contracts with customers, which will mainly impact construction and high-tech industries. The most significant potential impact to banking entities relates to less prescriptive derecognition requirements on the sale of OREO property. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Accordingly, the amendments are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for annual and interim reporting periods beginning after December 15, 2016. An entity may elect either a full retrospective or a modified retrospective application. The Company does not expect the application of this guidance to have a material impact on the Company's financial statements.
ASU No. 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) - "Classification of Certain Government-Guaranteed Residential Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”. The ASU has been issued to reduce diversity in practice in the classification of foreclosed residential mortgage loans held by creditors that are fully guaranteed under certain government programs, including the Federal Housing Administration guarantees. A residential mortgage loan would be derecognized and a separate other receivable would be recognized upon foreclosure if the loan has both of the following characteristics: (i) the loan has a government guarantee that is not separable from the loan before foreclosure entitling the creditor to the full unpaid principal balance of the loan; and (ii) at the time of foreclosure, the creditor has the intent to make a claim on the guarantee and the ability to recover the full unpaid principal balance of the loan through the guarantee. Notably, upon foreclosure, the separate other receivable would be measured based on the current amount of the loan balance expected to be recovered under the guarantee. The amendments were effective for the Company as of January 1, 2016. These amendments did not impact the Company’s financial statements and the Company does not expect the application of this guidance will have a material impact on the Company’s financial statements in the future.
ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.”The ASU has been issued to improve the recognition and measurement of financial instruments by requiring 1) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 3) the use of the exit price notion when measuring fair value of financial instruments for disclosure purposes; and 4) separate presentation by the reporting organization in other comprehensive income for the portion of the total change in the fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The standard is effective for the Company beginning on January 1, 2018. The Company holds a portfolio of marketable equity securities; depending on the size and composition of the portfolio at the adoption date, the impact of the ASU could be material to the Company’s consolidated financial statements.
ASU 2016-02, Leases (Topic 842).The amendments in this update require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. The guidance will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.
9 |
(4) | Investment Securities |
The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at March 31, 2016 and December 31, 2015:
Amortized | Gross | Gross | ||||||||||||||
Cost | Unrealized | Unrealized | Fair | |||||||||||||
(In thousands) | Basis | Gains | Losses | Value | ||||||||||||
March 31, 2016 | ||||||||||||||||
U.S. Government and federal agency | $ | 1,997 | $ | 29 | $ | - | $ | 2,026 | ||||||||
State and municipal | 3,371 | 349 | - | 3,720 | ||||||||||||
Corporate debt | 1,000 | 62 | - | 1,062 | ||||||||||||
Asset-backed securities | 9,441 | 114 | 17 | 9,538 | ||||||||||||
Government mortgage-backed securities | 50,170 | 814 | 129 | 50,855 | ||||||||||||
Trust preferred securities | 1,368 | 40 | 398 | 1,010 | ||||||||||||
Marketable equity securities | 8,718 | 2,918 | 224 | 11,412 | ||||||||||||
76,065 | 4,326 | 768 | 79,623 | |||||||||||||
Money market mutual funds included in cash and cash equivalents | (380 | ) | - | - | (380 | ) | ||||||||||
Total available-for-sale securities | $ | 75,685 | $ | 4,326 | $ | 768 | $ | 79,243 | ||||||||
December 31, 2015 | ||||||||||||||||
U.S. Government and federal agency | $ | 1,996 | $ | 37 | $ | - | $ | 2,033 | ||||||||
State and municipal | 3,373 | 309 | - | 3,682 | ||||||||||||
Corporate debt | 1,000 | 71 | - | 1,071 | ||||||||||||
Asset-backed securities | 9,656 | 9 | 41 | 9,624 | ||||||||||||
Government mortgage-backed securities | 52,515 | 622 | 325 | 52,812 | ||||||||||||
Trust preferred securities | 1,368 | 55 | 307 | 1,116 | ||||||||||||
Marketable equity securities | 8,638 | 2,653 | 348 | 10,943 | ||||||||||||
78,546 | 3,756 | 1,021 | 81,281 | |||||||||||||
Money market mutual funds included in cash and cash equivalents | (297 | ) | - | - | (297 | ) | ||||||||||
Total available-for-sale securities | $ | 78,249 | $ | 3,756 | $ | 1,021 | $ | 80,984 |
10 |
The following summarizes the amortized cost of investment securities classified as held-to-maturity and their approximate fair values at March 31, 2016 and December 31, 2015:
Amortized | Gross | Gross | ||||||||||||||
Cost | Unrealized | Unrealized | Fair | |||||||||||||
(In thousands) | Basis | Gains | Losses | Value | ||||||||||||
March 31, 2016 | ||||||||||||||||
State and municipal | $ | 44,282 | $ | 2,020 | $ | 21 | $ | 46,281 | ||||||||
December 31, 2015 | ||||||||||||||||
State and municipal | $ | 44,623 | $ | 1,905 | $ | 54 | $ | 46,474 |
The scheduled maturities of debt securities were as follows at March 31, 2016:
Available-for- Sale | Held-to-Maturity | |||||||||||
Fair | Amortized | Fair | ||||||||||
(In thousands) | Value | Cost Basis | Value | |||||||||
Due within one year | $ | 2,157 | $ | 792 | $ | 797 | ||||||
Due after one year through five years | 1,405 | 1,852 | 1,924 | |||||||||
Due after five years through ten years | 554 | 5,836 | 6,124 | |||||||||
Due after ten years | 3,702 | 35,802 | 37,436 | |||||||||
Government mortgage-backed securities | 50,855 | - | - | |||||||||
Asset-backed securities | 9,538 | - | - | |||||||||
$ | 68,211 | $ | 44,282 | $ | 46,281 |
11 |
The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, are as follows at March 31, 2016 and December 31, 2015:
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(In thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||
Temporarily impaired securities: | ||||||||||||||||||||||||
State and municipal | $ | 2,370 | $ | 19 | $ | 645 | $ | 2 | $ | 3,015 | $ | 21 | ||||||||||||
Asset-backed securities | - | - | 1,969 | 17 | 1,969 | 17 | ||||||||||||||||||
Government mortgage-backed securities | 1,257 | 4 | 8,202 | 125 | 9,459 | 129 | ||||||||||||||||||
Trust preferred securities | - | - | 926 | 398 | 926 | 398 | ||||||||||||||||||
Marketable equity securities | 691 | 65 | 792 | 159 | 1,483 | 224 | ||||||||||||||||||
Total temporarily impaired securities | $ | 4,318 | $ | 88 | $ | 12,534 | $ | 701 | $ | 16,852 | $ | 789 | ||||||||||||
December 31, 2015 | ||||||||||||||||||||||||
Temporarily impaired securities: | ||||||||||||||||||||||||
State and municipal | $ | 3,195 | $ | 28 | $ | 729 | $ | 26 | $ | 3,924 | $ | 54 | ||||||||||||
Asset-backed securities | 5,062 | 7 | 2,005 | 34 | 7,067 | 41 | ||||||||||||||||||
Government mortgage-backed securities | 21,108 | 88 | 9,156 | 237 | 30,264 | 325 | ||||||||||||||||||
Trust preferred securities | - | - | 1,017 | 307 | 1,017 | 307 | ||||||||||||||||||
Marketable equity securities | 1,591 | 166 | 529 | 182 | 2,120 | 348 | ||||||||||||||||||
Total temporarily impaired securities | $ | 30,956 | $ | 289 | $ | 13,436 | $ | 786 | $ | 44,392 | $ | 1,075 |
Government mortgage-backed securities, state and municipal securities and asset-backed securities: Because the decline in fair value of the government mortgage-backed securities, asset backed securities and state and municipal securities is primarily attributable to changes in interest rates and not credit quality, and because the Company has the intent and ability to hold these investments until market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
Marketable equity securities: Management continuously monitors equity securities for impairment by reviewing the financial condition of the issuer, company-specific events, industry developments, and general economic conditions. Management reviews corporate financial reports, credit agency reports and other publicly available information. Based on these reviews, these securities are not considered to be other-than-temporarily impaired.
Trust preferred securities: Management monitors its pooled-trust preferred securities for possible other-than-temporary-impairment on a quarterly basis. This review includes an analysis of collateral reports, cash flows, stress default levels and financial ratios of the underlying issuers. Management utilizes a third party to compile this data and perform other-than-temporary-impairment cash flow testing. Critical assumptions that go into the other-than-temporary-impairment cash flow testing are prepayment speeds, default rates of the underlying issuers and discount margins. The result of the third-party other-than-temporary-impairment cash flow testing indicated no other-than-temporary-impairment as of March 31, 2016.
12 |
(5) Loans
A summary of loans is as follows:
At | At | |||||||||||||||
March 31, | December 31, | |||||||||||||||
2016 | 2015 | |||||||||||||||
(In thousands) | Amount | Percent | Amount | Percent | ||||||||||||
Commercial real estate | $ | 301,055 | 53.39 | % | $ | 285,356 | 50.67 | % | ||||||||
Commercial | 110,737 | 19.64 | % | 112,073 | 19.90 | % | ||||||||||
Residential real estate | 89,182 | 15.82 | % | 92,392 | 16.40 | % | ||||||||||
Construction and land development | 61,258 | 10.86 | % | 71,535 | 12.70 | % | ||||||||||
Consumer | 1,651 | 0.29 | % | 1,855 | 0.33 | % | ||||||||||
563,883 | 100.00 | % | 563,211 | 100.00 | % | |||||||||||
Allowance for loan losses | (8,020 | ) | (7,905 | ) | ||||||||||||
Deferred loan fees, net | (400 | ) | (377 | ) | ||||||||||||
Net loans | $ | 555,463 | $ | 554,929 |
The following tables set forth information regarding the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016 and 2015:
Construction | ||||||||||||||||||||||||||||
Commercial | Residential | and Land | ||||||||||||||||||||||||||
(In thousands) | Real Estate | Commercial | Real Estate | Development | Consumer | Unallocated | Total | |||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Balance at December 31, 2015 | $ | 3,827 | $ | 2,138 | $ | 412 | $ | 1,236 | $ | 119 | $ | 173 | $ | 7,905 | ||||||||||||||
Charge-offs | - | - | - | - | (10 | ) | - | (10 | ) | |||||||||||||||||||
Recoveries | - | 1 | 13 | - | - | - | 14 | |||||||||||||||||||||
Provision (benefit) | 203 | (55 | ) | (41 | ) | (52 | ) | 2 | 54 | 111 | ||||||||||||||||||
Balance at March 31, 2016 | $ | 4,030 | $ | 2,084 | $ | 384 | $ | 1,184 | $ | 111 | $ | 227 | $ | 8,020 | ||||||||||||||
Balance at December 31, 2014 | $ | 3,500 | $ | 1,751 | $ | 560 | $ | 872 | $ | 184 | $ | 357 | $ | 7,224 | ||||||||||||||
Charge-offs | - | (103 | ) | - | - | (6 | ) | - | (109 | ) | ||||||||||||||||||
Recoveries | - | - | - | - | 2 | - | 2 | |||||||||||||||||||||
Provision (benefit) | 314 | 354 | (1 | ) | (290 | ) | (8 | ) | (91 | ) | 278 | |||||||||||||||||
Balance at March 31, 2015 | $ | 3,814 | $ | 2,002 | $ | 559 | $ | 582 | $ | 172 | $ | 266 | $ | 7,395 |
13 |
The following table sets forth information regarding the allowance for loan losses and related loan balances by segment at March 31, 2016 and December 31, 2015:
Construction | ||||||||||||||||||||||||||||
Commercial | Residential | and Land | ||||||||||||||||||||||||||
(In thousands) | Real Estate | Commercial | Real Estate | Development | Consumer | Unallocated | Total | |||||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | 482 | $ | - | $ | - | $ | - | $ | - | $ | 482 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
Collectively evaluated for impairment | 4,030 | 1,602 | 384 | 1,184 | 111 | 227 | 7,538 | |||||||||||||||||||||
Total allowance for loan | ||||||||||||||||||||||||||||
losses ending balance | $ | 4,030 | $ | 2,084 | $ | 384 | $ | 1,184 | $ | 111 | $ | 227 | $ | 8,020 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 3,259 | $ | 1,680 | $ | 433 | $ | - | $ | - | $ | - | $ | 5,372 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
Collectively evaluated for impairment | 297,796 | 109,057 | 88,749 | 61,258 | 1,651 | - | 558,511 | |||||||||||||||||||||
Total loans ending balance | $ | 301,055 | $ | 110,737 | $ | 89,182 | $ | 61,258 | $ | 1,651 | $ | - | $ | 563,883 | ||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | 488 | $ | - | $ | - | $ | - | $ | - | $ | 488 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
Collectively evaluated for impairment | 3,827 | 1,650 | 412 | 1,236 | 119 | 173 | 7,417 | |||||||||||||||||||||
Total allowance for loan | ||||||||||||||||||||||||||||
losses ending balance | $ | 3,827 | $ | 2,138 | $ | 412 | $ | 1,236 | $ | 119 | $ | 173 | $ | 7,905 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 3,272 | $ | 1,755 | $ | 437 | $ | - | $ | - | $ | - | $ | 5,464 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
Collectively evaluated for impairment | 282,084 | 110,318 | 91,955 | 71,535 | 1,855 | - | 557,747 | |||||||||||||||||||||
Total loans ending balance | $ | 285,356 | $ | 112,073 | $ | 92,392 | $ | 71,535 | $ | 1,855 | $ | - | $ | 563,211 |
14 |
The following tables set forth information regarding non-accrual loans and loan delinquencies by portfolio segment at March 31, 2016 and December 31, 2015:
90 Days | ||||||||||||||||||||||||||||||||
90 Days | Total | or More | ||||||||||||||||||||||||||||||
30 - 59 | 60 - 89 | or More | Past | Total | Total | Past Due | Non-accrual | |||||||||||||||||||||||||
(In thousands) | Days | Days | Past Due | Due | Current | Loans | and Accruing | Loans | ||||||||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||||||||||
Commercial real estate | $ | - | $ | - | $ | - | $ | - | $ | 301,055 | $ | 301,055 | $ | - | $ | 105 | ||||||||||||||||
Commercial | - | - | - | - | 110,737 | 110,737 | - | 1,129 | ||||||||||||||||||||||||
Residential real estate | 276 | - | - | 276 | 88,906 | 89,182 | - | 596 | ||||||||||||||||||||||||
Construction and land development | - | - | - | - | 61,258 | 61,258 | - | - | ||||||||||||||||||||||||
Consumer | - | - | - | - | 1,651 | 1,651 | - | - | ||||||||||||||||||||||||
Total | $ | 276 | $ | - | $ | - | $ | 276 | $ | 563,607 | $ | 563,883 | $ | - | $ | 1,830 | ||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||
Commercial real estate | $ | - | $ | - | $ | - | $ | - | $ | 285,356 | $ | 285,356 | $ | - | $ | 106 | ||||||||||||||||
Commercial | - | - | - | - | 112,073 | 112,073 | - | 1,147 | ||||||||||||||||||||||||
Residential real estate | 130 | 173 | 365 | 668 | 91,724 | 92,392 | 1,031 | |||||||||||||||||||||||||
Construction and land development | - | - | - | - | 71,535 | 71,535 | - | - | ||||||||||||||||||||||||
Consumer | 1 | 1 | - | 2 | 1,853 | 1,855 | - | - | ||||||||||||||||||||||||
Total | $ | 131 | $ | 174 | $ | 365 | $ | 670 | $ | 562,541 | $ | 563,211 | $ | - | $ | 2,284 |
15 |
Information about the Company’s impaired loans by portfolio segment was as follows at and for the period ended March 31, 2016 and for the year ended December 31, 2015:
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
(In thousands) | Investment | Balance | Allowance | Investment | Recognized | |||||||||||||||
March 31, 2016 | ||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial real estate | $ | 3,259 | $ | 3,259 | $ | - | $ | 3,266 | $ | 41 | ||||||||||
Commercial | 644 | 644 | - | 653 | 9 | |||||||||||||||
Residential real estate | 433 | 433 | - | 435 | 5 | |||||||||||||||
Construction and land development | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total impaired with no related allowance | 4,336 | 4,336 | - | 4,354 | 55 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial real estate | - | - | - | - | - | |||||||||||||||
Commercial | 1,036 | 1,036 | 482 | 1,042 | 2 | |||||||||||||||
Residential real estate | - | - | - | - | - | |||||||||||||||
Construction and land development | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total impaired with an allowance recorded | 1,036 | 1,036 | 482 | 1,042 | 2 | |||||||||||||||
Total | ||||||||||||||||||||
Commercial real estate | 3,259 | 3,259 | - | 3,266 | 41 | |||||||||||||||
Commercial | 1,680 | 1,680 | 482 | 1,695 | 11 | |||||||||||||||
Residential real estate | 433 | 433 | - | 435 | 5 | |||||||||||||||
Construction and land development | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total impaired loans | $ | 5,372 | $ | 5,372 | $ | 482 | $ | 5,396 | $ | 57 | ||||||||||
December 31, 2015 | ||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial real estate | $ | 3,272 | $ | 3,272 | $ | - | $ | 3,788 | $ | 149 | ||||||||||
Commercial | 661 | 661 | - | 611 | 20 | |||||||||||||||
Residential real estate | 437 | 437 | - | 323 | 17 | |||||||||||||||
Construction and land development | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total impaired with no related allowance | 4,370 | 4,370 | - | 4,722 | 186 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial real estate | - | - | - | - | - | |||||||||||||||
Commercial | 1,094 | 1,094 | 488 | 901 | 2 | |||||||||||||||
Residential real estate | - | - | - | - | - | |||||||||||||||
Construction and land development | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total impaired with an allowance recorded | 1,094 | 1,094 | 488 | 901 | 2 | |||||||||||||||
Total | ||||||||||||||||||||
Commercial real estate | 3,272 | 3,272 | - | 3,788 | 149 | |||||||||||||||
Commercial | 1,755 | 1,755 | 488 | 1,512 | 22 | |||||||||||||||
Residential real estate | 437 | 437 | - | 323 | 17 | |||||||||||||||
Construction and land development | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
Total impaired loans | $ | 5,464 | $ | 5,464 | $ | 488 | $ | 5,623 | $ | 188 |
16 |
There were no troubled debt restructurings during the three months ended March 31, 2016.
The following tables present the Company’s loans by risk rating and portfolio segment at March 31, 2016 and December 31, 2015:
(In thousands) | Commercial Real Estate | Commercial | Residential Real Estate | Construction and Land Development | Consumer | Total | ||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||
Pass | $ | 281,041 | $ | 105,582 | $ | - | $ | 61,258 | $ | - | $ | 447,881 | ||||||||||||
Special mention | 15,692 | 843 | - | - | - | 16,535 | ||||||||||||||||||
Substandard | 4,322 | 3,414 | 1,072 | - | - | 8,808 | ||||||||||||||||||
Doubtful | - | 898 | - | - | - | 898 | ||||||||||||||||||
Not formally rated | - | - | 88,110 | - | 1,651 | 89,761 | ||||||||||||||||||
Total | $ | 301,055 | $ | 110,737 | $ | 89,182 | $ | 61,258 | $ | 1,651 | $ | 563,883 | ||||||||||||
December 31, 2015 | ||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||
Pass | $ | 265,325 | $ | 106,677 | $ | - | $ | 71,535 | $ | - | $ | 443,537 | ||||||||||||
Special mention | 15,700 | 1,403 | - | - | - | 17,103 | ||||||||||||||||||
Substandard | 4,331 | 3,083 | 1,329 | - | - | 8,743 | ||||||||||||||||||
Doubtful | - | 910 | - | - | - | 910 | ||||||||||||||||||
Not formally rated | - | - | 91,063 | - | 1,855 | 92,918 | ||||||||||||||||||
Total | $ | 285,356 | $ | 112,073 | $ | 92,392 | $ | 71,535 | $ | 1,855 | $ | 563,211 |
Credit Quality Information
The Company utilizes a seven grade internal loan risk rating system for commercial real estate, construction and land development, and commercial loans as follows:
Loans rated 1-3: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 7: Loans in this category are considered uncollectible loss and of such little value that their continuance as loans is not warranted.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and land development, and commercial loans.
For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Subsequent risk rating downgrades are based upon the borrower’s payment activity. All other residential and consumer loans are not formally rated.
17 |
(6) Federal Home Loan Bank Advances
Borrowings from the FHLB are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain commercial loans and other qualified assets.
In August of 2015 the Bank modified $3.5 million of its FHLB borrowings and extended the maturity. The Bank incurred a prepayment penalty of $233,000. In accordance with ASC 470-50-40, the prepayment penalty is amortized over the life of the newly modified borrowing.
Maturities of advances from the FHLB ending after March 31, 2016 are summarized as follows:
(In thousands) | ||||
2016 | $ | 21,112 | ||
2017 | 5,000 | |||
2020 | 3,323 | |||
Total | $ | 29,435 |
(7) | Fair Value Measurements |
The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes six levels of inputs that may be used to measure fair values:
Basis of Fair Value Measurements
· | Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
· | Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; |
· | Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Fair Values of Financial Instruments Measured on a Recurring Basis
The Company’s investments in U.S. Government and federal agency, state and municipal, corporate debt, asset-backed and government mortgage-backed securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these investments, we obtain fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.
The Company classifies its investments in trust preferred securities as Level 3 securities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.
18 |
The Company classified its investments in marketable equity securities as Level 1 securities. Such securities are classified as Level 1 securities because fair values are obtained through quoted market prices for identical securities in active exchange markets.
The following summarizes financial instruments measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||
Active Markets for | Other Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(In thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
March 31, 2016 | ||||||||||||||||
U.S. Government and federal agency | $ | 2,026 | $ | - | $ | 2,026 | $ | - | ||||||||
State and municipal | 3,720 | - | 3,720 | - | ||||||||||||
Corporate debt | 1,062 | - | 1,062 | - | ||||||||||||
Asset-backed securities | 9,538 | - | 9,538 | - | ||||||||||||
Mortgage-backed securities | 50,855 | - | 50,855 | - | ||||||||||||
Trust preferred securities | 1,010 | - | - | 1,010 | ||||||||||||
Marketable equity securities | 11,032 | 11,032 | - | - | ||||||||||||
Totals | $ | 79,243 | $ | 11,032 | $ | 67,201 | $ | 1,010 | ||||||||
December 31, 2015 | ||||||||||||||||
U.S. Government and federal agency | $ | 2,033 | $ | - | $ | 2,033 | $ | - | ||||||||
State and municipal | 3,682 | - | 3,682 | - | ||||||||||||
Corporate debt | 1,071 | - | 1,071 | - | ||||||||||||
Asset-backed securities | 9,624 | - | 9,624 | - | ||||||||||||
Mortgage-backed securities | 52,812 | - | 52,812 | - | ||||||||||||
Trust preferred securities | 1,116 | - | - | 1,116 | ||||||||||||
Marketable equity securities | 10,646 | 10,646 | - | - | ||||||||||||
Totals | $ | 80,984 | $ | 10,646 | $ | 69,222 | $ | 1,116 |
19 |
The following is a summary of activity for Level 3 financial instruments measured at fair value on a recurring basis for the three months periods ended March 31, 2016 and 2015.
(In thousands) | Available-for- Sale Securities | |||
Balance beginning January 1, 2016 | $ | 1,116 | ||
Total gains or (losses) (realized/unrealized) | ||||
Included in earnings | - | |||
Included in other comprehensive income | (106 | ) | ||
Paydowns | - | |||
Ending balance, March 31, 2016 | $ | 1,010 | ||
Balance beginning January 1, 2015 | $ | 1,122 | ||
Total gains or (losses) (realized/unrealized) | ||||
Included in earnings | - | |||
Included in other comprehensive income | 207 | |||
Paydowns | - | |||
Ending balance, March 31, 2015 | $ | 1,329 |
Fair Values of Financial Instruments Measured on a Nonrecurring Basis
The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party. However, the Company generally discounts appraisals to arrive at fair value, therefore classifies such loans as Level 3 because the discounts are a significant input that is not observable.
The following summarizes financial instruments measured at fair value on a nonrecurring basis at March 31, 2016 and December 31, 2015:
Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||
Active Markets for | Other Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(In thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
March 31, 2016 | ||||||||||||||||
Impaired loans | $ | 554 | $ | - | $ | - | $ | 554 | ||||||||
December 31, 2015 | ||||||||||||||||
Impaired loans | $ | 606 | $ | - | $ | - | $ | 606 |
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 March 31, 2016 and December 31, 2015:
(In thousands) | Fair Value | Valuation Technique | Unobservable Input | Range | ||||||||
March 31, 2016 | ||||||||||||
Impaired loans | $ | 554 | Real estate appraisals | Discount for dated appraisals | 6-10% | |||||||
December 31, 2015 | ||||||||||||
Impaired loans | $ | 606 | Real estate appraisals | Discount for dated appraisals | 6-10% |
(8) | Fair Value of Financial Instruments |
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at March 31, 2016 and December 31, 2015:
Carrying | Fair Value | |||||||||||||||||||
(In thousands) | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
March 31, 2016 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 15,979 | $ | 15,979 | $ | - | $ | - | $ | 15,979 | ||||||||||
Available-for-sale securities | 79,243 | 11,032 | 67,201 | 1,010 | 79,243 | |||||||||||||||
Held-to-maturity securities | 44,282 | - | 46,281 | - | 46,281 | |||||||||||||||
Federal Home Loan Bank of Boston stock | 2,387 | 2,387 | - | - | 2,387 | |||||||||||||||
Loans, net | 555,463 | - | - | 564,996 | 564,996 | |||||||||||||||
Accrued interest receivable | 2,220 | - | 2,220 | - | 2,220 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 596,369 | - | - | 596,618 | 596,618 | |||||||||||||||
Federal Home Loan Bank advances | 29,435 | - | 29,819 | - | 29,819 | |||||||||||||||
December 31, 2015 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 20,464 | $ | 20,464 | $ | - | $ | - | $ | 20,464 | ||||||||||
Available-for-sale securities | 80,984 | 10,646 | 69,222 | 1,116 | 80,984 | |||||||||||||||
Held-to-maturity securities | 44,623 | - | 46,474 | - | 46,474 | |||||||||||||||
Federal Home Loan Bank of Boston stock | 3,310 | 3,310 | - | - | 3,310 | |||||||||||||||
Loans, net | 554,929 | - | - | 561,937 | 561,937 | |||||||||||||||
Accrued interest receivable | 2,251 | - | 2,251 | - | 2,251 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 577,235 | - | - | 577,316 | 577,316 | |||||||||||||||
Federal Home Loan Bank advances | 57,423 | - | 57,774 | - | 57,774 |
21 |
(9) | Regulatory Capital |
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to new capital regulations adopted by the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that started phasing in on January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends repurchases shares or pay discretionary bonuses.
The new regulations implemented changes to what constitutes regulatory capital. Certain instruments no longer constitute qualifying capital, subject to phase-out periods. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 must be deducted from capital. The Bank has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on the Bank’s regulatory capital ratios.
The new regulations also changed the risk weights of certain assets, including an increase in the risk weight of certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or on non-accrual status to 150% from 100%, a credit conversion factor for the unused portion of commitments with maturities of less than one year that are not cancellable to 20% from 0%, an increase in the risk weight for mortgage servicing rights and deferred tax assets that are not deducted from capital to 250% from 100%, and an increase in the risk weight for equity exposures to 600% from 0%.
As of March 31, 2016 and December 31, 2015, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. The completion of the stock offering has significantly enhanced the Bank’s Regulatory Capital.
22 |
The Bank’s actual capital amounts and ratios are presented in the following table.
To Be Well | ||||||||||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 105,721 | 17.5 | % | $ | 48,443 | > | 8.0 | % | $ | 60,554 | > | 10.0 | % | ||||||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | 96,934 | 16.0 | 36,332 | > | 6.0 | 48,443 | > | 8.0 | ||||||||||||||||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 96,934 | 16.0 | 27,249 | > | 4.5 | 39,360 | > | 6.5 | ||||||||||||||||||||||||
Tier 1 Capital (to Average Assets) | 96,934 | 13.2 | 29,354 | > | 4.0 | 36,693 | > | 5.0 | ||||||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) | $ | 104,032 | 17.1 | % | $ | 48,780 | > | 8.0 | % | $ | 60,975 | > | 10.0 | % | ||||||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) | 95,370 | 15.6 | 36,585 | > | 6.0 | 48,780 | > | 8.0 | ||||||||||||||||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets) | 95,370 | 15.6 | 27,439 | > | 4.5 | 39,634 | > | 6.5 | ||||||||||||||||||||||||
Tier 1 Capital (to Average Assets) | 95,370 | 13.4 | 28,435 | > | 4.0 | 35,544 | > | 5.0 |
(10) | Employee Stock Ownership Plan |
The Bank maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of Bank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The number of shares committed to be released per year through 2029 is 23,810.
The Company contributed funds to a subsidiary to enable it to grant a loan to the ESOP for the purchase of 357,152 shares of the Company’s common stock at a price of $10.00 per share. The loan obtained by the ESOP from the Company’s subsidiary to purchase Company common stock is payable annually over 15 years at a rate per annum equal to the Prime Rate (3.50% at March 31, 2016). Loan payments are principally funded by cash contributions from the Bank.
March 31, 2016 | ||||
Shares held by the ESOP include the following: | ||||
Allocated | 23,810 | |||
Committed to be allocated | 5,953 | |||
Unallocated | 327,389 | |||
Total | 357,152 |
The fair value of unallocated shares was approximately $4.3 million at March 31, 2016.
Total compensation expense recognized in connection with the ESOP for the three months ended March 31, 2016 was $78,000.
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(11) | Earnings Per Common Share |
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Unallocated ESOP shares are not deemed outstanding for earnings per share calculation. There were no potentially dilutive common stock equivalents as of March 31, 2016. Earnings per share is not applicable for the period ended March 31, 2015.
Three Months Ended | ||||
(Dollars in thousands) | March 31, 2016 | |||
Net Income attributable to common shareholders | $ | 1,487 | ||
Average number of common shares outstanding | 9,498,722 | |||
Less: average unallocated ESOP shares | (331,358 | ) | ||
Average number of common shares outstanding | 9,167,364 | |||
Earnings per common share: | ||||
Basic | $ | 0.16 | ||
Diluted | $ | 0.16 |
Item 2. Management’s Discussion of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 is intended to assist in understanding our financial condition and results of operations. 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,” and “believe,” “will,” “intends,” “will be,” “would” or similar expressions. 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. 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 factors include general economic conditions, trends in interest rates, the ability of our borrowers to repay their loans, the ability of the Company or the Bank to effectively manage its growth, real estate values in the market area, loan demand, competition, and results of regulatory examinations, among other factors. The foregoing list of important factors is not exclusive. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Current Reports on Form 8-K.
Except as required by applicable law and regulation, the Company does not undertake — and specifically disclaims any obligation — to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most
24 |
critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:
Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the size and composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment disclosures.
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction and land development, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses for the three months ended March 31, 2016 or during the twelve months December 31, 2015.
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.
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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 construction to permanent loans for which payment is derived from cash flows of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
Commercial: Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.
Consumer: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.
We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.
An unallocated component is 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.
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 $736.6 million at March 31, 2016, a decrease of $6.8 million, or 0.9%, from $743.4 million at December 31, 2015. The decrease resulted primarily from a decrease in cash and cash equivalents of $4.5 million and a decrease in available-for-sale securities of $1.7 million.
Cash and Cash Equivalents. Cash and cash equivalents decreased $4.5 million, or 21.9%, to $16.0 million at March 31, 2016 from $20.5 million at December 31, 2015. The decrease in cash and cash equivalents primarily resulted from paying off borrowings.
Loans. At March 31, 2016, net loans were $555.5 million, or 75.4% of total assets, compared to $554.9 million, or 74.6% of total assets, at December 31, 2015. An increase in commercial real estate loans of $15.7 million, or 5.5%, was partially offset by a decrease in commercial loans of $1.3 million, or 1.2%, a decrease in construction and land development loans of $10.3 million, or 14.4%, and a decrease in residential real estate loans of $3.2 million, or 3.5%. The decrease in construction and land development loans and increase in commercial real estate loans was related to loans moving from construction to permanent. During the year ended December 31, 2014, we discontinued single-family residential real estate lending, with the exception of home equity lines of credit. We believe that new federal regulations governing the origination of single-family residential real estate
26 |
loans would increase our costs and expand the risks associated with this type of lending beyond the benefits that we could realize from originating these loans. We have instead focused on commercial lending.
The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated, excluding loans held for sale.
At | At | |||||||||||||||
March 31, | December 31, | |||||||||||||||
2016 | 2015 | |||||||||||||||
(In thousands) | Amount | Percent | Amount | Percent | ||||||||||||
Commercial real estate | $ | 301,055 | 53.39 | % | $ | 285,356 | 50.67 | % | ||||||||
Commercial | 110,737 | 19.64 | % | 112,073 | 19.90 | % | ||||||||||
Residential real estate | 89,182 | 15.82 | % | 92,392 | 16.40 | % | ||||||||||
Construction and land development | 61,258 | 10.86 | % | 71,535 | 12.70 | % | ||||||||||
Consumer | 1,651 | 0.29 | % | 1,855 | 0.33 | % | ||||||||||
563,883 | 100.00 | % | 563,211 | 100.00 | % | |||||||||||
Allowance for loan losses | (8,020 | ) | (7,905 | ) | ||||||||||||
Deferred loan fees, net | (400 | ) | (377 | ) | ||||||||||||
Net loans | $ | 555,463 | $ | 554,929 |
Securities. Our available-for-sale securities portfolio decreased $1.7 million, or 2.2%, to $79.2 million at March 31, 2016 from $81.0 million at December 31, 2015, while our held-to-maturity securities portfolio decreased $341,000 to $44.3 million at March 31, 2016 from $44.6 million at December 31, 2015. Our securities portfolio decreased as we have set aside excess cash flows from securities to fund potential loan growth instead of re-investing the proceeds in investment securities.
Deposits. Total deposits increased $19.2 million, or 3.3%, to $596.4 million at March 31, 2016 from $577.2 million at December 31, 2015. The increase was primarily due to an increase in NOW accounts of $27.6 million, offset by decreases in time deposits of $4.0 million and demand deposits of $3.8 million. The increase was attributed to our continued strategy of obtaining deposits, while the decreases relate to the seasonality of municipal deposits.
Borrowings. Borrowings at March 31, 2016 consisted entirely of Federal Home Loan Bank advances. Borrowings decreased $28.0 million, or 48.7%, to $29.4 million at March 31, 2016 from $57.4 million at December 31, 2015. We utilized the increase in our deposits and cash to pay off $28 million in short-term borrowings.
Shareholders’ Equity. Total shareholders’ equity increased $2.1 million, or 2.0%, to $103.5 million at March 31, 2016, from $101.4 million at December 31, 2015. The increase was primarily the result of net income of $1.5 million and an increase in accumulated other comprehensive income of $505,000.
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Asset Quality.
The following table sets forth information regarding our non-performing assets at the dates indicated.
At | At | |||||||
March 31, | December 31, | |||||||
(In Thousands) | 2016 | 2015 | ||||||
Non-accrual loans: | ||||||||
Real estate: | ||||||||
Residential | $ | 596 | $ | 1,031 | ||||
Commercial | 105 | 106 | ||||||
Construction and land development | - | - | ||||||
Commercial | 1,129 | 1,147 | ||||||
Consumer | - | - | ||||||
Total non-accrual loans | 1,830 | 2,284 | ||||||
Accruing loans past due 90 days or more | - | - | ||||||
Real estate owned | - | - | ||||||
Total non-performing assets | $ | 1,830 | $ | 2,284 | ||||
Total loans(1) | $ | 563,483 | $ | 562,834 | ||||
Total assets | $ | 736,572 | $ | 743,397 | ||||
Total non-performing loans to total loans(1) | 0.32 | % | 0.41 | % | ||||
Total non-performing assets to total assets | 0.25 | % | 0.31 | % |
(1) Loans are presented before the allowance for loan losses but include deferred fees/costs |
The decrease in non-performing assets at March 31, 2016 compared to December 31, 2015 was primarily due to loans being upgraded to accrual status having proven the ability to repay the loan for the required period of time.
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Allowance for Loan Losses. The allowance for loan losses is maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of the consolidated balance sheet reporting dates. The allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio size and composition, amount of and trend regarding delinquent and non-accrual loans, national and local business conditions and loss experience and an overall evaluation of the quality of the underlying collateral.
The following table sets forth activity in our allowance for loan losses for the periods indicated:
Three Months Ended March 31, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Allowance at beginning of period | $ | 7,905 | $ | 7,224 | ||||
Provision for loan losses | 111 | 278 | ||||||
Charge offs: | ||||||||
Real estate: | ||||||||
Commercial | - | - | ||||||
Residential | - | - | ||||||
Construction and land development | - | - | ||||||
Commercial | - | 103 | ||||||
Consumer | 10 | 6 | ||||||
Total charge-offs | 10 | 109 | ||||||
Recoveries: | ||||||||
Real estate: | ||||||||
Commercial | - | - | ||||||
Residential | 13 | - | ||||||
Construction and land development | - | - | ||||||
Commercial | 1 | - | ||||||
Consumer | - | 2 | ||||||
Total recoveries | 14 | 2 | ||||||
Net (recoveries) charge-offs | (4 | ) | 107 | |||||
Allowance at end of period | $ | 8,020 | $ | 7,395 | ||||
Non-performing loans at end of period | $ | 1,830 | $ | 5,528 | ||||
Total loans outstanding at end of period(1) | $ | 563,483 | $ | 500,852 | ||||
Average loans outstanding during the period(1) | $ | 564,823 | $ | 499,467 | ||||
Allowance to non-performing loans | 438.25 | % | 133.77 | % | ||||
Allowance to total loans outstanding at end of period | 1.42 | % | 1.48 | % | ||||
Net charge-offs to average loans outstanding during the period (annualized) | 0.00 | % | 0.09 | % |
(1) Loans are presented before the allowance for loan losses but include deferred fees/costs |
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Results of Operations for the Three Months Ended March 31, 2016 and 2015
General. Net income attributable to common shareholders increased $519,000, or 53.6%, to $1.5 million for the three months ended March 31, 2016 from $968,000 for the three months ended March 31, 2015. The increase was related to the $907,000 increase in interest and dividend income, and a decrease in provision for loan losses of $167,000, which were partially offset by an increase in salaries and employee benefits of $253,000, increased income tax expense of $302,000, and increased interest expense of $150,000.
Interest and Dividend Income. Interest and dividend income increased $907,000, or 14.9%, to $7.0 million for the three months ended March 31, 2016 from $6.1 million for the three months ended March 31, 2015. This was primarily attributable to an increase in interest and fees on loans, which increased $848,000, or 16.2%, to $6.1 million for the three months ended March 31, 2016 from $5.2 million for the three months ended March 31, 2015, and an increase in interest and dividends on securities of $52,000, or 6.3%.
The increase in interest income on loans was due to an increase in average balance of $65.4 million, or 13.1%, to $564.8 million for the three months ended March 31, 2016 from $499.5 million for the three months ended March 31, 2015. The increase in interest income on loans was also due to an 11 basis point increase in yield, to 4.31% for the three months ended March 31, 2016 from 4.20% for the three months ended March 31, 2015, due to our continued focus on higher-yielding commercial lending.
The increase in interest on investment securities was primarily due to an increase in average balance of $4.2 million, or 3.5%, and a two basis point increase in yield on investment securities to 2.77% during the three months ended March 31, 2016 from 2.75% for the three months ended March 31, 2015. The average balance was higher due to investment purchases made in the last quarter of 2015.
Interest Expense. Interest expense increased $150,000, or 27.4%, to $697,000 for the three months ended March 31, 2016 from $547,000 for the three months ended March 31, 2015, primarily caused by an increase in interest expense on deposits. Interest expense on deposits increased $149,000, or 36.7%, to $555,000 for the three months ended March 31, 2016 from $406,000 for the three months ended March 31, 2015, as the average rate paid on interest-bearing deposits increased ten basis points to 0.50% for the three months ended March 31, 2016 from 0.40% for the three months ended March 31, 2015. The increase in the average rate was primarily the result in the increases in the average rates paid on the NOW accounts and certificates of deposits. The average balance of interest-bearing deposits increased $42.8 million, or 10.6%, to $447.9 million for the three months ended March 31, 2016 from $405.1 million for the three months ended March 31, 2015. The increase resulted primarily from an increase in the average balance of NOW accounts, which increased $31.3 million, or 39.4%.
Net Interest and Dividend Income. Net interest and dividend income increased $757,000, or 13.7%, to $6.3 million for the three months ended March 31, 2016 from $5.5 million for the three months ended March 31, 2015. The increase is due to both, higher balances of earning assets and expanding margins. Our net interest rate spread increased two basis points to 3.41% for the three months ended March 31, 2016 from 3.39% for the three months ended March 31, 2015, while our net interest margin increased six basis points to 3.59% for the three months ended March 31, 2016 from 3.53% for the three months ended March 31, 2015. The average yield we earned on interest-earning assets increased eleven basis points to 3.99% while the average rate paid on interest-bearing liabilities increased nine basis points to 0.58%.
Provision for Loan Losses. The provision for loan losses was $111,000 for the three months ended March 31, 2016 compared to $278,000 for the three months ended March 31, 2015, primarily due to decreases in net charge-offs and non-accrual loans. The provisions recorded resulted in an allowance for loan losses of $8.0 million, or 1.42% of total loans at March 31, 2016, compared to $7.9 million, or 1.40% of total loans at December 31, 2015 and $7.4 million, or 1.48% of total loans at March 31, 2015. The provision for the quarter ended March 31, 2016 resulted primarily from a change in the loan portfolio as we apply historical loss ratios to newly originated loans, which, absent other factors, results in an increase in the allowance for loan losses as the loan portfolio increases.
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Noninterest Income. Noninterest income was $935,000 for the three months ended March 31, 2016 and $824,000 for the three months ended March 31, 2015. The increase was caused primarily by a $77,000 increase in customer service fees on deposit accounts to $406,000 for the three months ended March 31, 2016 compared to $329,000 in the same period of 2015 due to increased volume in transactional deposit accounts. Other income also increased $58,000 to $91,000 for the three months ended March 31, 2016 compared to $33,000 at March 31, 2015. The increases were partially offset by a decrease in gains on sales of securities of $61,000 to $20,000 at March 31, 2016 compared to $81,000 at March 31, 2015.
Noninterest Expense. Noninterest expense increased $258,000, or 5.5%, to $4.9 million for the three months ended March 31, 2016 from $4.7 million for the three months ended March 31, 2015. The largest increase was related to the salaries and employee benefits expense, which increased $253,000, or 8.8%, to $3.1 million for the three months ended March 31, 2016 from $2.9 million for the three months ended March 31, 2015. The increase in salaries and employee benefits was due primarily to our hiring additional employees to support our loan growth and the opening of a new branch, as well as the recording of the ESOP expense of $78,000 during the three months ended March 31, 2016 compared to no expense recorded during the three months ended March 31, 2015. Occupancy expense decreased $28,000, or 7.1%, to $365,000 for the three months ended March 31, 2016, due primarily to the lower snow removal costs in 2016 compared to 2015. Professional services expenses increased $48,000, or 22.1%, to $265,000 for the three months ended March 31, 2016 from $217,000 for the three months ended March 31, 2015 due to increased management training and legal fees.
Income Tax Provision. We recorded a provision for income taxes of $696,000 for the three months ended March 31, 2016, reflecting an effective tax rate of 31.9%, compared to a provision of $394,000, or 28.0% for the three months ended March 31, 2015. The changes in the income tax provision were primarily due to an increase in pre-tax income. Our effective tax rates are below statutory federal and states rates due primarily to tax-exempt income related to investments in bank owned life insurance and municipal securities.
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Average Balance sheet and Related Yields and Rates
The following tables set forth the average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the amount of tax free interest-earning assets is immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
For the Three Months Ended March 31, | ||||||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | Earned/ | Yield/ | Average | Earned/ | Yield/ | |||||||||||||||||||
Balance | Paid | Rate | Balance | Paid | Rate | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 564,823 | $ | 6,091 | 4.31 | % | $ | 499,467 | $ | 5,243 | 4.20 | % | ||||||||||||
Interest-earning deposits | 7,582 | 8 | 0.42 | % | 2,270 | 1 | 0.18 | % | ||||||||||||||||
Investment securities | 124,795 | 863 | 2.77 | % | 120,604 | 829 | 2.75 | % | ||||||||||||||||
Federal Home Loan Bank stock | 2,989 | 18 | 2.41 | % | 3,642 | - | 0.00 | % | ||||||||||||||||
Total interest-earning assets | 700,189 | 6,980 | 3.99 | % | 625,983 | 6,073 | 3.88 | % | ||||||||||||||||
Non-interest earning assets | 39,254 | 30,982 | ||||||||||||||||||||||
Total assets | $ | 739,443 | $ | 656,965 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings accounts | $ | 107,065 | 44 | 0.16 | % | $ | 92,259 | 33 | 0.14 | % | ||||||||||||||
Money market accounts | 108,033 | 71 | 0.26 | % | 108,729 | 71 | 0.26 | % | ||||||||||||||||
Now accounts | 110,542 | 152 | 0.55 | % | 79,292 | 31 | 0.16 | % | ||||||||||||||||
Certificates of deposit | 122,257 | 288 | 0.94 | % | 124,841 | 271 | 0.87 | % | ||||||||||||||||
Total interest-bearing deposits | 447,897 | 555 | 0.50 | % | 405,121 | 406 | 0.40 | % | ||||||||||||||||
Federal Home Loan Bank advances | 34,844 | 142 | 1.63 | % | 41,215 | 141 | 1.37 | % | ||||||||||||||||
Total interest-bearing liabilities | 482,741 | 697 | 0.58 | % | 446,336 | 547 | 0.49 | % | ||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||
Noninterest-bearing deposits | 147,417 | 127,943 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 6,904 | 6,053 | ||||||||||||||||||||||
Total liabilities | 637,062 | 580,332 | ||||||||||||||||||||||
Total equity | 102,381 | 76,633 | ||||||||||||||||||||||
Total liabilities and equity | $ | 739,443 | $ | 656,965 | ||||||||||||||||||||
Net interest income | $ | 6,283 | $ | 5,526 | ||||||||||||||||||||
Interest rate spread(1) | 3.41 | % | 3.39 | % | ||||||||||||||||||||
Net interest-earning assets(2) | $ | 217,448 | $ | 179,647 | ||||||||||||||||||||
Net interest margin(3) | 3.59 | % | 3.53 | % | ||||||||||||||||||||
Average interest-earning assets to interest-bearing liabilities | 145.04 | % | 140.25 | % |
(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 |
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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 net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
For the Three Months Ended March 31, 206 | ||||||||||||
Compared to the Three Months Ended March 31, 2015 | ||||||||||||
Increase (Decrease) Due to | Total | |||||||||||
Rate | Volume | Increase (Decrease) | ||||||||||
(in thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | 146 | $ | 702 | $ | 848 | ||||||
Interest-earning deposits | 3 | 4 | 7 | |||||||||
Investment securities | 5 | 29 | 34 | |||||||||
Federal Home Loan Bank Stock | 18 | - | 18 | |||||||||
Total interest-earning assets | 172 | 735 | 907 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Savings accounts | 5 | 6 | 11 | |||||||||
Money Market Accounts | - | - | - | |||||||||
Now Accounts | 105 | 16 | 121 | |||||||||
Certificates of deposit | 23 | (6 | ) | 17 | ||||||||
Total interest-bearing deposits | 133 | 16 | 149 | |||||||||
Federal Home Loan Bank advances | 25 | (24 | ) | 1 | ||||||||
Total interest-bearing liabilities | 157 | (7 | ) | 150 | ||||||||
Change in net interest income | $ | 15 | $ | 742 | $ | 757 |
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Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2016, cash and cash equivalents totaled $16.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $79.2 million at March 31, 2016.
At March 31, 2016, we had the ability to borrow a total of $186.3 million from the Federal Home Loan Bank of Boston. On that date, we had $29.6 million in advances outstanding. At March 31, 2016, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $102.2 million, none of which was outstanding as of that date.
We have no material commitments or demands that are likely to affect our liquidity other than set forth below. In the event loan demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of Boston or obtain additional funds through brokered certificates of deposit.
At March 31, 2016 and December 31, 2015 we had $18.4 million and $15.6 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at March 31, 2016 and December 31, 2015, we had $188.9 million and $191.6 million in un-advanced funds to borrowers, respectively. We also had $5.3 million and $5.5 million in outstanding letters of credit at March 31, 2016 and December 31, 2015, respectively.
Certificates of deposit due within one year of March 31, 2016 totaled $83.1 million, or 13.9% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit at March 31, 2016. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are the origination of loans and the purchase of securities. During the three months ended March 31, 2016, we originated $36.5 million of loans, all of which were intended to be held in our portfolio, and we purchased $272,000 in loans. We did not purchase any securities. During the three months ended March 31, 2015, we originated $16.1 million of loans, all of which were intended to be held in our portfolio, and we purchased $287,000 of securities.
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increases in total deposits of $19.1 million and $1.3 million for the three months ended March 31, 2016 and 2015, 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 reflected a net decrease of $28.0 million and an increase of $2.4 million during the three months ended March 31, 2016 and 2015, respectively.
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The Provident Bank is subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. At March 31, 2016, The Provident Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 9 of the Notes to the Unaudited Consolidated Financial Statements for additional information.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable, as the Company is a smaller reporting company.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2016. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended March 31, 2016, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
Not applicable, as the Company is a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | Not applicable. |
(b) | Not applicable. |
(c) | There were no issuer repurchases of securities during the period covered by this Report and the Company does not have any authorized stock repurchase programs. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
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3.1 | Amended and Restated Articles of Organization of Provident Bancorp, Inc.(1) | |
3.2 | By-Laws of Provident Bancorp, Inc.(1) | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, 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. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PROVIDENT BANCORP, INC. | ||
Date: | May 12, 2016 | /s/ David P. Mansfield |
David P. Mansfield | ||
President and Chief Executive Officer | ||
Date: | May 12, 2016 | /s/ Carol L. Houle |
Carol L. Houle | ||
Executive Vice President and Chief Financial Officer |
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