A N N U A L
report.
2 0 2 0
To Our Shareholders:
As an institution, our core values are the foundation
for behaviors and qualities in which we pride
ourselves. They guide us through challenges,
help us make the right decisions and set forth the practices
that lead us to deliver a future-ready banking experience. Our
employees have always upheld these principles, but never have
they embodied them more than in the face of the intense and
unprecedented challenges of 2020.
The vast and devastating effects of the COVID-19 pandemic
were felt in every corner of the globe. As an organization deeply
invested in our communities, it was our aim to support our
customers and local businesses as they learned to live, work
and conduct business at a time when adapting was key to their
success. At the outset of the pandemic, our priority was to ensure
that we could continue to meet the needs of our customers
while securing the health and safety of our employees. Our IT
department worked around the clock to ensure our employees
could continue to collaborate remotely and service customers
with little-to-no disruption. We understood the importance of
enabling customers to safely access our branches and our
employees. Our front-line employees did not hesitate to step
up to the plate, showing great courage and adaptability in a
dynamic and unpredictable COVID-19 environment. Their
dedication to the organization and the health and safety of its
customers enabled us to keep our drive-up windows open and
allow for in-person appointment visits to certain lobbies. With
these creative solutions, we were able to adhere to regulatory
health guidance and mandates while simultaneously providing
the best possible service to our customers.
As the financial impacts of the pandemic began affecting
customers and local businesses, our organization focused
on ways in which we could assist in easing this burden. The
Coronavirus Aid Relief and Economic Security (CARES) Act was
signed into law at the end of March 2020. Under this Act our loan
and credit departments showcased our commitment to empathy
and worked tirelessly to process hundreds of applications for
Small Business Administration
(SBA) Paycheck Protection
Program (PPP) loans. In addition, to provide economic relief for
customers with existing loans, we provided loan modification
programs which allowed for up to six months of full or partial
loan payment deferrals. Lastly, we worked with customers to
waive fees from a variety of sources, such as, but not limited
to, insufficient funds, account maintenance, minimum balance,
and ATM fees. I am so proud and grateful for the efforts of our
team; it’s because of their efforts that our organization was able
to respond to the COVID-19 pandemic swiftly and adeptly.
with the purchase of a warehouse business line. This purchase
was instrumental in growing our loan portfolio, pushing us into
a new lending space and helping us form new relationships with
national exposure. In mid-2020 we announced our BankProv
rebrand in support of our growing nationwide presence,
which included a new logo and color scheme, as well as a
new website, and online and mobile banking theme. The new
brand showcases our entrepreneurial spirit and reflects our
commitment to embracing innovation by leveraging technology
to shape the future of banking.
It’s with great pride that we report to you our financial results
for 2020:
MORE THAN
N
O
$1 B
I
L
L
I
in total deposits
for the first time in
the Bank’s history
net loan growth of
$356
MILLION
$12
MILLION
in net income
THIS WAS A
10.9%
the same period in 2019
increase from
These results, despite the challenges posed by the COVID-19
pandemic, would not have been possible without
the
perseverance and dedication of our team.
With 2020 in the rear view we take its trials and its lessons and
emerge a better, stronger bank eager to embrace the future.
Our capital position coming out of 2020 is strong. We’re eager
to expand our lending portfolio and excited to explore potential
new business opportunities. Technology is enhancing the way
we live and the way we work. It’s turning banking upside-down
and creating opportunities for growth that we are not only ready,
but excited for. It’s an extremely exciting time for the financial
services industry. We’re laying the groundwork to be a financial
institution that challenges the status quo and paves the way for
the future. We pride ourselves on being both opportunistic and
agile, and it’s with a strong financial foundation, a talented
team, and a fierce desire to leverage new technologies to
deliver a better banking experience that we march head first
into the new year.
Thank you for your investment and continued support.
Sincerely,
Despite the challenges, our team kept an eye on the future
and continued to work collaboratively to innovate new ways of
pushing our brand and organization forward. We started the year
David Mansfield
Chief Executive Officer
courage. innovation. collaboration. empathy.
financials at a glance.
Net Interest Margin
Efficiency Ratio
2019
2020
4.44%
4.23%
2019
2020
58.15%
61.72%
Return on Assets
2019
2020
1.04%
0.89%
Non-interest Bearing Deposits
to Total Deposits
2019
2020
26.13%
30.96%
Loan Composition
commercial
[$565,976]
$1,337,563
re-commercial
[$438,949]
consumer [$5,547]
re-construction
& land [$28,927]
re-residential
[$32,785]
warehouse
[$265,379]
Despite the
challenges, our
team kept an eye
on the future and
continued to work
collaboratively
to innovate new
ways of pushing
our brand and
organization
forward.
Copyright © 2021 The Provident Bank All rights reserved
bankprov.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to______________
Commission File Number: 001-39090
PROVIDENT BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
5 Market Street, Amesbury, Massachusetts
(Address of Principal Executive Offices)
84-4132422
(I.R.S. Employer
Identification Number)
01913
Zip Code
(978) 834-8555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Trading Symbol
PVBC
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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
filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-accelerated Filer
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the last sale
price as of June 30, 2020, as reported by the Nasdaq Capital Market, was approximately $134.4 million.
The number of shares outstanding of the registrant’s common stock as of March 18, 2021 was 19,014,660.
Portions of the Registrant’s proxy statement for the 2021 Annual Meeting of Stockholders (Part III).
DOCUMENTS INCORPORATED BY REFERENCE:
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
INDEX
Part I
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Consolidated Financial and Other Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Part IV
Page
1
23
23
23
23
24
25
25
27
48
48
48
48
49
50
50
50
50
50
51
52
i
PART I
ITEM 1.
BUSINESS
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,”
“believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but
are not limited to:
statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to
significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition,
these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to
change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations
expressed in the forward-looking statements:
general economic conditions, either nationally or in our market areas, that are worse than expected, including as a result of the
ongoing COVID-19 pandemic;
changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the
allowance for loan losses;
our ability to access cost-effective funding;
fluctuations in real estate values and both residential and commercial real estate market conditions;
demand for loans and deposits in our market area;
changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board;
cyber attacks, computer viruses and other technological risks that may breach the security of our websites or other systems, or
those of third parties upon which we rely, to obtain unauthorized access to confidential information and destroy data or disable
our systems;
technological changes that may be more difficult or expensive than expected;
the ability of third-party providers to perform their obligations to us;
the ability of the U.S. Government to manage federal debt limits;
our ability to continue to implement or change our business strategies;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial
instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments
on loans we have made and make whether held in portfolio or sold in the secondary markets;
adverse changes in the securities markets;
changes in and impacts of laws or government regulations or policies affecting financial institutions, including changes in
regulatory fees, tax policy and rates, and capital requirements;
our ability to manage market risk, credit risk and operational risk;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we may acquire into
our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any
goodwill charges related thereto;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting
Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
1
our ability to retain key employees;
effects of natural disasters, terrorism and global pandemics;
the effects of any U.S. government shutdown;
our compensation expense associated with equity allocated or awarded to our employees; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The
extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled
and abated and whether the gradual reopening of business will result in a meaningful increase in economic activity. As the result of the
COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following
risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: demand
for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially
reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures
may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which
could cause loan losses to increase; our allowance for loan losses may have to be increased if borrowers experience financial difficulties,
which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor
commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our
assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and
spread and reducing net income; a material decrease in net income or a net loss over several quarters could result in a decrease in the
rate of our quarterly cash dividend; our cyber security risks are increased as the result of an increase in the number of employees working
remotely; and FDIC premiums may increase if the agency experiences additional resolution costs.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-
looking statements.
Provident Bancorp, Inc.
Provident Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in June 2019 to be the successor corporation
to Provident Bancorp, Inc. (“Old Provident”), a Massachusetts corporation, upon completion of the second-step mutual-to-stock
conversion (the “Conversion”) of Provident Bancorp (the “MHC”), the top tier mutual holding company of Old Provident. Old Provident
was the former mid-tier holding company for The Provident Bank (“BankProv” or the “Bank”). Prior to completion of the Conversion,
approximately 52% of the shares of common stock of Old Provident were owned by the MHC. In conjunction with the Conversion, the
MHC was merged into the Company (and ceased to exist) and the Company became its successor under the name Provident Bancorp,
Inc. At December 31, 2020, Provident Bancorp, Inc. had total assets of $1.51 billion, deposits of $1.24 billion and shareholders’ equity
of $235.9 million on a consolidated basis.
The Company’s executive offices are located at 5 Market Street, Amesbury, Massachusetts 01913, and the telephone number is (978)
834-8555. The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System and the
Massachusetts Commissioner of Banks.
On October 16, 2019, the Company completed the Conversion. The Company raised gross proceeds of $102.1 million by selling a total
of 10,212,397 shares of common stock at $10.00 per share in the second-step stock offering. The Company utilized $8.2 million of the
proceeds to fund an addition to its Employee Stock Ownership Plan (“ESOP”) loan for the acquisition of an additional 816,992 shares
at $10.00 per share. Expenses incurred related to the offering were $2.4 million, and have been recorded against offering proceeds. The
Company invested $45.8 million of the net proceeds it received from the sale into the Bank’s operations and has retained the remaining
amount for general corporate purposes. Concurrent with the completion of the stock offering, each share of Old Provident common
stock owned by public stockholders (stockholders other than the MHC) was exchanged for 2.0212 shares of Company common stock.
A total of 19,484,343 shares of common stock were outstanding following the completion of the stock offering.
BankProv
BankProv, legally operating as The Provident Bank, is a future-ready commercial bank for corporate clients specializing in offering
adaptive and technology-first banking solutions to niche markets including renewable energy, fin-tech and search fund lending.
BankProv is a Massachusetts-chartered stock savings bank that operates from its main office and two branch offices in the Northeastern
Massachusetts area, three branch offices in Southeastern New Hampshire and one branch located in Bedford, New Hampshire. We also
have loan production offices in Boston, Massachusetts and Ponte Vedra, Florida. Our primary lending area encompasses Northeastern
Massachusetts and Southern New Hampshire, with a focus on Essex County, Massachusetts, and Hillsborough and Rockingham
Counties, New Hampshire. However, we offer our enterprise value and mortgage warehouse loans nationwide. Our primary deposit-
gathering area is currently concentrated in Essex County, Massachusetts, Rockingham County, New Hampshire, and Hillsborough
2
County, New Hampshire, although we also receive deposits from our business customers who are located nationwide. We attract deposits
from the general public and use those funds to originate primarily commercial real estate and commercial business loans, and to invest
in securities. In recent years, we have been successful in growing both deposits and loans. From December 31, 2016 to December 31,
2020, deposits have increased $609.5 million, or 97.0%, and net loans have increased $690.4 million, or 110.6%.
BankProv is subject to regulation and examination by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance
Corporation.
Our website address is www.bankprov.com. Information on this website is not and should not be considered a part of this annual report.
Available Information
The Company is a public company and files interim, quarterly and annual reports with the Securities and Exchange Commission. These
reports are on file and a matter of public record with the Securities and Exchange Commission. The Securities and Exchange Commission
maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC (http://www.sec.gov). The Company’s reports can also be obtained for free on our website,
www.bankprov.com.
Market Area
Our primary lending area encompasses a broad market that includes Northeastern Massachusetts and Southern New Hampshire, with a
focus on Essex County, Massachusetts, and Hillsborough and Rockingham Counties, New Hampshire, which are part of, and bedroom
communities to, the technology corridor between Boston, Massachusetts and Concord, New Hampshire. Our enterprise value loan
product is offered nationally, and as of December 31, 2020 we had relationships spanning 26 states. In 2020, the Bank purchased a
warehouse lending business which is located in Ponte Vedra, Florida and targets national credit worthy, small to mid-cap non-bank
mortgage origination companies for facility lines. Our primary deposit-gathering area is currently concentrated in Essex County,
Massachusetts, and Rockingham County and Hillsborough County, New Hampshire, although we also receive deposits from our
business customers who are located nationwide.
The greater Boston metropolitan area is the 11th largest metropolitan area in the United States. Located adjacent to major transportation
corridors, the Boston metropolitan area provides a highly diversified economic base, with major employment sectors ranging from
services, manufacturing and wholesale and retail trade, to finance, technology and medical care. However, as of December 31, 2020,
the largest employment sectors in Massachusetts were education, healthcare and social services (accounting for 28.1% of jobs) and
services (accounting for 26.9% of jobs). Based on data from the U.S. Department of Labor, the unemployment rate for Massachusetts
was 7.1% in December 2020 compared to 2.4% in December 2019, and 6.5% for the United States as a whole for December 2020. The
population in Massachusetts grew 4.9% from 2013 to 2020, while the national population and the population in Essex County,
Massachusetts grew 4.9% and 5.7%, respectively, over the same time period. Median household income in Massachusetts was $85,145
for 2020, compared to $66,010 and $80,867 for the nation and Essex County, respectively.
New Hampshire also provides a highly diversified economic base, with major employment sectors ranging from services (24%),
manufacturing (15.2%) and finance/insurance/real estate (12%), but the largest employment sector is education, healthcare and social
services (24.7%). Based on data from the U.S. Department of Labor, the unemployment rate for New Hampshire was 3.8% in December
2020 compared to 2.3% in December 2019. The population in New Hampshire grew 3.4% from 2013 to 2020, while the population in
Hillsborough and Rockingham Counties, New Hampshire grew 3.6% and 4.9%, respectively, over the same time period. Median
household income in New Hampshire was $81,669 for 2020, compared to $88,792 and $99,103 for Hillsborough and Rockingham
Counties, respectively.
Competition
We face significant competition for deposits and loans. Our most direct competition for deposits has historically come from the many
financial institutions operating in our market area. Several large holding companies operate banks in our market area. Many of these
institutions, such as TD Bank, Bank of America and Citizens Bank, are significantly larger than us and, therefore, have greater resources.
Additionally, some of our competitors offer products and services that we do not offer, such as insurance services, trust services, and
wealth management. We also face competition for investors’ funds from other financial service companies such as brokerage firms,
fintech companies, money market funds, mutual funds and other corporate and government securities. Based on data from the Federal
Deposit Insurance Corporation as of June 30, 2020 (the latest date for which information is available), BankProv had 2.29% of the
deposit market share within Essex County, Massachusetts, giving us the 12th largest market share out of 35 financial institutions with
offices in that county as of that date and had 3.26% of the deposit market share within Rockingham County, New Hampshire, giving us
the 9th largest market share out of 26 financial institutions with offices in that county as of that date. This data excludes deposits held
by credit unions.
3
Our competition for loans comes primarily from financial institutions in our market area. Our experience in recent years is that many
financial institutions in our market area, especially community banks that are seeking to significantly expand their commercial loan
portfolios and banks located in lower growth regions in New Hampshire and Maine, have been willing to price commercial loans
aggressively in order to gain market share.
Lending Activities
Commercial Business Loans. We make commercial business loans primarily in our market area to a variety of small- and medium-
sized businesses, including professional and nonprofit organizations, and, to a lesser extent, sole proprietorships. We also originate our
enterprise value loans nationwide, and we originate our renewable energy loans primarily in New England and New York. Our
commercial business loans are generally secured by business assets, and we may support this collateral with junior liens on real property.
At December 31, 2020, commercial business loans were $566.0 million, or 42.3% of our total loan portfolio, and we intend to increase
the amount of commercial business loans that we originate. As part of our relationship driven focus, we encourage our commercial
business borrowers to maintain their primary deposit accounts with us, which enhances our interest rate spread and overall profitability.
As of December 31, 2020, enterprise value loans, which we also refer to as search fund lending, merger and acquisition, re-capitalization,
and shareholder/partner buyout loans, totaled $286.1 million, with relationships spanning 26 states. We originate these loans to small-
and medium-size businesses in a senior secured position; relying largely on the enterprise value of the business and ongoing cash flow
to support operational and debt service requirements. These are fully amortizing term loans (up to seven years) with material levels of
equity and/or combination of seller financing behind our senior secured lending. In underwriting these loans, we generally require
minimum fixed charge coverage ratios of 1.20x to 1.50x. The maximum senior loan-to-enterprise value is generally 65% or lower,
although we generally limit these loans to a loan-to-value limitation of 50%, as verified by a third-party business valuation. Further, we
generally limit senior debt to less than or equal to three times EBITDA (earnings before interest, tax, depreciation and amortization), as
verified by a third-party quality of earnings report typically completed by a certified public accounting firm. At December 31, 2020, the
largest loan was $15.8 million and is secured by all business assets. At December 31, 2020, the loan was performing in accordance with
its original repayment terms.
Commercial lending products include term loans and revolving lines of credit. Commercial loans and lines of credit are made with either
variable or fixed rates of interest. Variable rates and rates on Small Business Administration (“SBA”) loans (with the exception of SBA
Payment Protection Program (“PPP”) loans, discussed below) are based on the prime rate as published in The Wall Street Journal, plus
a margin. Initial rates on non-SBA fixed-rate business loans are generally based on a corresponding Federal Home Loan Bank rate, plus
a margin. Commercial business loans typically have shorter maturity terms and higher interest rates than commercial real estate loans,
but may involve more credit risk because of the type and nature of the collateral. We are focusing our efforts on originating such loans
to experienced, growing small- to medium-sized, privately-held companies with local or regional businesses and non-profit entities that
operate in our market area.
When making commercial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt
service capabilities and global cash flows of the borrower and other guarantors, the projected cash flows of the business and the value
of the collateral, accounts receivable, inventory and equipment. Depending on the collateral used to secure the loans, commercial loans
are made in amounts of up to 80% of the value of the collateral securing the loan. All of these loans are secured by assets of the respective
borrowers.
The following table provides information with respect to our enterprise value loans by type at December 31, 2020.
Type of Industry
Advertising
Consulting services
Industrial/manufacturing/warehouse
Information technology and software
Landscaping
Non-essential retail
Real estate services
Other
Total
4
Balance
(In thousands)
$
$
26,741
41,480
59,868
31,870
12,647
52,979
5,502
55,017
286,104
The non-essential retail loans include the following sectors:
Type of Industry
Professional services
Repairs and maintenance
Sporting goods and hobbies
Wholesale
Total
Balance
(In thousands)
$
$
24,231
17,641
4,106
7,001
52,979
In 2015, we started originating loans to developers of commercial-scale renewable energy facilities, primarily in New England and New
York, and at December 31, 2020, we had a total of $37.2 million in renewable energy loans. Our renewable energy loans primarily
include loans secured by solar arrays. The average term and amortization for these loans can extend to 15 years or more, given the asset
life, and are generally underwritten to a maximum term of two years less than the associated power purchase agreement (“PPA”)
supporting the repayment of each loan. The term of the loan is also shorter than the life expectancy of the related equipment. Generally,
the underwriting criteria includes: a report supporting the power generation capacity and ultimately the ability to generate sufficient
cash flows, assignment of the associated PPA, analysis on the quality of the power off-taker, an overall business valuation, and
appropriate loan covenants, which may include maximum loan-to-value and minimum debt service coverage requirements. At
December 31, 2020, $33.8 million, or 91.0%, of our renewable energy loans was secured by solar arrays. The largest loan was
$12.3 million and is secured by all business assets of the company, including the solar array and an assignment of the PPA. At
December 31, 2020, the loan was performing in accordance with its original repayment terms.
A portion of our commercial business loans are guaranteed by the SBA through the SBA 7(a) loan program. The SBA 7(a) loan program
supports, through a U.S. Government guarantee, some portion of the traditional commercial loan underwriting that might not be fully
covered absent the guarantee. A typical example would be a business acquiring another business, where the value purchased is an
enterprise value (as opposed to tangible assets), which results in a collateral shortfall under traditional loan underwriting requirements.
In addition, SBA 7(a) loans, through term loans, can provide a good source of permanent working capital for growing companies.
BankProv is a Preferred Lender under the SBA’s PLP Program, which allows expedited underwriting and approval of SBA 7(a) loans.
During 2020, as a result of the COVID-19 global health crisis, the U.S. government and regulatory agencies took several actions to
provide support to the U.S. economy. The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law
on March 27, 2020 as part of a $2 trillion legislative package. The CARES Act authorized the SBA to temporarily guarantee loans under
a new 7(a) program called the PPP. Eligible businesses could apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly
“payroll costs;” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a five-year loan term to maturity for loans made
on or after June 5, 2020 (loans made prior to June 5, 2020 have a two-year term; however borrowers and lenders may mutually agree to
extend the maturity for such loans to five years); and (c) principal and interest payments deferred for six months from the date of
disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of a borrower’s PPP
loan, including any accrued interest, is eligible to be forgiven under the PPP if employee and compensation levels of the business are
maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other
qualifying expenses. In total, the Company originated $78.0 million of PPP loans during 2020 and as of December 31, 2020, we had
$41.8 million outstanding.
Our largest commercial business loan at December 31, 2020 totaled $15.8 million, was originated in 2020 and is an enterprise value
loan. Our next largest commercial business loan totaled $15.0 million, was originated in 2020 and is a commercial line. The third largest
commercial loan totaled $12.3 million, was originated in 2019 and is a renewable energy loan. As of December 31, 2020, the loans were
performing in accordance with the original repayment terms.
Commercial Real Estate Loans. At December 31, 2020, commercial real estate loans were $439.0 million, or 32.8% of our total loan
portfolio. This amount includes $38.2 million of multi-family residential real estate loans, which we consider a subset of commercial
real estate loans, and which are described below. Our commercial real estate loans are generally secured by properties used for business
purposes such as office buildings, industrial facilities and retail facilities; however, we also originate loans secured by investment real
estate in the form of residential rental units. At December 31, 2020, $179.5 million of our commercial real estate portfolio was secured
by owner occupied commercial real estate, and $259.5 million was secured by income producing, or non-owner occupied commercial
real estate. We currently target new commercial real estate loan originations to experienced, growing small- and mid-size owners and
investors in our market area. The average outstanding loan in our commercial real estate portfolio was $619,000 as of December 31,
2020, although we originate commercial real estate loans with balances significantly larger than this average. At December 31, 2020,
our ten largest commercial real estate loans had an average balance of $8.7 million.
We focus our commercial real estate lending on properties within our primary market areas, but we will originate commercial real estate
loans on properties located outside the area based on an established relationship with a strong borrower. We intend to continue to grow
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our commercial real estate loan portfolio while maintaining prudent underwriting standards. In addition to originating these loans, we
occasionally will participate in commercial real estate loans with other financial institutions. Such participations are underwritten in
accordance with our policies before we will participate in such loans.
We originate a variety of fixed- and adjustable-rate commercial real estate loans with terms and amortization periods generally up to 20
years, although our Loan Policy permits longer terms and amortization periods depending on the risk profile, which may include balloon
loans. Interest rates and payments on our adjustable-rate loans adjust every three, five or seven years and generally are indexed to the
corresponding Federal Home Loan Bank borrowing rate plus a margin. Most of our adjustable-rate commercial real estate loans adjust
every five years and amortize over terms of 20 years. We generally include pre-payment penalties on commercial real estate loans we
originate. Commercial real estate loan amounts do not exceed 75% to 80% of the property’s appraised value at the time the loan is
originated. In addition, debt service ratios, by policy, are required to have a minimum net operating income to debt service coverage
ratio ranging from of 1.10x to 1.25x based on loan type and the defined and approved term/amortization. For commercial real estate
loans in excess of $500,000, we require independent appraisals from an approved appraisers list. For such loans below $500,000, we
require real estate evaluations but do not require an independent appraisal. We require commercial real estate loan borrowers with loan
relationships in excess of $1.0 million to submit annual financial statements and/or rent rolls on the subject property, although we may
request such information for smaller loans on a case-by-case basis. Loans below the $1.0 million threshold are reviewed annually using
business and consumer credit reports, payment history, and confirmation of real estate tax payments. Commercial real estate properties
may also be subject to annual inspections to support that appropriate maintenance is being performed by the owner/borrower. The loan
and its borrowers and/or guarantors are subject to an annual risk certification verifying that the loan is properly risk rated based upon
covenant compliance (as applicable) and other terms as provided for in the loan agreements. While this process does not prevent loans
from becoming delinquent, it provides us with the opportunity to better identify problem loans in a timely manner and to work with the
borrower prior to the loan becoming delinquent.
The following table provides information with respect to our commercial real estate loans by type at December 31, 2020. The table
excludes multi-family residential real estate loans, discussed below.
Type of Loan
Residential one-to-four family
Mixed use
Office
Retail
Industrial/manufacturing/warehouse
Hotel/motel/inn
Mobile home/park
Self-storage facility
Other commercial real estate
Total
Number
Balance
(In thousands)
149 $
68
76
62
110
18
7
18
202
710 $
30,860
51,913
48,510
32,400
59,235
27,612
30,908
28,545
128,966
438,949
If we foreclose on a commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be
lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective
buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property
to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate loans
can be unpredictable and substantial.
Our largest single commercial real estate loan at December 31, 2020 totaled $16.0 million, was originated in 2019 and is secured by
non-owner occupied commercial use property. Our next largest commercial real estate loan at December 31, 2020 was for $13.4 million,
was originated in 2019 and is secured by non-owner occupied commercial use property. The third largest commercial real estate loan
was for $12.1 million, was originated in 2013 and is a commercial line of credit secured by non-owner occupied commercial use
property. All of the collateral securing these loans is located in our primary lending area. At December 31, 2020, all of these loans were
performing in accordance with their original repayment terms.
Multi-Family Residential Real Estate Loans. At December 31, 2020, multi-family real estate loans were $38.2 million, or 2.9% of our
total loan portfolio. We do not focus on the origination of multi-family real estate lending, but we will originate these loans to well-
qualified borrowers when opportunities exist that meet our underwriting standards. We currently originate new individual multi-family
real estate loans to experienced, growing small- and mid-size owners and investors in our market area. Our multi-family real estate loans
are generally secured by properties consisting of five to 15 rental units. The average outstanding loan size in our multi-family real estate
portfolio was $530,000 as of December 31, 2020. We generally do not make multi-family real estate loans outside our primary market
areas. In addition to originating these loans, we also participate in multi-family residential real estate loans with other financial
institutions. Such participations are underwritten in accordance with our policies before we will participate in such loans.
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We originate a variety of fixed- and adjustable-rate multi-family real estate loans for terms up to 30 years. Interest rates and payments
on our adjustable-rate loans adjust every three, five or seven years and generally are indexed to the corresponding Federal Home Loan
Bank borrowing rate plus a margin. Most of our adjustable-rate multi-family real estate loans adjust every five years and amortize over
terms of 20 to 25 years. We also include pre-payment penalties on loans we originate. Multi-family real estate loan amounts do not
exceed 80% of the property’s appraised value at the time the loan is originated. Debt service ratios, by policy, are required to have a
minimum net operating income to debt service coverage ratio of 1.20x. We require multi-family real estate loan borrowers with loan
relationships in excess of $1.0 million to submit annual financial statements and/or rent rolls on the subject property, although we may
request such information for smaller loans on a case-by-case basis. Loans below the $1.0 million threshold are reviewed annually using
business and consumer credit reports, payment history, and confirmation of real estate tax payments. These properties may also be
subject to annual inspections to support that appropriate maintenance is being performed by the owner/borrower.
If we foreclose on a multi-family real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be
lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective
buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property
to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate loans
can be unpredictable and substantial.
Our largest multi-family real estate loan at December 31, 2020 totaled $5.0 million, was originated in 2016 and is secured by a multi-
family property. At December 31, 2020, this loan was performing in accordance with its original repayment terms.
Construction and Land Development Loans. At December 31, 2020, construction and land development loans were $28.9 million, or
2.2% of our total loan portfolio, consisting of $9.9 million of one- to four-family residential and condominium construction loans and
$19.0 million of commercial and multi-family real estate construction loans. At December 31, 2020, $14.4 million of our commercial
and multi-family real estate construction loans are expected to convert to permanent loans upon completion of the construction phase.
The majority of the balance of these loans is secured by properties located in our primary lending area.
We primarily make construction loans for commercial development projects, including hotels, condominiums and single family
residences, small industrial buildings, retail and office buildings and apartment buildings. Most of our construction loans are interest-
only loans that provide for the payment of interest during the construction phase, which is usually up to 12 to 24 months, although some
construction loans are renewed, generally for one or two additional years. At the end of the construction phase, the loan may convert to
a permanent mortgage loan or the loan may be paid in full. Loans generally can be made with a maximum loan-to-value ratio of 80% of
the appraised market value upon completion of the project. As appropriate to the underwriting, a discounted cash flow analysis is utilized.
Before making a commitment to fund a construction loan in excess of $500,000, we require an appraisal of the property by an
independent licensed appraiser. We also will generally require an inspection of the property before disbursement of funds during the
term of the construction loan.
We also originate construction and site development loans to contractors and builders to finance the construction of single-family homes
and subdivisions. While we may originate these loans whether or not the collateral property underlying the loan is under contract for
sale, we consider each project carefully in light of current residential real estate market conditions. We actively monitor the number of
unsold homes in our construction loan portfolio and local housing markets to attempt to maintain an appropriate balance between home
sales and new loan originations. We generally will limit the maximum number of speculative units (units that are not pre-sold) approved
for each project to two units. We have attempted to diversify the risk associated with speculative construction lending by doing business
with experienced small and mid-sized builders within our market area.
Residential real estate construction loans include single-family tract construction loans for the construction of entry level residential
homes. The maximum loan-to-value limit applicable to these loans is generally 75% to 80% of the appraised market value upon
completion of the project. Development plans are required from builders prior to making the loan. Our loan officers are required to
personally visit the proposed site of the development and the sites of competing developments. We require that builders maintain
adequate insurance coverage. While maturity dates for residential construction loans are largely a function of the estimated construction
period of the project, and generally do not exceed one year, land development loans generally are for 18 to 24 months. Substantially all
of our residential construction loans have adjustable rates of interest based on The Wall Street Journal prime rate plus a margin.
Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by our approved
inspectors warrant.
Our largest construction and land development loan at December 31, 2020 totaled $9.0 million, was originated in 2018 and is secured
by commercial use property. During 2020, this loan was modified under the CARES Act and was performing in accordance with its
modified repayment terms at December 31, 2020.
Mortgage Warehouse Loans. In 2020, the Bank completed an asset purchase of a mortgage warehouse line of business. Our mortgage
warehouse lending business has a national platform with relationship managers across the United Sates that offers facility lines to
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independent non-bank mortgage origination companies, which allow them to fund the closing of residential mortgage loans. Each facility
advance is fully collateralized by a security interest in one- to four-family residential mortgage loans and are further enhanced by deposit
balances. The primary source of repayment of the facility lines is the sale of the underlying mortgage loans to outside investors, which
typically occurs within 15 days. These investors can include Federal National Mortgage Association/Federal Home Loan Mortgage
Corporation and Government National Mortgage Association, as well as other large financial institutions who aggregate pools of loans.
To approve facility lines to non-bank mortgage origination borrowers we conduct a thorough due diligence of the company and its
ownership to assess the financial performance including assets and liquidity and regulatory profile. To underwrite the companies we use
a proprietary risk based scoring model that correlates to our internal regulatory loan risk grading system. We continually monitor
companies’ performance through both internal and external financial management and quality reviews. At December 31, 2020, mortgage
warehouse loans were $265.4 million, or 19.8% of total loans.
One- to Four-Family Residential Loans. Our one- to four-family residential loan portfolio consists of mortgage loans that enable
borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. At December 31, 2020,
one- to four-family residential real estate loans were $32.8 million, or 2.5% of our total loan portfolio, consisting of $20.7 million of
fixed-rate loans and $12.1 million of adjustable-rate loans, respectively. This amount includes $11.8 million of home equity loans and
lines of credit, which we consider a subset of one- to four-family residential real estate loans, and which are described below.
We discontinued this type of lending in 2014 to focus on commercial loan originations. Accordingly, we expect our portfolio of one- to
four-family residential real estate loans to continue to decrease over time due to normal amortization and repayments. Our one- to four-
family residential real estate loans generally do not have prepayment penalties.
Home Equity Loans and Lines of Credit. At December 31, 2020, the outstanding balance owed on home equity loans was $2.2 million,
or 0.2% of our total loan portfolio, and the outstanding balance owed on home equity lines of credit amounted to $9.6 million, or 0.7%
of our total loan portfolio. We discontinued home equity loan originations in 2014 and home equity lines of credit in 2020 to focus on
commercial loan originations. Home equity lines of credit have adjustable rates of interest with ten-year draws and terms of 15 years
that are indexed to the prime rate as published by The Wall Street Journal on the last business day of the month. We offer home equity
lines of credit with cumulative loan-to-value ratios generally up to 80%, when taking into account both the balance of the home equity
line of credit and first mortgage loan.
Consumer Loans. Our consumer loan portfolio consists of loans secured by certificate accounts and overdraft lines of credit. At
December 31, 2020, consumer loans were $5.5 million, or 0.4% of total loans. The procedures for underwriting consumer loans include
an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed
loan.
We discontinued lending for loans secured by certificate accounts in 2020 to focus on commercial loan originations. Accordingly, we
expect our portfolio of certificate account secured loans to decrease over time due to normal amortization and repayments. We are
continuing to offer overdraft lines of credit. Consumer loans generally do not have prepayment penalties.
In 2016, we entered into an agreement to purchase pools of unsecured consumer loans through the BancAlliance Lending Club Program.
This program encompasses loans risk graded by Lending Club as A through C with a 680 minimum credit score, out of a possible risk
grade of A through G. The Lending Club retains the servicing of these loans. As of December 31, 2020, we had $5.3 million in
outstanding consumer loans that were purchased through this program. Our last Lending Club investment purchase was in 2018 and as
of May 2019, we have stopped reinvesting any proceeds in new pools. At this time we are not anticipating purchasing any new loans
through this network.
Loan Underwriting Risks
Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to
make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make
repayment from the cash flow of the borrower’s business and the collateral securing these loans may fluctuate in value. Our commercial
business loans are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower. Most often, this collateral consists of accounts receivable, inventory or equipment, the value of which may
depreciate over time, may be more difficult to appraise and may be more susceptible to fluctuation in value. Credit support provided by
the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and
enforcement of a personal guarantee, if any. As a result, the availability of funds for the repayment of commercial business loans may
depend substantially on the success of the business itself. These types of loans are generally more sensitive to regional and local
economic conditions, making loss levels more difficult to predict.
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Enterprise value loans may expose us to a greater risk of non-payment and loss than our other business loans because: (1) repayment of
such loans may be dependent upon the successful execution of the borrower’s business plan, which may include new management and
be based on projected cash flows that may include business synergies, cost savings, and revenue growth that have yet to be realized; (2)
they may require additional financing from their private equity sponsors or others, a successful sale to a third party, a public offering,
or some other form of liquidity event; or (3) in the event of default and liquidation, there may be reliance on the sale of intangible assets
that may have insufficient value to repay the debt in full.
Commercial and Multi-Family Real Estate Loans. Loans secured by commercial and multi-family real estate generally have larger
balances and involve a greater degree of risk than one- to four-family residential mortgage loans. In addition, many of our commercial
borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit
relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-
family residential mortgage loan. Of primary concern in commercial and multi-family real estate lending is the borrower’s
creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income producing properties
often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater
extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income
producing properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on commercial and multi-
family real estate loans. In reaching a decision on whether to make a commercial or multi-family real estate loan, we consider and review
a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history
and profitability and the value of the underlying property. We have generally required that the properties securing these real estate loans
have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.20x. In accordance with our loan
policy, an environmental phase one report may be obtained when the possibility exists that hazardous materials may have existed on the
site, or the site may have been impacted by adjoining properties that handled hazardous materials. These types of loans are generally
more sensitive to regional and local economic conditions, making loss levels more difficult to predict. In addition, some of our
commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity. These balloon payments may
require the borrower to either sell or refinance the underlying property in order to make the balloon payment, which may increase the
risk of default or non-payment.
Further, if we foreclose on a commercial real estate or multi-family real estate loan, our holding period for the collateral may be longer
than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral, which can result
in substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers
expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to
profitability.
Construction and Land Development Loans. Our construction loans are based upon estimates of costs and values associated with the
completed project. Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a
quality product and effectively market and manage their operations. All construction loans for which the builder does not have a binding
purchase agreement must be approved by senior loan officers.
Construction lending involves additional risks when compared with permanent residential lending because funds are advanced upon the
security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction
costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively
difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. This type of lending
also typically involves higher loan principal amounts and is often concentrated with a small number of builders. In addition, generally
during the term of a construction loan, interest may be funded by the borrower or disbursed from an interest reserve set aside from the
construction loan budget. These loans often involve the disbursement of substantial funds with repayment substantially dependent on
the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing,
rather than the ability of the borrower or guarantor to repay principal and interest. If the appraised value of a completed project proves
to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may
incur a loss. A discounted cash flow analysis is utilized for determining the value of any construction project of five or more units. Our
ability to continue to originate a significant amount of construction loans is dependent on the strength of the housing market in our
market areas.
Land loans secured by improved lots generally involve greater risks than residential mortgage lending because land loans are more
difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default and foreclosure, we may be confronted with
a property the value of which is insufficient to assure full payment. These types of loans are generally more sensitive to regional and
local economic conditions, making loss levels more difficult to predict.
Mortgage Warehouse Loans. Mortgage warehouse loans are primarily facility lines to non-bank mortgage origination companies. The
risk of fraud associated with this type of lending includes, but is not limited to, settlement process risks, the risk of financing nonexistent
loans or fictitious mortgage loan transactions, or the risk that collateral delivered is fraudulent or non-existent, creating a risk of loss of
9
the full amount financed on the underlying residential mortgage loan, or in the settlement processes. In addition to fraud risk, there is
also the risk of the mortgage companies being unable to sell the loans.
Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest
rates as compared to fixed-rate loans, an increased monthly mortgage payment required of adjustable-rate loan borrowers in a rising
interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may
be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans make our asset base more
responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment
limits on residential loans.
Consumer Loans. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans
that are unsecured or secured by assets that depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial
collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore
are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can
be recovered on such loans.
Loan Originations, Purchases and Sales
We have grown our loan portfolio by developing expertise for customers who typically have not been supported by larger financial
institutions but whose business needs are usually too complex for smaller institutions. Loan originations come from a variety of sources.
The primary sources of loan originations are current customers, business development by our relationship managers, walk-in traffic, our
website, networking events and referrals from customers as well as our directors, trustees and corporators, business owners, investors,
entrepreneurs, builders, realtors, and other professional third parties, including brokers. Loan originations are further supported by
lending services offered through cross-selling and employees’ community service.
Historically, we generally originated loans for our portfolio. We occasionally sell participation interests in commercial real estate loans
and commercial business loans to local financial institutions, primarily on the portion of loans exceeding our borrowing limits. At
December 31, 2020, we were servicing $10.5 million of commercial real estate and commercial business loans where we had sold an
interest to local financial institutions. We sold loan participations of $1.4 million and $209,000 for the years ended December 31, 2020
and 2019, respectively.
While we generally do not purchase whole loans, we will occasionally purchase loan participations from other financial institutions and
have in previous years purchased through a shared national credit program. As of December 31, 2020, we had $11.3 million of
outstanding purchased loans. We do not expect to make any purchases through a shared national credit program going forward. During
the year ended December 31, 2020 and 2019, we had no loan participation purchases.
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by
BankProv’s board of directors and management. BankProv’s board of directors has granted loan approval authority to certain officers
up to prescribed limits, depending on the officer’s experience, the type of loan and whether the loan is secured or unsecured. All loans
require the approval of a minimum of two lending officers, one of which must be a Senior Vice President or above (the exception is
borrowing relationships of $25,000 and below, which can be approved by one officer with sufficient authority for that loan type, as well
as, loans of any amount which are 100% cash secured). For loan relationships below $2.0 million, approval is required by designated
individuals with delegated loan authority as identified within our loan policy. Our loan policy dictates that for loan relationships of
between $2.0 million and $3.0 million approval is required by two of the following members of Credit Committee: Chief Executive
Officer, Chief Financial Officer and/or President/Chief Lending Officer. While our loan policy dictates that loan relationships greater
than $3.0 million be presented to and approved by Credit Committee; our practice has been to present loan relationships greater than
$2.0 million to Credit Committee for review and formal approval. Loans that involve exceptions to policy, including loans in excess of
our internal loans-to-one borrower limitation, must be authorized by BankProv’s Risk Committee of the board of directors. Exceptions
are fully disclosed to the approving authority, either an individual officer or the appropriate management or board committee prior to
commitment. Exceptions are reported to the board of directors quarterly.
When entering a new lending line, we typically seek to manage risks and costs by limiting initial activity. We then decide whether it
would be profitable and consistent with our risk tolerance levels to expand the activity, and continually calibrate and adjust our actions
to maintain appropriate risk limitations.
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Loans-to-One Borrower Limit and Loan Category Concentration
The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by statute, to 20% of
our capital, which is defined under Massachusetts law as the sum of our capital stock, surplus account and undivided profits. At
December 31, 2020, our regulatory limit on loans-to-one borrower was $40.2 million. We generally establish our internal loans-to-one
borrower limit as 90% of our regulatory limit. As of December 31, 2020, this amount was $36.1 million, with loans greater than this
amount requiring approval by BankProv’s Risk Committee of the board of directors.
At December 31, 2020, our largest lending relationship consisted of 12 commercial business loans with a total exposure of $32.6 million,
secured by all business assets. This relationship was performing in accordance with its original repayment terms at December 31,
2020. Our second largest lending relationship consisted of 13 commercial real estate loans, commercial business loans, and construction
and land development loans with a total exposure of $21.0 million, secured by non-owner occupied investment real estate. Included in
this $21.0 million relationship at December 31, 2020 is $413,000 of PPP loans which are guaranteed by the SBA, $1.2 million in
available but unused credit lines and $1.6 million of commercial real estate loans that were performing in accordance with their original
repayment terms. The remaining $17.8 million was modified under the CARES Act, with $3.4 million modified for interest-only
payments and performing in accordance with its modified repayment terms at December 31, 2020 and $14.4 million under full payment
deferral at December 31, 2020. Our third largest lending relationship consisted of four commercial real estate and commercial business
loans, with a total exposure of $20.9 million, secured by non-owner occupied investment real estate and commercial business assets.
This relationship was performing in accordance with its original repayment terms at December 31, 2020. Our fourth largest lending
relationship consisted of seven commercial real estate loans with a total exposure of $20.0 million, secured by non-owner occupied
commercial use property. The entire loan relationship was placed on non-accrual status and analyzed and restructured in the first quarter
of 2020. The relationship was returned to accrual status in the fourth quarter of 2020 after demonstrating the ability to pay the loan under
the restructured terms, and as of December 31, 2020, the relationship was performing in accordance with its restructured repayment
terms. Our fifth largest lending relationship consisted of 14 commercial real estate loans and commercial business loans, with a total
exposure of $19.2 million, secured by owner occupied commercial use property and business assets. Included in this relationship is a
$1.9 million commercial business loan that was modified under the CARES Act and was performing in accordance with its modified
repayment terms at December 31, 2020. The remaining balance of the relationship was performing in accordance with its original
repayment terms at December 31, 2020.
Investment Activities
We have legal authority to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations,
securities of various government-sponsored enterprises, residential mortgage-backed securities and municipal government bonds,
deposits at the Federal Home Loan Bank of Boston, certificates of deposit of federally insured institutions, investment grade corporate
bonds and investment grade marketable equity securities, including common stock and money market mutual funds. We also are required
to maintain an investment in Federal Home Loan Bank of Boston stock, which investment is based on the level of our Federal Home
Loan Bank borrowings. While we have the authority under applicable law to invest in derivative securities, we had no investments in
derivative securities at December 31, 2020.
At December 31, 2020, our investment portfolio had a fair value of $32.2 million, and consisted of U.S. Government Agency mortgage-
backed securities, and state and municipal bonds.
Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide
a use of funds when demand for loans is weak and to generate a favorable return. Our board of directors has the overall responsibility
for the investment portfolio, including approval of our investment policy. The Risk Committee of the board of directors and management
are responsible for implementation of the investment policy and monitoring our investment performance. Our Risk Committee reviews
the status of our investment portfolio quarterly.
Each reporting period, we evaluate all debt securities with a decline in fair value below the amortized cost of the investment to determine
whether or not the impairment is deemed to be other-than-temporarily impaired (“OTTI”). OTTI is required to be recognized if (1) we
intend to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost
basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For
all impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount of the depreciation is
recognized as OTTI resulting in a realized loss that is a charged to earnings through a reduction in our noninterest income. For all other
impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other
comprehensive income/loss, net of applicable taxes. We did not recognize any OTTI during the years ended December 31, 2020 or
2019.
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Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use
borrowings, primarily Federal Home Loan Bank of Boston advances, brokered deposits and certificates of deposit obtained from a
national exchange, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the
cost of funds. In addition, funds are derived from scheduled loan payments, investment securities maturities and sales, loan prepayments,
retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and
levels of competition.
Deposit Accounts. The majority of our deposits (other than certificates of deposit) are from depositors who reside in our primary market
areas. However, a significant portion of our brokered certificates of deposits and QwickRate deposits, described below, are from
depositors located outside our primary market areas. We also receive deposits from our nationwide business customers. Deposits are
attracted through the offering of a broad selection of deposit instruments, including noninterest-bearing demand deposits (such as
checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), savings accounts and certificates of
deposit. In addition to accounts for individuals, we also offer several commercial checking accounts designed for the businesses
operating in our market area, and we encourage our commercial borrowing customers to maintain their deposit relationships with us.
We have grown our core deposits (which we define as all deposits except for certificates of deposit) through a variety of strategies,
including investing in technology and hiring additional employees, as well as proactive interaction with our customers. Our investment
in technology has enabled us to better serve commercial customers who demand faster processing times and simplified online interaction.
For example, we provide deposit and cash management services for 1031 qualified intermediaries, digital currency customers, payroll
providers and community association management companies. Funds we receive from digital currency customers are denominated in
U.S. dollars; we do not have any digital assets or liabilities on our balance sheet and we do not take any digital currency exchange rate
risk. In addition, we believe that our specialized commercial activities have provided opportunities to generate business deposits from
those customers, including from customers outside of our branch network, that may not be available to traditional community banks.
At December 31, 2020, our deposits totaled $1.24 billion. As of that date, our certificates of deposit included $114.1 million of brokered
certificates of deposit and $39.9 million of QwickRate certificates of deposit, where we gather certificates of deposit nationwide by
posting rates we will pay on these deposits. At December 31, 2020, all of our QwickRate certificates of deposit were in amounts of
$100,000 or greater.
Deposit account terms vary according to the minimum balance required, the time period that funds must remain on deposit, and the
interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition,
our liquidity needs, profitability, and customer preferences and concerns. We generally review our deposit mix and pricing on a weekly
basis. Our deposit pricing strategy has generally been to offer competitive rates and services and to periodically offer special rates in
order to attract deposits of a specific type or term, although we have not done so in recent periods. We do not price our deposit products
to be among the highest rate paying institution in our market area, but instead focus on services to gather deposits.
Borrowings. We primarily utilize advances from the Federal Home Loan Bank of Boston to supplement our supply of investable funds.
The Federal Home Loan Bank functions as a central reserve bank providing credit for its member financial institutions. As a member,
we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such
stock and certain of our whole first mortgage loans and other assets (principally securities which are obligations of, or guaranteed by,
the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different
programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances
are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s
creditworthiness. As of December 31, 2020, we had a borrowing capacity of $159.3 million with the Federal Home Loan Bank of
Boston, including an available line of credit of $2.0 million at an interest rate that adjusts daily. On that date, we had $13.5 million in
advances outstanding from the Federal Home Loan Bank of Boston. All of our borrowings from the Federal Home Loan Bank are
secured by investment securities and qualified collateral, including one- to four-family loans and multi-family and commercial real
estate loans held in our portfolio.
From time to time and dependent on rates, we may utilize the FRB Borrower In Custody (“BIC”) program as a source of overnight
borrowings. Borrowings from the FRB BIC program are secured by a Uniform Commercial Code (“UCC”) financing statement on
qualified collateral, consisting of certain commercial loans and qualified mortgage-backed government securities. We did not have any
outstanding FRB borrowings at December 31, 2020 or 2019.
Personnel
As of December 31, 2020, we had 149 full-time and nine part-time employees, none of whom is represented by a collective bargaining
unit. We believe we have a good working relationship with our employees.
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Subsidiaries
The Provident Bank’s subsidiaries include Provident Security Corporation and 5 Market Street Security Corporation, which were
established to buy, sell, and hold investments for their own account.
SUPERVISION AND REGULATION
General
The Provident Bank is a Massachusetts-chartered stock savings bank. The Bank’s deposits are insured up to applicable limits by the
Federal Deposit Insurance Corporation and by the Depositors Insurance Fund for amounts in excess of the Federal Deposit Insurance
Corporation insurance limits. The Provident Bank is subject to extensive regulation by the Massachusetts Commissioner of Banks, as
its chartering agency, and by the Federal Deposit Insurance Corporation, as its primary deposit insurer. The Provident Bank is required
to file reports with, and is periodically examined by, the Federal Deposit Insurance Corporation and the Massachusetts Commissioner
of Banks concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions,
including, but not limited to, mergers with or acquisitions of other financial institutions. The Provident Bank is a member of the Federal
Home Loan Bank of Boston.
The regulation and supervision of The Provident Bank establish a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of depositors and borrowers and, for purposes of the Federal Deposit Insurance
Corporation, the protection of the insurance fund. The regulatory structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
As a bank holding company, Provident Bancorp, Inc. is required to comply with the rules and regulations of the Federal Reserve Board.
It is required to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement authority of
the Federal Reserve Board. Provident Bancorp, Inc. is also subject to the rules and regulations of the Securities and Exchange
Commission under the federal securities laws.
Any change in applicable laws or regulations, whether by the Massachusetts Commissioner of Banks, the Federal Deposit Insurance
Corporation, the Federal Reserve Board, the Commonwealth of Massachusetts or Congress, could have a material adverse impact on
the operations and financial performance of Provident Bancorp, Inc. and The Provident Bank. In addition, Provident Bancorp, Inc. and
The Provident Bank are affected by the monetary and fiscal policies of various agencies of the United States Government, including the
Federal Reserve Board. In view of changing conditions in the national economy and in the money markets, it is impossible for
management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition
of Provident Bancorp, Inc. and The Provident Bank.
Set forth below is a brief description of material regulatory requirements that are or will be applicable to The Provident Bank and
Provident Bancorp, Inc. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended
to be a complete description of such statutes and regulations and their effects on The Provident Bank and Provident Bancorp, Inc.
Massachusetts Banking Laws and Supervision
The Provident Bank, as a Massachusetts-chartered stock savings bank, is regulated and supervised by the Massachusetts Commissioner
of Banks. The Massachusetts Commissioner of Banks is required to regularly examine each state-chartered bank. The approval of the
Massachusetts Commissioner of Banks is required to establish or close branches, to merge with another bank, to issue stock and to
undertake many other activities. Any Massachusetts savings bank that does not operate in accordance with the regulations, policies and
directives of the Massachusetts Commissioner of Banks may be sanctioned. The Massachusetts Commissioner of Banks may suspend
or remove directors or officers of a savings bank who have violated the law, conducted a bank’s business in a manner that is unsafe,
unsound or contrary to the depositors’ interests, or been negligent in the performance of their duties. In addition, the Massachusetts
Commissioner of Banks has the authority to appoint a receiver or conservator if it is determined that the bank is conducting its business
in an unsafe or unauthorized manner, and under certain other circumstances.
The powers that Massachusetts-chartered savings banks can exercise under these laws include, but are not limited to, the following.
Lending Activities. A Massachusetts-chartered savings bank may make a wide variety of mortgage loans including fixed-rate loans,
adjustable-rate loans, variable-rate loans, participation loans, graduated payment loans, construction and development loans,
condominium and co-operative loans, second mortgage loans and other types of loans that may be made in accordance with applicable
regulations. Commercial loans may be made to corporations and other commercial enterprises with or without security. Consumer and
personal loans may also be made with or without security.
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Insurance Sales. Massachusetts savings banks may engage in insurance sales activities if the Massachusetts Commissioner of Banks
has approved a plan of operation for insurance activities and the bank obtains a license from the Massachusetts Division of Insurance.
A savings bank may be licensed directly or indirectly through an affiliate or a subsidiary corporation established for this purpose.
Although The Provident Bank has received approval for insurance sales activities, it does not offer insurance products.
Investment Activities. In general, Massachusetts-chartered savings banks may invest in preferred and common stock of any corporation
organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do
not, in the aggregate, exceed 4.0% of the bank’s deposits. Massachusetts-chartered savings banks may in addition invest an amount
equal to 1.0% of their deposits in stocks of Massachusetts corporations or companies with substantial employment in the Commonwealth
which have pledged to the Massachusetts Commissioner of Banks that such monies will be used for further development within the
Commonwealth. At the present time, The Provident Bank has the authority to invest in equity securities. However, such investment
authority is constrained by federal law. See “—Federal Bank Regulation—Investment Activities” for such federal restrictions.
Dividends. A Massachusetts stock bank may declare from net profits cash dividends not more frequently than quarterly and non-cash
dividends at any time. No dividends may be declared, credited or paid if the bank’s capital stock is impaired. A Massachusetts savings
bank with outstanding preferred stock may not, without the prior approval of the Commissioner of Banks, declare dividends to the
common stock without also declaring dividends to the preferred stock. The approval of the Massachusetts Commissioner of Banks is
required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its
retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock.
Net profits for this purpose means the remainder of all earnings from current operations plus actual recoveries on loans and investments
and other assets after deducting current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal
and state taxes.
Protection of Personal Information. Massachusetts has adopted regulatory requirements intended to protect personal information. The
requirements are similar to existing federal laws such as the Gramm-Leach-Bliley Act, discussed below under “—Federal Bank
Regulation—Privacy Regulations.” They require organizations to establish written information security programs to prevent identity
theft. The Massachusetts regulation also contains technology system requirements, especially for the encryption of personal information
sent over wireless or public networks or stored on portable devices.
Parity Approval. A Massachusetts bank may, in accordance with Massachusetts law, exercise any power and engage in any activity that
has been authorized for national banks, federal thrifts or state banks in a state other than Massachusetts, provided that the activity is
permissible under applicable federal law and not specifically prohibited by Massachusetts law. Such powers and activities must be
subject to the same limitations and restrictions imposed on the national bank, federal thrift or out-of-state bank that exercised the power
or activity. A Massachusetts bank may exercise such powers, and engage in such activities by providing 30 days’ advanced written
notice to the Massachusetts Commissioner of Banks.
Loans to One Borrower Limitations. Massachusetts banking law grants broad lending authority. However, with certain limited
exceptions, total obligations of one borrower to a bank may not exceed 20.0% of the total of the bank’s capital, which is defined under
Massachusetts law as the sum of the bank’s capital stock, surplus account and undivided profits.
Loans to a Bank’s Insiders. Massachusetts law provides that a Massachusetts financial institution shall comply with Regulation O of
the Federal Reserve Board, which generally requires that extensions of credit to insiders:
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than,
those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features; and
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of the Massachusetts financial institution’s capital.
Regulatory Enforcement Authority. Any Massachusetts bank that does not operate in accordance with the regulations, policies and
directives of the Massachusetts Commissioner of Banks may be subject to sanctions for non-compliance, including seizure of the
property and business of the bank and suspension or revocation of its charter. The Massachusetts Commissioner of Banks may, under
certain circumstances, suspend or remove officers or directors who have violated the law, conducted the bank’s business in a manner
which is unsafe, unsound or contrary to the depositors’ interests or been negligent in the performance of their duties. In addition, upon
finding that a bank has engaged in an unfair or deceptive act or practice, the Massachusetts Commissioner of Banks may issue an order
to cease and desist and impose a fine on the bank concerned. Massachusetts consumer protection and civil rights statutes applicable to
The Provident Bank permit private individual and class action law suits and provide for the rescission of consumer transactions,
including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.
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Depositors Insurance Fund. The Provident Bank is a member of the Depositors Insurance Fund, a corporation that insures savings bank
deposits in excess of federal deposit insurance coverage. The Depositors Insurance Fund is authorized to charge savings banks a risk-
based assessment on deposit balances in excess of the amounts insured by the Federal Deposit Insurance Corporation.
Massachusetts has other statutes and regulations that are similar to the federal provisions discussed below.
Federal Bank Regulation
Interagency Statement on Loan Modifications. On March 22, 2020, the federal banking agencies issued an interagency statement to
provide additional guidance to financial institutions who are working with borrowers affected by the coronavirus (“COVID-19”). The
statement provided that agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to
automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (“TDRs”). The agencies have
confirmed with staff of the Financial Accounting Standards Board that short-term modifications made on a good faith basis in response
to COVID-19 to borrowers who were current prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications
such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers
considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is
implemented.
The statement further provided that working with borrowers that are current on existing loans, either individually or as part of a program
for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of COVID-19, generally would
not be considered TDRs. For modification programs designed to provide temporary relief for current borrowers affected by COVID-19,
financial institutions may presume that borrowers that are current on payments are not experiencing financial difficulties at the time of
the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the
program.
The statement indicated that the agencies’ examiners will exercise judgment in reviewing loan modifications, including TDRs, and will
not automatically adversely risk rate credits that are affected by COVID-19, including those considered TDRs.
In addition, the statement noted that efforts to work with borrowers of one- to-four family residential mortgages, where the loans are
prudently underwritten, and not past due or carried on non-accrual status, will not result in the loans being considered restructured or
modified for the purposes of their risk-based capital rules. With regard to loans not otherwise reportable as past due, financial institutions
are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral.
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, which became law on March 27, 2020,
provided over $2 trillion to combat COVID-19 and stimulate the economy. The law had several provisions relevant to financial
institutions, including:
• Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt
restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes.
• An option to delay the implementation of the accounting standard for current expected credit losses (CECL) until the
earlier of December 31, 2020 or when the President declares that the coronavirus emergency is terminated.
• The ability of a borrower of a federally backed mortgage loan (VA, FHA, USDA, Freddie and Fannie) experiencing
financial hardship due, directly or indirectly, to the COVID-19 pandemic to request forbearance from paying their
mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19
emergency. Such a forbearance will be granted for up to 180 days, which can be extended for an additional 180-day period
upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or
calculated as if the borrower made all contractual payments on time and in full under the mortgage contract will accrue on
the borrower’s account. Except for vacant or abandoned property, the servicer of a federally backed mortgage is prohibited
from taking any foreclosure action, including any eviction or sale action, for not less than the 60-day period beginning
March 18, 2020.
• The ability of a borrower of a multi-family federally backed mortgage loan that was current as of February 1, 2020, to
submit a request for forbearance to the borrower’s servicer affirming that the borrower is experiencing financial hardship
during the COVID-19 emergency. A forbearance will be granted for up to 30 days, which can be extended for up to two
additional 30-day periods upon the request of the borrower. During the time of the forbearance, the multi-family borrower
cannot evict or initiate the eviction of a tenant or charge any late fees, penalties or other charges to a tenant for late payment
of rent. Additionally, a multi-family borrower that receives a forbearance may not require a tenant to vacate a dwelling
unit before a date that is 30 days after the date on which the borrower provides the tenant notice to vacate and may not
issue a notice to vacate until after the expiration of the forbearance.
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The Paycheck Protection Program. The CARES Act provides approximately $350 billion to fund loans to eligible small businesses
through the Small Business Administration’s (“SBA”) 7(a) loan guaranty program. These loans will be 100% federally guaranteed
(principal and interest) through December 31, 2020 (which date was subsequently extended). An eligible business can apply for a
Paycheck Protection Program (“PPP”) loan up to 2.5 times its average monthly “payroll costs" limited to a loan amount of $10.0 million.
The proceeds of the loan can be used for payroll (excluding individual employee compensation over $100,000 per year), mortgage,
interest, rent, insurance, utilities and other qualifying expenses. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan
term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee
100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued
interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the
business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used
for other qualifying expenses.
Coronavirus Response and Relief Supplemental Appropriations Act of 2021. On December 27, 2020, the Coronavirus Response and
Relief Supplemental Appropriations Act of 2021 was signed into law, which also contains provisions that could directly impact financial
institutions, including extending the time that insured depository institutions and depository institution holding companies have to
comply with the current expected credit losses (CECL) accounting standard and extending the authority granted to banks under the
CARES Act to elect to temporarily suspend the requirements under U.S. GAAP applicable to troubled debt restructurings for loan
modifications related to the COVID-19 pandemic for any loan that was not more than 30 days past due as of December 31, 2019. The
act directs financial regulators to support community development financial institutions and minority depository institutions and directs
Congress to re-appropriate $429 billion in unobligated CARES Act funds. The PPP, which was originally established under the CARES
Act, was also extended under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.
Capital Requirements. Federal regulations require Federal Deposit Insurance Corporation-insured depository institutions to meet
several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based
assets ratio of 6.0%, a total capital to risk-based assets ratio of 8%, and a Tier 1 capital to average assets leverage ratio of 4%.
For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders’ equity
and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital
includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated
subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2
capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred
stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.
Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and,
for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45%
of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not
exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on
available-for-sale-securities). The Provident Bank has exercised the opt-out and therefore does not include AOCI in its regulatory capital
determinations. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-
balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned
by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories
believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of
50% is generally assigned to prudently underwritten first lien one to four- family residential mortgages, a risk weight of 100% is assigned
to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600%
is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain
discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of
common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements.
The capital conservation buffer requirement began being phased in starting on January 1, 2016 at 0.625% of risk-weighted assets and
increased each year until fully implemented at 2.5% on January 1, 2019. At December 31, 2020, The Provident Bank exceeded the fully
phased in regulatory requirement for the capital conservation buffer.
Legislation enacted in 2018 required the federal banking agencies, including the Federal Deposit Insurance Corporation, to establish a
“community bank leverage ratio” of between 8 to 10% of average total consolidated assets for qualifying institutions with assets of less
than $10 billion. Institutions with capital meeting the specified requirements and electing to follow the alternative framework are
deemed to comply with the applicable regulatory capital requirements, including the risk-based requirements. A qualifying institution
may opt in and out of the community bank leverage ratio on its quarterly call report.
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The federal regulators issued a final rule that set the optional community bank leverage ratio at 9%, effective the first quarter of 2020.
The rule also established a two-quarter grace period for an institution that ceases to meet any qualifying criteria provided that the bank
maintains a leverage ratio 8% or greater.
Section 4012 of the CARES Act of 2020 required that the community bank leverage ratio be temporarily lowered to 8%. The federal
regulators issued a rule implementing the lower ratio, effective April 23, 2020. The rule also established a two-quarter grace period for
a qualifying institution whose leverage ratio falls below the 8% community bank leverage ratio requirement so long as the bank maintains
a leverage ratio of 7% or greater. Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the
ratio to 8.5% for calendar year 2021 and 9% thereafter. As of December 31, 2020, the Bank has not opted into the CBLR framework.
The Federal Deposit Insurance Corporation Improvement Act required each federal banking agency to revise its risk-based capital
standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk,
and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential
loans. The Federal Deposit Insurance Corporation, along with the other federal banking agencies, adopted a regulation providing that
the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a
bank’s capital adequacy. The Federal Deposit Insurance Corporation also has authority to establish individual minimum capital
requirements in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of
the particular circumstances.
Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted final regulations and
Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines
set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system,
credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and
benefits. The agencies have also established standards for safeguarding customer information. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to
the agency an acceptable plan to achieve compliance with the standard.
Investment Activities. All state-chartered Federal Deposit Insurance Corporation insured banks, including savings banks, are generally
limited in their activities as principal and equity investments to activities and equity investments of the type and in the amount authorized
for national banks, notwithstanding state law, subject to certain exceptions. For example, state-chartered banks may, with Federal
Deposit Insurance Corporation approval, continue to exercise state authority to invest in common or preferred stocks listed on a national
securities exchange and in the shares of an investment company registered under the Investment Company Act of 1940, as amended.
The maximum permissible investment is 100% of Tier 1 Capital, as specified by the Federal Deposit Insurance Corporation’s
regulations, or the maximum amount permitted by Massachusetts law, whichever is less.
In addition, the Federal Deposit Insurance Corporation is authorized to permit such a state bank to engage in state-authorized activities
or investments not permissible for national banks (other than non-subsidiary equity investments) if it meets all applicable capital
requirements and it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund. The
Federal Deposit Insurance Corporation has adopted procedures for institutions seeking approval to engage in such activities or
investments. In addition, a nonmember bank may control a subsidiary that engages in activities as principal that would only be permitted
for a national bank to conduct in a “financial subsidiary” if a bank meets specified conditions and deducts its investment in the subsidiary
for regulatory capital purposes.
Interstate Banking and Branching. Federal law permits well capitalized and well managed bank holding companies to acquire banks
in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers
of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, recent amendments made by the
Dodd-Frank Act permit banks to establish de novo branches on an interstate basis to the extent that branching is authorized by the law
of the host state for the banks chartered by that state.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt
corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
The Federal Deposit Insurance Corporation has adopted regulations to implement the prompt corrective action legislation. An institution
is deemed to be “well capitalized” if it has a CBLR leverage ratio of 9.0% or greater, or a total risk-based capital ratio of 10.0% or
greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5%
or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital
ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is
“undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage
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ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized”
if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than
3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio
of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. As of December 31, 2020, The Provident
Bank was a “well capitalized” institution under the Federal Deposit Insurance Corporation regulations.
At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including
restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions
on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized
categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must
guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized,
or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such
treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that
controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit
an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one
or more of a number of additional restrictions, including but not limited to an order by the Federal Deposit Insurance Corporation to sell
sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from
correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive
officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional
measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such
status.
The previously referenced rulemaking to establish a “community bank leverage ratio” adjusted the referenced categories for qualifying
institutions that opt into the alternative framework for regulatory capital requirements. Institutions that exceed the community bank
leverage ratio would be considered to have met the capital ratio requirements to be “well capitalized” for the agencies’ prompt corrective
rules.
Transaction with Affiliates and Regulation W of the Federal Reserve Regulations. Transactions between banks and their affiliates are
governed by federal law. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with
the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent
holding company are affiliates of the bank (although subsidiaries of the bank itself, except financial subsidiaries, are generally not
considered affiliates). Generally, Section 23A of the Federal Reserve Act and the Federal Reserve Board’s Regulation W limit the extent
to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such
institution’s capital stock and surplus, and with all such transactions with all affiliates to an amount equal to 20.0% of such institution’s
capital stock and surplus. Section 23B applies to “covered transactions” as well as to certain other transactions and requires that all such
transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-
affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from, and issuance of a guarantee to an
affiliate, and other similar transactions. Section 23B transactions also include the provision of services and the sale of assets by a bank
to an affiliate. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized
in accordance with the requirements set forth in Section 23A of the Federal Reserve Act.
Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to a bank’s insiders, i.e., executive officers, directors and
principal shareholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a greater than
10.0% shareholder of a financial institution, and certain affiliated interests of these, together with all other outstanding loans to such
person and affiliated interests, may not exceed specified limits. Section 22(h) of the Federal Reserve Act also requires that loans to
directors, executive officers and principal shareholders be made on terms and conditions substantially the same as offered in comparable
transactions to persons who are not insiders and also requires prior board approval for certain loans. In addition, the aggregate amount
of extensions of credit by a financial institution to insiders cannot exceed the institution’s unimpaired capital and surplus. Section 22(g)
of the Federal Reserve Act places additional restrictions on loans to executive officers.
Enforcement. The Federal Deposit Insurance Corporation has extensive enforcement authority over insured state savings banks,
including The Provident Bank. The enforcement authority includes, among other things, the ability to assess civil money penalties, issue
cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations
of laws and regulations, breaches of fiduciary duty and unsafe or unsound practices. The Federal Deposit Insurance Corporation is
required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically
undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically
undercapitalized.” The Federal Deposit Insurance Corporation may also appoint itself as conservator or receiver for an insured state
non-member bank under specified circumstances, including: (1) insolvency; (2) substantial dissipation of assets or earnings through
violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; (4) insufficient
18
capital; or (5) the incurrence of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of
replenishment without federal assistance.
Federal Insurance of Deposit Accounts. The Provident Bank is a member of the Deposit Insurance Fund, which is administered by the
Federal Deposit Insurance Corporation. Deposit accounts in The Provident Bank are insured up to a maximum of $250,000 for each
separately insured depositor.
The Federal Deposit Insurance Corporation imposes an assessment for deposit insurance on all depository institutions. Under the Federal
Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory
evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is
assigned and certain adjustments specified by Federal Deposit Insurance Corporation regulations, with less risky institutions paying
lower rates. Assessment rates (inclusive of possible adjustments) for most banks with less than $10 billion of assets currently range from
1 1/2 to 30 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or
decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and
comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank
Act, from its prior practice of basing the assessment on an institution’s volume of deposits.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of
estimated insured deposits. The Federal Deposit Insurance Corporation was required to seek to achieve the 1.35% ratio by September 30,
2020. Insured institutions with assets of $10 billion or more were supposed to fund the increase. The Federal Deposit Insurance
Corporation indicated in November 2018 that the 1.35% ratio was exceeded. Insured institutions of less than $10 billion of assets
received credits for the portion of their assessments that contributed to raising the reserve ratio between 1.15% and 1.35% effective
when the fund rate achieved 1.38%; the credits were exhausted as of September 20, 2020. The Dodd-Frank Act eliminated the 1.5%
maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance
Corporation has exercised that discretion by establishing a long-range fund ratio of 2%.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance
premiums would likely have an adverse effect on the operating expenses and results of operations of The Provident Bank. Future
insurance assessment rates cannot be predicted.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation,
rule order or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to
termination of deposit insurance.
Privacy Regulations. Federal Deposit Insurance Corporation regulations generally require that The Provident Bank disclose its privacy
policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of
establishing the customer relationship and annually thereafter. In addition, The Provident Bank is required to provide its customers with
the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers
or access codes to non-affiliated third parties for marketing purposes. The Provident Bank currently has a privacy protection policy in
place and believes that such policy is in compliance with the regulations.
Community Reinvestment Act. Under the Community Reinvestment Act, or CRA, as implemented by Federal Deposit Insurance
Corporation regulations, a non-member bank has a continuing and affirmative obligation, consistent with its safe and sound operation,
to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of
products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA does require the
Federal Deposit Insurance Corporation, in connection with its examination of a non-member bank, to assess the institution’s record of
meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution,
including applications to acquire branches and other financial institutions. The CRA requires the Federal Deposit Insurance Corporation
to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. The Provident
Bank’s latest Federal Deposit Insurance Corporation CRA rating was “Satisfactory.”
Massachusetts has its own statutory counterpart to the CRA which is also applicable to The Provident Bank. The Massachusetts version
is generally similar to the CRA but utilizes a five-tiered descriptive rating system. Massachusetts law requires the Massachusetts
Commissioner of Banks to consider, but not be limited to, a bank’s record of performance under Massachusetts law in considering any
application by the bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or
acquire the assets and assume the liabilities of any other banking institution. The Provident Bank’s most recent rating under
Massachusetts law was “Satisfactory.”
19
Consumer Protection and Fair Lending Regulations. Massachusetts savings banks are subject to a variety of federal and Massachusetts
statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and
regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and
remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive
relief. Certain of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive
damages and attorneys’ fees for certain types of violations.
USA PATRIOT Act. The Provident Bank is subject to the USA PATRIOT Act, which gave federal agencies additional powers to address
terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and
broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act
provided measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further,
certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents, and parties registered under the Commodity Exchange Act.
Other Regulations
Interest and other charges collected or contracted for by The Provident Bank are subject to state usury laws and federal laws concerning
interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:
Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public
and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in
extending credit;
Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
Massachusetts Debt Collection Regulations, establishing standards, by defining unfair or deceptive acts or practices,
for the collection of debts from persons within the Commonwealth of Massachusetts and the General Laws of
Massachusetts, Chapter 167E, which governs The Provident Bank’s lending powers; and
Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such
federal and state laws.
The deposit operations of The Provident Bank also are subject to, among others, the:
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital
check images and copies made from that image, the same legal standing as the original paper check;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller
machines and other electronic banking services; and
General Laws of Massachusetts, Chapter 167D, which governs deposit powers.
Federal Reserve System
The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts (primarily
NOW and regular checking account). Effective March 26, 2020, the Federal Reserve Board reduced the reserve requirement to zero.
This action eliminated reserve requirements for The Provident Bank. The Federal Reserve Board has indicated that is has no plans to
re-impose reserve requirements, but could in the future if conditions warrant.
Federal Home Loan Bank System
The Provident Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.
The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan
Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. The Provident Bank was in compliance
with this requirement at December 31, 2020. Based on redemption provisions of the Federal Home Loan Bank of Boston, the stock has
no quoted market value and is carried at cost. The Provident Bank reviews for impairment based on the ultimate recoverability of the
cost basis of the Federal Home Loan Bank of Boston stock. As of December 31, 2020, no impairment has been recognized.
At its discretion, the Federal Home Loan Bank of Boston may declare dividends on the stock. The Federal Home Loan Banks are
required to provide funds for certain purposes including the resolution of insolvent thrifts in the late 1980s and to contributing funds for
affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their
members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. In 2020, the
20
Federal Home Loan Bank of Boston paid dividends equal to an annual yield of 5.25%. There can be no assurance that such dividends
will continue in the future.
Holding Company Regulation
Provident Bancorp, Inc. is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as
amended, as administered by the Federal Reserve Board. Provident Bancorp, Inc. is required to obtain the prior approval of the Federal
Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board
approval would be required for Provident Bancorp, Inc. to acquire direct or indirect ownership or control of any voting securities of any
bank or bank holding company if, after such acquisition, it would, directly or indirectly, own or control more than 5% of any class of
voting shares of the bank or bank holding company. In addition to the approval of the Federal Reserve Board, prior approval may also
be necessary from other agencies having supervisory jurisdiction over the bank to be acquired before any bank acquisition can be
completed.
A bank holding company is generally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more
than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition
is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely
related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage
services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in
corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose
direct and indirect activities are limited to those permitted for bank holding companies.
The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well
capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial
activities than previously permitted. Such activities can include insurance underwriting and investment banking.
A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of
then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration
paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net
worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an
unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed
by, or written agreement with, the Federal Reserve Board. There is an exception to this approval requirement for well-capitalized bank
holding companies that meet certain other conditions.
The Federal Reserve Board has issued a policy statement regarding capital distributions, including dividends, by bank holding
companies. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only
if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset
quality and overall financial condition. The Federal Reserve Board’s policies also require that a bank holding company serve as a source
of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks
during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength doctrine. Under the
prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes
undercapitalized. In addition, the Federal Reserve Board has issued guidance that requires consultation with the agency prior to a bank
holding company’s payment of dividends or repurchase of stock under certain circumstances. These regulatory policies could affect the
ability of Provident Bancorp, Inc. to pay dividends, repurchase its stock or otherwise engage in capital distributions.
Under the Federal Deposit Insurance Act, depository institutions are liable to the Federal Deposit Insurance Corporation for losses
suffered or anticipated by the Federal Deposit Insurance Corporation in connection with the default of a commonly controlled depository
institution or any assistance provided by the Federal Deposit Insurance Corporation to such an institution in danger of default.
The status of Provident Bancorp, Inc. as a registered bank holding company under the Bank Holding Company Act will not exempt it
from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions
of the federal securities laws.
Massachusetts Holding Company Regulation. Under the Massachusetts banking laws, a company owning or controlling two or more
banking institutions, including a savings bank, is regulated as a bank holding company. The term “company” is defined by the
Massachusetts banking laws similarly to the definition of “company” under the Bank Holding Company Act. Each Massachusetts bank
holding company: (i) must obtain the approval of the Massachusetts Board of Bank Incorporation before engaging in certain transactions,
such as the acquisition of more than 5% of the voting stock of another banking institution; (ii) must register, and file reports, with the
21
Massachusetts Commissioner of Banks; and (iii) is subject to examination by the Massachusetts Commissioner of Banks. Provident
Bancorp, Inc. is not a “bank holding company” under the Massachusetts banking laws.
Federal Securities Laws
Provident Bancorp, Inc.’s common stock is registered with the Securities and Exchange Commission. Provident Bancorp, Inc. is subject
to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of common stock issued in the stock offering does not cover the resale of
those shares. Shares of common stock purchased by persons who are not affiliates of Provident Bancorp, Inc. may be resold without
registration. Shares purchased by an affiliate of Provident Bancorp, Inc. are subject to the resale restrictions of Rule 144 under the
Securities Act of 1933. If Provident Bancorp, Inc. meets the current public information requirements of Rule 144 under the Securities
Act of 1933, each affiliate of Provident Bancorp, Inc. that complies with the other conditions of Rule 144, including those that require
the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number
of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Provident Bancorp, Inc., or the average
weekly volume of trading in the shares during the preceding four calendar weeks. In the future, Provident Bancorp, Inc. may permit
affiliates to have their shares registered for sale under the Securities Act of 1933.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in 2012, made numerous changes to the federal securities
laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion
during its most recently completed fiscal year qualifies as an “emerging growth company.” Provident Bancorp, Inc. qualified as an
emerging growth company under the JOBS Act until December 31, 2020.
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and
we review and document such policies, procedures and systems to ensure continued compliance with these regulations.
Change in Control Regulations
Under the Change in Bank Control Act, no person, or group of persons acting in concert, may acquire control of a bank holding company
such as New Provident unless the Federal Reserve Board has been given 60 days’ prior written notice and not disapproved the proposed
acquisition. The Federal Reserve Board considers several factors in evaluating a notice, including the financial and managerial resources
of the acquirer and competitive effects. Control, as defined under the applicable regulations, means the power, directly or indirectly, to
direct the management or policies of the company or to vote 25% or more of any class of voting securities of the company. Acquisition
of more than 10% of any class of a bank holding company’s voting securities constitutes a rebuttable presumption of control under
certain circumstances, including where, as will be the case with Provident Bancorp, Inc., the issuer has registered securities under Section
12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control of a bank holding company (as “control” is defined in the
Bank Holding Company Act and Federal Reserve Board regulations) of a bank holding company without the prior approval of the
Federal Reserve Board. Any company that acquires such control becomes a “bank holding company” subject to registration, examination
and regulation by the Federal Reserve Board. Effective September 30, 2020, the Federal Reserve Board amended its regulations
concerning when a company controls a bank or bank holding company for purposes of the Bank Holding Company Act. Relevant
factors include the company’s voting and nonvoting equity investment in the bank or bank holding company, director, officer and
employee overlap and the scope of business relationships between the company and bank or bank holding company.
TAXATION
Provident Bancorp, Inc. and The Provident Bank are subject to federal and state income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to
summarize certain pertinent tax matters and is not a comprehensive description of the tax rules applicable to Provident Bancorp, Inc. or
The Provident Bank.
Federal Taxation
General. Provident Bancorp reports its income on a calendar year basis using the accrual method of accounting. Provident Bancorp,
Inc.’s federal income tax returns have been either audited or closed under the statute of limitations through December 31, 2016. For its
2020 tax year, The Provident Bank’s maximum federal income tax rate is 21%.
22
Bad Debt Reserves. For taxable years beginning before January 1, 1996, thrift institutions that qualified under certain definitional tests
and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property
loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the
experience method. The reserve for non-qualifying loans was computed using the experience method. Federal legislation enacted in
1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after
1995 and required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. However,
those bad debt reserves accumulated prior to 1988 (“Base Year Reserves”) were not required to be recaptured unless the savings
institution failed certain tests. The Provident Bank has recaptured all of its Base Year Reserves.
State Taxation
Financial institutions in Massachusetts are required to file combined income tax returns beginning with the year ended December 31,
2009. The Massachusetts excise tax rate for savings banks is currently 9.0% of federal taxable income, adjusted for certain items.
Taxable income includes gross income as defined under the Internal Revenue Code, plus interest from bonds, notes and evidences of
indebtedness of any state, including Massachusetts, less deductions, but not the credits, allowable under the provisions of the Internal
Revenue Code, except for those deductions relating to dividends received and income or franchise taxes imposed by a state or political
subdivision. Carryforwards and carrybacks of net operating losses and capital losses are not allowed. Provident Bancorp Inc.’s state tax
returns, as well as those of its subsidiaries, are not currently under audit.
A financial institution or business corporation is generally entitled to special tax treatment as a “security corporation” under
Massachusetts law provided that: (a) its activities are limited to buying, selling, dealing in or holding securities on its own behalf and
not as a broker; and (b) it has applied for, and received, classification as a “security corporation” by the Commissioner of the
Massachusetts Department of Revenue. A security corporation that is also a bank holding company under the Internal Revenue Code
must pay a tax equal to 0.33% of its gross income. A security corporation that is not a bank holding company under the Internal Revenue
Code must pay a tax equal to 1.32% of its gross income. The Provident Bank’s subsidiaries, Provident Security Corporation and 5
Market Street Security Corporation, which engage in securities transactions on their own behalf, are qualified as security corporations.
As such, it has received security corporation classification by the Massachusetts Department of Revenue; and does not conduct any
activities deemed impermissible under the governing statutes and the various regulations, directives, letter rulings and administrative
pronouncements issued by the Massachusetts Department of Revenue.
The New Hampshire Business Profits tax is assessed at the rate of 7.7%. For this purpose, gross business profits generally mean federal
taxable income subject to certain modifications provided for in New Hampshire law. The New Hampshire Business Enterprise tax is
assessed at 0.6% of the total amount of payroll and certain employee benefits expense, interest expense, and dividends paid to
shareholders. The New Hampshire Business Enterprise tax is applied as a credit towards the New Hampshire Business Profits tax.
As a Maryland corporation, the Company is required to file an annual report and pay franchise taxes to Maryland. In addition, we operate
in other states, primarily due to our nationwide lending operations. However, the tax obligations in other states related to these operations
are not material to our financial condition or results of operations.
ITEM 1A.
RISK FACTORS
Not required for a smaller reporting company.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
At December 31, 2020, we conducted business through our main office and six branch offices located in Amesbury and Newburyport,
Massachusetts and Bedford, Exeter, Portsmouth and Seabrook, New Hampshire, as well as two loan production offices located in
Boston, Massachusetts and Ponte Vedra, Florida. We own five of our offices, including our main office, and lease two of our branch
offices as well as two loan production offices. All of our loan production offices are leased. At December 31, 2020, the total net book
value of our land, buildings, furniture, fixtures, equipment and lease right-of-use assets was $19.0 million.
ITEM 3.
LEGAL PROCEEDINGS
None.
23
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
24
PART II
ITEM 5.
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
(a) Market, Holder and Dividend Information. Our common stock is traded on the NASDAQ Capital Market under the symbol
“PVBC.” The approximate number of holders of record of Provident Bancorp Inc.’s common stock as of March 18, 2021 was
791. Certain shares of Provident Bancorp Inc. are held in “nominee” or “street” name and, accordingly, the number of beneficial owners
of such shares is not known or included in the foregoing number.
(b) Sales of Unregistered Securities. Not applicable.
(c) Use of Proceeds. Not applicable.
(e) Stock Repurchases. On October 19, 2020, the Company announced a stock repurchase program under which it would repurchase
up to 1,000,000 shares of its common stock, or approximately 5.2% of the then-outstanding shares. The repurchase program was
completed in February 2021. The Company’s repurchases of common stock for the fourth quarter of 2020 were as follows:
Period
October 1, 2020 - October 31, 2020
November 1, 2020 - November 30,
2020
December 1, 2020 - December 31,
2020
Total
Total
Number of
Shares
Purchased
Average Price
Paid
per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
47,169 $
189,617
$
501,257
$
738,043 $
8.64
9.66
11.32
10.72
47,169
176,315
501,257
724,741
952,831
776,516
275,259
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical financial and other data of Provident Bancorp, Inc. for the years ended
and at the dates indicated. The following is only a summary and you should read it in conjunction with the business and financial
information regarding Provident Bancorp, Inc. contained elsewhere in this Annual Report. The information at December 31, 2020 and
2019, and for the years ended December 31, 2020 and 2019, is derived in part from the audited consolidated financial statements that
appear in this Annual Report.
Financial Condition Data:
Total assets
Cash and cash equivalents
Debt securities available-for-sale (at fair
value)
Federal Home Loan Bank stock, at cost
Loans receivable, net (1)
Bank-owned life insurance
Deposits
Borrowings
Total shareholders' equity (2)
2020
2019
At December 31,
2018
(In thousands)
2017
2016
$
1,505,781 $
83,819
1,121,788 $
59,658
974,079 $
28,613
902,265 $
47,689
795,543
10,705
32,215
895
1,314,810
36,684
1,237,428
13,500
235,856
41,790
1,416
959,286
26,925
849,905
24,998
230,933
51,403
2,650
835,528
26,226
768,096
68,022
125,584
61,429
1,854
742,138
25,540
750,057
26,841
115,777
117,867
2,787
624,425
19,395
627,982
49,858
109,149
25
Operating Data:
Interest and dividend income
Interest expense
Net interest and dividend income
Provision for loan losses
$
Net interest and dividend income after
provision for loan losses
Gains on sales of securities, net
Other noninterest income
Write down of other assets and receivables
Noninterest expense
Income before income taxes
Income tax expense (3)
Net income
$
2020
60,403 $
5,931
54,472
5,597
48,875
—
3,543
2,207
33,601
16,610
4,625
11,985 $
2019
For the Year Ended December 31,
2018
(In thousands, except per share data)
2017
51,538 $
8,148
43,390
5,326
38,064
113
3,998
—
27,556
14,619
3,811
10,808 $
42,340 $
5,213
37,127
3,329
33,798
—
4,178
—
25,414
12,562
3,237
9,325 $
35,782 $
3,726
32,056
2,929
29,127
5,912
4,043
—
23,749
15,333
7,418
7,915 $
Earnings per common share: (4)
Basic
Diluted
___________________
$
$
0.66 $
0.66 $
0.60 $
0.60 $
0.50 $
0.50 $
0.43
0.43
2016
28,894
2,785
26,109
703
25,406
690
3,745
—
20,477
9,364
3,025
6,339
0.34
0.34
(1) Excludes loans held-for-sale.
(2) Includes retained earnings and accumulated other comprehensive income/loss.
(3) Includes the expense related to the Tax Cuts and Jobs Act in 2017 of $2.0 million
(4) Share amounts related to periods prior to the date of the Conversion (October 16, 2019) have been restated to give the retroactive
recognition to the exchange ratio applied in the Conversion (2.0212-to-one)
26
Performance Ratios:
Return on average assets
Return on average equity
Interest rate spread (1)
Net interest margin (2)
Efficiency ratio (3)
Dividend payout ratio
Average interest-earning assets to
average interest-bearing liabilities
Average equity to average assets
Regulatory Capital Ratios:
Total capital to risk weighted assets (bank
only)
Tier 1 capital to risk weighted assets (bank
only)
Tier 1 capital to average assets (bank only)
Common equity tier 1 capital (bank only)
Total capital to total assets (company)
Asset Quality Ratios:
Allowance for loan losses as a percentage of
total loans (4)
Allowance for loan losses as a percentage
of non-performing loans
Net charge-offs to average
outstanding loans during the year
Non-performing loans as a percentage of
total loans (4)
Non-performing loans as a percentage of
total assets
Total non-performing assets as a percentage of
total assets
Other:
Number of offices
Number of full-time equivalent employees
___________________
2020
0.89%
5.05%
3.93%
4.23%
61.72%
13.65%
At or For the Year Ended December 31,
2017
2018
2019
1.04%
7.38%
4.05%
4.44%
58.15%
—%
1.03%
7.75%
4.05%
4.33%
61.53%
—%
0.91%
6.84%
3.71%
3.90%
65.79%
—%
2016
0.84%
5.98%
3.46%
3.65%
68.59%
—%
165.71%
17.58%
146.87%
14.08%
146.01%
13.26%
142.10%
13.32%
147.58%
14.06%
14.60%
17.62%
14.55%
14.96%
15.88%
13.35%
12.37%
13.35%
15.66%
16.37%
15.18%
16.37%
20.59%
13.30%
12.69%
13.30%
12.89%
13.71%
11.80%
13.71%
12.83%
14.41%
12.59%
14.41%
13.72%
1.39%
1.42%
1.38%
1.30%
1.36%
341.72%
237.58%
186.55%
108.02%
542.98%
0.08%
0.35%
0.18%
0.25%
0.00%
0.41%
0.60%
0.74%
1.20%
0.25%
0.36%
0.52%
0.64%
1.00%
0.20%
0.36%
0.52%
0.81%
1.00%
0.20%
7
158
7
139
8
123
8
126
7
121
(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost
of interest-bearing liabilities.
(2) Represents net interest income as a percent of average interest-earning assets.
(3) Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains on securities
available-for-sale, net.
(4) Loans are presented before the allowance but include deferred costs/fees.
ITEM 7.
OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance
your understanding of our financial condition and results of operations. You should read the information in this section in conjunction
with the business and financial information regarding Provident Bancorp, Inc., including the financial statements, provided in this
Annual Report.
27
COVID-19
The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could
impair their ability to fulfill their financial obligations. The World Health Organization declared COVID-19 to be a global pandemic
indicating that almost all public commerce and related business activities were to be, to varying degrees, curtailed with the goal of
decreasing the rate of new infections. The spread of the outbreak has caused significant disruption in the U.S. economy and has disrupted
banking and other financial activity in the areas in which the Company operates.
The U.S. government and regulatory agencies have taken several actions to provide support to the U.S. economy. Most notably, the
Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 as a $2 trillion
legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct
financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also includes
extensive emergency funding for hospitals and providers. In addition to the general impact of the COVID-19 pandemic, certain
provisions of the CARES Act, as well as other recent legislative and regulatory relief efforts, are expected to have a material impact on
the Company’s operations. Also, the actions of the Board of Governors of the Federal Reserve System (the “FRB”) to combat the
economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing
programs, could, if prolonged, adversely affect the Company’s net interest income, margins, and profitability.
Federal banking agencies issued guidance encouraging financial institutions to work with borrowers that may be unable to meet
contractual obligations due to the effects of COVID-19. In addition, Section 4013 of the CARES Act states, “banks may elect not to
categorize loan modifications as TDRs [troubled debt restructurings] if they are (1) related to COVID-19; (2) executed on a loan that
was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days
after the date of termination of the National Emergency or (B) December 31, 2020.” The December 31, 2020 date was subsequently
extended to January 1, 2022 under the Consolidated Appropriations Act, 2021. The Company did not classify any modifications related
to COVID-19 which met either the agency guidance or the CARES Act conditions as TDRs.
The Company implemented its business continuity and pandemic plans, which include remote working arrangements for the majority
of its workforce. While there has been no material impact to the Company’s employees as of this report date, if COVID-19 escalates
further it could also potentially create business continuity issues. The Company does not currently anticipate significant challenges to
its ability to maintain systems and controls in light of the measures the Company has taken in response to COVID-19. While it is not
possible to know the full extent of these impacts as of the date of this filing, detailed below are potentially material items of which we
are aware.
Financial position and results of operations
The Company’s fee income will be reduced due to COVID-19. In keeping with the guidance from regulators, during the second quarter
of 2020 the Company actively worked with COVID-19 affected customers to waive fees from a variety of sources, such as, but not
limited to, insufficient funds, account maintenance, minimum balance, and ATM fees. Management continues to monitor and measure
the impact on its assets and operations.
The Company’s interest income could be reduced due to COVID-19. In keeping with the guidance from the regulators, the Company
actively worked with COVID-19 affected borrowers to defer payments, interest and fees. While interest and fees will accrue to income
through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued
would need to be reversed. Management continues to monitor and measure the impact and potential future impact on operations.
Allowance for loan losses
Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to
affect the accounting for loan losses, which could cause the provision for loan losses to increase. It also is possible that asset quality
could worsen, expenses associated with collection efforts could increase and loan charge-offs could increase. The Company actively
participated in the first round of the Small Business Administration’s (“SBA’s”) Paycheck Protection Program (“PPP”), providing loans
to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government; if that
should change, the Company could be required to increase its allowance for loan losses through an additional provision for loan losses
charged to earnings.
28
In accordance with guidance issued by federal banking agencies, the Company actively worked with borrowers that were unable to meet
contractual obligations due to the effects of COVID-19. In order to mitigate the risk associated with these modifications the Company
has incorporated covenants that require borrowers to submit quarterly financial statements, prohibits them from distributing funds to
any owner or stockholder (with the exception of payroll) and also prohibits them from making any payments on debt owed to
subordinated debt holders for the duration of their modification. If borrowers are unable to return to their normal payment plan following
their modification period, the Company could be required to increase its allowance for loan losses through an additional provision for
loan losses charged to earnings.
Valuation
Valuation and fair value measurement challenges may occur. For example, COVID-19 could cause further and sustained decline in the
financial markets or the occurrence of what management would deem a valuation triggering event that could result in an impairment
charge to earnings, such as our investment securities.
Critical Accounting Policies
A summary of our accounting policies is described in Note 2 to the Consolidated Financial Statements included in this annual report.
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly
susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by
management that could have a material impact on the carrying value of certain assets or on income under different assumptions or
conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or
assessments, are as follows:
Allowance for Loan Losses.
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance
when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan loss experience, the size and composition of the
portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s
judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as
impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and
for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and are classified as
impaired.
The Company classifies a loan as impaired when, based on current information and events, it is probable that it will be unable to collect
the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered
by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately
identify individual consumer and residential loans for impairment disclosures.
Mortgage warehouse loans are facility lines to non-bank mortgage origination companies for sale into secondary markets, which is
typically within 15 days of loan closure. Due to their short-term nature, these loans are assessed at a lower credit risk and do not carry
the same allocation as traditional loans.
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified
by all loan segments. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss
data for each loan segment. The historical loss factors are adjusted for the following qualitative factors: levels/trends in delinquencies
and non-accruals, economic conditions, portfolio trends, portfolio concentrations, loan grading and management’s discretion. There
were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during 2020.
29
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to
each portfolio segment are as follows:
Residential real estate: We generally do not originate loans with a loan-to-value ratio greater than 80% and do not grant subprime loans.
Loans with loan to value ratios greater than 80% require the purchase of private mortgage insurance. All loans in this segment are
collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The
overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
Commercial real estate: Loans in this segment are primarily income-producing properties throughout Massachusetts and New
Hampshire. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced
by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management periodically obtains
rent rolls and continually monitors the cash flows of these loans.
Construction and land development: Loans in this segment primarily include speculative and pre-sold real estate development loans for
which payment is derived from sale of the property and a conversion of the construction loans to permanent loans for which payment is
then derived from cash flows of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market
conditions.
Mortgage warehouse: Loans in this segment are primarily facility lines to non-bank mortgage origination companies. The underlying
collateral of these loans are residential real estate loans. Loans are originated by the mortgage companies for sale into secondary markets,
which is typically within 15 days of the loan closure. The primary source of repayment is the cash flow upon the sale of the loans. The
credit risk associated with this type of lending is the risk that the mortgage companies are unable to sell the loans.
Commercial: Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected
from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit
quality in this segment.
Consumer: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial,
commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective
interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash
flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.
Troubled debt restructurings are individually evaluated for impairment and included in the separately identified impairment disclosures.
TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered
to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the
Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan
losses on loans individually identified as impaired.
An unallocated component can be maintained to cover uncertainties that could affect management’s estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating allocated and general reserves in the portfolio.
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 the Company's 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.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties
related to income tax matters in income tax expense.
Comparison of Financial Condition at December 31, 2020 and December 31, 2019
Assets. Our total assets increased $384.0 million, or 34.2%, to $1.51 billion at December 31, 2020 from $1.12 billion at December 31,
2019. The primary reasons for the increase were increases in net loans, cash and cash equivalents, bank owned life insurance and accrued
interest receivable partially offset by a decrease in investments in available-for-sale securities.
30
Cash and Cash Equivalents. Cash and cash equivalents increased $24.1 million, or 40.5%, to $83.8 million at December 31, 2020 from
$59.7 million at December 31, 2019. The increase was primarily related to an increase in short-term investments of $24.3 million, or
51.0%. Short-term investments were increased as a result of an increase in deposits that exceeded loan growth.
Debt Securities Available-for-Sale. Investments in debt securities available-for-sale decreased $9.6 million or 22.9% to $32.2 million
at December 31, 2020 from $41.8 million at December 31, 2019. The decrease resulted primarily from principal pay downs on
government mortgage-backed securities.
Bank Owned Life Insurance. Bank owned life insurance increased $9.8 million, or 36.3%, to $36.7 million at December 31, 2020 from
$26.9 million at December 31, 2019. The increase was primarily due to the purchase of additional insurance policies.
Accrued Interest Receivable. Accrued interest receivable increased $3.5 million, or 123.2%, to $6.4 million at December 31, 2020 from
$2.9 million at December 31, 2019. The increase was primarily due to deferred interest on loan modifications as part of interagency
guidance and Section 4013 of the CARES Act. The Company continues to monitor the accrued interest receivable related to these loan
modifications for collectability.
Loan Portfolio Analysis. At December 31, 2020, net loans were $1.31 billion, or 87.3% of total assets, compared to $959.3 million, or
85.5% of total assets, at December 31, 2019. Increases in commercial loans of $114.2 million, or 25.3%, the acquisition and growth of
mortgage warehouse loans to $265.4 million, and an increase in commercial real estate loans of $20.6 million, or 4.9% were partially
offset by decreases in construction and land development loans of $17.8 million, or 38.1%, residential real estate loans of $12.9 million,
or 28.3%, and consumer loans of $7.2 million, or 56.4%. Our commercial loan growth attributed to a continued focus on our specialty
lending of, enterprise value loans, which increased $108.1 million, or 60.7%, to $286.1 million at December 31, 2020 from $178.0
million at December 31, 2019. Also included in commercial loans at December 31, 2020 are $41.8 million in SBA PPP loans originated
in the second quarter of 2020. This growth was partially offset by a decrease in our specialty lending of renewable energy loans of $28.9
million, or 43.8%, to $37.2 million at December 31, 2020 from $66.1 million at December 31, 2019 due to loan payoffs.
The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated, excluding loans held for sale.
(Dollars in thousands)
Real estate:
Residential (1)
Commercial (2)
Construction and land
development
Commercial
Consumer
Mortgage warehouse
Total loans
2020
2019
2018
2017
2016
Amount
Percent Amount Percent Amount Percent Amount Percent Amount Percent
At December 31,
$
32,785
2.46 % $ 45,695
4.69 % $ 57,361
6.76 % $ 67,724
9.00 % $ 76,850 12.13 %
438,949 32.82
418,356 42.89
364,867 43.00
371,510 49.35
336,102 53.07
28,927
2.16
565,976 42.31
0.41
265,379 19.84
5,547
19,815
—
1,337,563 100.00 % 975,342 100.00 % 848,431 100.00 % 752,740 100.00 % 633,442 100.00 %
17,455
—
44,606
5.26
361,782 42.64
2.34
—
55,828
7.42
240,223 31.91
2.32
—
48,161
7.60
166,157 26.23
0.97
—
6,172
—
46,763
4.79
451,791 46.32
1.31
—
12,737
—
Deferred loan fees, net
Allowance for loan losses
Loans, net
___________________
(4,235)
(18,518)
$1,314,810
(2,212)
(13,844)
$959,286
(1,223)
(11,680)
$835,528
(845)
(9,757)
$742,138
(427)
(8,590)
$624,425
(1) Includes home equity loans and lines of credit
(2) Includes multi-family real estate loans
31
Loan Maturity. The following table sets forth certain information at December 31, 2020 regarding the contractual maturity of our loan
portfolio. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one
year or less. The table does not include any estimate of prepayments that could significantly shorten the average life of all loans and
may cause our actual repayment experience to differ from that shown below.
(In thousands)
Amounts due in:
One year or less
More than one year to five
years
More than five years through
15 years
More than 15 years
Total
Residential
Real Estate
Commercial
Real Estate
Construction and
Land
Development
Commercial Consumer
Mortgage
Warehouse
Total Loans
$
118 $
25,744 $
11,478 $
58,922 $
903 $ 265,379 $
362,544
2,483
29,958
3,089
243,462
4,644
—
283,636
13,107
17,077
32,785 $ 438,949 $
124,735
258,512
$
385
13,975
28,927 $ 565,976 $
248,642
14,950
—
—
386,869
304,514
5,547 $ 265,379 $ 1,337,563
—
—
The following table sets forth our fixed and adjustable-rate loans at December 31, 2020 that are contractually due after December 31,
2021.
(In thousands)
Real estate:
Residential
Commercial
Construction and land development
Commercial
Consumer
Mortgage warehouse
Total loans
Asset Quality
Fixed Rates
Floating or
Adjustable Rates
Total Due After
December 31,
2021
$
$
20,563 $
58,245
385
358,680
4,644
—
442,517 $
12,104 $
354,960
17,064
148,374
—
—
532,502 $
32,667
413,205
17,449
507,054
4,644
—
975,019
Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform
underwriting criteria and providing prompt attention to potential problem loans. Management of asset quality is accomplished by internal
controls, monitoring and reporting of key risk indicators, and both internal and independent third-party loan reviews. The primary
objective of our loan review process is to measure borrower performance and assess risk for the purpose of identifying loan weakness
in order to minimize loan loss exposure. From the time of loan origination through final repayment, commercial real estate, construction
and land development and commercial business loans are assigned a risk rating based on pre-determined criteria and levels of risk. The
risk rating is monitored annually for most loans; however, it may change during the life of the loan as appropriate.
When entering a new lending line, we typically seek to manage risks and costs by limiting initial activity. We then decide whether it
would be profitable and consistent with our risk tolerance levels to expand the activity, and continually calibrate and adjust our actions
to maintain appropriate risk limitations. We typically enter a new lending line based upon the experience of our existing employees, or
we may hire an experienced individual or group of individuals to manage new activities.
Internal and independent third-party loan reviews vary by loan type. Depending on the size and complexity of the loan, some loans may
warrant detailed individual review, while other loans may have less risk based upon size, or be of a homogeneous nature reducing the
need for detailed individual analysis. Assets with these characteristics, such as consumer loans and loans secured by residential real
estate, may be reviewed on the basis of risk indicators such as delinquency or credit rating. In cases of significant concern, a total re-
evaluation of the loan and associated risks are documented by completing a loan risk assessment and action plan. Some loans may be
re-evaluated in terms of their fair market value or net realizable value in order to determine the likelihood of potential loss exposure
and, consequently, the adequacy of specific and general loan loss reserves.
32
When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and
restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in
default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full,
or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Management informs the
board of directors monthly of the amount of loans delinquent more than 30 days. Management provides detailed information to the board
of directors quarterly on loans 60 or more days past due and all loans in foreclosure and repossessed property that we own.
Delinquent Loans. The following tables set forth our loan delinquencies by type and amount at the dates indicated.
30-59
Days
90 Days
or more
Past Due Past Due Past Due Past Due Past Due Past Due Past Due Past Due Past Due
30-59
or more Days
30-59
or more Days
90 Days
90 Days
2018
60-89
Days
2020
60-89
Days
At December 31,
2019
60-89
Days
$
255 $
—
346 $
—
1,030 $
—
715 $
473
154 $
832 $
18,256
1,368
321 $
742
223 $
—
30
519
—
4,358
61
—
4,674 $
$
—
—
21
—
367 $
—
291
64
—
1,385 $
—
529
111
—
—
85
58
—
1,828 $ 18,553 $
165
484
38
—
2,887 $
—
40
62
—
1,165 $
—
—
46
—
269 $
—
3,167
59
—
3,775
(In thousands)
Real Estate:
Residential
Commercial
Construction and land
development
Commercial
Consumer
Mortgage warehouse
Total
(In thousands)
Real Estate:
Residential
Commercial
Construction and land development
$
Commercial
Consumer
Mortgage warehouse
Total
30-59
Days
Past Due
2017
60-89
Days
Past Due
At December 31,
90 Days
or more
Past Due
30-59
Days
Past Due
2016
60-89
Days
Past Due
90 Days
or more
Past Due
$
699
—
—
12
63
—
$
178
3,669
—
—
45
—
3,892 $
$
81
—
—
—
60
—
141 $
$
—
—
—
29
—
—
29 $
$
—
—
—
—
—
—
— $
—
346
—
—
—
—
346
$
774 $
The $4.4 million in commercial delinquencies 30-59 days past due at December 31, 2020 were primarily related two loan relationships
that were in the process of receiving COVID modifications as of that date. The modifications were finalized in the first quarter of 2021.
The $18.3 million in commercial real estate loans that were 60-89 days past due at December 31, 2019 were primarily related to one
loan relationship that was placed on non-accrual status and analyzed and restructured in the first quarter of 2020. The relationship was
returned to accrual status in the fourth quarter of 2020 after demonstrating the ability to pay the loan under the restructured terms, and
as of December 31, 2020, the relationship was performing in accordance with its restructured repayment terms.
Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status, including
troubled debt restructurings on non-accrual status, and real estate and other loan collateral acquired through foreclosure and repossession.
Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, loans modified at interest
rates materially less than current market rates, or the borrower is experiencing financial difficulty. Loans 90 days or greater past due
may remain on an accrual basis if adequately collateralized and in the process of collection. At December 31, 2020, we did not have any
accruing loans past due 90 days or greater. For non-accrual loans, interest previously accrued but not collected is reversed and charged
against income at the time a loan is placed on non-accrual status. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold.
When property is acquired, it is initially recorded at the lower of cost or fair value less costs to sell at the date of foreclosure. Holding
costs and declines in fair value after acquisition of the property result in charges against income.
33
The following table sets forth information regarding our non-performing assets at the dates indicated.
(Dollars in thousands)
Non-accrual loans:
Real estate:
Residential
Commercial
Construction and land development
Commercial
Consumer
Mortgage warehouse
Total non-accrual loans
Accruing loans past due 90 days or more
Other real estate owned
Total non-performing assets
Total loans (1)
Total assets
$
$
$
$
2020
2019
At December 31,
2018
2017
2016
1,156 $
—
—
4,198
65
—
5,419
—
—
5,419 $
969 $
1,701
165
2,955
37
—
5,827
—
—
5,827 $
850 $
519
—
4,830
62
—
6,261
—
1,676
7,937 $
364 $
7,102
—
1,505
62
—
9,033
—
—
9,033 $
303
346
—
933
—
—
1,582
—
—
1,582
1,333,328 $
1,505,781 $
973,130 $
1,121,788 $
847,208 $
974,079 $
751,895 $
902,265 $
633,015
795,543
Total non-performing loans to total loans (1)
Total non-performing assets to total assets
___________________
(1) Loans are presented before allowance for loan losses, but include deferred loan costs/fees.
0.41%
0.36%
0.60%
0.52%
0.74%
0.81%
1.20%
1.00%
0.25%
0.20%
The decrease in commercial real estate non-accrual loans at December 31, 2020 as compared to the prior year was primarily due to
workouts of loans in our portfolio. The increase in commercial non-accrual loans at December 31, 2020 as compared to the prior year
was primarily due to one $1.9 million commercial relationship, which is secured by business assets, and was placed on non-accrual
status in the second quarter. The relationship was evaluated and specific reserves of $1.8 million was allocated to this relationship.
We have cooperative relationships with the vast majority of our non-performing loan customers. Substantially all non-performing loans
are collateralized by business assets or real estate and the repayment is largely dependent on the return of such loans to performing status
or the liquidation of the underlying collateral. We pursue the resolution of all non-performing loans through collections, restructures,
voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return
a loan to performing status, including restructuring the loan, are unsuccessful, we will initiate appropriate legal action seeking to acquire
property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.
The following table sets forth the accruing and non-accruing status of troubled debt restructurings at the dates indicated.
(In thousands)
Troubled Debt Restructurings:
Real estate:
Residential
Commercial
Construction and land development
Commercial
Consumer
Mortgage warehouse
Total
2020
Non-
Accruing
At December 31,
2019
Non-
2018
Non-
Accruing
Accruing
Accruing
Accruing
Accruing
$
$
— $
—
—
1,805
—
—
1,805 $
162 $
21,042
—
257
—
—
21,461 $
— $
—
—
2,436
—
—
2,436 $
182 $
1,243
—
371
—
—
1,796 $
— $
—
—
1,089
—
—
1,089 $
388
1,334
—
462
—
—
2,184
34
(In thousands)
Troubled Debt Restructurings:
Real estate:
Residential
Commercial
Construction and land development
Commercial
Consumer
Mortgage warehouse
Total
At December 31,
2017
2016
Non-
Accruing
Accruing
Non-
Accruing
Accruing
$
$
— $
—
—
67
—
—
67 $
404 $
1,521
—
1,698
—
—
3,623 $
— $
346
—
919
—
—
1,265 $
422
1,610
—
727
—
—
2,759
Total troubled debt restructurings increased in 2020 primarily due to one commercial real estate loan relationship totaling $20.1 million.
The Bank analyzed and modified the relationship during the first quarter of 2020. The loan was placed on non-accrual status but was
subsequently returned to accrual status in the fourth quarter after demonstrating the ability to pay the loan under the restructured terms.
During 2019 two commercial business loans totaling $2.6 million were modified under troubled debt restructures As of December 31,
2020, one of the two loans was paid off. The remaining loan is paying as agreed upon in the modified terms.
Potential Problem Loans. We classify certain commercial real estate, construction and land development, and commercial loans as
“special mention”, “substandard”, or “doubtful”, based on criteria consistent with guidelines provided by our banking regulators. Certain
potential problem loans represent loans that are currently performing, but for which known information about possible credit problems
of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment
terms and which may result in such loans becoming non-performing at some time in the future. Potential problem loans also include
non-accrual or restructured loans presented above. We expect the levels of non-performing assets and potential problem loans to fluctuate
in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with our degree
of success in resolving problem assets.
Other potential problem loans are those loans that are currently performing, but where known information about possible credit problems
of the borrowers causes us to have concerns as to the ability of such borrowers to comply with contractual loan repayment terms. At
December 31, 2020, other potential problem loans totaled $21.5 million, consisting of 19 troubled debt restructured loans that were
accruing interest in accordance with their modified terms.
The Company is working with customers affected by COVID-19. As a result of the current economic crisis caused by the COVID-19
virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and challenges
faced. The extent to which industries, or the tangential impact of those industries to other borrowers or industries are impacted, will
likely be in direct proportion to the duration and depth of the COVID-19 pandemic. In determining “at-risk” industries we have used a
threshold of 25% when comparing the value of COVID-19 modified loans to our total loans within that industry. As of December 31,
2020, total balances within the at-risk industries are as follows:
(Dollars in thousands)
Hotel/motel/inn
Non-essential retail - personal
services
Non-essential retail - transit services
$
$
Commercial Real Estate
% of
Loan
Class
6.3 % $
27,612
Amount
Amount
121
% of
Loan
Class
— % $
Commercial
Total
145
—
27,757
—
—
6.3 % $
5,988
5,337
11,446
1.1
0.9
2.0 % $
Amount
27,733
6,133
5,337
39,203
% of
Loan
Class
2.8 %
0.6
0.5
3.9 %
The Company has established a modification program in accordance with applicable regulations to provide economic relief. In working
with our borrowers, the Company has provided up to six month payment deferrals. At the completion of the payment deferral, the
Company has allowed for deferral extensions on an as-needed and case-by-case basis. Under agency guidance and Section 4013 of the
CARES Act, these modifications will not be classified as troubled debt restructurings and are not considered delinquent. Throughout
2020, there were 287 outstanding loans, totaling $265.6 million, or 19.9% of total loans, that had been modified under agency guidance
and Section 4013 of the CARES Act. Of these, 38 loans totaling $43.1 million, or 3.2% of total loans, remained modified at December
31, 2020.
35
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 composition, 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 years indicated.
(Dollars in thousands)
Allowance at beginning of year
Provision for loan losses
Charge offs:
Real estate:
Residential
Commercial
Construction and land development
Commercial
Consumer
Mortgage warehouse
Total charge-offs
Recoveries:
Real estate:
Residential
Commercial
Construction and land development
Commercial
Consumer
Mortgage warehouse
Total recoveries
$
$
$
$
Net charge-offs
Allowance at end of year
Non-performing loans at end of year
Total loans outstanding at end of year (1)
Average loans outstanding during the year
(1)
Allowance to non-performing loans
Allowance to total loans outstanding at end
of the year (2)
Net charge-offs to average loans
outstanding during the year
___________________
2020
Year Ended December 31,
2018
2019
2017
$
13,844 $
5,597
11,680 $
5,326
9,757 $
3,329
8,590 $
2,929
2016
7,905
703
—
117
24
176
772
—
1,089
4
—
—
7
155
—
166
923
18,518 $
5,419 $
—
—
—
1,950
1,355
—
3,305
—
670
—
190
699
—
1,559
7
—
—
35
101
—
143
3,162
13,844 $
5,827 $
2
—
—
87
64
—
153
1,406
11,680 $
6,261 $
—
1,522
—
107
190
—
1,819
—
45
—
—
12
—
57
1,762
9,757 $
9,033 $
—
—
—
—
44
—
44
12
—
—
1
13
—
26
18
8,590
1,582
1,333,328 $
973,130 $
847,208 $
751,895 $
633,015
1,209,736 $
341.72%
906,909 $
237.58%
783,570 $
186.55%
698,859 $
108.02%
583,156
542.98%
1.39%
1.42%
1.38%
1.30%
1.36%
0.08%
0.35%
0.18%
0.25%
0.00%
(1) Loans are presented before the allowance for loan losses but include deferred fees/costs
(2) Allowance to total loans outstanding at end of the year, excluding $41.8 million in PPP loans, was 1.43% at December 31, 2020.
36
The following tables set forth net (recoveries)/charge-offs to average loans outstanding during the year based on loan categories.
2020
For the Year Ended December 31,
2019
2018
Average
Balance
$
415,055
39,584 $
(Dollars in thousands)
Real estate:
Residential
Commercial
Construction and land
development
Commercial
Consumer
Mortgage warehouse
Total gross loans 1,213,620 $
Deferred loan fees, net
Total loans outstanding
at end of year (1)
45,444
554,705
9,077
149,755
$1,209,736
(3,884)
% of Net
(Recoveries)
/ Charge-
offs to
Average
Balance
Net
(Recoveries)
/ Charge-
offs
Average
Balance
% of Net
(Recoveries)
/ Charge-
offs to
Average
Balance
Net
(Recoveries)
/ Charge-
offs
Average
Balance
% of Net
(Recoveries)
/ Charge-
offs to
Average
Balance
Net
(Recoveries)
/ Charge-
offs
(4)
117
(0.01) % $ 52,068 $
0.03
389,729
(7)
—
(0.01) % $ 62,698 $
—
363,903
(2)
670
— %
0.18
24
169
617
—
923
0.05
0.03
6.80
—
0.08
41,810
407,285
17,755
—
908,647 $
(1,738)
—
1,915
1,254
—
3,162
—
0.47
7.06
—
0.35
52,285
286,142
19,474
—
784,502 $
(932)
—
103
635
—
1,406
—
0.04
3.26
—
0.18
0.08 % $
906,909
0.35 % $
783,570
0.18 %
For the Year Ended December 31,
2017
2016
(Dollars in thousands)
Real estate:
Residential
Commercial
Construction and land development
Commercial
Consumer
Mortgage warehouse
Total gross loans
Deferred loan fees, net
Average
Balance
Net
(Recoveries)
/ Charge-offs
$
72,477 $
367,144
38,091
210,316
11,419
—
699,447 $
(587)
—
1,477
—
107
178
—
1,762
Total loans outstanding at end of year (1)$
_____________________
698,860
% of Net
(Recoveries) /
Charge-offs
to Average
Balance
Average
Balance
Net
(Recoveries)
/ Charge-offs
% of Net
(Recoveries)
/ Charge-offs
to Average
Balance
— % $
85,135 $
0.40
—
0.05
1.56
—
0.25
304,516
65,892
126,090
1,898
—
583,531 $
(375)
(12)
—
—
(1)
31
—
18
(0.01)%
—
—
—
1.63
—
—
0.25 % $
583,156
— %
(1) Loans are presented before the allowance for loan losses but include deferred fees/costs
37
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category. The
allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not
restrict the use of the allowance to absorb losses in other categories.
$
(Dollars in thousands)
Real estate:
Residential
Commercial
Construction and land
development
Commercial
Consumer
Mortgage warehouse
Total allocated
allowance for loan
losses
Unallocated
Total
$
2020
At December 31,
2019
2018
Allowance
for Loan
Losses
% of Loans
in Category
to Total Loans
Allowance
for Loan
Losses
% of Loans
in Category
to Total Loans
Allowance
for Loan
Losses
% of Loans
in Category
to Total Loans
184
6,095
447
10,543
586
663
18,518
—
18,518
2.46 % $
32.82
2.16
42.31
0.41
19.84
100.00 %
$
254
6,104
749
6,086
650
—
13,843
1
13,844
2017
4.69 % $
42.89
4.79
46.32
1.31
—
100.00 %
$
At December 31,
251
4,152
738
5,742
710
—
11,593
87
11,680
2016
6.76 %
43.00
5.26
42.64
2.34
—
100.00 %
(Dollars in thousands)
Real estate:
Residential
Commercial
Construction and land development
Commercial
Consumer
Mortgage warehouse
Total allocated allowance for loan losses
Unallocated
Total
Allowance
for Loan
Losses
% of Loans
in Category
to Total Loans
Allowance
for Loan
Losses
% of Loans
in Category
to Total Loans
$
$
300
4,483
965
3,280
649
—
9,677
80
9,757
9.00 % $
49.35
7.42
31.91
2.32
—
100.00 %
$
328
4,503
882
2,513
279
—
8,505
85
8,590
12.13 %
53.07
7.60
26.23
0.97
—
100.00 %
The allowance consists of general, specific, and unallocated components. The general component relates to pools of non-impaired loans
and is based on historical loss experience adjusted for qualitative factors. The allocated component relates to loans that are classified as
impaired, whereby an allowance is established when the discounted cash flows, collateral value, less estimated selling costs, or
observable market price of the impaired loan is lower than the carrying value of that loan.
An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating allocated and general reserves in the portfolio.
We had impaired loans totaling $25.7 million and $24.7 million as of December 31, 2020 and 2019, respectively. Impaired loans totaling
$4.0 million and $20.9 million had a valuation allowance of $2.0 million and $1.7 million at December 31, 2020 and 2019, respectively.
Our average investment in impaired loans was $26.2 million and $26.9 million for the years ended December 31, 2020 and 2019,
respectively.
38
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. Impairment is measured
on a loan-by-loan basis for commercial business, commercial real estate and construction and land development loans by either the
present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair
value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on payment status. Accordingly,
we do not separately identify individual one- to four-family residential and consumer loans for impairment disclosures, unless such
loans are subject to a troubled debt restructuring. We periodically 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.
Mortgage warehouse loans are facility lines to non-bank mortgage origination companies for sale into secondary markets, which is
typically within 15 days of loan closure. Due to their short-term nature, these loans are assessed at a lower credit risk and do not carry
the same allocation as traditional loans.
We review residential and commercial loans for impairment based on the fair value of collateral, if collateral-dependent, or the present
value of expected cash flows. Management has reviewed the collateral value for all impaired and non-accrual loans that were collateral
dependent as of December 31, 2020 and considered any probable loss in determining the allowance for loan losses.
Loans that are partially charged off generally remain on non-accrual status until foreclosure or such time that they are performing in
accordance with the terms of the loan and have a sustained payment history of at least six months. The accrual of interest is generally
discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts
about further collectability of principal or interest, even though the loan is currently performing. Loan losses are charged against the
allowance when we believe the uncollectability of a loan balance is confirmed; for collateral-dependent loans, generally when appraised
values (as adjusted values, if applicable) less estimated costs to sell, are less than our carrying values.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the
allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially
from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan
losses in conformity with generally accepted accounting principles in the United States of America, our regulators, in reviewing our
loan portfolio, may require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate or increases may be necessary
should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan
losses may adversely affect our financial condition and results of operations.
Securities Portfolio
The following table sets forth the composition of our securities portfolio at the dates indicated,
2020
At December 31,
2019
2018
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
10,211 $
10,894 $
10,808 $
11,206 $
20,118 $
20,255
4,432
4,710
5,433
5,500
6,512
6,371
16,172
30,815 $
16,611
32,215 $
24,954
41,195 $
25,084
41,790 $
25,135
51,765 $
24,777
51,403
(In thousands)
Securities available-
for-sale:
State and municipal $
Asset-backed
securities
Government
mortgage-backed
securities
Total
$
39
At December 31, 2020, we had no investments in a single company or entity, other than government and government agency securities,
that had an aggregate book value in excess of 10% of our equity.
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2020 are
summarized in the following table. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within
the various maturity ranges. These repricing schedules are not reflected in the table below. No tax-equivalent yield adjustments have
been made, as the amount of tax-free interest-earning assets is immaterial.
One Year or Less
Weighted
More than
One Year to Five
Years
More than
Five Years to Ten
Years
More than
Ten Years
Weighted
Weighted
Weighted
Total
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair
Weighted
Average
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Value Yield
—
0% $
919
3.43% $
912
4.30% $
8,380
3.12% $ 10,211 $10,894
3.25%
—
0%
416
1.98%
—
0%
4,016
2.75%
4,432
4,710
2.67%
37 0.54%
37 0.54% $
15
1,350
5.72%
3.00% $
3,764
4,676
1.90%
12,356
2.36% $ 24,752
1.62%
16,611
16,172
2.31% $ 30,815 $32,215
2.15%
2.35%
(Dollars in
thousands)
Securities
available-for-sale:
State and municipal $
Asset-backed
securities
Government
mortgage-backed
securities
Total
$
Each reporting period, we evaluate all securities with a decline in fair value below the amortized cost of the investment to determine
whether or not the impairment is deemed to be other-than-temporary. Other-than-temporary impairment (“OTTI”) is required to be
recognized if (1) we intend to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery
of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire
amortized cost basis. For impaired debt securities that we intend to sell, or more likely than not will be required to sell, the full amount
of the depreciation is recognized as OTTI, resulting in a realized loss that is a charged to earnings through a reduction in our non-interest
income. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is
recognized in other comprehensive income/loss, net of applicable taxes. We did not recognize any OTTI during the years ended
December 31, 2020 or 2019.
Deposits
Total deposits increased $387.5 million, or 45.6%, to $1.24 billion at December 31, 2020 from $849.9 million at December 31, 2019.
Our continuing focus on the acquisition and expansion of core deposit relationships, which we define as all deposits except for
certificates of deposit, resulted in net growth in these deposits of $303.7 million, or 40.2%, to $1.06 billion at December 31, 2020, or
85.6% of total deposits at that date. Included in the growth of our core deposit relationships is an increase in NOW and demand deposits
of $184.7 million, or 50.0%, an increase of $83.3 million, or 30.8% in money market accounts and an increase of $35.7 million, or
30.9%, in savings account. NOW and demand deposits and money market deposits increased primarily due to funds from the origination
of PPP loans and increased deposit balances from our existing customer base. The increase in savings accounts is primarily caused by
decreased consumer spending which resulted in increased consumer savings. Certificates of deposit increased $83.8 million, or 88.7%
primarily due to increases in brokered certificates of deposit of $65.5 million, or 134.9% and $31.3 million, or 361.6%, from QwickRate
deposits, where we gather certificates of deposit nationwide by posting rates we will pay on these deposits.
40
The following tables set forth the distribution of total deposits by account type at the dates indicated.
$
Noninterest bearing
Negotiable order of withdrawal
(NOW)
Savings accounts
Money market deposit accounts
Certificates of deposit
Total
$
2020
Amount
Percent
At December 31,
2019
Amount
(Dollars in thousands)
Percent
2018
Amount
Percent
383,079
30.96% $
222,088
26.13% $
195,293
25.43%
171,016
151,341
353,793
178,199
1,237,428
13.82%
12.23%
28.59%
14.40%
100.00% $
147,335
115,593
270,471
94,418
849,905
17.34%
13.60%
31.82%
11.11%
100.00% $
136,771
109,322
229,314
97,396
768,096
17.81%
14.23%
29.85%
12.68%
100.00%
As of December 31, 2020, our certificates of deposit included $114.1 million of brokered certificates of deposit and $39.9 million of
QwickRate certificates of deposit. As of December 31, 2020, all deposits are insured in full through our participation in the
Massachusetts Depositors Insurance Fund (“DIF”).
As of December 31, 2020, the aggregate amount of all our certificates of deposit in amounts greater than or equal to $250,000, which
excludes all brokered certificates, was approximately $5.2 million. The following table sets forth the maturity of these certificates as of
December 31, 2020.
Maturity Period
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
Borrowings
At
December 31,
2020
(In thousands)
$
$
—
1,160
1,999
2,008
5,167
Borrowings decreased $11.5 million, or 46.0%, to $13.5 million at December 31, 2020 from $25.0 million at December 31, 2019
primarily due to maturing borrowings not being repurchased as the liquidity provided from increased customer deposits was sufficient
to support asset growth. All of the borrowings at December 31, 2020 and 2019 were Federal Home Loan Bank long-term advances with
an original maturity of more than one year. The weighted average interest rate was 2.12% and 2.45% at December 31, 2020 and 2019
respectively.
We had no securities sold under agreements to repurchase during the years ended December 31, 2020 and 2019.
Shareholders’ Equity
Total shareholders’ equity increased $5.0 million, or 2.1%, to $235.9 million at December 31, 2020, from $230.9 million at
December 31, 2019. The increase was due primarily to net income of $12.0 million, stock-based compensation expense of $1.1 million,
other comprehensive income of $600,000 and employee stock ownership plan shares earned of $841,000, partially offset by a decrease
of $7.8 million related to the repurchase of common stock and $1.6 million from dividends declared.
41
Average Balance Sheets and Related Yields and Rates
The following tables set forth average balance sheets, average yields and costs, and certain other information for the years indicated. No
tax-equivalent yield adjustments have been made, as we consider 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.
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans(1)
Short-term investments
Debt securities available-for-sale
Federal Home Loan Bank stock
Total interest-earning assets
Non-interest earning assets
Total assets
Interest-bearing liabilities:
Savings accounts
Money market accounts
Now accounts
Certificates of deposit
Total interest-bearing deposits
Borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Total liabilities
Total equity
Total liabilities and equity
Net interest income
Interest rate spread (2)
2020
Interest
Earned/ Yield/ Average
Balance
Paid
For the Year Ended December 31,
2019
Interest
Earned/ Yield/ Average Earned/ Yield/
Rate
Paid
2018
Interest
Balance Paid
Rate
Rate
Average
Balance
$1,209,736 $ 59,391 4.91% $ 906,909 $ 49,693 5.48% $ 783,570 $ 40,358 5.15%
313 1.98%
1,560 2.80%
109 5.66%
977,089 51,538 5.27% 857,027 42,340 4.94%
99 0.26%
830 2.22%
83 5.25%
1,286,686 60,403 4.69%
296 1.55%
1,344 2.81%
205 6.25%
38,048
37,320
1,582
15,846
55,686
1,925
19,106
47,793
3,281
62,741
$1,349,427
62,522
$1,039,611
50,411
$ 907,438
$ 137,679
295,483
136,613
163,032
732,807
43,682
776,489
314 0.23% $ 128,438
238,708
108,658
117,126
592,930
72,361
665,291
2,159 0.73%
518 0.38%
2,212 1.36%
5,203 0.71%
728 1.67%
5,931 0.76%
419 0.33% $ 116,126
2,857 1.20% 227,057
423 0.39% 116,816
2,559 2.18%
95,987
6,258 1.06% 555,986
30,987
1,890 2.61%
8,148 1.22% 586,973
281 0.24%
2,224 0.98%
602 0.52%
1,361 1.42%
4,468 0.80%
745 2.40%
5,213 0.89%
319,451
16,293
1,112,233
237,194
$1,349,427
212,753
15,178
893,222
146,389
$1,039,611
189,369
10,759
787,101
120,337
$ 907,438
$ 54,472
$ 43,390
37,127
3.93%
4.05%
4.05%
Net interest-earning assets (3)
$ 510,197
$ 311,798
$ 270,054
Net interest margin (4)
Average interest-earning assets to
interest-bearing liabilities
___________________
4.23%
4.44%
4.33%
165.71%
146.87%
146.01%
(1) Interest earned/paid on loans includes fee income related to SBA loan forgiveness of $1.8 million and mortgage warehouse loan
origination fee income of $759,000 for the year ended December 31, 2020.
(2) 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.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
42
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 effects 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 proportionally based on the
changes due to rate and the changes due to volume. There are no out-of-period adjustments excluded from the table below.
(In thousands)
Interest-earning assets:
Loans
Short-term investments
Debt securities available-for-sale
Federal Home Loan Bank stock
Total interest-earning assets
Interest-bearing liabilities:
Savings accounts
Money market accounts
Now accounts
Certificates of deposit
Total interest-bearing deposits
Borrowings
Total interest-bearing liabilities
Change in net interest and dividend
income
Year Ended December 31,
2020 vs. 2019
Year Ended December 31,
2019 vs. 2018
Increase (Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
Increase (Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
$
(5,579)
$
(357)
(251)
(29)
(6,216)
(133)
(1,277)
(11)
(1,157)
(2,578)
(555)
(3,133)
$
15,277
160
(263)
(93)
15,081
9,698 $
(197)
(514)
(122)
8,865
28
579
106
810
1,523
(607)
916
(105)
(698)
95
(347)
(1,055)
(1,162)
(2,217)
$
2,694
(75)
6
12
2,637
106
514
(139)
851
1,332
70
1,402
$
6,641
58
(222)
84
6,561
32
119
(40)
347
458
1,075
1,533
9,335
(17)
(216)
96
9,198
138
633
(179)
1,198
1,790
1,145
2,935
$
(3,083)
$
14,165
$
11,082 $
1,235
$
5,028
$
6,263
Comparison of Results of Operations for the Years Ended December 31, 2020 and 2019
General. Net income increased $1.2 million, or 10.9%, to $12.0 million for the year ended December 31, 2020 from $10.8 million for
the year ended December 31, 2019. The increase was primarily due to an increase of $11.1 million, or 25.5%, in net interest and dividend
income partially offset by an increase in salaries and employee benefits expense of $4.9 million, or 27.0%, an increase in the provision
for loan losses of $271,000, or 5.1%, a decrease in noninterest income of $568,000, or 13.8%, and write downs of other assets and
receivables of $2.2 million.
Interest and Dividend Income. Interest and dividend income increased $8.9 million, or 17.2%, to $60.4 million for the year ended
December 31, 2020 from $51.5 million for the year ended December 31, 2019. This was caused by an increase in interest and fees on
loans, which increased $9.7 million, or 19.5%, partially offset by a decrease in interest and dividends on securities of $636,000, or
41.1%.
The increase in interest income on loans was due to an increase in average loan balance of $302.8 million, or 33.4%, to $1.21 billion for
the year ended December 31, 2020 from $906.9 million for the year ended December 31, 2019. The increase was partially offset by a
decrease in the yield on loans of 57 basis points, to 4.91% for the year ended December 31, 2020 from 5.48% for the year ended
December 31, 2019, due to lower market interest rates, the origination of PPP loans with a yield of 1.0% and mortgage warehouse loans
which yield a lower rate.
The decrease in interest and dividends on securities was due to a decrease in the average balance of debt securities available-for-sale of
$10.5 million, or 21.9%, to $37.3 million for the year ended December 31, 2020 from $47.8 million for the year ended December 31,
2019 and a 59 basis point decrease in the yield on such securities to 2.22% for 2020 from 2.81% for 2019.
43
Interest Expense. Interest expense decreased $2.2 million, or 27.2%, to $5.9 million for the year ended December 31, 2020 from
$8.1 million for the year ended December 31, 2019. The decrease was caused by decreases in interest expense on deposits and
borrowings. Interest expense on deposits decreased $1.1 million, or 16.9%, to $5.2 million for the year ended December 31, 2020 from
$6.3 million for the year ended December 31, 2019. This was primarily due to a decrease in the cost of interest-bearing deposits of 35
basis points to 0.71% for the year ended December 31, 2020 from 1.06% for the year ended December 31, 2019. This decrease was
partially offset by an increase in the average balance of interest-bearing deposits of $139.9 million, or 23.6%, to $732.8 million for the
year ended December 31, 2020 from $592.9 million for the year ended December 31, 2019. The increase resulted primarily from an
increase in the average balance of certificates of deposit, which increased $45.9 million, or 39.2%, and money market accounts, which
increased $56.8 million, or 23.8%.
Interest expense on borrowings, which consists of advances from the Federal Home Loan Bank of Boston and borrowings from the
Federal Reserve Bank borrower-in-custody program, decreased $1.2 million, or 61.5%, to $728,000 for the year ended December 31,
2020 from $1.9 million for the year ended December 31, 2019. This decrease was primarily due to a decrease in the average balance of
borrowings of $28.7 million, or 39.6%, to $43.7 million for the year ended December 31, 2020 from $72.4 million for the year ended
December 31, 2019, primarily due to increased deposits funding loan growth. Interest expense on borrowings also decreased due to the
yield on borrowings decreasing 94 basis points to 1.67% for the year ended December 31, 2020 compared to 2.61% for the year ended
December 31, 2019 due to a decrease in market rates.
Net Interest and Dividend Income. Net interest and dividend income increased $11.1 million, or 25.5%, to $54.5 million for the year
ended December 31, 2020 from $43.4 million for the year ended December 31, 2019. The growth in net interest and dividend income
was primarily the result of an increase in our average interest-earning assets of $309.6 million, or 31.7%, offset by an increase in average
interest-bearing liabilities of $111.2 million, or 16.7%, and a decrease in net interest margin of 21 basis points to 4.23%. The decrease
in the net interest margin was the result of a combination of factors including a decreasing rate environment and an increase in mortgage
warehouse and PPP loan balances, which yield a lower rate. The net interest margin benefitted from the accretion of fee income related
to the forgiveness of the SBA PPP loans. The amount of income recognized from the forgiveness totaled $962,000 for the year ended
December 31, 2020. As of December 31, 2020, there was $993,000 in SBA PPP fee income remaining to be accreted.
Provision for Loan Losses. The provision for loan losses was $5.6 million for the year ended December 31, 2020 compared to
$5.3 million for the year ended December 31, 2019, which is an increase of $271,000, or 5.1%. The changes in the provision were based
on management’s assessment of economic conditions, including the impact of the COVID-19 pandemic, loan portfolio growth and
composition changes, historical charge-off trends, levels of problem loans and other asset quality trends. For the year ended December
31, 2020, the increased provision as offset by a decrease in net charge-offs, which were $925,000 for the year ended December 31, 2020
compared to $3.2 million for the year ended December 31, 2019.
The provision recorded resulted in an allowance for loan losses of $18.5 million, or 1.39% of total loans at December 31, 2020, compared
to $13.8 million, or 1.42% of total loans at December 31, 2019. Included in total loans at December 31, 2020 was $41.8 million in PPP
loans originated as part of the CARES Act that we believe have no credit risk due to a government guarantee, therefore, we have not
provided for losses for these loans. Excluding these loans, the allowance for loan losses as a percentage of total loans was 1.43% as of
December 31, 2020. As of December 31, 2020, there was $265.4 million in outstanding mortgage warehouse loan balances. Loans in
this segment are facility lines to non-bank mortgage origination companies for sale into secondary markets, which is typically within 15
days of loan closure. Due to their short-term nature, these loans are assessed at a lower credit risk and do not carry the same allocation
as traditional loans. The allowance for loans losses as a percentage of non-performing loans was 341.72% as of December 31, 2020
compared to 237.58% as of December 31, 2019. Non-performing loans were $5.4 million, or 0.36% of total assets as of December 31,
2020 compared to $5.8 million, or 0.52% of total assets, as of December 31, 2019. As of December 31, 2020, non-performing loans
consisted primarily of two commercial relationships totaling $3.6 million. These loan relationships were evaluated for impairment and
specific reserves of $1.9 million were allocated as of December 31, 2020.
Noninterest Income. Noninterest income information is as follows.
(Dollars in thousands)
Customer service fees on deposit accounts
Service charges and fees - other
Gain on sales of securities, net
Bank owned life insurance income
Other income
Total noninterest income
$
$
Years Ended
December 31,
Change
2020
2019
Amount
Percent
1,452 $
1,783
113
699
64
4,111 $
(121)
(461)
(113)
110
17
(568)
(8.3) %
(25.9) %
100.0 %
15.7 %
26.6 %
(13.8) %
1,331 $
1,322
—
809
81
3,543 $
44
Gains on sales of securities, net, decreased $113,000, or 100.0%, for the year ended December 31, 2020 compared to the year ended
December 31, 2019 as we repositioned our investment portfolio in debt securities available-for-sale in 2019 by selling securities with
maturity dates that were coming due and purchasing securities with longer terms to maturity. Customer service fees on deposit accounts
decreased $121,000, or 8.3%, and other service charges and fees decreased $461,000, or 25.9%, primarily due to waived service charges
and fees during the second quarter for customers impacted by COVID-19. Bank owned life insurance income increased $110,000, or
15.7%, due to the purchase of additional insurance policies.
Noninterest Expense. Noninterest expense information is as follows.
$
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Equipment expense
Deposit insurance
Data processing
Marketing expense
Professional fees
Directors' compensation
Software amortization and implementation
Write down of other assets and receivables
Other
Total noninterest expense
$
Years Ended
December 31,
Change
2020
2019
Amount
Percent
23,175 $
1,684
577
416
1,000
223
1,868
750
959
2,207
2,949
35,808 $
18,243 $
1,968
444
203
826
385
1,210
741
734
—
2,802
27,556 $
4,932
(284)
133
213
174
(162)
658
9
225
2,207
147
8,252
27.0 %
(14.4) %
30.0 %
104.9 %
21.1 %
(42.1) %
54.4 %
1.2 %
30.7 %
— %
5.2 %
29.9 %
Salaries and employee benefits expense increased $4.9 million, or 27.0%, for the year ended December 31, 2020 from the year ended
December 31, 2019 primarily due to a higher number of sales and operations positions compared to 2019, the addition of staff from the
mortgage warehouse operations and ESOP expense which increased due to the acquisition of additional shares from our second-step
conversion and related stock offering in October 2019. Write down of other assets and receivables were $2.2 million for the year ended
December 31, 2020 compared to zero for the year ended December 31, 2019. In the fourth quarter of 2020, a write-down of other
investments was completed after the Company performed an evaluation and deemed $400,000 impaired. A write-down of an SBA
receivable balance was completed in the third quarter of 2020 after the Company evaluated the collectability and determined that $1.3
million was uncollectible. In addition, a write-down of a notes receivable balance of $500,000 was completed in the first quarter of 2020
after the Company evaluated the collectability and determined it was uncollectible. Deposit insurance costs increased $213,000, or
104.9%, primarily due to decreased expenses in 2019 relating to FDIC assessment credits that were not available in 2020. Professional
fees increased $658,000, or 54.4%, primarily due to increased audit and compliance costs as well as consulting services to aid in the
development of deposit and lending services. The increase was also a result of a one-time credit received in 2019 relating to an insurance
settlement. Occupancy expense decreased $284,000, or 14.4%, primarily due to the acceleration of amortization on our leasehold
improvements related to the closure of our Hampton, New Hampshire branch in 2019. Marketing expense decreased $162,000, or 42.1%,
primarily due to increased marketing costs in 2019 related to the development of the new BankProv brand, which was rolled out in 2020.
Software amortization and implementation increased $225,000, or 30.7%, due to additional software needed to manage the mortgage
warehouse operations, as well as new software purchased to assist with strategic initiatives.
Income Tax Provision. We recorded a provision for income taxes of $4.6 million for the year ended December 31, 2020, reflecting an
effective tax rate of 27.8%, compared to $3.8 million, or an effective tax rate of 26.1%, for the year ended December 31, 2019.
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is
interest rate risk. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits.
As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to
changes in market interest rates. Accordingly, we have established a management-level Asset/Liability Management Committee, which
takes initial responsibility for developing an asset/liability management process and related procedures, establishing and monitoring
reporting systems and developing asset/liability strategies. On at least a quarterly basis, the Asset/Liability Management Committee
reviews asset/liability management with the Investment Asset/Liability Committee that has been established by the board of directors.
This committee also reviews any changes in strategies as well as the performance of any specific asset/liability management actions that
have been implemented previously. On a quarterly basis, an outside consulting firm provides us with detailed information and analysis
as to asset/liability management, including our interest rate risk profile. Ultimate responsibility for effective asset/liability management
rests with our board of directors.
45
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest
rates. We have implemented the following strategies to manage our interest rate risk: originating loans with adjustable interest rates;
promoting core deposit products; and adjusting the interest rates and maturities of funding sources, as necessary. In addition, we no
longer originate single-family residential real estate loans, which often have longer terms and fixed rates. By following these strategies,
we believe that we are better positioned to react to changes in market interest rates.
Net Interest Income Simulation. We analyze our sensitivity to changes in interest rates through a net interest income simulation model.
Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities,
and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income
would be for a 12-month period in the current interest rate environment. We then calculate what the net interest income would be for
the same period under the assumption that interest rates increase 200 basis points from current market rates and under the assumption
that interest rates decrease 100 basis points from current market rates, with changes in interest rates representing immediate and
permanent, parallel shifts in the yield curve.
The following table presents the estimated changes in net interest income of BankProv, calculated on a bank-only basis, that would
result from changes in market interest rates over twelve-month periods beginning December 31, 2020 and 2019.
(Dollars in thousands)
Changes in Interest Rates (Basis Points)
200
0
-100
At December 31,
2020
Estimated
Net Interest Income
Over Next 12
Months
Change
2019
Estimated
Net Interest Income
Over Next 12
Months
$
55,856
54,301
54,222
2.90 % $
—
(0.10)
49,797
50,004
49,835
Change
(0.40) %
—
(0.30)
Economic Value of Equity Simulation. We also analyze our sensitivity to changes in interest rates through an economic value of equity
(“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash
flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The EVE ratio represents the dollar amount of our
EVE divided by the present value of our total assets for a given interest rate scenario. EVE attempts to quantify our economic value
using a discounted cash flow methodology while the EVE ratio reflects that value as a form of capital ratio. We estimate what our EVE
would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios
representing immediate and permanent, parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest
rates increase 100, 200, 300 and 400 basis points from current market rates, and under the assumption that interest rates decrease 100
basis points from current market rates.
The following table presents the estimated changes in EVE of BankProv, calculated on a bank-only basis, that would result from changes
in market interest rates as of December 31, 2020 and 2019.
(Dollars in thousands)
Changes in Interest Rates (Basis Points)
400
300
200
100
0
(100)
At December 31,
2020
2019
Economic
Value of
Equity
Change
Economic
Value of
Equity
Change
$
270,977
265,117
258,078
250,743
239,739
205,526
13.00 % $
10.60
7.60
4.60
—
(14.30)
176,680
177,055
176,761
175,789
171,464
160,469
3.00 %
3.30
3.10
2.50
—
(6.40)
46
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require
making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the tables presented above assume that the composition of our interest-sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables
provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of
deposit inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and loan 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 December 31, 2020, cash and cash equivalents totaled $83.8 million. Debt securities
classified as available-for-sale, which provide additional sources of liquidity, totaled $32.2 million at December 31, 2020.
In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for
premises and equipment, agreements with respect to borrowed funds and deposit liabilities, agreements with respect to investments and
employment agreements with certain of our executive officers.
At December 31, 2020, we had a borrowing capacity of $159.3 million with the Federal Home Loan Bank of Boston, of which
$13.5 million in advances were outstanding. At December 31, 2020, we also had an available line of credit with the Federal Reserve
Bank of Boston’s borrower-in-custody program of $194.1 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 as set forth below. In the event loan
demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing
capacity with the Federal Home Loan Bank of Boston or obtain additional funds through brokered certificates of deposit.
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our
customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets. At December 31, 2020 and 2019, we had $31.9 million and
$29.4 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at December 31, 2020 and
2019, we had $202.0 million and $201.9 million in unadvanced funds to borrowers, respectively. We also had $1.7 and $1.5 million in
outstanding letters of credit at December 31, 2020 and 2019, respectively.
A significant decrease in deposits could result in the Company having to seek other sources of funds, including brokered certificates of
deposit, QwickRate deposits, and Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required
to pay higher rates on such deposits or other borrowings than we currently pay. We believe, however, based on past experience that a
significant portion of our deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates
offered.
The Company maintains access to multiple sources of liquidity. We have utilized wholesale funding markets and have remained open
but with rates that have been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the
Company’s net interest margin. If an extended recession causes large numbers of the Company’ deposit customers to withdraw their
funds, the Company might become more reliant on volatile or more expensive sources of funding.
BankProv is subject to various regulatory capital requirements administered by Massachusetts Commissioner of Banks, and the Federal
Deposit Insurance Corporation. At December 31, 2020, BankProv exceeded all applicable regulatory capital requirements, and was
considered “well capitalized” under regulatory guidelines. See Note 12 of the Notes to the Consolidated Financial Statements for
additional information.
47
In October 2019, the Company successfully completed its second-step mutual-to-stock conversion that raised $91.6 million in net
proceeds. The Company down-streamed 50% of the net proceeds raised to the Bank. Based on the additional capital, the Company feels
that it has sufficient capital to withstand an extended economic recession brought by the COVID-19. However, regulatory capital could
be adversely impacted by further credit losses. With only 50% being down-streamed to the Bank, the Company has adequate cash to
cover dividend payments in the near term.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements that are applicable to Provident Bancorp, Inc., see Note 2 of the
Notes to the Consolidated Financial Statements.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data included in this annual report have been prepared in accordance with
generally accepted accounting principles in the United States of America, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due
to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in
the same direction or to the same extent as the prices of goods and services.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, including supplemental data, of Provident Bancorp, Inc. begin on page F-1 of this Annual
Report.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
ITEM 9.
DISCLOSURE
None.
ITEM 9A.
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 December 31, 2020. 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 December 31, 2020, 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.
Management’s Report Regarding Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such
terms are defined in Rule 13a-15(f) of the Exchange Act of 1934. Our system of internal controls is designed to provide reasonable
assurance that the financial statements that we provide to the public are fairly presented.
Our internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and dispositions of assets, (ii) provide reasonable assurances that transactions
are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in
the United States of America and that receipts and expenditures are being made only in accordance with authorizations of management
and the directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.
48
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Accordingly, absolute
assurance cannot be provided that the effectiveness of the internal control systems may not become inadequate in future periods because
of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making
this assessment, the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-
Integrated Framework (2013) was utilized. Based on this assessment, management believes that, as of December 31, 2020, the
Company’s internal control over financial reporting is effective at the reasonable assurance level.
The Annual Report on Form 10-K does not include an attestation report on the Company’s internal control over financial reporting from
the Company’s independent registered public accounting firm due to the Company’s status as a smaller reporting company.
ITEM 9B.
OTHER INFORMATION
Not applicable.
49
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information in the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders under the captions “Proposal
1—Election of Directors,” “Information About Executive Officers,” “Delinquent Section 16(a) Reports,” “Corporate Governance—
Code of Ethics for Senior Officers,” “Nominating and Corporate Governance Committee Procedures—Procedures to be Followed by
Stockholders,” “Corporate Governance—Committees of the Board of Directors” and “—Audit Committee” is incorporated herein by
reference.
A copy of the Code of Ethics is available to shareholders on the “Corporate Governance” portion of the Investor Relations’ section on
the Company’s website at www.theproividentbank.com.
ITEM 11.
EXECUTIVE COMPENSATION
The information in the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders under the caption
“Executive Compensation,” “Director Compensation,” and “Corporate Governance—Committees of the Board of Directors—
Compensation Committee” is incorporated herein by reference.
ITEM 12.
RELATED STOCKHOLDERS MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
The information in the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders under the caption “Stock
Ownership” is incorporated herein by reference.
Equity Compensation Plan Information
Information regarding stock-based compensation awards outstanding and available for future grants as of December 31, 2020 is
presented in Note 10 – Employee Benefits & Share-Based Compensation Plans, in the Notes to Consolidated Financial Statements
included in Item 8, Financial Statements and Supplementary Data, within this report.
Equity Compensation Plan Information
Number of Securities
to Be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights (1)
Number of Securities
Remaining Available
for Future Issuance
Under Share-based
Compensation Plans
(excluding securities
reflected in first
column)
Equity compensation plans approved by security
holders
Equity compensation plans not approved by security
holders
Total
__________________
(1) Reflects weighted average price of stock options only
1,644,731 $
—
1,644,731 $
10.25
—
10.25
278,852
—
278,852
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information in the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders under the captions
“Transactions with Certain Related Persons” and “Proposal 1 — Election of Directors” is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information in the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders under the captions “Proposal
2—Ratification of Independent Registered Public Accounting Firm—Audit Fees” and “—Pre-Approval of Services by the Independent
Registered Public Accounting Firm” is incorporated herein by reference.
50
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following documents are filed as part of this Form 10-K.
(i) Reports of Independent Registered Public Accounting Firms
(ii) Consolidated Balance Sheets
(iii) Consolidated Statements of Income
(iv) Consolidated Statements of Comprehensive Income
(v) Consolidated Statements of Changes in Shareholders’ Equity
(vi) Consolidated Statements of Cash Flows
(vii) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Articles of Organization of Provident Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on
Form S-1 of Provident Bancorp, Inc. (file no. 333-232018), initially filed with the Securities and Exchange Commission on
June 7, 2019)
Bylaws of Provident Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 of
Provident Bancorp, Inc. (file no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019)
Form of Common Stock Certificate of Provident Bancorp, Inc. (incorporated by reference to Exhibit 4 to the Registration
Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-232018), initially filed with the Securities and Exchange
Commission on June 7, 2019)
Description of registrant’s securities (incorporated by reference to Exhibit 4.2 to the Annual Report on Form 10-K of Provident
Bancorp, Inc. for the year ended December 31, 2019 (file no. 001-39090), filed by the Company under the Exchange Act on
March 13, 2020)
Employment Agreement with David P. Mansfield † (incorporated by reference to Exhibit 10.2 to the Registration Statement
on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission
on March 13, 2015)
Employment Agreement with Carol L. Houle † (incorporated by reference to Exhibit 10.4 to the Registration Statement on
Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange Commission on
March 13, 2015)
Amended and Restated Supplemental Executive Retirement Agreement with David P. Mansfield † (incorporated by reference
to Exhibit 10.5 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with
the Securities and Exchange Commission on March 13, 2015)
Amended and Restated Supplemental Executive Retirement Agreement with Charles F. Withee † (incorporated by reference
to Exhibit 10.6 to the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with
the Securities and Exchange Commission on March 13, 2015)
Supplemental Executive Retirement Agreement with Carol L. Houle † (incorporated by reference to Exhibit 10.7 to the
Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and
Exchange Commission on March 13, 2015)
The Provident Bank Executive Annual Incentive Plan † (incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities and Exchange
Commission on March 13, 2015)
The Provident Bank 2005 Amended and Restated Long-Term Incentive Plan † (incorporated by reference to Exhibit 10.9 to
the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities
and Exchange Commission on March 13, 2015)
51
10.8
Provident Bancorp, Inc. 2016 Equity Incentive Plan† (incorporated by reference to Appendix A to the definitive proxy
statement for the Special Meeting of Shareholders of Provident Bancorp, Inc. (File No. 001-37504), filed by the Company
under the Exchange Act on August 9, 2016)
10.9
Form of Incentive Stock Option Award Agreement† (incorporated by reference to Exhibit 10.2 to the Registration Statement
on Form S-8 (File No. 333-214702), filed with the Securities and Exchange Commission on November 18, 2016)
10.10 Form of Non-Statutory Incentive Stock Option Award Agreement† (incorporated by reference to Exhibit 10.3 to the
Registration Statement on Form S-8 (File No. 333-214702), filed with the Securities and Exchange Commission on
November 18, 2016)
10.11 Form of Restricted Stock Award Agreement† (incorporated by reference to Exhibit 10.4 to the Registration Statement on
Form S-8 (File No. 333-214702), filed with the Securities and Exchange Commission on November 18, 2016)
10.12 First Amendment to Employment Agreement with David P. Mansfield† (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37504), filed by the Company under the Exchange Act
on December 26, 2018)
10.13 First Amendment to Employment Agreement with Carol L. Houle† (incorporated by reference to Exhibit 10.3 to the Current
Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37504), filed by the Company under the Exchange Act on
December 26, 2018)
10.14 Provident Bancorp, Inc. 2020 Equity Incentive Plan (incorporated by reference to Appendix A to the proxy statement for the
Special Meeting of Shareholders of Provident Bancorp, Inc. (file no. 001-39090), filed by the Company under the Exchange
Act on October 19, 2020)
10.15 Amendment One to the Amended and Restated Supplemental Executive Retirement Agreement for David P. Mansfield†
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-
39090), filed under the Exchange Act on December 23, 2020)
10.16 Amendment One to the Amended and Restated Supplemental Executive Retirement Agreement for Charles F. Withee†
(incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-
39090), filed under the Exchange Act on December 23, 2020)
10.17 Deferred Cash Bonus Agreement with David P. Mansfield† (incorporated by reference to Exhibit 10.3 to the Current Report
on Form 8-K of Provident Bancorp, Inc. (File No. 001-39090), filed under the Exchange Act on December 23, 2020)
10.18 Employment Agreement with Charles F. Withee† (incorporated by reference to Exhibit 10.4 to the Current Report on Form
8-K of Provident Bancorp, Inc. (File No. 001-39090), filed under the Exchange Act on December 23, 2020)
10.19 Form of Incentive Stock Option Award Agreement† (incorporated by reference to Exhibit 10.2 to the Registration Statement
on Form S-8 (File No. 333-250886), filed with the Securities and Exchange Commission on November 23, 2020)
10.20 Form of Non-Qualified Stock Options Award Agreement† (incorporated by reference to Exhibit 10.3 to the Registration
Statement on Form S-8 (File No. 333-250886), filed with the Securities and Exchange Commission on November 23, 2020)
10.21 Form of Restricted Stock Award Agreement† (incorporated by reference to Exhibit 10.4 to the Registration Statement on
Form S-8 (File No. 333-250886), filed with the Securities and Exchange Commission on November 23, 2020)
21
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 of Provident
Bancorp, Inc. (file no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019)
23.1
23.2
31.1
Consent of Independent Registered Public Accounting Firm (Crowe LLP)
Consent of Independent Registered Public Accounting Firm (Whittlesey PC)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following financial statements from Provident Bancorp, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2020, filed on March 25, 2021, formatted in 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) the Notes to Consolidated Financial Statements.
_________________
† Compensatory arrangements.
ITEM 16.
FORM 10-K SUMMARY
None.
52
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 25, 2021
PROVIDENT BANCORP, INC.
/s/ David P. Mansfield
David P. Mansfield
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ David P. Mansfield
David P. Mansfield
/s/ Carol L. Houle
Carol L. Houle
/s/ Frank G. Cousins, Jr.
Frank G. Cousins, Jr.
/s/ James A. DeLeo
James A. DeLeo
/s/ Lisa B. DeStefano
Lisa B. DeStefano
/s/ Jay E. Gould
Jay E. Gould
/s/ Laurie H. Knapp
Laurie H. Knapp
/s/ Barbara A. Piette
Barbara A. Piette
/s/ Joseph B. Reilly
Joseph B. Reilly
/s/ Arthur W. Sullivan
Arthur W. Sullivan
/s/ Charles F. Withee
Charles F. Withee
President and Chief Executive Officer
(Principal Executive Officer)
March 25, 2021
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
Director
Director
Director
Director
Director
Director
Director
Director
Director
53
PROVIDENT BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
F-4
F-5
F-6
F-7
F-8
F-10
F-i
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Provident Bancorp, Inc. and Subsidiary
Amesbury, Massachusetts
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Provident Bancorp, Inc. and Subsidiary (the "Company") as of
December 31, 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash
flows for the year ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and the
results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit
provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are
material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Allowance for Loan Losses – Qualitative factors
As more fully described in Note 1 and Note 5 to the consolidated financial statements, the Company’s allowance for loan losses
represents management’s best estimate of probable incurred losses in the loan portfolio.
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified
by all loan segments. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies and non-
accruals, economic conditions, portfolio trends, portfolio concentrations, loan grading and management’s discretion.
The principal consideration for our determination that auditing the allowance for loan losses risk factors applied to adjust historical loss
experience (qualitative factors) is a critical audit matter is the high degree of subjectivity involved in management’s assignment of values
to reflect current portfolio conditions based on management’s best judgement associated with each risk factor, and the significant degree
of auditor judgement and audit effort.
F-1
Our audit procedures related to the allowance loan losses qualitative factors included the following procedures to address the critical
audit matter.
Substantive tests included:
o Data inputs used to adjust historical loss rates by qualitative factors were agreed to source documentation.
o Evaluating the reliability and relevance of the underlying objective data used to derive the qualitative factors. Based
on the underlying data, we evaluated the reasonableness of management’s designation of improving, stable or
declining conditions and the resulting adjustment to the historical loss experience.
o Analytical procedures were performed to evaluate changes that occurred in the allowance for loan losses for loans
collectively evaluated for impairment.
We have served as the Company's auditor since 2020.
/s/ Crowe LLP
Boston, Massachusetts
March 25, 2021
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Provident Bancorp, Inc. and Subsidiary
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Provident Bancorp, Inc. and subsidiary (the “Company”) as of
December 31, 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and
cash flows for the year then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of their
operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States
of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of
our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit
provides a reasonable basis for our opinion.
/s/ Whittlesey PC
We have served as the Company’s auditor since 2013.
Hartford, Connecticut
March 13, 2020
F-3
PROVIDENT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
(In thousands)
Assets
Cash and due from banks
Short-term investments
Cash and cash equivalents
Debt securities available-for-sale (at fair value)
Federal Home Loan Bank stock, at cost
Loans, net of allowance for loan losses of $18,518 and $13,844 as of
December 31, 2020 and 2019, respectively
Bank owned life insurance
Premises and equipment, net
Accrued interest receivable
Right-of-use assets
Other assets
Total assets
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Long-term borrowings
Operating lease liabilities
Other liabilities
Total liabilities
Shareholders' equity:
Preferred stock; authorized 50,000 shares:
no shares issued and outstanding
Common stock, $0.01 par value, 100,000,000 shares authorized;
19,047,544 and 19,473,818 shares issued and outstanding
at December 31, 2020 and 2019, respectively
Additional paid in capital
Retained earnings
Accumulated other comprehensive income
Unearned compensation - ESOP
Total shareholders' equity
Total liabilities and shareholders' equity
___________________
$
$
$
2020
2019
11,830 $
71,989
83,819
32,215
895
1,314,810
36,684
14,716
6,371
4,258
12,013
1,505,781 $
383,079 $
854,349
1,237,428
13,500
4,488
14,509
1,269,925
11,990
47,668
59,658
41,790
1,416
959,286
26,925
14,728
2,854
3,713
11,418
1,121,788
222,088
627,817
849,905
24,998
3,877
12,075
890,855
—
—
191
139,450
104,508
1,058
(9,351)
235,856
1,505,781 $
195
146,174
94,159
458
(10,053)
230,933
1,121,788
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2020 and 2019
(In thousands)
Interest and dividend income:
Interest and fees on loans
Interest and dividends on debt securities available-for-sale
Interest on short-term investments
Total interest and dividend income
Interest expense:
Interest on deposits
Interest on borrowings
Total interest expense
Net interest and dividend income
Provision for loan losses
Net interest and dividend income after provision for loan losses
Noninterest income:
Customer service fees on deposit accounts
Service charges and fees - other
Gain on sales of securities, net
Bank owned life insurance
Other income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy expense
Equipment expense
Deposit insurance
Data processing
Marketing expense
Professional fees
Directors' compensation
Software depreciation and implementation
Write down of other assets and receivables
Other
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Weighted Average Shares:
Basic
Diluted
2020
2019
$
59,391 $
913
99
60,403
5,203
728
5,931
54,472
5,597
48,875
1,331
1,322
—
809
81
3,543
23,175
1,684
577
416
1,000
223
1,868
750
959
2,207
2,949
35,808
16,610
4,625
11,985 $
0.66 $
0.66 $
$
$
$
49,693
1,549
296
51,538
6,258
1,890
8,148
43,390
5,326
38,064
1,452
1,783
113
699
64
4,111
18,243
1,968
444
203
826
385
1,210
741
734
—
2,802
27,556
14,619
3,811
10,808
0.60
0.60
18,090,229
18,131,025
17,958,186
18,066,968
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2020 and 2019
(In thousands)
Net income
Other comprehensive income:
Unrealized holding gains on available-for-sale securities
Reclassification adjustment for realized gains in net income
Unrealized gains
Income tax effect
Other comprehensive income, net of tax
Total comprehensive income
2020
2019
$
11,985 $
10,808
805
—
805
(205)
600
12,585 $
1,070
(113)
957
(244)
713
11,521
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2020 and 2019
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Unearned
Comprehensive Compensation Treasury
Income (Loss)
ESOP
Stock
83,351 $
10,808
—
(255) $
—
713
(In thousands, except share
data)
Balance, December 31, 2018
Net income
Other comprehensive income
Stock-based compensation
expense
Restricted stock award grants
Corporate reorganization:
Conversion of Provident
Bancorp
Purchase by ESOP
Treasury stock retired
Contribution from
Provident Bancorp
Shares surrendered related to
tax withholdings on restricted
stock awards
ESOP shares earned
Balance, December 31, 2019
Net income
Dividends declared ($0.03 per
share)
Other comprehensive income
Stock-based compensation
expense
Restricted stock award grants
net of forfeitures
Repurchase of common stock
Shares surrendered related to
tax withholdings on restricted
stock awards
ESOP shares earned
Shares of
Common
Stock (1)
19,455,503 $
Common
Stock
—
—
—
5,907
— $
—
—
—
—
45,895 $
—
—
999
—
(788,152)
816,992
—
195
—
—
91,383
8,170
(788)
—
—
372
(16,432)
—
19,473,818
—
—
—
—
—
—
195
—
(193)
336
146,174
—
—
—
94,159
11,985
—
—
—
—
(1,636)
—
—
1,089
311,769
(724,741)
3
(7)
(3)
(7,818)
(13,302)
—
—
—
(131)
139
—
—
—
—
—
—
—
—
—
—
—
(2,619) $
—
—
—
—
(788) $
—
—
Total
125,584
10,808
713
—
—
999
—
—
(8,170)
—
—
—
788
91,578
—
—
—
—
372
—
736
(10,053)
—
—
—
—
—
—
—
—
—
—
—
—
(193)
1,072
230,933
11,985
(1,636)
600
—
1,089
—
—
—
(7,825)
—
702
—
—
(131)
841
—
—
—
—
—
—
—
—
458
—
—
600
—
—
—
—
—
Balance, December 31, 2020
___________________
19,047,544 $
191 $
139,450 $
104,508 $
1,058 $
(9,351) $
— $
235,856
(1) Share amounts related to periods prior to the date of the Conversion (October 16, 2019) have been restated to give the
retroactive recognition to the exchange ratio applied in the Conversion (2.0212-to-one) (see Note 1).
The accompanying notes are an integral part of these consolidated financial statements.
F-7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2020 and 2019
(In thousands)
Cash flows from operating activities:
2020
2019
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
11,985 $
10,808
Amortization of securities premiums, net of accretion
ESOP expense
Gain on sale of securities, net
Change in deferred loan fees, net
Provision for loan losses
Depreciation and amortization
Gain on disposal of premises and equipment
Increase in accrued interest receivable
Deferred tax benefit
Stock-based compensation expense
Bank owned life insurance income
Expense recovery from sale of other real estate owned
Principal repayments of operating lease liabilities
Increase in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of debt securities available-for-sale
Proceeds from sales of debt securities available-for-sale
Proceeds from pay downs, maturities and calls of debt securities available-for-sale
Redemption of Federal Home Loan Bank stock
Loan originations and purchases, net of paydowns
Cash paid for mortgage warehouse asset purchase, net (1)
Additions to premises and equipment
Additions to other real estate owned
Proceeds from sale of equipment
Purchase of bank owned life insurance
Proceeds from sales of other real estate owned
Cash received from Provident Bancorp
Write down of other assets and receivables
Net cash used in investing activities
266
841
—
2,023
5,597
1,091
—
(3,267)
(2,202)
1,089
(809)
—
(82)
(785)
2,434
18,181
—
—
10,114
521
(296,472)
(66,962)
(911)
—
—
(8,950)
—
—
2,207
(360,453)
218
1,072
(113)
989
5,326
1,391
(9)
(216)
(1,049)
999
(699)
(138)
(61)
(810)
(200)
17,508
(13,729)
13,565
10,629
1,234
(124,358)
—
(6,245)
(64)
85
—
1,878
372
—
(116,633)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31, 2020 and 2019
(In thousands)
Cash flows from financing activities:
Net increase in noninterest-bearing accounts
Net increase in interest-bearing accounts
Cash dividends paid on common stock
Net change in short-term borrowings
Payments made on Federal Home Loan Bank long-term advances
Shares surrendered related to tax withholdings on restricted stock awards
Repurchase of common stock
Proceeds from sale of common stock, net
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures:
Interest paid
Income taxes paid
Recognition of right-of-use assets in premises and equipment
Recognition of operating lease liabilities
Reclassification of accrued rent from other liabilities to premises and
equipment
Loan originated from sale of premises and equipment
Loans transferred to other assets
Reclassification of premises and equipment to other assets
___________________
2020
2019
160,991
226,532
(1,636)
—
(11,498)
(131)
(7,825)
—
366,433
24,161
59,658
83,819 $
5,932 $
6,264
693
693
—
—
—
3
84,787
(2,978)
—
(38,024)
(5,000)
(193)
—
91,578
130,170
31,045
28,613
59,658
8,148
5,008
3,836
3,938
102
6,455
740
—
$
$
(1) See Note 16 for information regarding the mortgage warehouse asset purchase.
The accompanying notes are an integral part of these consolidated financial statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS
Provident Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in June 2019 to be the successor corporation
to Provident Bancorp, Inc. (“Old Provident”), a Massachusetts corporation, upon completion of the second-step mutual-to-stock
conversion (the “Conversion”) of Provident Bancorp (the “MHC”), the top tier mutual holding company of Old Provident. Old Provident
was the former mid-tier holding company for The Provident Bank (“BankProv” or the “Bank”). Prior to completion of the Conversion,
approximately 52% of the shares of common stock of Old Provident were owned by the MHC. In conjunction with the Conversion, the
MHC was merged into the Company (and ceased to exist) and the Company became its successor under the name Provident Bancorp,
Inc. The Conversion was completed on October 16, 2019. The Company raised gross proceeds of $102.1 million by selling 10,212,397
shares of common stock at $10.00 per share in the second-step stock offering. The Company utilized $8.2 million of the proceeds to
lend to its Employee Stock Ownership Plan (the “ESOP”) for the acquisition of an additional 816,992 shares at $10.00 per share.
Expenses incurred related to the offering were $2.4 million, and have been recorded against offering proceeds. The Company invested
$45.8 million of the net proceeds it received from the sale into the Bank’s operations and has retained the remaining amount for general
corporate purposes. Concurrent with the completion of the stock offering, each share of Old Provident common stock owned by public
stockholders (stockholders other than the MHC) was exchanged for 2.0212 shares of Company common stock. A total of 19,484,343
shares of common stock were outstanding following the completion of the stock offering.
The Bank, headquartered in Amesbury, Massachusetts, operates its business from seven banking offices located in Amesbury and
Newburyport, Massachusetts and Portsmouth, Exeter, Bedford, and Seabrook, New Hampshire. The Bank also has loan production
offices in Boston, Massachusetts and Ponte Vedra, Florida. The Bank provides a variety of financial services to small businesses and
individuals. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are
commercial mortgages, commercial loans and mortgage warehouse loans.
NOTE 2 — ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of
America (“GAAP”) and predominant practices within the banking industry. The consolidated financial statements were prepared using
the accrual basis of accounting.
Use of Estimates
To prepare financial statements in conformity with GAAP management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and
actual results could differ.
Basis of Presentation
The consolidated financial statements include the accounts of Provident Bancorp, Inc., its wholly owned subsidiary, the Bank, and the
Bank’s wholly owned subsidiaries, Provident Security Corporation and 5 Market Street Security Corporation. Provident Security
Corporation and 5 Market Street Security Corporation were established to buy, sell, and hold investments for their own account. All
material intercompany balances and transactions have been eliminated in consolidation.
Significant Concentrations of Credit Risk
The primary lending area for the includes Northeastern Massachusetts and Southern New Hampshire, with a focus on Essex County,
Massachusetts, and Hillsborough and Rockingham Counties, New Hampshire, which are part of, and bedroom communities to, the
technology corridor between Boston, Massachusetts and Concord, New Hampshire. In 2018, the Bank started offering its enterprise
value loan product nationally. In 2020, the Bank purchased a warehouse lending business which is located in Ponte Vedra, Florida and
targets national credit worthy, small to mid-cap non-bank mortgage origination companies for facility lines. The primary deposit-
gathering area is currently concentrated in Essex County, Massachusetts, and Rockingham County and Hillsborough County, New
Hampshire. The Company believes that it does not have any significant loan concentrations or investment securities in any one industry
or with any customer.
Reclassification
Certain amounts in the prior year have been reclassified to be consistent with the current year's consolidated financial statement
presentation, and the reclassifications had no effect on the net income reported in the consolidated income statement.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents include cash, deposits with other financial institutions with maturities fewer than 90 days, and federal funds
sold. Net cash flows are reported for customer loan and deposit transactions and interest-bearing deposits in other financial institutions.
Debt Securities
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to
hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Debt securities
available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the
level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains
and losses on sales are recorded on the trade date and determined using the specific identification method.
The Company evaluates debt securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently
when economic or market conditions warrant such an evaluation. For debt securities in an unrealized loss position, management
considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. The Company
also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a debt security in an unrealized loss
position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire
difference between amortized cost and fair value is recognized as impairment through earnings.
For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows:
1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is
recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows
expected to be collected and the amortized cost basis.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank of Boston (the “FHLB”), the Company is required to invest in $100 par value stock of
the FHLB. The FHLB capital structure mandates that members own stock as determined by their Total Stock Investment Requirement
which is the sum of a member’s Membership Stock Investment Requirement and Activity-Based Stock Investment Requirement. FHLB
stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par
value. Both cash and stock dividends are reported as income.
Loans
Loan receivables that management has the intent and ability to hold until maturity or payoff are reported at their outstanding principal
balances adjusted for amounts due to borrowers on unadvanced loans, any charge-offs, the allowance for loan losses and any deferred
fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.
Interest income is accrued on the unpaid principal balance.
Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is recognized as an
adjustment of the related loan yield using the interest method. The Company is amortizing these amounts over the contractual life of the
related loans.
Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on non-
accrual status, unless secured by sufficient cash or other assets immediately convertible to cash. Residential real estate loans are generally
placed on non-accrual status when reaching 90 days past due or in process of collection. Past due status is based on the contractual terms
of the loan. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on non-
accrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching
120 or 180 days past due depending on the type of loan. When a loan has been placed on non-accrual status, previously accrued and
uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectability of principal is
reasonably assured and the loan has performed for a period of time, generally six months. Interest income received on non-accrual loans
is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the
collectability of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized
as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income
on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been
accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit
and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully
recovered.
Troubled debt restructurings: Loans are considered to be troubled debt restructurings (“TDRs”) when the Company has granted
concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may
include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance,
reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be
bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the
collection of the loan may benefit the Company by increasing the ultimate probability of collection.
Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans
which are already on nonaccrual status at the time of the restructuring generally remain on non-accrual status for approximately six
months before management considers such loans for return to accruing status. Accruing restructured loans are placed into non-accrual
status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will
return to a status of compliance in the near term.
Loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established under Section 4013 of the CARES
Act or under applicable interagency guidance of the federal banking regulators are excluded from evaluation of TDR classification and
will continue to be reported as current during the payment deferral period. The Company’s policy is to continue to accrue interest during
the deferral period. The Company continues to monitor the accrued interest receivable related to these loan modifications for
collectability. Loans not meeting the CARES Act or regulatory guidance are evaluated for TDR and non-accrual treatment under the
Company’s existing policies and procedures.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance
when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan loss experience, the size and composition of the
portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s
judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as
impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and
for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and are classified as
impaired.
The Company classifies a loan as impaired when, based on current information and events, it is probable that it will be unable to collect
the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered
by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately
identify individual consumer and residential loans for impairment disclosures.
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified
by all loan segments. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss
data for each loan segment. The historical loss factors are adjusted for the following qualitative factors: levels/trends in delinquencies
and non-accruals, economic conditions, portfolio trends, portfolio concentrations, loan grading and management’s discretion.
The allowance for loan loss is determined based on the various risk characteristics of each loan segment. Risk characteristics relevant
to each portfolio segment are as follows:
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
Residential real estate: The Company generally does not originate loans with a loan-to-value ratio greater than 80% and does 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.
Construction and land development: Loans in this segment primarily include speculative and pre-sold real estate development loans for
which payment is derived from sale of the property and a conversion of the construction loans to permanent loans for which payment is
then derived from cash flows of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market
conditions.
Consumer: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
Mortgage warehouse: Loans in this segment are primarily facility lines to non-bank mortgage origination companies. The underlying
collateral of these loans are residential real estate loans. Loans are originated by the mortgage companies for sale into secondary markets,
which is typically within 15 days of the loan closure. The primary source of repayment is the cash flow upon the sale of the loans. The
credit risk associated with this type of lending is the risk that the mortgage companies are unable to sell the loans.
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.
Troubled debt restructurings are individually evaluated for impairment and included in the separately identified impairment disclosures.
TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered
to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the
Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan
losses on loans individually identified as impaired.
An unallocated component can be maintained to cover uncertainties that could affect management’s estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating allocated and general reserves in the portfolio.
Bank Owned Life Insurance
Bank owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value. Changes in the net cash
surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the consolidated
statements of income and are not subject to income taxes.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation
and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain
or loss included in income or expense. Depreciation on building and leasehold improvements is calculated primarily using the straight-
line method with useful lives of seven to 40 years. Furniture and fixtures are depreciated using the straight-line method with useful lives
of one to 15 years. Computer equipment is also depreciated using the straight-line method with useful lives ranging from two to five
years.
Other Real Estate Owned and Repossessed Assets
Assets acquired through, or in lieu of, loan foreclosure or repossession are held for sale and are initially recorded at the lower of the
investment in the loan or fair value less estimated costs to sell at the date of foreclosure or repossession, establishing a new cost basis.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequently, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair
value less estimated costs to sell. Revenue and expenses from operations, changes in the valuation allowance, any direct write-downs
and gains or losses on sales are included in other real estate owned expense.
Revenue Recognition
Revenue from contracts with customers in the scope of Accounting Standards Codification (“ASC”) ("Topic 606") is measured based
on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The Company
recognizes revenue from contracts with customers when it satisfies its performance obligations.
The Company’s performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or
over time. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.
The Company recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized
at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft
charge fees, and stop-payment and returned check fees. Additionally, revenue is collected from loan fees, such as letters of credit, line
renewal fees and application fees. Such revenue is derived from transactional information and is recognized as revenue immediately as
the transactions occur or upon providing the service to complete the customer’s transaction.
Leases
The Company determines if an arrangement is a lease at inception. Lease right-of-use (“ROU”) assets represent the Company’s right to
use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments
arising from the lease. Lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease
payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing
rate based on the information available at commencement date in determining the present value of lease payments. The lease ROU asset
also includes any lease payments made and excludes lease incentives. The lease terms may include options to extend or terminate the
lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a
straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally
accounted for separately.
Advertising
The Company directly expenses costs associated with advertising as they are incurred.
Earnings per Share
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the
period. ESOP shares are considered outstanding for this calculation unless unallocated. Diluted earnings per common share includes the
dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all
stock splits and stock dividends through the date of issuance of the financial statements, if applicable.
The Company’s unvested share-based payment awards do not contain rights to nonforfeitable dividends and as such are not considered
participating.
Employee Stock Ownership Plan
Compensation expense for The Provident Bank Employee Stock Ownership Plan (the “ESOP”) is recorded at an amount equal to the
shares allocated by the ESOP multiplied by the average fair value of the shares during the period. The Company recognizes compensation
expense ratably over the year based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP.
Unearned compensation applicable to the ESOP is reflected as a reduction of shareholders’ equity on the consolidated balance sheets.
The difference between the average fair value and the cost of the shares by the ESOP is recorded as an adjustment to additional paid-in-
capital.
Stock-based Compensation Plans
The Company measures and recognizes compensation cost relating to stock-based payment transactions based on the grant-date fair
value of the equity instruments issued. Stock-based compensation is recognized over the period the employee is required to provide
services for the award. The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options granted.
The determination of fair value involves a number of significant estimates, which require a number of assumptions to determine the
model inputs. The fair value of restricted stock is recorded based on the grant date value of the equity instrument issued.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Company's 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.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties
related to income tax matters in income tax expense.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized
gains and losses on debt securities available-for-sale which are also recognized as separate components of equity.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there now
are such matters that will have a material effect on the financial statements.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or
by the holding company to shareholders.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market and other assumptions, as more fully disclosed in a separate
note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments,
and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions
could significantly affect these estimates.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit,
issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when they are funded.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred
assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not
maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13,
Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” The ASU changes the
impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt
securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace
the current “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with
unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as
an allowance. On October 16, 2019, FASB approved a delay on the implementation until January 2023 for smaller reporting companies
as defined by the SEC. The amendments in this update will be effective for the Company on January 1, 2023. Early adoption is permitted
as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently
evaluating the impact of its pending adoption of this guidance on the Company’s financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): “Disclosure Framework-Changes to the
Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for
fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop
significant unobservable inputs for Level 3 fair value measurements. The Company adopted the provision of ASU 2018-13 effective
January 1, 2020 and the adoption did not have a material impact on the consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (“ASU
2019-12”). This ASU simplifies the accounting for income taxes and is effective for fiscal years beginning after December 15, 2020,
with early adoption permitted. Certain provisions under ASU 2019-12 require prospective application, some require modified
retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while
other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The
adoption of ASU 2019-12 is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate
Reform on Financial Reporting (“ASU 2020-04”), to ease the potential burden in accounting for recognizing the effects of reference
rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and
hedge accounting. The provisions in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to loan and lease
agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract
modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying
modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification
would be considered "minor" so that any existing unamortized deferred loan origination fees and costs would carry forward and continue
to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with
no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required
for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge
accounting.
ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning
of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes
or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments
must be applied prospectively for all eligible contract modifications. The Company is currently evaluating the effect that this ASU will
have on the Company’s consolidated financial statements.
In October 2020, the FASB issued ASU No. 2020-08, Receivables (Topic 310) – Nonrefundable Fees and Other Costs (“ASU 2020-
08”), to provide further clarification and update the previously issued guidance in ASU 2017-08, “Receivables - Nonrefundable Fees
and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). ASU 2017-08
shortened the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized
to the earliest call date. The Company early adopted the provisions of ASU 2017-08, effective January 1, 2017. ASU 2017-08 requires
that at each reporting period, to the extent that the amortized cost of an individual callable debt security exceeds the amount repayable
by the issuer at the next call date, the excess premium shall be amortized to the next call date. ASU 2020-08 is effective for fiscal years
ending after December 15, 2020 and early adoption is not permitted. The provisions under ASU 2020-08 are required to be applied
prospectively. The adoption of ASU 2020-08 is not expected to have a material impact on the Company’s consolidated financial
statements.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – RISKS AND UNCERTAINTIES
The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could
impair their ability to fulfill their financial obligations. The World Health Organization declared COVID-19 to be a global pandemic
indicating that almost all public commerce and related business activities were to be, to varying degrees, curtailed with the goal of
decreasing the rate of new infections. The spread of the outbreak has caused significant disruption in the U.S. economy and has disrupted
banking and other financial activity in the areas in which the Company operates.
The U.S. government and regulatory agencies have taken several actions to provide support to the U.S. economy. Most notably, the
Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 as a $2 trillion
legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct
financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also includes
extensive emergency funding for hospitals and providers. In addition to the general impact of the COVID-19 pandemic, certain
provisions of the CARES Act, as well as other recent legislative and regulatory relief efforts, are expected to have a material impact on
the Company’s operations. Also, the actions of the Board of Governors of the Federal Reserve System (the “FRB”) to combat the
economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing
programs, could, if prolonged, adversely affect the Company’s net interest income, margins, and profitability.
Federal banking agencies issued guidance encouraging financial institutions to work with borrowers that may be unable to meet
contractual obligations due to the effects of COVID-19. In addition, Section 4013 of the CARES Act states, “banks may elect not to
categorize loan modifications as TDRs if they are (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past
due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of
the National Emergency or (B) December 31, 2020.” The December 31, 2020 date was subsequently extended to January 1, 2022 under
the Consolidated Appropriations Act, 2021.
The Company implemented its business continuity and pandemic plans, which include remote working arrangements for the majority
of its workforce. While there has been no material impact to the Company’s employees as of this report date, if COVID-19 escalates
further it could also potentially create business continuity issues. The Company does not currently anticipate significant challenges to
its ability to maintain systems and controls in light of the measures the Company has taken in response to COVID-19. While it is not
possible to know the full extent of these impacts as of the date of this filing, detailed below are potentially material items of which we
are aware.
Financial position and results of operations
The Company’s fee income will be reduced due to COVID-19. In keeping with the guidance from regulators, during the second quarter
of 2020 the Company actively worked with COVID-19 affected customers to waive fees from a variety of sources, such as, but not
limited to, insufficient funds, account maintenance, minimum balance, and ATM fees. Management continues to monitor and measure
the impact on its assets and operations.
The Company’s interest income could be reduced due to COVID-19. In keeping with the guidance from the regulators, the Company
actively worked with COVID-19 affected borrowers to defer payments, interest and fees. While interest and fees will accrue to income
through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued
would need to be reversed. Management continues to monitor and measure the impact and potential future impact on operations.
Allowance for loan losses
Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to
affect the accounting for loan losses, which could cause the provision for loan losses to increase. It also is possible that asset quality
could worsen, expenses associated with collection efforts could increase and loan charge-offs could increase. The Company actively
participated in the first round of the Small Business Administration’s (“SBA’s”) Paycheck Protection Program (“PPP”), providing loans
to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government; if that
should change, the Company could be required to increase its allowance for loan losses through an additional provision for loan losses
charged to earnings.
In accordance with guidance issued by federal banking agencies, the Company actively worked with borrowers that were unable to meet
contractual obligations due to the effects of COVID-19. In order to mitigate the risk associated with these modifications the Company
has incorporated covenants that require borrowers to submit quarterly financial statements, prohibits them from distributing funds to
any owner or stockholder (with the exception of payroll) and also prohibits them from making any payments on debt owed to
subordinated debt holders for the duration of their modification. If borrowers are unable to return to their normal payment plan following
their modification period, the Company could be required to increase its allowance for loan losses through an additional provision for
loan losses charged to earnings.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Valuation
Valuation and fair value measurement challenges may occur. For example, COVID-19 could cause further and sustained decline in the
financial markets or the occurrence of what management would deem a valuation triggering event that could result in an impairment
charge to earnings, such as our investment securities.
NOTE 4 — DEBT SECURITIES
The following table summarizes the amortized cost and fair value of securities available-for-sale at December 31, 2020 and 2019 and
the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:
(In thousands)
December 31, 2020
State and municipal
Asset-backed securities
Government mortgage-backed securities
Total debt securities available-for-sale
December 31, 2019
State and municipal
Asset-backed securities
Government mortgage-backed securities
Total debt securities available-for-sale
Amortized
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
10,211 $
4,432
16,172
30,815 $
10,808 $
5,433
24,954
41,195 $
683 $
278
449
1,410 $
398 $
71
197
666 $
— $
—
10
10 $
— $
4
67
71 $
10,894
4,710
16,611
32,215
11,206
5,500
25,084
41,790
The scheduled maturities of debt securities were as follows at December 31, 2020. Actual maturities of mortgage-backed securities may
differ from contractual maturities because the mortgages underlying the securities may be repaid without any penalties. Because
mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity
summary.
(In thousands)
Due after one year through five years
Due after five years through ten years
Due after ten years
Government mortgage-backed securities
Asset-backed securities
Available-for-Sale
Amortized
Cost
Fair
Value
$
$
919 $
912
8,380
16,172
4,432
30,815 $
963
917
9,014
16,611
4,710
32,215
There were no realized gains or losses on sales and calls during the year ended December 31, 2020. During the year ended December 31,
2019, gross realized gains on sales and calls were $216,000 and gross realized losses were $103,000.
There were no securities of issuers whose aggregate carrying amount exceeded 10% of equity at December 31, 2020.
Securities with carrying amounts of $21.3 million and $30.6 million were pledged to secure available borrowings with the Federal Home
Loan Bank at December 31, 2020 and 2019, respectively.
As of December 31, 2020, the Company’ security portfolio consisted of 56 securities, three of which were in an unrealized loss position.
The unrealized losses were related to the Company’s government mortgage-backed securities, as discussed below.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, and are temporarily impaired, are as follows at December 31, 2020 and 2019:
Less than 12 Months
Fair
Value
Losses
Unrealized
12 Months or Longer
Fair
Value
Losses
Unrealized
Total
Fair
Value
Unrealized
Losses
(In thousands)
December 31, 2020
Temporarily impaired
securities:
Government mortgage-
backed securities
Total temporarily impaired
debt securities
$
$
— $
— $
817 $
10 $
817 $
— $
— $
817 $
10 $
817 $
December 31, 2019
Temporarily impaired
securities:
Asset-backed securities
Government mortgage-
backed securities
Total temporarily impaired
debt securities
$
606 $
4 $
— $
— $
606 $
5,207
8
5,418
59
10,625
$
5,813 $
12 $
5,418 $
59 $
11,231 $
10
10
4
67
71
Government mortgage-backed securities: The gross unrealized losses on government mortgage-backed securities were primarily
attributable to relative changes in interest rates since the time of purchase. Management believes that the unrealized losses on these debt
security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality.
Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Company does not intend to sell
these securities and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of their cost
basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at
December 31, 2020.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — LOANS
Loans consisted of the following at December 31, 2020 and 2019:
(In thousands)
Commercial real estate
Commercial (1)
Residential real estate
Construction and land development
Consumer
Mortgage warehouse
Allowance for loan losses
Deferred loan fees, net (2)
Net loans
2020
2019
$
$
438,949 $
565,976
32,785
28,927
5,547
265,379
1,337,563
(18,518)
(4,235)
1,314,810 $
418,356
451,791
45,695
46,763
12,737
—
975,342
(13,844)
(2,212)
959,286
(1) Includes $41.8 million in PPP loans at December 31, 2020. There were no PPP loans at December 31, 2019.
(2) Includes $993,000 in deferred fees related to PPP loans at December 31, 2020. There were no deferred fees related to PPP loans at
December 31, 2019.
The following tables set forth information regarding the allowance for loans and gross impaired loans by portfolio segment as of and
for the years ended December 31, 2020 and 2019:
Construction
Commercial
Real Estate Commercial Real Estate Development Consumer Warehouse Unallocated
Residential and Land
Mortgage
Total
$
$
$
6,104 $
(117)
—
108
6,095 $
6,086 $
(176)
7
4,626
10,543 $
254 $
—
4
(74)
184 $
749 $
(24)
—
(278)
447 $
650 $
(772)
155
553
586 $
— $
—
—
663
663 $
1 $
—
—
(1)
— $
13,844
(1,089)
166
5,597
18,518
— $
2,024 $
— $
— $
— $
— $
— $
2,024
6,095
8,519
184
447
586
663
—
16,494
$
6,095 $
10,543 $
184 $
447 $
586 $
663 $
— $
18,518
$
21,039 $
4,458 $
162 $
— $
—
—
$
25,659
(In thousands)
December 31, 2020
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
Ending balance:
Individually evaluated
for impairment
Ending balance:
Collectively evaluated
for impairment
Total allowance for loan
losses ending balance
Loans (1):
Ending balance:
Individually evaluated
for impairment
Ending balance:
Collectively evaluated
for impairment
Total loans ending balance $ 438,949 $ 565,976 $
417,910
561,518
32,623
32,785 $
28,927
28,927 $
5,547
265,379
5,547 $ 265,379
1,311,904
$ 1,337,563
(1) Balances represent gross loans. The difference between gross loans versus recorded investment, which would consist of unpaid
principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and
costs, is not material.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Construction
Commercial
Real Estate Commercial Real Estate Development Consumer Warehouse Unallocated
Residential and Land
Mortgage
Total
$
$
4,152 $
—
—
1,952
6,104 $
5,742 $
(1,950)
35
2,259
6,086 $
251 $
—
7
(4)
254 $
738 $
—
—
11
749 $
710 $
(1,355)
101
1,194
650 $
— $
—
—
—
— $
87 $
—
—
(86)
1 $
11,680
(3,305)
143
5,326
13,844
$
1,508 $
174 $
— $
— $
— $
— $
— $
1,682
4,596
5,912
254
749
650
—
1
12,162
$
6,104 $
6,086 $
254 $
749 $
650 $
— $
1 $
13,844
$
20,990 $
3,326 $
182 $
165 $
— $
—
$
24,663
(In thousands)
December 31, 2019
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision (credit)
Ending balance
Ending balance:
Individually evaluated
for impairment
Ending balance:
Collectively evaluated
for impairment
Total allowance for loan
losses ending balance
Loans (1):
Ending balance:
Individually evaluated
for impairment
Ending balance:
Collectively evaluated
for impairment
Total loans ending balance $ 418,356 $ 451,791 $
397,366
448,465
45,513
45,695 $
46,598
46,763 $
12,737
12,737 $
—
—
950,679
975,342
$
(1) Balances represent gross loans. The difference between gross loans versus recorded investment, which would consist of unpaid
principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and
costs, is not material.
At December 31, 2020 and 2019, loans with an aggregate principal balance of $360.5 million and $450.6 million, respectively, were
pledged to secure possible borrowings from the Federal Reserve Bank.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth information regarding non-accrual loans and loan delinquencies by portfolio segment at December 31,
2020 and 2019:
30 - 59
Days
60 - 89
Days
90 Days
or More
Past Due
Total
Past
Due
Total
Current
Total
Loans
90 Days
or More
Past Due
and Accruing
Nonaccrual
Loans
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
—
4,198
1,156
—
65
—
5,419
1,701
2,955
969
165
37
—
5,827
(In thousands)
December 31, 2020
Commercial real estate $
Commercial
Residential real estate
Construction and
land development
Consumer
Mortgage warehouse
Total
$
December 31, 2019
Commercial real estate $
Commercial
Residential real estate
Construction and
land development
Consumer
Mortgage warehouse
— $
4,358
255
—
61
—
4,674 $
— $
—
346
—
21
—
367 $
— $
— $
291
1,030
4,649
1,631
438,949 $
561,327
31,154
438,949 $
565,976
32,785
—
64
—
1,385 $
—
146
—
28,927
5,401
265,379
28,927
5,547
265,379
6,426 $ 1,331,137 $ 1,337,563 $
473 $ 18,256 $
529
715
85
154
1,368 $ 20,097 $
484
832
1,098
1,701
398,259 $
450,693
43,994
418,356 $
451,791
45,695
—
111
—
—
58
—
165
38
—
165
207
—
46,598
12,530
—
46,763
12,737
—
Total
$
1,828 $ 18,553 $
2,887 $ 23,268 $
952,074 $
975,342 $
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information about the Company’s impaired loans by portfolio segment was as follows at December 31, 2020 and 2019:
(In thousands)
December 31, 2020
With no related allowance
recorded:
Commercial real estate
Commercial
Residential real estate
Construction and land
development
Consumer
Mortgage warehouse
Total impaired with no
related allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
21,039 $
434
162
21,312 $
441
162
—
—
—
—
—
—
— $
—
—
—
—
—
21,356 $
476
164
—
—
—
350
19
8
—
—
—
$
21,635 $
21,915 $
— $
21,996 $
377
$
With an allowance recorded:
Commercial real estate
Commercial
Residential real estate
Construction and land
development
Consumer
Mortgage warehouse
Total impaired with an
allowance recorded
Total
Commercial real estate
Commercial
Residential real estate
Construction and land
development
Consumer
Mortgage warehouse
Total impaired loans
$
$
$
— $
— $
— $
— $
4,024
—
—
—
—
4,605
—
—
—
—
2,024
—
—
—
—
4,177
—
—
—
—
4,024 $
4,605 $
2,024 $
4,177 $
21,039 $
4,458
162
—
—
—
25,659 $
21,312 $
5,046
162
—
—
—
26,520 $
— $
2,024
—
—
—
—
2,024 $
21,356 $
4,653
164
—
—
—
26,173 $
—
1
—
—
—
—
1
350
20
8
—
—
—
378
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
2,070 $
1,348
182
165
—
2,082 $
1,745
182
165
—
— $
—
—
—
—
2,144 $
2,323
303
273
—
59
26
16
—
—
$
3,765 $
4,174 $
— $
5,043 $
101
(In thousands)
December 31, 2019
With no related allowance
recorded:
Commercial real estate
Commercial
Residential real estate
Construction and land
development
Consumer
Total impaired with no
related allowance
$
With an allowance recorded:
Commercial real estate
Commercial
Residential real estate
Construction and land
development
Consumer
$
$
Total impaired with an
allowance recorded
Total
Commercial real estate
Commercial
Residential real estate
Construction and land
development
Consumer
Total impaired loans
$
18,920 $
1,978
—
18,921 $
2,085
—
1,508 $
174
—
18,921 $
2,972
—
—
—
—
—
—
—
—
—
20,898 $
21,006 $
1,682 $
21,893 $
20,990 $
3,326
182
165
—
24,663 $
21,003 $
3,830
182
165
—
25,180 $
1,508 $
174
—
—
—
1,682 $
21,065 $
5,295
303
273
—
26,936 $
—
—
—
—
—
—
59
26
16
—
—
101
The following summarizes TDRs entered into during the years ended December 31, 2020 and 2019:
Year Ended December 31,
2020
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
2019
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
Number of
Contracts
9
1
10
$
$
18,811 $
81
18,892 $
20,311
81
20,392
—
2
2
$
$
— $
2,640
2,640 $
—
2,640
2,640
(Dollars in thousands)
Troubled debt restructurings:
Commercial real estate
Commercial
In 2020, the Bank approved 10 TDRs. Of the 10 TDRs, seven were for one commercial real estate loan relationship totaling
$20.1 million. The Bank analyzed the relationship and modified the relationship as follows:
$16.5 million was placed on interest-only payments for three years at a reduced rate;
$2.1 million was restructured to amortize and pay out over a 10-year term at a reduced rate; and
$1.5 million was advanced for necessary capital expenditures. The advance was placed on interest-only payments for three
years at a reduced rate.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon completion of the restructuring in the first quarter, the commercial relationship was placed on non-accrual status and after
demonstrating the ability to pay the loan under the restructured terms, it was taken off non-accrual status in the fourth quarter of 2020.
The Bank approved two TDRs for another commercial real estate relationship totaling $165,000. These loans have a reduced rate for a
period of two years. The Bank also approved one TDR for a commercial loan totaling $81,000. This commercial loan was placed on an
extended 6-month interest-only period with a new term and re-amortization to follow. As of December 31, 2020, these loans were paying
in accordance with the restructured terms.
In 2019, the Bank approved two troubled debt restructures totaling $2.6 million. Both commercial loans were placed on an extended 12-
month interest-only period with re-amortization to follow. As of December 31, 2020, one of the two loans was paid off. The remaining
loan is paying as agreed upon in the modified terms.
As of December 31, 2020, an impairment analysis was performed and specific reserves of $157,000 were allocated to the relationships
approved as TDRs in 2019 and 2020.
The total recorded investment in TDRs was $23.3 million and $4.2 million at December 31, 2020 and 2019, respectively. At
December 31, 2020, there were no commitments to lend additional funds to borrowers whose loans were modified in troubled debt
restructurings.
Additionally, the Company is working with borrowers impacted by COVID-19 and providing modifications to allow for deferral of
interest or principal and interest payments on an as-needed and case-by-case basis. These modifications are excluded from troubled debt
restructuring classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking
regulators. As previously noted, loan modifications and payment deferrals as a result of COVID-19 that meet the criteria established
under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators are excluded from
evaluation of TDR classification and will continue to be reported as current during the payment deferral period. The Company’s policy
is to continue to accrue interest during the deferral period. Loans not meeting the CARES Act or regulatory guidance are evaluated for
TDR and non-accrual treatment under the Company’s existing policies and procedures. Loan modifications made pursuant to the
CARES Act or interagency guidance that were in payment deferral at December 31, 2020 totaled approximately $44.0 million. There
were eight commercial real estate loans that amounted to $12.4 million, 28 commercial and industrial loans that amounted to $22.4
million, and one residential mortgage loan that amounted to $177,000. There were no consumer loans that were in payment deferral at
December 31, 2020 based on modifications made pursuant to the CARES Act or interagency guidance.
Credit Quality Information
The Company utilizes a seven grade internal loan rating system for commercial real estate, construction and land development,
commercial loans and mortgage warehouse as follows:
Loans rated 1-3: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness
and are being closely monitored by management.
Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately
protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that
the Company will sustain some loss if the weakness is not corrected.
Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those
classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, highly questionable and improbable.
Loans rated 7: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not
warranted.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and
land development, and commercial loans.
On an annual basis, or more often if needed, the Company completes a credit recertification on all mortgage warehouse originators.
For residential real estate loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such
loans as pass. Ongoing monitoring is based upon the borrower’s payment activity.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consumer loans are not formally rated.
The following tables present the Company’s loans by risk rating and portfolio segment at December 31, 2020 and 2019:
Commercial
Real Estate
Commercial Real Estate
Development Consumer
Residential
Construction
and Land
Mortgage
Warehouse
Total
(In thousands)
December 31, 2020
Grade:
Pass
Special mention
Substandard
Not formally rated
$
401,541 $
17,702
19,706
—
538,449 $
13,625
13,902
—
Total
$
438,949 $
565,976 $
December 31, 2019
Grade:
Pass
Special mention
Substandard
Not formally rated
$
396,217 $
1,936
20,203
—
433,076 $
14,044
4,671
—
Total
$
418,356 $
451,791 $
— $
—
1,560
31,225
32,785 $
28,927 $
—
—
—
28,927 $
— $
—
—
5,547
5,547 $
265,379 $ 1,234,296
31,327
35,168
36,772
265,379 $ 1,337,563
—
—
—
— $
—
1,379
44,316
45,695 $
46,598 $
—
165
—
46,763 $
— $
—
—
12,737
12,737 $
— $
—
—
—
— $
875,891
15,980
26,418
57,053
975,342
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage
and other loans serviced for others were $14.0 million and $16.0 million at December 31, 2020 and 2019, respectively.
Certain directors and executive officers of the Company and companies in which they have significant ownership interests were
customers of the Bank during 2020. The following is a summary of the loans to such persons and their companies at December 31, 2020
and 2019:
(In thousands)
Beginning balance, January 1, 2019
Advances
Principal payments
Ending balance, December 31, 2019
Beginning balance, January 1, 2020
Advances
Principal payments
Ending balance, December 31, 2020
NOTE 6 — PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 2020 and 2019:
(In thousands)
Land
Buildings and leasehold improvements
Furniture and equipment
Leasehold improvements
Construction in progress
Accumulated depreciation and amortization
Premises and equipment, net
$
$
$
$
11,957
5,303
(13,555)
3,705
3,705
12,329
(656)
15,378
2020
2019
$
$
2,424 $
13,828
5,308
3,526
—
25,086
(10,370)
14,716 $
2,424
13,401
4,854
3,526
29
24,234
(9,506)
14,728
Depreciation and amortization expense was $944,000 and $1.2 million for the years ended December 31, 2020 and 2019, respectively.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 — DEPOSITS
The following is a summary of deposit balances by type at December 31, 2020 and 2019:
(In thousands)
NOW and demand
Regular savings
Money market deposits
Total non-certificate accounts
Certificate accounts of $250,000 or more
Certificate accounts less than $250,000
Total certificate accounts
Total deposits
2020
2019
$
$
554,095 $
151,341
353,793
1,059,229
5,167
173,032
178,199
1,237,428 $
369,423
115,593
270,471
755,487
15,575
78,843
94,418
849,905
At December 31, 2020 and 2019, the aggregate amount of brokered certificates of deposit was $114.1 million and $48.6 million
respectively. Brokered certificates of deposit are not included in the totals for time deposits in denominations over $250,000 listed above.
At December 31, 2020, the scheduled maturities for certificate accounts for each of the following five years are as follows:
(In thousands)
2021
2022
2023
2024
2025
Total
$
$
139,794
36,161
897
175
1,172
178,199
Deposits from related parties held by the Company at December 31, 2020 and 2019 amounted to $8.8 million and $7.8 million,
respectively.
NOTE 8 — BORROWINGS
Advances consist of funds borrowed from the FHLB. Maturities of advances from the FHLB for years ending after December 31, 2020
and 2019 are summarized as follows:
(In thousands)
2020
2021
2022
2023
2024
2025
Total
2020
2019
$
$
— $
—
—
8,500
—
5,000
13,500 $
11,498
5,000
—
8,500
—
—
24,998
Borrowings from the FHLB, which aggregated $13.5 million and $25.0 million at December 31, 2020 and 2019, respectively, 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 qualified mortgage-backed government securities. At December 31, 2020, the interest rates on
FHLB advances ranged from 1.21% to 3.01%, and the weighted average interest rate on FHLB advances was 2.12%. At December 31,
2020, the Company had the ability to borrow $143.8 million from the FHLB.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — INCOME TAXES
The components of income tax expense are as follows for the years ended December 31, 2020 and 2019:
(In thousands)
Current tax expense (benefit):
Federal
State
Net operating loss carryforward
Deferred tax benefit:
Federal
State
Income tax expense
2020
2019
$
$
4,906 $
1,928
(7)
6,827
(1,525)
(677)
(2,202)
4,625 $
3,477
1,392
(9)
4,860
(724)
(325)
(1,049)
3,811
The following is a summary of the differences between the statutory federal income tax rate and the effective tax rates for the years
ended December 31, 2020 and 2019:
Federal income tax at statutory rate
Increase (decrease) in tax resulting from:
State tax, net of federal tax benefit
Tax exempt income and dividends received deduction
Other
Effective tax rate
2020
2019
21.0 %
21.0 %
6.0
(0.4)
1.2
27.8 %
5.8
(0.6)
(0.1)
26.1 %
The following is a summary of the Company’s gross deferred tax assets and gross deferred tax liabilities at December 31, 2020 and
2019:
(In thousands)
Deferred tax assets:
Allowance for loan losses
Depreciation
Net operating loss carryforward
Employee benefit plans and share-based compensation plans
Deferred loan fees, net
Write down of other assets and receivables
Reserve for unfunded commitments
Net unrealized loss on securities
Other
Gross deferred tax assets
Deferred tax liabilities:
Depreciation
Prepaid expenses
FHLB restructure fees
Net unrealized holding gain on securities
Gross deferred tax liabilities
Net deferred tax asset
2020
2019
$
$
5,132 $
—
—
2,849
1,174
111
37
—
344
9,647
(5)
(60)
—
(342)
(407)
9,240 $
3,837
71
7
2,707
613
—
31
—
164
7,430
—
(43)
(8)
(137)
(188)
7,242
The Company reduces the deferred tax asset by a valuation allowance if, based on the weight of the available evidence, it is not “more
likely than not” that some portion or all of the deferred tax assets will be realized. The Company assesses the realizability of its deferred
tax assets by assessing the likelihood of the Company generating federal and state income tax, as applicable, in future periods in amounts
sufficient to offset the deferred tax charges in the periods they are expected to reverse. Based on this assessment, management concluded
that a valuation allowance was not required as of December 31, 2020 or 2019.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s
assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At December 31, 2020
and 2019, there was no material uncertain tax positions related to federal and state income tax matters. The Company is currently open
to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31,
2017 through December 31, 2019.
NOTE 10 — EMPLOYEE BENEFITS & STOCK-BASED COMPENSATION PLANS
401(k) Plan
The Company sponsors a 401(k) plan. All employees are eligible to join the 401(k) plan. A Safe Harbor Plan was adopted by the
Company effective January 1, 2007. Under the Safe Harbor Plan, the Company matches 100% of employee contributions up to 6% of
compensation. In addition, the Company may make a discretionary contribution to the 401(k) plan determined on an annual basis.
Employees may contribute up to 75% of their salary subject to certain limits based on federal tax laws. The expense recognized under
the 401(k) plan was $781,000 and $598,000 for the years ended December 31, 2020 and 2019, respectively.
Supplemental Executive Retirement Plans
The Company has Supplemental Executive Retirement Agreements with certain executive officers. These agreements are designed to
supplement the benefits available through the Company’s retirement plan. The liability for the retirement benefits amounted to
$9.1 million and $7.8 million at December 31, 2020 and 2019, respectively, and is included in other liabilities. The expense recognized
for these benefits was $1.3 million and $1.0 million for the years ended December 31, 2020 and 2019, respectively.
Employee Stock Ownership Plan
Old Provident established an ESOP to provide eligible employees the opportunity to own Old Provident stock. The plan is a tax-qualified
plan for the benefit of all eligible Bank employees. Contributions are allocated to eligible participants on the basis of compensation,
subject to federal tax law limits. The ESOP acquired 721,876 shares in Old Provident’s initial stock offering with the proceeds of a loan
totaling $3.6 million. The loan was payable annually over 15 years at a rate per annum equal to the prime rate. In conjunction with the
Conversion, the Company refinanced the original loan to the ESOP with an additional $8.2 million payable over 15 years at a rate per
annum equal to the prime rate (3.25% and 4.75% as December 31, 2020 and 2019, respectively) to acquire an additional 816,992 shares
at $10.00 per share, representing 8% of the shares sold in the Company’s second-step offering. After the Conversion, the unallocated
shares had an average price of $8.01 per share. Shares used as collateral to secure the loan are released and available for allocation to
eligible employees as the principal and interest on the loan is paid. The number of shares committed to be released per year through
2033 is 89,757.
Shares held by the ESOP include the following:
Allocated
Committed to be allocated
Unallocated
Total
December 31,
2020
December 31,
2019
282,256
89,758
1,166,854
1,538,868
192,499
89,757
1,256,612
1,538,868
The fair value of unallocated shares was approximately $14.0 million at December 31, 2020.
Total compensation expense recognized for the years ended December 31, 2020 and 2019 was $841,000 and $1.1 million respectively.
Stock-Based Compensation Plan
The shareholders of the Company approved the Provident Bancorp, Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”) on
November 23, 2020, which is in addition to the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the "2016 Equity Plan"),
(collectively called the “Equity Incentive Plans”). Under the Equity Incentive Plans the Company may grant options, restricted stock,
restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock
options may be granted under the Equity Incentive Plans, with 902,344 and 1,021,239 shares reserved for options under the 2016 Equity
Plan and 2020 Equity Plan, respectively. The exercise price of each option equals the market price of the Company’s stock on the date
of grant and the maximum term of each option is ten years. The total number of shares reserved for restricted stock or restricted units is
360,935 and 408,495 under the 2016 Equity Plan and 2020 Equity Plan, respectively. The value of restricted stock grants is based on
the market price of the stock on grant date. Options and awards vest ratably over 3 to 5 years.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expense related to options and restricted stock granted to directors is recognized as directors' fees within non-interest expense.
Stock Options
The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following
assumptions:
Expected volatility is based on historical volatility of the Company’s common stock price.
Expected life represents the period of time that the option is expected to be outstanding, taking into account the
contractual term, and the vesting period.
The dividend yield assumption is based on the Company’s expectation of dividend payouts.
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the
expected life of the option.
The fair value of options granted was determined using the following weighted-average assumptions as of grant date.
Expected volatility
Expected life (years)
Expected dividend yield
Risk free interest rate
Fair value per option
2020
2019
34.63 %
7.5
1.04 %
0.66 %
3.79
$
31.15 %
7.5
— %
1.83 %
4.80
$
A summary of the status of the Company’s stock option grants for the year ended December 31, 2020, is presented in the table below:
Outstanding at January 1, 2020
Granted
Forfeited
Exercised
Outstanding at December 31, 2020
Outstanding and expected to vest at December 31,
2020
Vested and Exercisable at December 31, 2020
Unrecognized compensation cost
Weighted average remaining recognition period
(years)
Stock Option
Awards
Weighted Average
Exercise Price
816,057 $
838,518
(9,844)
—
1,644,731 $
1,644,731 $
626,258 $
8.93
11.52
8.61
—
10.25
10.25
8.79
$
3,583,000
4.30
Weighted
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic Value
7.97 $
2,934,571
7.97 $
5.83 $
2,934,571
2,028,370
Total expense for the stock options was $462,000 and $406,000 for the years ended December 31, 2020 and 2019, respectively.
Restricted Stock
Shares issued upon the granting of restricted stock may come from authorized but unissued shares or reacquired shares held by the
Company. Any shares forfeited because vesting requirements are not met will again be available for issuance under the Equity Plan.
The fair market value of shares awarded, based on the market prices at the date of grant, is recorded as unearned compensation and
amortized over the applicable vesting period.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the activity in unvested restricted stock awards under the Equity Plan for the year ended December 31,
2020:
Unvested restricted stock awards at January 1, 2020
Granted
Forfeited
Vested
Unvested restricted stock awards at December 31, 2020
Unrecognized compensation cost
Weighted average remaining recognition period (years)
Number of
Shares
Weighted
Average
Grant Price
140,019 $
315,707
(3,938)
(64,105)
387,683 $
9.19
11.49
8.61
8.98
11.10
$
4,175,000
4.25
Total expense for the restricted stock awards was $627,000 and $593,000 for the years ended December 31, 2020 and 2019, respectively.
The total fair value of shares vested during the years ended December 31, 2020 and 2019 was $631,000 and $757,000, respectively.
NOTE 11 — EARNINGS PER SHARE
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic earnings per share
except that the weighted-average number of common shares outstanding is increased to include the number of incremental common
shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents were
issued during the period. Unallocated ESOP shares, treasury stock and unvested restricted stock is not deemed outstanding for earnings
per share calculations.
(Dollars in thousands)
Net income attributable to common shareholders
Average number of common shares issued
Less:
average unallocated ESOP shares
average unvested restricted stock
average treasury stock acquired
Average number of common shares outstanding to calculate basic earnings per common
share
Effect of dilutive unvested restricted stock and stock option awards
Average number of common shares outstanding to calculate diluted earnings per common
share
Earnings per common share:
Basic
Diluted
2020
$
11,985 $
19,422,096
(1,207,892)
(123,975)
—
2019
10,808
19,511,700
(1,345,983)
(152,682)
(54,849)
18,090,229
40,796
17,958,186
108,782
18,131,025
18,066,968
$
$
0.66 $
0.66 $
0.60
0.60
Stock options for 73,399 and 14,298 shares of common stock were not considered in computing diluted earnings per common share for
2020 and 2019, respectively, because they were antidilutive, meaning the exercise price for such options were higher than the average
price for the Company for such period.
NOTE 12 — REGULATORY MATTERS
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.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank is subject to capital regulations that require a Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital
to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio
of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. In order to
be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk-based
capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. As of December 31, 2020 and 2019, the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
Applicable regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not
hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount
necessary to meet its minimum risk-based capital requirements. At December 31, 2020, the Bank exceeded the regulatory requirement
for the capital conservation buffer.
In September 2019, the federal banking agencies adopted a final rule to implement Section 201 of the Economic Growth, Regulatory
Relief, and Consumer Protection Act, effective January 1, 2020, establishing a community bank leverage ratio (“CBLR”) framework
for community banking organizations having total consolidated assets of less than $10 billion, having a leverage ratio of greater than
9%, and satisfying other criteria, such as limitations on the amount of off-balance sheet exposures and on trading assets and liabilities.
A community banking organization that qualifies for and elects to use the CBLR framework and that maintains a leverage ratio of greater
than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the banking
agencies’ generally applicable capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for
purposes of Section 38 of the Federal Deposit Insurance Act. The CARES Act temporarily lowered the community bank leverage ratio
to 8% through 2020. The CBLR requirement will transition from 8% to 8.5% for the calendar year 2021 and then to 9% beginning in
2022. As of December 31, 2020, the Bank has not opted into the CBLR framework.
The Bank’s actual capital amounts and ratios at December 31, 2020 and 2019 are summarized as follows:
Actual
Capital
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
$
199,377
14.60 %
$
109,273
>
8.0 %
$
136,591
>
10.0 %
182,286
13.35
81,955
>
182,286
13.35
61,466
>
182,286
12.37
58,926
>
6.0
4.5
4.0
109,273
>
88,784
>
73,658
>
8.0
6.5
5.0
$
181,135
17.62 %
$
82,238
>
8.0 %
$
102,798
>
10.0 %
168,273
16.37
61,679
168,273
16.37
46,259
>
>
168,273
15.18
44,352
>
6.0
4.5
4.0
82,238
66,819
>
>
55,440
>
8.0
6.5
5.0
(Dollars in thousands)
December 31, 2020
Total Capital (to Risk
Weighted Assets)
Tier 1 Capital (to Risk
Weighted Assets)
Common Equity Tier 1 Capital
(to Risk Weighted Assets)
Tier 1 Capital (to Average
Assets)
December 31, 2019
Total Capital (to Risk
Weighted Assets)
Tier 1 Capital (to Risk
Weighted Assets)
Common Equity Tier 1 Capital
(to Risk Weighted Assets)
Tier 1 Capital (to Average
Assets)
Liquidation Accounts
Upon the completion of Old Provident’s stock offering in 2015, a “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 Old Provident held by persons other than
the MHC as of the date of the latest balance sheet contained in the prospectus utilized in connection with the offering. The Company is
not permitted to pay dividends on its capital stock if the Company’s shareholders’ equity would be reduced below the amount of the
liquidation account. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying
deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon the completion of the Conversion, “liquidation accounts” for the benefit of certain depositors of the Bank in an amount equal to
the MHC’s ownership interest in the retained earnings of the Company as of the date of the latest balance sheet contained in the 2019
prospectus plus the MHC’s net assets (excluding its ownership of the Company) were established by the Company and the Bank. The
Company and the Bank are not permitted to pay dividends on their capital stock if the shareholders’ equity of the Company, or the
shareholder’s equity of the Bank, would be reduced below the amount of the liquidation accounts. The liquidation accounts will be
reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore
an eligible account holder’s interest in the liquidation accounts.
Other Restrictions
The Company’s principal source of funds for dividend payments is dividends received from the Bank. Federal and state banking
regulations restrict the amount of dividends that may be paid in a year, without prior approval of regulatory agencies, to the net income
of the Bank for the year plus the retained net income of the previous two years. As of December 31, 2020, 2019 and 2018, $12.1 million,
$10.7 million and $9.3 million, respectively, of retained earnings was available to pay dividends
The Company may, at times, repurchase its own shares in the open market. Such transactions are subject to the Federal Reserve Board’s
notice provisions for stock repurchases. In October 2020, the Company announced its plan to repurchase 1,000,000 shares of its common
stock. The repurchase program was adopted following the receipt of non-objection from the Federal Reserve Bank of Boston, and in
compliance with applicable state and federal regulations. As of December 31, 2020, the Company had repurchased 724,741 shares of
its outstanding common stock.
NOTE 13 — LEASES
The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an
arrangement meets the definition of a lease upon inception. Operating leases are included in operating lease right-of-use (“ROU”) assets
and operating lease liabilities on the Company’s balance sheet.
Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent
the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized
at the commencement date based on the present value of lease payments over the lease term. The Company’s leases do not provide an
implicit rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms
to determine present value of operating lease liabilities. The Company’s lease terms may include lease extension and termination options
when it is reasonably certain that the Company will exercise the option. The Company recognized right-of-use assets totaling
$4.3 million and $3.7 million and operating lease liabilities totaling $4.5 million and $3.9 million at December 31, 2020 and
December 31, 2019, respectively. The lease liabilities recognized by the Company represent two leased branch locations and one loan
production office.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease components, such as fair
market value adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities. Leases with an initial
term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over
the lease term. For the year ended December 31, 2020 and 2019, rent expense for the operating leases totaled $307,000 and $375,000,
respectively.
The following table presents information regarding the Company’s operating leases:
Weighted-average discount rate
Range of lease expiration dates
Range of lease renewal options
Weighted-average remaining lease term
December 31,
2020
3.54%
2 - 15 years
5 - 20 years
27.6 years
December 31,
2019
3.78%
4.5 - 16 years
20 years
31.9 years
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the undiscounted annual lease payments under the terms of the Company's operating leases at
December 31, 2020, including a reconciliation to the present value of operating lease liabilities recognized in the unaudited Consolidated
Balance Sheets:
(In thousands)
2021
2022
2023
2024
2025
Years thereafter
Total lease payments
Less imputed interest
Total lease liabilities
$
$
258
261
264
270
280
6,325
7,658
(3,170)
4,488
NOTE 14 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on
loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The
contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan
commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral
held varies, but may include secured interests in real property, accounts receivable, inventory, property, plant and equipment and income
producing properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third
party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company
may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may
take possession of the collateral, if any, securing the line of credit.
Notional amounts of financial instruments with off-balance sheet credit risk are as follows at December 31, 2020 and 2019:
(In thousands)
Commitments to originate loans
Letters of credit
Unadvanced portions of loans
NOTE 15 — FAIR VALUE MEASUREMENTS
2020
2019
$
$
31,920 $
1,682
202,015
235,617 $
29,388
1,463
201,921
232,772
The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for
measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as the exchange price that would
be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair values:
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Fair Value Measurements
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially
the full term of the asset or liability;
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and
unobservable (i.e., supported by little or no market activity).
An asset’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company used the following methods and significant assumptions to estimate fair value:
Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate fair values.
Debt Securities Available-For-Sale: Fair values for investments are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices of comparable instruments or pricing models. See Note 15 for
further details.
Loans receivable: Fair values are based on an exit price notion in which an orderly transaction would take place between market
participants at the measurement date under current market conditions.
Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for deposits (e.g., interest and non-interest checking, savings, and money market accounts)
are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time deposits.
Borrowings: Fair values of Federal Reserve Bank (“FRB”) Discount Window and Federal Home Loan Bank advances are estimated
using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing
arrangements.
Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments and the unadvanced portions of loans, fair value also considers the difference between current levels
of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.
Fair Values of Assets Measured on a Recurring Basis
The Company’s investments in state and municipal, asset-backed and government mortgage-backed debt securities available-for-sale
are generally classified within Level 2 of the fair value hierarchy. For these investments, the Company obtains fair value measurements
from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market
spreads, cash flows, the U.S. Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the
instrument’s terms and conditions.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes assets measured at fair value on a recurring basis at December 31, 2020 and 2019:
(In thousands)
December 31, 2020
State and municipal
Asset-backed securities
Mortgage-backed securities
Totals
December 31, 2019
State and municipal
Asset-backed securities
Mortgage-backed securities
Totals
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets
for
Identical Assets
Level 1
Significant
Significant
Other Observable Unobservable
Inputs
Level 2
Inputs
Level 3
Total
$
$
$
$
10,894 $
4,710
16,611
32,215 $
11,206 $
5,500
25,084
41,790 $
— $
—
—
— $
— $
—
—
— $
10,894 $
4,710
16,611
32,215 $
11,206 $
5,500
25,084
41,790 $
—
—
—
—
—
—
—
—
Fair Values of Assets Measured on a Nonrecurring Basis
The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance
with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or
market accounting or write-downs of individual assets.
Certain impaired loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses.
The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan
losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable
inputs for specific properties.
The following summarizes assets measured at fair value on a nonrecurring basis at December 31, 2020 and 2019:
(In thousands)
December 31, 2020
Impaired loans
Commercial
Totals
December 31, 2019
Impaired loans
Commercial real estate
Commercial
Totals
Fair Value Measurements at Reporting Date Using:
Quoted Prices in
Active Markets for Other Observable
Significant
Significant
Unobservable
Identical Assets
Level 1
Inputs
Level 2
Inputs
Level 3
Total
$
$
$
$
2,000 $
2,000 $
215 $
1,805
2,020 $
—
—
$
$
—
—
—
$
$
— $
— $
— $
—
— $
2,000
2,000
215
1,805
2,020
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2020 and 2019:
(In thousands)
December 31, 2020
Impaired loans
Commercial
December 31, 2019
Impaired loans
Fair Value
Valuation Technique
Unobservable Input
Range
$
2,000 Business valuation
Comparable company evaluations
—
Commercial real estate $
Commercial
215 Real estate appraisals
1,805 Business valuation
Discount for dated appraisals
Comparable company evaluations
6 - 10%
—
The carrying amount of impaired commercial loans measured at fair value on a nonrecurring basis was $4.0 million and $2.0 million
with specific reserves of $2.0 million and $174,000 at December 31, 2020 and 2019, respectively. There were no outstanding impaired
commercial real estate loans at December 31, 2020. The carrying amount of impaired commercial real estate loans was $273,000 with
specific reserves of $58,000 at December 31, 2019.
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 December 31, 2020 and 2019:
(In thousands)
December 31, 2020
Financial assets:
Cash and cash equivalents
Debt securities available-for-sale
Federal Home Loan Bank of Boston
stock
Loans, net
Accrued interest receivable
Financial liabilities:
Deposits
Borrowings
December 31, 2019
Financial assets:
Cash and cash equivalents
Debt securities available-for-sale
Federal Home Loan Bank of Boston
stock
Loans, net
Accrued interest receivable
Financial liabilities:
Deposits
Borrowings
Carrying
Amount
Level 1
Level 2
Level 3
Total
Fair Value
$
83,819 $
32,215
83,819 $
—
— $
32,215
— $
—
83,819
32,215
895
1,314,810
6,371
1,237,428
13,500
N/A
—
—
—
—
N/A
—
6,371
N/A
1,321,143
—
N/A
1,321,143
6,371
1,237,867
14,016
—
—
1,237,867
14,016
$
59,658 $
41,790
59,658 $
—
— $
41,790
— $
—
59,658
41,790
1,416
959,286
2,854
849,905
24,998
N/A
—
—
—
—
N/A
—
2,854
N/A
958,270
—
850,774
25,351
—
—
N/A
958,270
2,854
850,774
25,351
The carrying amounts of financial instruments shown above are included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 — ASSET PURCHASE
On January 17, 2020, the Company completed an asset purchase of a mortgage warehouse line of business, which comprised primarily
of mortgage warehouse loans. This line of business was originally developed by United Bank in Connecticut. People’s United Bank,
N.A. acquired United Bank in 2019 and made the business decision to no longer support the mortgage warehouse line of business
developed by United Bank. The Company acquired the mortgage warehouse loan portfolio, plus aggregate accrued interest and fees,
fixed assets, and prepaid expenses. The Company also assumed the employment contracts of the six employees in the department and
agreed to pay all costs associated with the acquisition, which totaled $80,000 and were reflected in the Company’s income statement for
the year ended December 31, 2020.
The following table summarizes the consideration paid for the mortgage warehouse line of business and the amounts of assets purchased:
(In thousands)
Consideration:
Cash
Recognized amounts of identifiable assets acquired:
Loans
Accrued interest and fees
Premises and equipment
Other assets
Total identifiable assets
$
66,962
66,672
250
24
16
66,962
$
The Company paid par for the purchase. A valuation was performed and the fair value of the loans purchased approximates the purchase
price.
NOTE 17 — CONDENSED FINANCIAL STATEMENTS OF PARENT ONLY
Financial information pertaining only to Provident Bancorp, Inc. is as follows:
Provident Bancorp, Inc. - Parent Only Balance Sheet
(In thousands)
Assets
Cash and due from banks
Investment in common stock of The Provident Bank
Other assets
Total assets
Liabilities and Shareholders' Equity
Other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
Provident Bancorp, Inc. - Parent Only Income Statement
(In thousands)
Total income
Operating expenses
Income before income taxes and equity in undistributed net income of
The Provident Bank
Applicable income tax (benefit) provision
Income before equity in income of subsidiaries
Equity in undistributed net income of The Provident Bank
Net income
F-38
2020
2019
42,850 $
183,343
9,821
236,014 $
158 $
235,856
236,014 $
51,634
168,737
10,636
231,007
74
230,933
231,007
Years Ended
December 31,
2020
2019
371 $
494
(123)
(34)
(89)
12,074
11,985 $
245
105
140
39
101
10,707
10,808
$
$
$
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident Bancorp, Inc. - Parent Only Statement of Cash Flows
(In thousands)
Cash flows from operating activities:
Twelve Months Ended
December 31,
2020
2019
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
11,985 $
10,808
Equity in undistributed earnings of subsidiaries
Deferred tax benefit
Decrease (increase) in other assets
Increase in other liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Investment in The Provident Bank
Purchase of other investment
Capital contribution from Provident Bancorp
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from sale of common stock, net
Cash dividends paid on common stock
Shares surrendered related to tax withholdings on restricted stock awards
Purchase of common stock
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
NOTE 18 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(12,074)
111
704
82
808
—
—
—
—
—
(1,636)
(131)
(7,825)
(9,592)
(8,784)
51,634
42,850 $
(10,707)
—
(7,381)
39
(7,241)
(37,631)
(500)
372
(37,759)
91,578
—
(193)
—
91,385
46,385
5,249
51,634
(In thousands)
Interest and dividend
income
Interest expense
Net interest and dividend
income
Provision for loan losses
Gain on sale of securities,
net
Other income
Total noninterest income
Total noninterest expense
Income tax expense
Net income
Earnings per share (1):
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2020
2019
2020
2019
2020
2019
2020
2019
$
14,089 $
2,017
12,129 $
1,971
14,654 $
1,619
12,731 $
2,130
15,178 $
1,183
13,316 $
2,259
16,482 $
1,112
13,362
1,788
12,072
3,099
10,158
1,462
13,035
872
10,601
1,354
13,995
760
11,057
833
15,370
866
11,574
1,677
—
1,010
1,010
8,306
446
1,231 $
113
933
1,046
6,746
778
2,218 $
—
704
704
8,361
1,256
3,250 $
—
1,056
1,056
6,883
889
2,531 $
—
911
911
9,686
1,258
3,202 $
—
1,040
1,040
6,460
1,295
3,509 $
—
918
918
9,455
1,665
4,302 $
—
969
969
7,466
849
2,551
$
Basic
Diluted
$
$
Weighted Average Shares
(1):
0.06 $
0.06 $
0.12 $
0.12 $
0.18 $
0.18 $
0.14 $
0.14 $
0.18 $
0.18 $
0.19 $
0.19 $
0.24 $
0.24 $
0.15
0.15
Basic
Diluted
18,115,970 18,730,676 18,150,106 18,758,735 18,185,995 18,786,692 17,912,975 18,006,471
18,261,282 18,807,840 18,179,858 18,895,918 18,222,766 18,965,924 18,007,580 18,135,220
___________________
(1) Share amounts related to periods prior to the date of the Conversion (October 16, 2019) have been restated to give the
retroactive recognition to the exchange ratio applied in the Conversion (2.0212-to-one).
F-39
5 MARKET STRE ET • A ME SBURY, MA 01913 • BANKPROV.COM
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Report are the property of their respective owners.