Provident Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Provident Bancorp, Inc.	t1502582_ex32.htm
EX-31.1 - EXHIBIT 31.1 - Provident Bancorp, Inc.	t1502582_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Provident Bancorp, Inc.	t1502582_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2015

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

For the transition period from _______________ to ______________________

Commission File No. 001-37504

Provident Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Massachusetts		45-3231576
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

5 Market Street, Amesbury, Massachusetts		01913
(Address of Principal Executive Offices)		Zip Code

(978) 834-8555

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES x NO¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company x
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of November 6, 2015, there were 9,498,722 shares of the Registrant’s common stock, no par value per share, issued and outstanding.

Provident Bancorp, Inc.

Form 10-Q

		Page

Part I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	2

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)	3

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014 (unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (unaudited)	6-7

	Notes to Consolidated Financial Statements (unaudited)	8-10

Item 2.	Management’s Discussion and Analysis of Financial Condition	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41

Item 4.	Controls and Procedures	41

Part II.	Other Information

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 3.	Defaults upon Senior Securities	41

Item 4.	Mine Safety Disclosures	41

Item 5.	Other Information	41

Item 6.	Exhibits	42

Signatures		43

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

	At			At
	September 30,			December 31,
(In thousands)	2015			2014
	(unaudited)
Assets
Cash and due from banks	$	9,469		$	7,533
Interest-bearing demand deposits with other banks		16,672			1,311
Money market mutual funds		216			714
Cash and cash equivalents		26,357			9,558
Investments in available-for-sale securities (at fair value)		67,042			76,032
Investments in held-to-maturity securities (fair values of $46,778 as of September 30, 2015 and $47,435 as of December 31, 2014)		45,194			45,559
Federal Home Loan Bank stock, at cost		3,642			3,642
Loans, net		521,785			494,183
Bank owned life insurance		15,879			12,144
Premises and equipment, net		10,203			10,503
Accrued interest receivable		2,001			2,056
Deferred tax asset, net		4,053			3,632
Other assets		2,956			1,297
Total assets	$	699,112		$	658,606

Liabilities and Equity
Deposits:
Noninterest-bearing	$	153,324		$	128,407
Interest-bearing		404,775			408,527
Total deposits		558,099			536,934
Federal Home Loan Bank advances		17,412			39,237
Other liabilities		6,587			6,644
Total liabilities		582,098			582,815
Shareholders' Equity:
Preferred stock; authorized 50,000 shares: senior non-cumulative perpetual, Series A, no par, 17,145 shares issued and outstanding at September 30, 2015 and December 31, 2014; liquidation value $1,000 per share		17,145			17,145
Common stock, no par value: 30,000,000 and 275,000 shares authorized as of September 30, 2015 and December 31, 2014, respectively; 9,498,722 and 275,000 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively		-			-
Additional paid-in capital		43,128			275
Retained earnings		58,477			55,959
Accumulated other comprehensive income		1,716			2,412
Unearned compensation - ESOP 357,152 and 0 shares at September 30, 2015 and December 31, 2014, respectively		(3,452	)		-
Total shareholders' equity		117,014			75,791
Total liabilities and shareholders' equity	$	699,112		$	658,606

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PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In thousands)	2015			2014		2015		2014
				(unaudited)
Interest and dividend income:
Interest and fees on loans	$	5,634		$	5,051	$	16,294	$	14,625
Interest and dividends on securities		798			827		2,453		2,571
Interest on interest-bearing deposits		16			1		27		4
Total interest and dividend income		6,448			5,879		18,774		17,200
Interest expense:
Interest on deposits		410			437		1,227		1,307
Interest on Federal Home Loan Bank advances		157			141		437		427
Total interest expense		567			578		1,664		1,734
Net interest and dividend income		5,881			5,301		17,110		15,466
Provision for loan losses		174			187		645		921
Net interest and dividend income after provision for loan losses		5,707			5,114		16,465		14,545
Noninterest income:
Service charges on deposit accounts		105			40		188		121
Service charges and fees - other		468			460		1,289		1,331
Gain on sales, calls and donated securities, net		215			-		317		424
Other income		372			418		1,049		1,082
Total noninterest income		1,160			918		2,843		2,958
Noninterest expense:
Salaries and employee benefits		3,016			2,663		8,681		7,678
Occupancy expense		383			336		1,170		1,001
Equipment expense		132			122		400		458
FDIC assessment		93			86		283		256
Data processing		142			146		415		394
Marketing expense		18			8		144		130
Professional fees		217			151		662		469
Charitable Foundation expense		2,150			-		2,150		-
Other		719			713		2,310		2,511
Total noninterest expense		6,870			4,225		16,215		12,897
(Loss) income before income tax (benefit) expense		(3	)		1,807		3,093		4,606
Income tax (benefit) expense		(133	)		556		721		1,058
Net income	$	130		$	1,251	$	2,372	$	3,548

Income (loss) per share:
Basic		N/A			N/A		N/A		N/A
Diluted		N/A			N/A		N/A		N/A

Weighted Average Shares:
Basic		N/A			N/A		N/A		N/A
Diluted		N/A			N/A		N/A		N/A

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PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2015			2014			2015			2014

Net income	$	130		$	1,251		$	2,372		$	3,548
Other comprehensive income before tax:
Unrealized (losses) gains on securities:
Change in net unrealized holding (losses) gains arising during the period		(265	)		81			(800	)		2,333
Less: Reclassification adjustment for realized gains in net income		(215	)		-			(317	)		(424	)
Other comprehensive (loss) income before tax		(480	)		81			(1,117	)		1,909
Income tax benefit (expense)		169			(6	)		421			(721	)
Other comprehensive (loss) income, net of tax		(311	)		75			(696	)		1,188
Total comprehensive (loss) income	$	(181	)	$	1,326		$	1,676		$	4,736

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PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

												Accumulated
	Shares of					Additional						Other			Unearned
	Common			Preferred		Paid-in			Retained			Comprehensive			Compensation
(In thousands)	Stock			Stock		Capital			Earnings			Income			ESOP			Total

Balance, December 31, 2013		275,000		$	17,145	$	275		$	51,569		$	838		$	-		$	69,827
Net income		-			-		-			3,548			-			-			3,548
Net change in other comprehensive income		-			-		-			-			1,188			-			1,188
Preferred stock dividends		-			-		-			(129	)		-			-			(129	)
Balance, September 30, 2014		275,000		$	17,145	$	275		$	54,988		$	2,026		$	-		$	74,434

Balance, December 31, 2014		275,000		$	17,145	$	275		$	55,959		$	2,412		$	-		$	75,791
Net income		-			-		-			2,372			-			-			2,372
Net change in other comprehensive income		-			-		-			-			(696	)		-			(696	)
Preferred stock dividends		-			-		-			(129	)		-			-			(129	)
Issuance of 5,034,323 shares to the mutual holding company		5,034,323			-		-			-			-			-			-
Transfer due to stock offering		(275,000	)		-		(275	)		275			-			-			-
Issuance of 4,274,425 shares in the initial public offering, net of expenses of $1,547		4,274,425			-		41,197			-			-			-			41,197
Issuance and contribution of 189,974 shares to the Provident Community Charitable Organization		189,974			-		1,900			-			-			-			1,900
Purchase of 357,152 shares of common stock by the ESOP		-			-		-			-			-			(3,572	)		(3,572	)
ESOP shares earned (11,907 shares)		-			-		31			-			-			120			151
Balance, September 30, 2015		9,498,722		$	17,145	$	43,128		$	58,477		$	1,716		$	(3,452	)	$	117,014

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PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
(In thousands)	2015			2014
Cash flows from operating activities:
Net income	$	2,372		$	3,548
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities premiums, net of accretion		660			682
ESOP expense		151			-
Contribution of stock to charitable foundation		1,900			-
Gain on sales, calls and donations of securities, net		(317	)		(424	)
Change in deferred loan fees, net		(93	)		(80	)
Provision for loan losses		645			921
Depreciation and amortization		549			578
Increase in accrued interest receivable		55			42
(Increase) decrease in taxes receivable		(879	)		211
Increase in cash surrender value of life insurance		(288	)		(278	)
Increase in other assets		(779	)		(638	)
(Decrease) increase in other liabilities		(57	)		596
Net cash provided by operating activities		3,919			5,158

Cash flows from investing activities:
Purchases of available-for-sale securities		(1,415	)		(1,156	)
Proceeds from sales of available-for-sale securities		739			1,693
Proceeds from pay downs, maturities and calls of available-for-sale securities		8,570			10,799
Purchases of held-to-maturity securities		-			(1,434	)
Proceeds from pay downs, maturities and calls of held-to-maturity securities		-			1,456
Redemption of Federal Home Loan Bank Stock		-			1,676
Loan originations and principal collections, net		(28,174	)		(30,334	)
Recoveries of loans previously charged off		20			50
Loans purchased		-			(7,706	)
Additions to premises and equipment		(249	)		(497	)
Purchase of bank owned life insurance		(3,447	)		-
Net cash used in investing activities		(23,956	)		(25,453	)

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PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

	Nine Months Ended
	September 30,
(In thousands)	2015			2014
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		28,927			21,378
Net (decrease) increase in time deposits		(7,762	)		3,365
Proceeds from sale of common stock, net		41,197			-
Common stock purchased by ESOP		(3,572	)		-
Payments made on Federal Home Loan Bank long-term advances		-			(3,351	)
Net change in Federal Home Loan Bank short-term advances		(21,825	)		(5,000	)
Preferred stock dividends		(129	)		(129	)
Net cash provided by financing activities		36,836			16,263

Net increase (decrease) in cash and cash equivalents		16,799			(4,032	)
Cash and cash equivalents at beginning of year		9,558			15,356
Cash and cash equivalents at end of year	$	26,357		$	11,324

Supplemental disclosures:
Interest paid	$	1,658		$	1,692
Income taxes paid		1,600			902

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PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(1)

Basis of Presentation

The accompanying unaudited financial statements of Provident Bancorp, Inc., a Massachusetts corporation (the “Company”), were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three and nine months period ended September 30, 2015 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. These financial statements should be read in conjunction with the annual financial statements and notes thereto that are included in the Company’s Prospectus dated May 14, 2015, as filed with the Securities and Exchange Commission. The consolidated financial statements include the accounts of Provident Bancorp, Inc., its wholly owned subsidiary, The Provident Bank (the “Bank”), and the Bank’s wholly owned subsidiaries, Provident Security Corporation and 5 Market Street Security Corporation. Provident Security Corporation was established to buy, sell, and hold investments for its own account, and 5 Market Street Security Corporation, an inactive corporation, was established to buy, sell, and hold investments for its own account. All significant inter-company balances and transactions have been eliminated in consolidation. These consolidated financial statements consider events that occurred through the date the consolidated financial statements were issued.

(2)

Corporate Structure

On March 10, 2015, the Board of Directors of the Company adopted a plan of stock issuance (the “Plan”) pursuant to which the Company sold shares of common stock, representing a minority ownership of the estimated pro forma market value of the Company. On July 15, 2015, the Company closed its offering and issued 4,274,425 shares of common stock to the public at $10.00 per share, including 357,152 shares purchased by The Provident Bank Employee Stock Ownership Plan. In addition, the Company issued 5,034,323 shares to Provident Bancorp Inc., the Company’s mutual holding company, and 189,974 shares to The Provident Community Charitable Organization, Inc., a charitable foundation that was formed in connection with the stock offering and is dedicated to supporting charitable organizations operating in the Bank’s local community. A total of 9,498,722 shares of common stock are outstanding following the completion of the stock offering.

Expenses incurred related to the offering were $1.5 million, and have been recorded against offering proceeds.

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

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(3)

Recent Accounting Pronouncements

ASU No. 2014-01 — Investments — Equity Method and Joint Ventures (Topic 323) — "Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the Financial Accounting Standards Board (FASB) Emerging Issues Task Force)”. The ASU permits an entity to make an accounting policy election to account for its investment in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportionate amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). The decision to apply the proportionate amortization method of accounting should be applied consistently to all qualifying affordable housing project investments. A reporting entity that uses the effective yield or other method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply such method to those preexisting investments. The amendments were effective for the Company on January 1, 2015. The application of this guidance did not have a material impact on the Company's financial statements.

ASU No. 2014-04, Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40) — "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar agreement. In addition, the amendments require disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure in accordance with local requirements of the applicable jurisdiction. An entity can elect to adopt the amendments using either a modified retrospective method or a prospective transition method. The amendments were effective for the Company on January 1, 2015. The application of this guidance did not have a material impact on the Company's financial statements.

ASU No. 2014-14, Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40) — "Classification of Certain Government-Guaranteed Residential Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”. The ASU has been issued to reduce diversity in practice in the classification of foreclosed residential mortgage loans held by creditors that are fully guaranteed under certain government programs, including the Federal Housing Administration guarantees. A residential mortgage loan would be derecognized and a separate other receivable would be recognized upon foreclosure if the loan has both of the following characteristics: (i) the loan has a government guarantee that is not separable from the loan before foreclosure entitling the creditor to the full unpaid principal balance of the loan; and (ii) at the time of foreclosure, the creditor has the intent to make a claim on the guarantee and the ability to recover the full unpaid principal balance of the loan through the guarantee. Notably, upon foreclosure, the separate other receivable would be measured based on the current amount of the loan balance expected to be recovered under the guarantee. The amendments are effective for the Company beginning on January 1, 2016. The Company does not expect the application of this guidance to have a material impact on the Company's financial statements.

ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

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ASU No. 2015-03, “Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The standard is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The guidance should be applied on a retrospective basis. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

ASU No. 2015-05, “Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

ASU No. 2015-16, Business Combinations (Topic 805) — “Simplifying the Accounting for Measurement-Period Adjustments”. This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not expect the application of this guidance to have a material impact on the Company's financial statements.

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(4)

Investment Securities

The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at September 30, 2015 and December 31, 2014:

	Amortized			Gross		Gross
	Cost			Unrealized		Unrealized		Fair
(In thousands)	Basis			Gains		Losses		Value

September 30, 2015
U.S. Government and federal agency	$	1,995		$	57	$	-	$	2,052
State and municipal		3,374			314		-		3,688
Corporate debt		1,000			87		-		1,087
Asset-backed securities		2,366			-		32		2,334
Government mortgage-backed securities		45,800			888		159		46,529
Trust preferred securities		1,368			58		176		1,250
Marketable equity securities		8,558			2,112		352		10,318
		64,461			3,516		719		67,258
Money market mutual funds included in cash and cash equivalents		(216	)		-		-		(216	)
Total available-for-sale securities	$	64,245		$	3,516	$	719	$	67,042

December 31, 2014
U.S. Government and federal agency	$	1,992		$	92	$	-	$	2,084
State and municipal		3,479			422		-		3,901
Corporate debt		1,000			114		-		1,114
Asset-backed securities		2,732			-		87		2,645
Government mortgage-backed securities		54,063			989		199		54,853
Trust preferred securities		1,502			-		380		1,122
Marketable equity securities		8,063			3,048		84		11,027
		72,831			4,665		750		76,746
Money market mutual funds included in cash and cash equivalents		(714	)		-		-		(714	)
Total available-for-sale securities	$	72,117		$	4,665	$	750	$	76,032

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The following summarizes the amortized cost of investment securities classified as held-to-maturity and their approximate fair values at September 30, 2015 and December 31, 2014:

	Amortized		Gross		Gross
	Cost		Unrealized		Unrealized		Fair
(In thousands)	Basis		Gains		Losses		Value

September 30, 2015
State and municipal	$	45,194	$	1,650	$	66	$	46,778

December 31, 2014
State and municipal	$	45,559	$	1,940	$	64	$	47,435

The scheduled maturities of debt securities were as follows at September 30, 2015:

	Available-for- Sale		Held-to-Maturity
	Fair		Amortized		Fair
(In thousands)	Value		Cost Basis		Value

Due within one year	$	2,185	$	90	$	90
Due after one year through five years		1,364		2,650		2,728
Due after five years through ten years		619		5,701		5,852
Due after ten years		3,909		36,753		38,108
Government mortgage-backed securities		46,529		-		-
Asset-backed securities		2,334		-		-
	$	56,940	$	45,194	$	46,778

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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 September 30, 2015 and December 31, 2014:

	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Losses		Value		Losses		Value		Losses

September 30, 2015
Temporarily impaired securities:
State and municipal	$	4,670	$	33	$	1,457	$	33	$	6,127	$	66
Asset-backed securities		-		-		2,010		32		2,010		32
Government mortgage-backed securities		1,343		3		9,629		156		10,972		159
Trust preferred securities		-		-		1,149		176		1,149		176
Marketable equity securities		1,842		200		452		152		2,294		352
Total temporarily impaired securities	$	7,855	$	236	$	14,697	$	549	$	22,552	$	785

December 31, 2014
Temporarily impaired securities:
State and municipal	$	-	$	-	$	5,847	$	64	$	5,847	$	64
Asset-backed securities		-		-		2,645		87		2,645		87
Government mortgage-backed securities		2,472		4		12,518		195		14,990		199
Trust preferred securities		26		36		1,096		344		1,122		380
Marketable equity securities		683		80		115		4		798		84
Total temporarily impaired securities	$	3,181	$	120	$	22,221	$	694	$	25,402	$	814

Government mortgage-backed securities, state and municipal securities and asset-backed securities: Because the decline in fair value of the government mortgage-backed securities, asset backed securities and state and municipal securities is primarily attributable to changes in interest rates and not credit quality, and because the Company has the intent and ability to hold these investments until market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

Marketable equity securities: Management continuously monitors equity securities for impairment by reviewing the financial condition of the issuer, company-specific events, industry developments, and general economic conditions. Management reviews corporate financial reports, credit agency reports and other publicly available information. Based on these reviews, these securities are not considered to be other-than-temporarily impaired.

Trust preferred securities: Management monitors its pooled-trust preferred securities for possible other-than-temporary-impairment on a quarterly basis. This review included an analysis of collateral reports, cash flows, stress default levels and financial ratios of the underlying issuers. Management utilizes a third party to compile this data and perform other-than-temporary-impairment cash flow testing. Critical assumptions that go into the other-than-temporary-impairment cash flow testing are prepayment speeds, default rates of the underlying issuers and discount margins. The result of the third-party other-than-temporary-impairment cash flow testing indicated no other-than-temporary-impairment as of September 30, 2015.

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(5) Loans

A summary of loans is as follows:

	At						At
	September 30,						December 31,
	2015						2014
(In thousands)	Amount			Percent			Amount			Percent
Commercial real estate	$	268,522			50.69	%	$	249,691			49.76	%
Commercial		107,298			20.25	%		97,589			19.45	%
Residential real estate		95,707			18.06	%		104,568			20.84	%
Construction and land development		56,216			10.61	%		47,079			9.38	%
Consumer		2,076			0.39	%		2,863			0.57	%
		529,819			100.00	%		501,790			100.00	%
Allowance for loan losses		(7,744	)					(7,224	)
Deferred loan fees, net		(290	)					(383	)
Net loans	$	521,785					$	494,183

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The following tables set forth information regarding the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2015 and 2014:

	For the three months ended September 30,
			Construction
	Commercial		and Land		Residential
(In thousands)	Real Estate		Development		Real Estate			Commercial			Consumer			Unallocated			Total
Allowance for loan losses:

Balance at June 30, 2015	$	3,510	$	921	$	541		$	2,108		$	159		$	330		$	7,569
Charge-offs		-		-		-			8			(16	)		-			(8	)
Recoveries		-		-		-			8			1			-			9
Provision (benefit)		83		175		(106	)		18			(4	)		8			174
Balance at September 30, 2015	$	3,593	$	1,096	$	435		$	2,142		$	140		$	338		$	7,744

Balance at June 30, 2014	$	3,408	$	483	$	712		$	1,555		$	157		$	252		$	6,567
Charge-offs		-		-		(30	)		-			(16	)		-			(46	)
Recoveries		-		-		-			1			3			-			4
Provision (benefit)		237		90		(18	)		(15	)		25			(132	)		187
Balance at September 30, 2014	$	3,645	$	573	$	664		$	1,541		$	169		$	120		$	6,712

	For the nine months ended September 30,
				Construction
	Commercial			and Land		Residential
(In thousands)	Real Estate			Development		Real Estate			Commercial			Consumer			Unallocated			Total
Allowance for loan losses:

Balance at December 31, 2014	$	3,500		$	872	$	560		$	1,751		$	184		$	357		$	7,224
Charge-offs		-			-		-			(96	)		(49	)		-			(145	)
Recoveries		-			-		6			9			5			-			20
Provision (benefit)		93			224		(131	)		478						(19	)		645
Balance at September 30, 2015	$	3,593		$	1,096	$	435		$	2,142		$	140		$	338		$	7,744

Balance at December 31, 2013	$	3,207		$	363	$	725		$	1,331		$	206		$	245		$	6,077
Charge-offs		(243	)		-		(30	)		-			(63	)		-			(336	)
Recoveries		20			2		24			-			4			-			50
Provision (benefit)		661			208		(55	)		210			22			(125	)		921
Balance at September 30, 2014	$	3,645		$	573	$	664		$	1,541		$	169		$	120		$	6,712

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The following table sets forth information regarding the allowance for loan losses and related loan balances by segment at September 30, 2015 and December 31, 2014:

			Construction
	Commercial		and Land		Residential
(In thousands)	Real Estate		Development		Real Estate		Commercial		Consumer		Unallocated		Total
September 30, 2015
Ending balance:
Individually evaluated for impairment	$	-	$	-	$	-	$	494	$	-	$	-	$	494
Ending balance:
Collectively evaluated for impairment		3,593		1,096		435		1,648		140		338		7,250
Total allowance for loan losses ending balance	$	3,593	$	1,096	$	435	$	2,142	$	140	$	338	$	7,744

Loans:
Ending balance:
Individually evaluated for impairment	$	3,531	$	-	$	440	$	1,772	$	-	$	-	$	5,743
Ending balance:
Collectively evaluated for impairment		264,991		56,216		95,267		105,526		2,076		-		524,076
Total loans ending balance	$	268,522	$	56,216	$	95,707	$	107,298	$	2,076	$	-	$	529,819

December 31, 2014
Ending balance:
Individually evaluated for impairment	$	-	$	-	$	-	$	62	$	-	$	-	$	62
Ending balance:
Collectively evaluated for impairment		3,500		872		560		1,689		184		357		7,162
Total allowance for loan losses ending balance	$	3,500	$	872	$	560	$	1,751	$	184	$	357	$	7,224

Loans:
Ending balance:
Individually evaluated for impairment	$	4,276	$	-	$	221	$	821	$	-	$	-	$	5,318
Ending balance:
Collectively evaluated for impairment		245,415		47,079		104,347		96,768		2,863		-		496,472
Total loans ending balance	$	249,691	$	47,079	$	104,568	$	97,589	$	2,863	$	-	$	501,790

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The following tables set forth information regarding non-accrual loans and loan delinquencies by portfolio segment at September 30, 2015 and December 31, 2014:

													90 Days
					90 Days		Total						or More
	30 - 59		60 - 89		or More		Past		Total		Total		Past Due		Non-accrual
(In thousands)	Days		Days		Past Due		Due		Current		Loans		and Accruing		Loans

September 30, 2015
Residential real estate	$	-	$	243	$	-	$	243	$	95,464	$	95,707	$	-	$	1,301
Commercial real estate		-		-		102		102		268,420		268,522		-		598
Construction and land development		-		-		-		-		56,216		56,216		-		-
Commercial		186		-		176		362		106,936		107,298		-		1,199
Consumer		-		13		-		13		2,063		2,076		-		-
Total	$	186	$	256	$	278	$	720	$	529,099	$	529,819	$	-	$	3,098

December 31, 2014
Residential real estate	$	-	$	404	$	423	$	827	$	103,741	$	104,568	$	-	$	1,564
Commercial real estate		110		132		363		605		249,086		249,691		-		3,002
Construction and land development		-		-		-		-		47,079		47,079		-		-
Commercial		149		108		350		607		96,982		97,589		-		516
Consumer		9		-		-		9		2,854		2,863		-		-
Total	$	268	$	644	$	1,136	$	2,048	$	499,742	$	501,790	$	-	$	5,082

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Information about the Company’s impaired loans by portfolio segment was as follows at September 30, 2015 and December 31, 2014:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized

September 30, 2015
With no related allowance recorded:
Residential real estate	$	440	$	440	$	-	$	295	$	18
Commercial real estate		3,531		3,531		-		3,916		87
Construction and land development		-		-		-		-		-
Commercial		711		711		-		599		17
Consumer		-		-		-		-		-
Total impaired with no related allowance		4,682		4,682		-		4,810		122

With an allowance recorded:
Residential real estate		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Construction and land development		-		-		-		-		-
Commercial		1,061		1,098		494		853		-
Consumer		-		-		-		-		-
Total impaired with an allowance recorded		1,061		1,098		494		853		-

Total
Residential real estate		440		440		-		295		18
Commercial real estate		3,531		3,531		-		3,916		87
Construction and land development		-		-		-		-		-
Commercial		1,772		1,809		494		1,452		17
Consumer		-		-		-		-		-
Total impaired loans	$	5,743	$	5,780	$	494	$	5,663	$	122


December 31, 2014
With no related allowance recorded:
Residential real estate	$	221	$	221	$	-	$	368	$	24
Commercial real estate		4,276		4,276		-		3,070		161
Construction and land development		-		-		-		-		-
Commercial		506		506		-		370		20
Consumer		-		-		-		-		-
Total impaired with no related allowance		5,003		5,003		-		3,808		205

With an allowance recorded:
Residential real estate		-		-		-		-		-
Commercial real estate		-		-		-		279		-
Construction and land development		-		-		-		-		-
Commercial		315		318		62		328		12
Consumer		-		-		-		-		-
Total impaired with an allowance recorded		315		318		62		607		12

Total
Residential real estate		221		221		-		368		24
Commercial real estate		4,276		4,276		-		3,349		161
Construction and land development		-		-		-		-		-
Commercial		821		824		62		698		32
Consumer		-		-		-		-		-
Total impaired loans	$	5,318	$	5,321	$	62	$	4,415	$	217

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The following summarizes troubled debt restructurings entered into during the nine months ended September 30, 2015:

(Dollars in thousands)	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment

September 30, 2015
Troubled debt restructurings:
Commercial		4	$	1,479	$	1,479
Residential real estate		2		226		226
Commercial real estate		2		464		464
		8	$	2,169	$	2,169

We approved seven troubled debt restructures with no specific reserves required based on our analysis of the borrowers’ repayment ability and/or collateral coverage. Of these, two commercial loans to the same borrower were placed on a 13-month interest only period with re-amortization to follow based on the remaining term. One commercial loan and one owner-occupied commercial real estate mortgage to the same borrower were re-amortized over an extended term and maturity to ease up the borrowers’ cash flow. One investment commercial real estate loan was placed on interest only payments to allow the borrower time to market the property, with principal and interest payments to follow. Finally, two residential real estate mortgages were modified to interest only payments and later were re-amortized over an extended term and maturity.

We approved one troubled debt restructure that required a specific reserve consisting of a commercial loan that was modified to defer principal payments. We have classified this loan as doubtful and maintain a 50% reserve on the balance of the loan.

The following tables present the Company’s loans by risk rating and portfolio segment at September 30, 2015 and December 31, 2014:

					Construction
	Residential		Commercial		and Land
(In thousands)	Real Estate		Real Estate		Development		Commercial		Consumer		Total

September 30, 2015
Grade:
Pass	$	-	$	257,164	$	51,096	$	100,485	$	-	$	408,745
Special mention		-		6,063		5,120		2,732		-		13,915
Substandard		1,596		5,295		-		3,159		-		10,050
Doubtful		-		-		-		922		-		922
Not formally rated		94,111		-		-		-		2,076		96,187
Total	$	95,707	$	268,522	$	56,216	$	107,298	$	2,076	$	529,819

December 31, 2014
Grade:
Pass	$	-	$	236,689	$	37,867	$	89,269	$	-	$	363,825
Special mention		-		5,336		9,212		6,498		-		21,046
Substandard		1,374		7,666		-		1,822		-		10,862
Not formally rated		103,194		-		-		-		2,863		106,057
Total	$	104,568	$	249,691	$	47,079	$	97,589	$	2,863	$	501,790

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Credit Quality Information

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

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

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

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

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

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

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

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

(6) Federal Home Loan Bank Advances

Borrowings from the FHLB are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain commercial loans and other qualified assets.

In August of 2015 the Bank modified $3.5 million of its FHLB borrowings and extended the maturity. The Bank incurred a prepayment penalty of $233,000. In accordance with ASC 470-50-40, the prepayment penalty is amortized over the life of the newly modified borrowing.

Maturities of advances from the FHLB ending after September 30, 2015 are summarized as follows:

(In thousands)
2016	$	9,112
2017		5,000
2020		3,300
Total	$	17,412

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(7)

Fair Value Measurements

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

Basis of Fair Value Measurements

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

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

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

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Fair Values of Financial Instruments Measured on a Recurring Basis

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

The Company classifies its investments in trust preferred securities as Level 3 securities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

The Company classified its investments in marketable equity securities as Level 1 securities. Such securities are classified as Level 1 securities because fair values are obtained through quoted market prices for identical securities in active exchange markets.

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The following summarizes financial instruments measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014:

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
(In thousands)	Total		Level 1		Level 2		Level 3

September 30, 2015
U.S. Government and federal agency	$	2,052	$	-	$	2,052	$	-
State and municipal		3,688		-		3,688		-
Corporate debt		1,087		-		1,087		-
Asset-backed securities		2,334		-		2,334		-
Mortgage-backed securities		46,529		-		46,529		-
Trust preferred securities		1,250		-		-		1,250
Marketable equity securities		10,102		10,102		-		-
Totals	$	67,042	$	10,102	$	55,690	$	1,250

December 31, 2014
U.S. Government and federal agency	$	2,084	$	-	$	2,084	$	-
State and municipal		3,901		-		3,901		-
Corporate debt		1,114		-		1,114		-
Asset-backed securities		2,645		-		2,645		-
Mortgage-backed securities		54,853		-		54,853		-
Trust preferred securities		1,122		-		-		1,122
Marketable equity securities		10,313		10,313		-		-
Totals	$	76,032	$	10,313	$	64,597	$	1,122

The following is a summary of activity for Level 3 financial instruments measured at fair value on a recurring basis for the nine months periods ended September 30, 2015 and 2014.

(In thousands)	Available-for- Sale Securities

Balance beginning January 1, 2015	$	1,122
Total gains or (losses) (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		262
Paydowns		(134	)
Ending balance, September 30, 2015	$	1,250

Balance beginning January 1, 2014	$	1,392
Total gains or (losses) (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		941
Paydowns		(1,093	)
Ending balance, September 30, 2014	$	1,240

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Fair Values of Financial Instruments Measured on a Nonrecurring Basis

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

The following summarizes financial instruments measured at fair value on a nonrecurring basis at September 30, 2015 and December 31, 2014:

	Fair Value Measurements at Reporting Date Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
			Identical Assets		Inputs		Inputs
(In thousands)	Total		Level 1		Level 2		Level 3

September 30, 2015
Impaired loans	$	567	$	-	$	-	$	567

December 31, 2014
Impaired loans	$	253	$	-	$	-	$	253

The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at September 30, 2015 and December 31, 2014:

(In thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
September 30, 2015
Impaired loans	$	567	Real estate appraisals	Discount for dated appraisals	6-10%
December 31, 2014
Impaired loans	$	253	Real estate appraisals	Discount for dated appraisals	6-10%

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(8)

Fair Value of Financial Instruments

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

The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at September 30, 2015 and December 31, 2014:

	Carrying		Fair Value
(In thousands)	Amount		Level 1		Level 2		Level 3		Total

September 30, 2015
Financial assets:
Cash and cash equivalents	$	26,357	$	26,357	$	-	$	-	$	26,357
Available-for-sale securities		67,042		10,102		55,690		1,250		67,042
Held-to-maturity securities		45,194		-		46,778		-		46,778
Federal Home Loan Bank of Boston stock		3,642		3,642		-		-		3,642
Loans, net		521,785		-		-		530,418		530,418
Accrued interest receivable		2,001		-		2,001		-		2,001
Financial liabilities:
Deposits		558,099		-		-		558,332		558,332
Federal Home Loan Bank advances		17,412		-		17,886		-		17,886

December 31, 2014
Financial assets:
Cash and cash equivalents	$	9,558	$	9,558	$	-	$	-	$	9,558
Available-for-sale securities		76,032		10,313		64,597		1,122		76,032
Held-to-maturity securities		45,559		-		47,435		-		47,435
Federal Home Loan Bank of Boston stock		3,642		3,642		-		-		3,642
Loans, net		494,183		-		-		501,049		501,049
Accrued interest receivable		2,056		-		2,056		-		2,056
Financial liabilities:
Deposits		536,934		-		-		537,281		537,281
Federal Home Loan Bank advances		39,237		-		40,020		-		40,020

(9)

Regulatory Capital

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

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to new capital regulations adopted by the Board of Governors of the Federal Reserve System (“FRB”) and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1

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capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that phases in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends repurchases shares or pay discretionary bonuses.

The new regulations implemented changes to what constitutes regulatory capital. Certain instruments no longer constitute qualifying capital, subject to phase-out periods. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 must be deducted from capital. The Bank has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on the Bank’s regulatory capital ratios.

The new regulations also changed the risk weights of certain assets, including an increase in the risk weight of certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or on non-accrual status to 150% from 100%, a credit conversion factor for the unused portion of commitments with maturities of less than one year that are not cancellable to 20% from 0%, an increase in the risk weight for mortgage servicing rights and deferred tax assets that are not deducted from capital to 250% from 100%, and an increase in the risk weight for equity exposures to 600% from 0%.

As of September 30, 2015 and December 31, 2014, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. The completion of the stock offering has significantly enhanced the Bank’s Regulatory Capital.

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

												To Be Well
												Capitalized Under
						For Capital						Prompt Corrective
	Actual					Adequacy Purposes						Action Provisions
(dollars in thousands)	Amount		Ratio			Amount			Ratio			Amount			Ratio
September 30, 2015
Total Capital (to Risk Weighted Assets)	$	101,655		18.0	%	$	44,008	>		8.0	%	$	55,010	>		10.0	%
Tier 1 Capital (to Risk Weighted Assets)		93,788		16.6			33,006	>		6.0			44,008	>		8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		93,788		16.6			24,754	>		4.5			35,756	>		6.5
Tier 1 Capital (to Average Assets)		93,788		13.3			26,562	>		4.0			33,202	>		5.0
December 31, 2014
Total Capital (to Risk Weighted Assets)	$	81,229		15.4	%	$	42,273	>		8.0	%	$	52,841	>		10.0	%
Tier 1 Capital (to Risk Weighted Assets)		73,282		13.9			21,136	>		4.0			31,705	>		6.0
Tier 1 Capital (to Average Assets)		73,282		11.3			25,915	>		4.0			32,393	>		5.0

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Employee Stock Ownership Plan

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

	September 30, 2015
Shares held by the ESOP include the following:
Allocated		-
Committed to be allocated		11,907
Unallocated		345,245
Total		357,152

The fair value of unallocated shares was approximately $4.3 million at September 30, 2015.

Total compensation expense recognized in connection with the ESOP for the three and nine months ended September 30, 2015 was $151,000.

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

Management’s discussion and analysis of financial condition and results of operations at September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

Forward-Looking Statements

This quarterly 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;

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;

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demand for loans and deposits in our market area;

our ability to continue to implement 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 laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations;

our ability to manage market risk, credit risk and operational risk in the current economic conditions;

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;

our ability to retain key employees;

our compensation expense associated with equity allocated or awarded to our employees;

our ability to redeem the Small Business Lending Fund (“SBLF”) preferred stock before the dividend rate on the preferred stock increases to 9.0% per annum; and

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events or otherwise. For further information, please see “Risk Factors” included in our Prospectus dated May 14, 2015, filed with the Securities and Exchange Commission on May 22, 2015.

Critical Accounting Policies

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

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

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

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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, commercial real estate and construction 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. Accordingly, we do not separately identify individual consumer and residential loans for impairment disclosures.

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction and land development, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during 2014 or for the nine months ended September 30, 2015.

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

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

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

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

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

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

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

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

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

Income Taxes. We recognize income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of our assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled.

We examine our significant income tax positions annually to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.

Balance Sheet Analysis

Assets. Total assets were $699.1 million at September 30, 2015, an increase of $40.5 million from $658.6 million at December 31, 2014. The increase resulted primarily from an increase in cash and cash equivalents of $16.8 million and an increase in loans of $27.6 million.

Cash and Cash Equivalents. Cash and cash equivalents increased $16.8 million, or 175.8%, to $26.4 million at September 30, 2015 from $9.6 million at December 31, 2014. The increase in cash and cash equivalents primarily resulted from the proceeds from the stock offering offset by increases in loans and bank owned life insurance.

Loans. At September 30, 2015, net loans were $521.8 million, or 74.6% of total assets, compared to $494.2 million, or 75.0% of total assets at December 31, 2014. An increase in commercial real estate loans of $18.8 million, or 7.5%, an increase in commercial loans of $9.7 million, or 9.9%, and an increase in construction and land development loans of $9.1 million, or 19.4%, was partially offset by a decrease in residential real estate loans. During the year ended December 31, 2014, we discontinued single-family residential real estate lending, with the exception of home equity lines of credit. We believe that new federal regulations governing the origination of single-family residential real estate loans would increase our costs and expand the risks associated with this type of lending beyond the benefits that we could realize from originating these loans. We have instead focused on commercial lending.

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The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated, excluding loans held for sale.

	At						At
	September 30,						December 31,
	2015						2014
(In thousands)	Amount			Percent			Amount			Percent
Commercial real estate	$	268,522			50.68	%	$	249,691			49.76	%
Commercial		107,298			20.25	%		97,589			19.45	%
Residential real estate		95,707			18.06	%		104,568			20.84	%
Construction and land development		56,216			10.61	%		47,079			9.38	%
Consumer		2,076			0.39	%		2,863			0.57	%
		529,819			100.00	%		501,790			100.00	%
Allowance for loan losses		(7,744	)					(7,224	)
Deferred loan fees, net		(290	)					(383	)
Net loans	$	521,785					$	494,183

Securities. Our available-for-sale securities portfolio decreased $9.0 million, or 11.8%, to $67.0 million at September 30, 2015 from $76.0 million at December 31, 2014, while our held-to-maturity securities portfolio decreased $365,000 to $45.2 million at September 30, 2015 from $45.6 million at December 31, 2014. Our securities portfolio decreased as we have set aside excess cash flows from securities to fund potential loan growth instead of re-investing the proceeds in investment securities.

Deposits. Total deposits increased $21.2 million, or 3.9%, to $558.1 million at September 30, 2015 from $536.9 million at December 31, 2014. The increase is primarily an increase in core deposits of $29.9 million offset by a decrease in time deposits of $8.8 million. The increase was attributed to our continued strategy of obtaining deposits.

Borrowings. Borrowings at September 30, 2015 consisted entirely of Federal Home Loan Bank advances. Borrowings decreased $21.8 million, or 55.6%, to $17.4 million at September 30, 2015 from $39.2 million at December 31, 2014. The decrease in borrowings is as a result of the funds received from our stock offering.

Shareholders’ Equity. Total shareholders’ equity increased $41.2 million, or 54.4%, to $117.0 million at September 30, 2015, from $75.8 million at December 31, 2014. The increase was due primarily to $41.2 million in funds received from the stock offering.

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Asset Quality.

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

	At			At
	September 30,			December 31,
	2015			2014
(In Thousands)
Non-accrual loans:
Real estate loans:
Residential	$	1,301		$	1,564
Commercial		598			1,773
Construction and land development		-			-
Commercial business loans		1,199			516
Consumer loans		-			-
Total non-accrual loans		3,098			3,853

Accruing loans past due 90 days or more		-			-

Real estate owned		-			-

Total non-performing assets	$	3,098		$	3,853

Total loans (1)	$	529,529		$	501,407
Total assets	$	699,112		$	658,606
Total non-performing loans to total loans (1)		0.59	%		0.77	%
Total non-performing assets to total assets		0.44	%		0.59	%

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

The decrease in non-performing assets at September 30, 2015 compared to December 31, 2014 was primarily due to a $2 million restructured loan, having proven the ability to pay the loan that was we upgraded to accrual status.

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.

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

	Nine Months Ended September 30,
	2015			2014
(In thousands)
Allowance at beginning of period	$	7,224		$	6,077
Provision for loan losses		645			921
Charge offs:
Real estate loans:
Residential		-			30
Commercial		-			243
Construction and land development		-			-
Commercial business loans		96			-
Consumer loans		49			63
Total charge-offs		145			336

Recoveries:
Real estate loans:
Residential		6			24
Commercial		-			20
Construction and land development		-			-
Commercial business loans		9			2
Consumer loans		5			4
Total recoveries		20			50

Net charge-offs		125			286

Allowance at end of period	$	7,744		$	6,712

Non-performing loans at end of period	$	3,098		$	3,853
Total loans outstanding at end of period (1)	$	529,529		$	483,573
Average loans outstanding during the period (1)	$	507,642		$	465,914

Allowance to non-performing loans		249.97	%		174.20	%
Allowance to total loans outstanding at end of period		1.46	%		1.39	%
Net charge-offs to average loans outstanding during the period (annualized)		0.03	%		0.08	%

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

Results of Operations for the Three Months Ended September 30, 2015 and 2014

General. Net income decreased $1.1 million, or 89.6%, to $130,000 for the three months ended September 30, 2015 from $1.3 million for the three months ended September 30, 2014. The decrease was related to the $2.2 million funding of the Bank’s new charitable foundation ($1.4 million net of tax) and an increase in salaries and employee benefits of $353,000, partially offset by gains on sales of investments of $215,000 and increased net interest income of $767,000.

Interest and Dividend Income. Interest and dividend income increased $569,000, or 9.7%, to $6.4 million for the three months ended September 30, 2015 from $5.9 million for the three months ended September 30, 2014. This was attributable to an increase in interest and fees on loans, which increased $583,000, or 11.5%, to $5.6

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million for the three months ended September 30, 2015 from $5.1 million for the three months ended September 30, 2014.

The increase in interest income on loans was due to an increase in average balance of $45.4 million, or 9.5%, to $522.4 million for the three months ended September 30, 2015 from $477.0 million for the three months ended September 30, 2014. The increase in interest income on loans was also due to a seven basis point increase in yield, to 4.31% for the three months ended September 30, 2015 from 4.24% for the three months ended September 30, 2014, due to our continued focus on higher yielding commercial lending.

Interest Expense. Interest expense decreased $11,000, or 1.9%, to $567,000 for the three months ended September 30, 2015 from $578,000 for the three months ended September 30, 2014, primarily caused by a decrease in interest expense on deposits. Interest expense on deposits decreased $27,000, or 6.2%, to $410,000 for the three months ended September 30, 2015 from $437,000 for the three months ended September 30, 2014, as the average rate paid on interest-bearing deposits decreased three basis points to 0.40% for the three months ended September 30, 2015 from 0.43% for the three months ended September 30, 2014. The decrease in the average rate is primarily the result in the decrease in the average rates paid on the certificates of deposits. The average balance of interest-bearing deposits increased $6.9 million, or 1.7%, to $411.1 million for the three months ended September 30, 2015 from $404.2 million for the three months ended September 30, 2014. The increase resulted from increases in the average balance of all deposit categories, except higher cost certificates of deposits, which declined $6.6 million or 5.2%.

Net Interest and Dividend Income. Net interest and dividend income increased $580,000, or 10.9%, to $5.9 million for the three months ended September 30, 2015 from $5.3 million for the three months ended September 30, 2014. Our net interest rate spread increased 1 basis point to 3.34% for the three months ended September 30, 2015 from 3.33% for the three months ended September 30, 2014, while our net interest margin increased five basis points to 3.53% for the three months ended September 30, 2015 from 3.48% for the three months ended September 30, 2014. The average yield we earned on interest-earning assets increased one basis point to 3.87% while the average rate paid on interest-bearing liabilities remained the same at 0.53%.

Provision for Loan Losses. The provision for loan losses was $174,000 for the three months ended September 30, 2015 compared to $187,000 for the three months ended September 30, 2014. The provisions recorded resulted in an allowance for loan losses of $7.7 million, or 1.46% of total loans at September 30, 2015, compared to $7.2 million, or 1.44% of total loans at December 31, 2014 and $6.7 million, or 1.39% of total loans at September 30, 2014. The increase in the allowance for loan losses from September 30, 2014 to September 30, 2015 resulted primarily from an increase in our loan portfolio as we apply historical loss ratios to newly originated loans, which, absent other factors, results in an increase in the allowance for loan losses as the loan portfolio increases.

Noninterest Income. Noninterest income was $1.2 million for the three months ended September 30, 2015 and $918,000 for the three months ended September 30, 2014. The increase was caused primarily by a $215,000 increase in gain on sales of securities of $215,000 for the three months ended September 30, 2015 compared to no gains in the same period of 2014.

Noninterest Expense. Noninterest expense increased $2.6 million, or 62.6%, to $6.9 million for the three months ended September 30, 2015 from $4.2 million for the three months ended September 30, 2014. The largest increase was related to the $2.2 million funding of the Bank’s new charitable foundation. Salaries and employee benefits expense increased $353,000, or 13.3%, to $3.0 million for the three months ended September 30, 2015 from $2.7 million for the three months ended September 30, 2014, due primarily to our hiring additional employees to support our loan growth. Occupancy expense increased $47,000, or 14.0% to $383,000 for the three months ended September 30, 2015, due primarily to the additional costs for branch maintenance and updates. Professional services expenses increased $66,000, or 43.7%, to $217,000 for the three months ended September 30, 2015 from $151,000 for the three months ended September 30, 2014 due to increased management training and legal fees.

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Income Tax Provision. We recorded a benefit for income taxes of $133,000 for the three months ended September 30, 2015 compared to a provision of $556,000 for the three months ended September 30, 2014. The benefit recognized during the 2015 quarter resulted primarily to the tax benefit recognized for the $2.2 million donation to the charitable foundation. The changes in the income tax provision were primarily due to changes in the components of pre-tax income. Our effective tax rates are below statutory federal and states rates due primarily to tax-exempt income related to investments in bank owned life insurance and municipal securities.

Average Balance sheet and Related Yields and Rates

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

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	For the Three Months Ended September 30,
	2015								2014
				Interest								Interest
	Average			Earned/		Yield/			Average			Earned/		Yield/
	Balance			Paid		Rate			Balance			Paid		Rate
(dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	522,404		$	5,634		4.31	%	$	477,012		$	5,051		4.24	%
Interest-earning deposits		25,828			16		0.25	%		1,557			1		0.26	%
Investment securities		114,450			769		2.69	%		127,121			808		2.54	%
Federal Home Loan Bank stock		3,642			29		3.19	%		4,097			19		1.86	%
Total interest-earning assets		666,324			6,448		3.87	%		609,787			5,879		3.86	%
Non-interest earning assets		36,377								33,411

Total assets	$	702,701							$	643,198

Interest-bearing liabilities:
Savings accounts	$	95,218			35		0.15	%	$	87,618			33		0.15	%
Money market accounts		112,993			76		0.27	%		111,697			72		0.26	%
Now accounts		83,418			32		0.15	%		78,845			32		0.16	%
Certificates of deposit		119,457			267		0.89	%		126,044			300		0.95	%
Total interest-bearing deposits		411,086			410		0.40	%		404,204			437		0.43	%
Federal Home Loan Bank advances		17,560			157		3.58	%		35,786			141		1.58	%
Total interest-bearing liabilities		428,646			567		0.53	%		439,990			578		0.53	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		151,094								123,505
Other noninterest-bearing liabilities		18,003								5,775
Total liabilities		597,743								569,270
Total equity		104,958								73,928
Total liabilities and equity	$	702,701							$	643,198

Net interest income				$	5,881							$	5,301
Interest rate spread (1)							3.34	%							3.33	%
Net interest-earning assets (2)	$	237,678							$	169,797
Net interest margin (3)							3.53	%							3.48	%
Average interest-earning assets to interest-bearing liabilities		155.45	%							138.59	%

(1)

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

(2)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3)

Net interest margin represents net interest income divided by average total interest-earning assets

Rate/Volume Analysis

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

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	For the Three Months Ended September 30, 2015
	Compared to the Three Months Ended September 30, 2014
	Increase (Decrease) Due to						Total
	Rate			Volume			Increase (Decrease)
(in thousands)
Interest-earning assets:
Loans	$	94		$	489		$	583
Interest-earning deposits		-			15			15
Investment securities		44			(83	)		(39	)
Federal Home Loan Bank Stock		12			(2	)		10

Total interest-earning assets		151			418			569

Interest-bearing liabilities:
Savings accounts		(1	)		3		$	2
Money Market Accounts		3			1			4
Now Accounts		(2	)		2			-
Certificates of deposit		(19	)		(14	)		(33	)

Total interest-bearing deposits		(18	)		(9	)		(27	)

Federal Home Loan Bank advances		114			(98	)		16

Total interest-bearing liabilities		95			(106	)		(11	)

Change in net interest income	$	55		$	525		$	580

Results of Operations for the Nine Months Ended September 30, 2015 and 2014

General. Net income decreased $1.2 million, or 33.1%, to $2.4 million for the nine months ended September 30, 2015 from $3.5 million for the nine months ended September 30, 2014. The decrease was related to the $2.2 million funding of the Bank’s new charitable foundation ($1.4 million net of tax), and an increase in salaries and employee benefits of $1.0 million. The increased expenses were partially offset by an increase in interest and dividend income of $1.6 million.

Interest and Dividend Income. Interest and dividend income increased $1.6 million, or 9.2%, to $18.8 million for the nine months ended September 30, 2015 from $17.2 million for the nine months ended September 30, 2014. This was attributable to an increase in interest and fees on loans, which increased $1.7 million, or 11.4%, to $16.3 million for the nine months ended September 30, 2015 from $14.6 million for the nine months ended September 30, 2014.

The increase in interest income on loans was due to an increase in average balance of $41.7 million, or 9.0%, to $507.6 million for the nine months ended September 30, 2015 from $465.9 million for the nine months ended September 30, 2014. The increase in interest income on loans was also due to a nine basis point increase in yield, to 4.28% for the nine months ended September 30, 2015 from 4.19% for the nine months ended September 30, 2014, due to our continued focus on higher yielding commercial lending.

Interest Expense. Interest expense decreased $70,000, or 4.0%, to $1.6 million for the nine months ended September 30, 2015 from $1.7 million for the nine months ended September 30, 2014, primarily caused by a decrease in interest expense on deposits. Interest expense on deposits decreased $80,000, or 6.1%, to $1.2 million for the nine months ended September 30, 2015 from $1.3 million for the nine months ended September 30, 2014 as the average rate paid on interest-bearing deposits decreased four basis points to 0.40% for the nine

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months ended September 30, 2015 from 0.44% for the nine months ended September 30, 2014. The decrease in rates paid is primarily the result of a decrease in the average rates paid on the certificates of deposits. The average balance of interest-bearing deposits increased $10.1 million, or 2.5%, to $407.9 million for the nine months ended September 30, 2015 from $397.8 million for the nine months ended September 30, 2014. The increase resulted from increases in the average balance of all deposit categories, except for certificate of deposit accounts, which decreased slightly. Interest expense on borrowings increased $10,000 to $437,000 for the nine months ended September 30, 2015 from $427,000 for the nine months ended September 30, 2014. The average balance of borrowings decreased $13.4 million while the rates paid on borrowings increased 59 basis points.

Net Interest and Dividend Income. Net interest and dividend income increased $1.6 million, or 10.6%, to $17.1 million for the nine months ended September 30, 2015 from $15.5 million for the nine months ended September 30, 2014. Our net interest rate spread increased 11 basis points to 3.39% for the nine months ended September 30, 2015 from 3.28% for the nine months ended September 30, 2014, while our net interest margin increased 13 basis points to 3.55% for the nine months ended September 30, 2015 from 3.42% for the nine months ended September 30, 2014. The average yield earned on interest-earning assets increased 10 basis points to 3.90% while we were able to decrease the average rate paid on interest-bearing liabilities decreased by one basis point to 0.51%.

Provision for Loan Losses. Our provision for loan losses was $645,000 for the nine months ended September 30, 2015 compared to $921,000 for the nine months ended September 30, 2014. The provisions recorded resulted in an allowance for loan losses of $7.7 million, or 1.46% of total loans at September 30, 2015, compared to $7.2 million, or 1.44% of total loans at December 31, 2014 and $6.7 million, or 1.39% of total loans at September 30, 2014. The increase in the allowance for loan losses from September 30, 2014 to September 30, 2015 resulted primarily from an increase in our loan portfolio as we apply historical loss ratios to newly originated loans, which, absent other factors, results in an increase in the allowance for loan losses as the loan portfolio increases.

Noninterest Income. Noninterest income was $2.8 million for the nine months ended September 30, 2015 and $3.0 million for the nine months ended September 30, 2014. The decrease was caused primarily by a $107,000 decrease in gain on sales, calls and donated securities, which totaled $317,000 for the nine months ended September 30, 2015 and $424,000 for the nine months ended September 30, 2014.

Noninterest Expense. Noninterest expense increased $3.3 million, or 25.7%, to $16.2 million for the nine months ended September 30, 2015 from $12.9 million for the nine months ended September 30, 2014. The largest increase was related to the $2.2 million funding of the Bank’s new charitable foundation. Salaries and employee benefits expense increased $1.0 million, or 13.0%, to $8.7 million for the nine months ended September 30, 2015 from $7.7 million for the nine months ended September 30, 2014, due primarily to our hiring additional employees to support our loan growth. Occupancy expense increased $169,000, or 16.9% to $1.2 million for the nine months ended September 30, 2015, due primarily to the additional costs for snow removal. Professional services expenses increased $193,000, or 41.2%, to $662,000 for the nine months ended September 30, 2015 from $469,000 for the nine months ended September 30, 2014 due to increased management training and development of our sales team. Other expense decreased $201,000, or 8.0% to $2.3 million for the nine months ended September 30, 2015, due primarily to a donation of $250,000 during the nine months ended September 30, 2014.

Income Tax Provision. We recorded a provision for income taxes of $721,000 for the nine months ended September 30, 2015, reflecting an effective tax rate of 23.3%, compared to $1.1 million, or 23.0%, for the nine months ended September 30, 2014. The changes in the income tax provision were primarily due to changes in the components of pre-tax income. The effective tax rates are below statutory federal and states rates due primarily to tax-exempt income related to investments in bank owned life insurance and municipal securities.

Average Balance sheet and Related Yields and Rates

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were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.

	For the Nine Months Ended September 30,
	2015								2014
				Interest								Interest
	Average			Earned/		Yield/			Average			Earned/		Yield/
	Balance			Paid		Rate			Balance			Paid		Rate
(dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	507,642		$	16,294		4.28	%	$	465,914		$	14,625		4.19	%
Interest-earning deposits		13,386			27		0.27	%		2,074			4		0.26	%
Investment securities		117,635			2,408		2.73	%		130,050			2,513		2.58	%
Federal Home Loan Bank Stock		3,642			45		1.65	%		4,844			58		1.60	%
Total interest-earning assets		642,305			18,774		3.90	%		602,882			17,200		3.80	%
Non-interest earning assets		33,780								33,499

Total assets	$	676,085							$	636,381

Interest-bearing liabilities:
Savings accounts	$	94,086			103		0.15	%	$	87,025			97		0.15	%
Money Market Accounts		111,679			222		0.27	%		110,477			209		0.25	%
Now Accounts		79,369			92		0.15	%		74,677			88		0.16	%
Certificates of deposit		122,738			810		0.88	%		125,589			913		0.97	%
Total interest-bearing deposits		407,872			1,227		0.40	%		397,768			1,307		0.44	%
Federal Home Loan Bank advances		31,085			437		1.87	%		44,452			427		1.28	%
Total interest-bearing liabilities		438,957			1,664		0.51	%		442,220			1,734		0.52	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		138,675								116,604
Other noninterest-bearing liabilities		11,941								5,298
Total liabilities		589,573								564,122
Total equity		86,512								72,259
Total liabilities and equity	$	676,085							$	636,381

Net interest income				$	17,110							$	15,466
Interest rate spread (1)							3.39	%							3.28	%
Net interest-earning assets (2)	$	203,348							$	160,662
Net interest margin (3)							3.55	%							3.42	%
Average interest-earning assets to interest-bearing liabilities		146.33	%							136.33	%

(1)

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

(2)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3)

Net interest margin represents net interest income divided by average total interest-earning assets

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Rate/Volume Analysis

	For the Nine Months Ended September 30, 2015
	Compared to the Nine Months Ended September 30, 2014
	Increase (Decrease) Due to						Total
	Rate			Volume			Increase (Decrease)
(in thousands)
Interest-earning assets:
Loans	$	336		$	1,333		$	1,669
Interest-earning deposits		-			23			23
Investment securities		144			(249	)		(105	)
Federal Home Loan Bank Stock		2			(15	)		(13	)
Total interest-earning assets		482			1,092			1,574
Interest-bearing liabilities:
Savings accounts		(2	)		8		$	6
Money Market Accounts		11			2			13
Now Accounts		(1	)		5			4
Certificates of deposit		(83	)		(20	)		(103	)
Total interest-bearing deposits		(75	)		(5	)		(80	)
Federal Home Loan Bank advances		162			(152	)		10
Total interest-bearing liabilities		87			(157	)		(70	)
Change in net interest income	$	395		$	1,249		$	1,644

Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2015, cash and cash equivalents totaled $26.4 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $67.0 million at September 30, 2015.

At September 30, 2015, we had the ability to borrow a total of $175.4 million from the Federal Home Loan Bank of Boston. On that date, we had $17.4 million in advances outstanding. At September 30, 2015, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $101.2 million, none of which was outstanding as of that date.

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We have no material commitments or demands that are likely to affect our liquidity other than set forth below. In the event loan demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of Boston or obtain additional funds through brokered certificates of deposit.

At September 30, 2015 and December 31, 2014 we had $15.7 million and $9.1 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at September 30, 2015 and December 31, 2014, we had $163.9 million and $115.4 million in un-advanced funds to borrowers, respectively. We also had $4.3 million in outstanding letters of credit at September 30, 2015 and December 31, 2014.

Certificates of deposit due within one year of September 30, 2015 totaled $64.2 million, or 11.5% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit at September 30, 2015. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of securities. During the nine months ended September 30, 2015, we originated $138.5 million of loans, all of which were intended to be held in our portfolio, and we purchased $1.4 million of securities. During the nine months ended September 30, 2014, we originated $112.6 million of loans, including $112.6 million of loans to be held in our portfolio, and we purchased $1.2 million of securities.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increases in total deposits of $21.2 million and $24.7 million for the nine months ended September 30, 2015 and 2014, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Federal Home Loan Bank advances reflected a net decrease of $21.8 million and a decrease of $8.4 million during the nine months ended September 30, 2015 and 2014, respectively.

The Provident Bank is subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. At September 30, 2015, The Provident Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 9 of the Notes to the Unaudited Consolidated Financial Statements for additional information.

We paid $44,000 in dividends on our SBLF preferred stock during the quarter ended September 30, 2015. The per annum dividend rate on the SBLF preferred stock is currently 1.00%, but during the first quarter of 2016, the per annum dividend rate will increase to a fixed rate of 9.0% if any SBLF preferred stock remains outstanding at that time. Assuming the increased dividend rate of 9.0% per annum and assuming no redemption our annual dividends payable would increase to $1.5 million, which could have a negative effect on our liquidity and capital resources, including reducing our net income available to holders of our common stock and our earnings per share. The Company has begun the application process to redeem its SBLF preferred stock. The anticipated redemption will occur no later than January 2016.

The net proceeds from the stock offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of loans. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, resulting in increased net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, as well as other factors associated with the stock offering, our return on equity was adversely affected following the stock offering and could continue to be adversely affected in the future.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable, as the Company is a smaller reporting company.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2015. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2015, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not applicable, as the Company is a smaller reporting company.

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

(a)

Not applicable.

(b)

Not applicable.

(c)

There were no issuer repurchases of securities during the period covered by this Report.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

3.1	Amended and Restated Articles of Organization of Provident Bancorp, Inc. (1)
3.2	By-Laws of Provident Bancorp, Inc. (1)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101	The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.

(1)

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

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SIGNATURES

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

		PROVIDENT BANCORP, INC.

Date: November 12, 2015		/s/ David P. Mansfield
		David P. Mansfield
		President and Chief Executive Officer

Date: November 12, 2015		/s/ Carol L. Houle
		Carol L. Houle
		Executive Vice President and Chief Financial Officer

Attached files

Provident Bancorp, Inc. Reports

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