UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

o 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. 001-39090

Provident Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Maryland		84-4132422
(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, former address, and former fiscal year if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock	PVBC	The NASDAQ Stock Market LLC

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 o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO o

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


Large Accelerated Filer	o	Accelerated Filer	o
Non-accelerated Filer	x	Smaller Reporting Company	x
Emerging Growth Company	o

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

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

As of November 3, 2021, there were 17,925,430 shares of the Registrant’s common stock, $0.01 par value per share, outstanding.

‎

Provident Bancorp, Inc.

Form 10-Q


Part I.	Financial Information	Page

Item 1.	Interim Financial Statements	2

	Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020	2

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	3

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (unaudited)	7

	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	45

Part II.	Other Information	46

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

Signatures		48

Part I.Financial Information

Item 1.Financial Statements

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS



	At		At
	September 30,		December 31,
	2021		2020
(Dollars in thousands)	(unaudited)
Assets
Cash and due from banks	$	19,517	$	11,830
Short-term investments		171,644		71,989
Cash and cash equivalents		191,161		83,819
Debt securities available-for-sale (at fair value)		35,901		32,215
Federal Home Loan Bank stock, at cost		785		895
Loans, net of allowance for loan losses of $18,142 and $18,518 as of
September 30, 2021 and December 31, 2020, respectively		1,322,485		1,314,810
Bank owned life insurance		36,826		36,684
Premises and equipment, net		14,363		14,716
Accrued interest receivable		5,070		6,371
Right-of-use assets		4,141		4,258
Other assets		14,566		12,013
Total assets	$	1,625,298	$	1,505,781

Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing	$	494,839	$	383,079
Interest-bearing		866,280		854,349
Total deposits		1,361,119		1,237,428
Long-term borrowings		13,500		13,500
Operating lease liabilities		4,413		4,488
Other liabilities		15,005		14,509
Total liabilities		1,394,037		1,269,925
Shareholders' equity:
Preferred stock; authorized 50,000 shares:
no shares issued and outstanding		—		—
Common stock, $0.01 par value, 100,000,000 shares authorized;
17,889,759 and 19,047,544 shares issued and outstanding
at September 30, 2021 and December 31, 2020, respectively		179		191
Additional paid-in capital		123,797		139,450
Retained earnings		115,163		104,508
Accumulated other comprehensive income		933		1,058
Unearned compensation - ESOP		(8,811)		(9,351)
Total shareholders' equity		231,261		235,856
Total liabilities and shareholders' equity	$	1,625,298	$	1,505,781

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

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME



	Three Months Ended					Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
(Dollars in thousands, except per share data)	(unaudited)
Interest and dividend income:
Interest and fees on loans	$	16,084	$	14,972	$	47,079	$	43,123
Interest and dividends on debt securities available-for-sale		183		200		538		717
Interest on short-term investments		69		6		121		81
Total interest and dividend income		16,336		15,178		47,738		43,921
Interest expense:
Interest on deposits		760		1,075		2,510		4,164
Interest on borrowings		72		108		213		655
Total interest expense		832		1,183		2,723		4,819
Net interest and dividend income		15,504		13,995		45,015		39,102
Provision for loan losses		232		760		2,654		4,731
Net interest and dividend income after provision for loan losses		15,272		13,235		42,361		34,371
Noninterest income:
Customer service fees on deposit accounts		485		382		1,297		998
Service charges and fees - other		818		252		1,606		973
Bank owned life insurance income		509		234		951		584
Other income		11		43		90		70
Total noninterest income		1,823		911		3,944		2,625
Noninterest expense:
Salaries and employee benefits		7,136		5,929		20,317		17,130
Occupancy expense		449		384		1,278		1,254
Equipment expense		128		151		377		432
Deposit insurance		124		118		341		242
Data processing		320		253		955		701
Marketing expense		36		46		154		181
Professional fees		410		464		1,310		1,217
Directors' compensation		259		177		774		542
Software depreciation and implementation		255		256		742		694
Write down of other assets and receivables		225		1,307		225		1,807
Other		726		601		2,336		2,153
Total noninterest expense		10,068		9,686		28,809		26,353
Income before income tax expense		7,027		4,460		17,496		10,643
Income tax expense		1,940		1,258		4,946		2,960
Net income	$	5,087	$	3,202	$	12,550	$	7,683
Earnings per share:
Basic	$	0.31	$	0.18	$	0.74	$	0.42
Diluted	$	0.30	$	0.18	$	0.72	$	0.42
Weighted Average Shares:
Basic		16,637,852		18,185,995		16,870,674		18,149,745
Diluted		17,235,852		18,222,766		17,344,147		18,184,550

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

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
(In thousands)
Net income	$	5,087	$	3,202	$	12,550	$	7,683
Other comprehensive income:
Unrealized holding (losses) gains arising during the period on debt securities available-for-sale		(88)		79		(172)		810
Unrealized (loss) gain		(88)		79		(172)		810
Income tax effect		22		(22)		47		(209)
Total other comprehensive (loss) income		(66)		57		(125)		601
Comprehensive income	$	5,021	$	3,259	$	12,425	$	8,284

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

‎

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)



	For the three months ended September 30, 2021 and 2020
									Accumulated
	Shares of				Additional				Other		Unearned
	Common		Common		Paid-in		Retained		Comprehensive		Compensation
(In thousands, except share data)	Stock		Stock		Capital		Earnings		Income (Loss)		ESOP		Total
Balance, June 30, 2021		18,246,136	$	182	$	128,666	$	110,752	$	999	$	(8,991)	$	231,608
Net income		—		—		—		5,087		—		—		5,087
Dividends declared ($0.04 per share)		—		—		—		(676)		—		—		(676)
Other comprehensive loss		—		—		—		—		(66)		—		(66)
Stock-based compensation expense, net of forfeitures		—		—		700		—		—		—		700
Repurchase of common stock		(357,877)		(3)		(5,764)		—		—		—		(5,767)
Stock options exercised, net		1,500		—		13		—		—		—		13
ESOP shares earned		—		—		182		—		—		180		362
Balance, September 30, 2021		17,889,759	$	179	$	123,797	$	115,163	$	933	$	(8,811)	$	231,261

Balance, June 30, 2020		19,472,310	$	195	$	146,778	$	98,057	$	1,002	$	(9,710)	$	236,322
Net income		—		—		—		3,202		—		—		3,202
Dividends declared ($0.03 per share)		—		—		—		(584)		—		—		(584)
Other comprehensive income		—		—		—		—		57		—		57
Stock-based compensation expense, net of forfeitures		—		—		257		—		—		—		257
ESOP shares earned		—		—		(3)		—		—		180		177
Balance, September 30, 2020		19,472,310	$	195	$	147,032	$	100,675	$	1,059	$	(9,530)	$	239,431

‎

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)

(Unaudited)


		For the nine months ended September 30, 2021 and 2020
									Accumulated
	Shares of				Additional				Other		Unearned
	Common		Common		Paid-in		Retained		Comprehensive		Compensation
(In thousands, except share data)	Stock		Stock		Capital		Earnings		Income (Loss)		ESOP		Total
Balance, December 31, 2020		19,047,544	$	191	$	139,450	$	104,508	$	1,058	$	(9,351)	$	235,856
Net income		—		—		—		12,550		—		—		12,550
Dividends declared ($0.04 per share)		—		—		—		(1,895)		—		—		(1,895)
Other comprehensive loss		—		—		—		—		(125)		—		(125)
Stock-based compensation expense, net of forfeitures		—		—		1,978		—		—		—		1,978
Restricted stock award grants, net of forfeitures		60,000		—		—		—		—		—		—
Repurchase of common stock		(1,226,976)		(12)		(18,120)		—		—		—		(18,132)
Shares surrendered related to tax withholdings on restricted stock awards		(202)		—		(2)		—		—		—		(2)
Stock options exercised, net		9,393				22		—		—		—		22
ESOP shares earned		—		—		469		—		—		540		1,009
Balance, September 30, 2021		17,889,759	$	179	$	123,797	$	115,163	$	933	$	(8,811)	$	231,261

Balance, December 31, 2019		19,473,818	$	195	$	146,174	$	94,159	$	458	$	(10,053)	$	230,933
Net income		—		—		—		7,683		—		—		7,683
Dividends declared ($0.03 per share)		—		—		—		(1,167)		—		—		(1,167)
Other comprehensive income		—		—		—		—		601		—		601
Stock-based compensation expense, net of forfeitures		—		—		760		—		—		—		760
Restricted stock award grants, net of forfeitures		(1,508)		—		—		—		—		—		—
ESOP shares earned		—		—		98		—		—		523		621
Balance, September 30, 2020		19,472,310	$	195	$	147,032	$	100,675	$	1,059	$	(9,530)	$	239,431

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

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 30,
(In thousands)	2021		2020
Cash flows from operating activities:
Net income	$	12,550	$	7,683
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities premiums, net of accretion		136		211
ESOP expense		1,009		621
Change in deferred loan fees, net		639		3,081
Provision for loan losses		2,654		4,731
Depreciation and amortization		760		814
Decrease (increase) in accrued interest receivable		1,301		(3,014)
Deferred tax benefit		(863)		(2,007)
Share-based compensation expense		1,978		760
Bank-owned life insurance income		(664)		(584)
Proceeds from death benefit on cash surrender value for bank-owned life insurance		(287)		—
Principal repayments of operating lease obligations		(75)		(59)
Net (increase) decrease in other assets		(1,642)		928
Net increase in other liabilities		496		230
Net cash provided by operating activities		17,992		13,395

Cash flows from investing activities:
Purchases of debt securities available-for-sale		(10,639)		—
Proceeds from pay downs, maturities and calls of debt securities available-for-sale		6,644		7,969
Redemption of Federal Home Loan Bank stock		110		521
Loan originations and purchases, net of paydowns		(10,968)		(323,195)
Cash paid for mortgage warehouse asset purchase, net		—		(66,962)
Additions to premises and equipment		(290)		(656)
Purchase of bank owned life insurance		—		(8,950)
Proceeds from distribution of bank owned life insurance		809		—
Net cash used in investing activities		(14,334)		(391,273)

‎

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)



	Nine Months Ended
	September 30,
(In thousands)	2021		2020
Cash flows from financing activities:
Net increase in noninterest-bearing accounts		111,760		139,003
Net increase in interest-bearing accounts		11,931		179,326
Repurchase of common stock		(18,132)		—
Cash dividends paid on common stock		(1,895)		(1,167)
Proceeds from exercise of stock options, net		22		—
Net change in short-term borrowings		—		60,027
Payments made on Federal Home Loan Bank long-term advances		—		(11,525)
Shares surrendered related to tax withholdings on restricted stock awards		(2)		—
Net cash provided by financing activities		103,684		365,664

Net increase (decrease) in cash and cash equivalents		107,342		(12,214)
Cash and cash equivalents at beginning of period		83,819		59,658
Cash and cash equivalents at end of period	$	191,161	$	47,444

Supplemental disclosures:
Interest paid	$	2,723	$	4,819
Income taxes paid		6,804		4,330
Reclassification of premises and equipment to other assets		—		3
Recognition of right-of-use assets		—		693
Recognition of operating lease liabilities		—		693

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

‎

PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited financial statements of Provident Bancorp, Inc., a Maryland corporation (the “Company”), were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of the financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three-and nine-month periods ended September 30, 2021 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. Certain amounts in 2020 have been reclassified to be consistent with the 2021 consolidated financial statement presentation and had no effect on the net income reported in the consolidated statements of income. These financial statements should be read in conjunction with the annual financial statements and notes thereto included in the annual report on Form 10-K the Company filed with the Securities and Exchange Commission (the “SEC”) on March 26, 2021.

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

(2) Corporate Structure

The Company is a Maryland corporation whose primary purpose is to act as the holding company for the Bank. The Bank, headquartered in Amesbury, Massachusetts, operates its business from seven banking offices located in Amesbury and Newburyport, Massachusetts and Portsmouth, Exeter, Bedford, and Seabrook, New Hampshire. The Bank also has two loan production offices in Boston, Massachusetts and Ponte Vedra, Florida. Our primary deposit products are checking, savings, and term certificate accounts and our primary lending products are commercial mortgages, commercial and mortgage warehouse loans. BankProv is also a commercial bank for corporate clients, specializing in offering adaptive and technology-first banking solutions to niche markets, including cryptocurrency, renewable energy, fin-tech and search fund lending.

(3) COVID-19

Since the distribution of COVID-19 vaccinations began in December 2020, significant progress has been made to combat the spread of the virus and as a result, there has been an uptick in economic activity, particularly those industries that had been most heavily impacted by the economic downturn caused by the COVID-19 pandemic. Despite the progress, COVID-19 has caused significant disruption in the U.S. economy and has adversely impacted a broad range of industries in which the Company’s customers operate, which could impair their ability to fulfill their financial obligations. While it is not possible to know the full extent of these impacts as of the date of this filing, detailed below are potentially material items of which we are aware.

Congress, the President, and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings (“TDR”) for a limited period of time to account for the effects of COVID-19. Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) was enacted on December 27, 2020, providing for a second round of Paycheck Protection Program (“PPP”) loans. Also on December 27, 2020, the Consolidated Appropriations Act (“CAA”) was signed into law. Section 541 of the CAA extends the provision in Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings”, to January 1, 2022. The Federal Reserve also took actions to mitigate the economic impact of the COVID-19 pandemic, including cutting the federal funds rate 150 basis points and targeting a 0 to 25 basis point rate. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Economic Aid Act amended the PPP by extending the authority of the Small Business Administration (“SBA”) to guarantee loans and the ability of PPP lenders to disburse PPP loans until March 31, 2021. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extended the PPP application deadline to May 31, 2021, and provided the SBA additional time to process applications through June 30, 2021.

Financial position and results of operations

In keeping with the guidance from regulators, during the height of the pandemic, the Company worked with COVID-19 affected customers to waive fees from a variety of sources and worked with affected borrowers to defer payments, interest and fees. The Company continues to monitor and measure the impact and potential future impact on operations.

Allowance for loan losses

Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for credit losses, which could cause the provision for loan losses to increase. It also is possible that asset quality could worsen and expenses associated with collection efforts and loan charge-offs could increase. The Company participated in both rounds of the PPP, providing loans to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government; if that should change, the Company could be required to increase its allowance for loan losses through an additional provision for loan losses charged to earnings.

In accordance with guidance issued by federal banking agencies, the Company worked with borrowers that were unable to meet contractual obligations due to the effects of COVID-19 by providing modifications to allow for deferral of interest or principal and interest payments a case-by-case basis. In order to mitigate the risk associated with these modifications the Company incorporated covenants that require borrowers to submit quarterly financial statements, prohibit them from distributing funds to any owner or stockholder (with the exception of payroll) and also prohibit them from making any payments on debt owed to subordinated debt holders for the duration of their modification. If borrowers are unable to return to their normal payment plan following their modification period, the Company could be required to increase its allowance for loan losses through an additional provision for loan losses charged to earnings.

Valuation

Valuation and fair value measurement challenges may occur. For example, COVID-19 could cause a further and sustained decline in the financial markets or the occurrence of what management would deem a valuation triggering event that could result in an impairment charge to earnings, such as our investment securities.

(4) Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace the current “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. On October 16, 2019, FASB approved a delay in the implementation until January 2023 for smaller reporting companies as defined by the SEC. The amendments in this update will be effective for the Company on January 1, 2023. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of its pending adoption of this guidance on the Company’s financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This ASU simplifies the accounting for income taxes and is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The Company adopted the provision of ASU 2019-12 effective January 1, 2021 and the adoption did not have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), to ease the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. The provisions in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification would be considered "minor" so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting.

ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Company is currently evaluating the effect that this ASU will have on the Company’s consolidated financial statements.

In October 2020, the FASB issued ASU No. 2020-08, Receivables (Topic 310) – Nonrefundable Fees and Other Costs (“ASU 2020-08”), to provide further clarification and update the previously issued guidance in ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). ASU 2017-08 shortened the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. The Company early adopted the provisions of ASU 2017-08, effective January 1, 2017. ASU 2017-08 requires that at each reporting period, to the extent that the amortized cost of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess premium should be amortized to the next call date. ASU 2020-08 is effective for fiscal years ending after December 15, 2020 and early adoption was not permitted. The provisions under ASU 2020-08 are required to be applied prospectively. The Company adopted the provision of ASU 2020-08 effective January 1, 2021 and the adoption did not have a material impact on the consolidated financial statements.

(5) Investment Securities

The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at September 30, 2021 and December 31, 2020:



	Amortized		Gross		Gross
	Cost		Unrealized		Unrealized		Fair
(In thousands)	Basis		Gains		Losses		Value
September 30, 2021
State and municipal securities	$	9,029	$	654	$	—	$	9,683
Asset-backed securities		8,455		261		—		8,716
Government mortgage-backed securities		17,189		329		16		17,502
Total debt securities available-for-sale	$	34,673	$	1,244	$	16	$	35,901
December 31, 2020
State and municipal securities	$	10,211	$	683	$	—	$	10,894
Asset-backed securities		4,432		278		—		4,710
Government mortgage-backed securities		16,172		449		10		16,611
Total debt securities available-for-sale	$	30,815	$	1,410	$	10	$	32,215

The scheduled maturities of debt securities at September 30, 2021 are summarized in the table below. Actual maturities of asset and mortgage-backed securities may differ from contractual maturities because the assets and mortgages underlying the securities may be repaid without any penalties. Because asset- and mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.



	Available-for-Sale
	Amortized		Fair
(In thousands)	Cost		Value
Due after one year through five years	$	585	$	621
Due after five years through ten years		598		602
Due after ten years		7,846		8,460
Government mortgage-backed securities		17,189		17,502
Asset-backed securities		8,455		8,716
	$	34,673	$	35,901

There were no realized gains or losses on sales and calls during the nine months ended September 30, 2021 or September 30, 2020.

Securities with carrying amounts of $16.0 million and $21.3 million were pledged to secure available borrowings with the Federal Home Loan Bank at September 30, 2021 and December 31, 2020, respectively.

Other-than-temporary impairment assessment: Management assesses whether the decline in fair value of investment securities is other-than-temporary on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates impairments in value both qualitatively and quantitatively to assess whether they are other-than-temporary.

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or longer are as follows at September 30, 2021 and December 31, 2020:



	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, 2021
Temporarily impaired securities:
Government mortgage-backed securities	$	5,391	$	12	$	127	$	4	$	5,518	$	16
Total temporarily impaired debt securities	$	5,391	$	12	$	127	$	4	$	5,518	$	16

December 31, 2020
Temporarily impaired securities:
Government mortgage-backed securities	$	—	$	—	$	817	$	10	$	817	$	10
Total temporarily impaired debt securities	$	—	$	—	$	817	$	10	$	817	$	10

Government mortgage-backed securities: The gross unrealized losses on government mortgage-backed securities were primarily attributable to changes in interest rates since the time of purchase. Management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2021.

(6) Loans

A summary of loans is as follows:



	At		At
	September 30,		December 31,
(In thousands)	2021		2020
Commercial real estate	$	423,526	$	438,949
Commercial (1)		609,638		565,976
Residential real estate		25,100		32,785
Construction and land development		34,800		28,927
Consumer		2,389		5,547
Mortgage warehouse		250,048		265,379
		1,345,501		1,337,563
Allowance for loan losses		(18,142)		(18,518)
Deferred loan fees, net (2)		(4,874)		(4,235)
Net loans	$	1,322,485	$	1,314,810

(1)Includes $27.4 million and $41.8 million in PPP loans at September 30, 2021 and December 31, 2020, respectively.

(2)Includes $1.1 million and $993,000 in deferred fees related to PPP loans at September 30, 2021 and December 31, 2020, respectively.

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, 2021 and 2020:



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

Balance at June 30, 2021	$	5,753	$	12,396	$	141	$	445	$	336	$	341	$	—	$	19,412
Charge-offs		—		(1,570)		—		—		(37)		—		—		(1,607)
Recoveries		—		88		—		—		17		—		—		105
Provision (credit)		(267)		573		(32)		(8)		(68)		34		—		232
Balance at September 30, 2021	$	5,486	$	11,487	$	109	$	437	$	248	$	375	$	—	$	18,142

Balance at June 30, 2020	$	6,758	$	7,925	$	207	$	955	$	851	$	462	$	—	$	17,158
Charge-offs		—		(78)		—		—		(96)		—		—		(174)
Recoveries		—		—		—		—		44		—		—		44
Provision (credit)		106		869		(11)		(376)		(55)		227		—		760
Balance at September 30, 2020	$	6,864	$	8,716	$	196	$	579	$	744	$	689	$	—	$	17,788



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

Balance at December 31, 2020	$	6,095	$	10,543	$	184	$	447	$	586	$	663	$	—	$	18,518
Charge-offs		(150)		(2,979)		—		—		(228)		—		—		(3,357)
Recoveries		81		185		2		—		59		—		—		327
Provision (credit)		(540)		3,738		(77)		(10)		(169)		(288)		—		2,654
Balance at September 30, 2021	$	5,486	$	11,487	$	109	$	437	$	248	$	375	$	—	$	18,142

Balance at December 31, 2019	$	6,104	$	6,086	$	254	$	749	$	650	$	—	$	1	$	13,844
Charge-offs		(118)		(175)		—		(24)		(609)		—		—		(926)
Recoveries		—		7		4		—		128		—		—		139
Provision (credit)		878		2,798		(62)		(146)		575		689		(1)		4,731
Balance at September 30, 2020	$	6,864	$	8,716	$	196	$	579	$	744	$	689	$	—	$	17,788

The following table sets forth information regarding the allowance for loan losses and related loan balances by portfolio segment at September 30, 2021 and December 31, 2020:



(In thousands)	Commercial Real Estate		Commercial		Residential Real Estate		Construction and Land Development		Consumer		Mortgage Warehouse		Total
September 30, 2021
Allowance for loan losses:
Ending balance:
Individually evaluated
for impairment	$	—	$	1,257	$	—	$	—	$	—	$	—	$	1,257
Ending balance:
Collectively evaluated
for impairment		5,486		10,230		109		437		248		375		16,885
Total allowance for loan
losses ending balance	$	5,486	$	11,487	$	109	$	437	$	248	$	375	$	18,142

Loans (1):
Ending balance:
Individually evaluated
for impairment	$	20,762	$	3,960	$	159	$	—	$	—	$	—	$	24,881
Ending balance:
Collectively evaluated
for impairment		402,764		605,678		24,941		34,800		2,389		250,048		1,320,620
Total loans ending balance	$	423,526	$	609,638	$	25,100	$	34,800	$	2,389	$	250,048	$	1,345,501

(1)Balances represent gross loans. The difference between gross loans versus recorded investment, which would consist of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs, is not material.



(In thousands)	Commercial Real Estate		Commercial		Residential Real Estate		Construction and Land Development		Consumer		Mortgage Warehouse		Total
December 31, 2020
Allowance for loan losses:
Ending balance:
Individually evaluated
for impairment	$	—	$	2,024	$	—	$	—	$	—	$	—	$	2,024
Ending balance:
Collectively evaluated
for impairment		6,095		8,519		184		447		586		663		16,494
Total allowance for loan
losses ending balance	$	6,095	$	10,543	$	184	$	447	$	586	$	663	$	18,518

Loans (1):
Ending balance:
Individually evaluated
for impairment	$	21,039	$	4,458	$	162	$	—	$	—	$	—	$	25,659
Ending balance:
Collectively evaluated
for impairment		417,910		561,518		32,623		28,927		5,547		265,379		1,311,904
Total loans ending balance	$	438,949	$	565,976	$	32,785	$	28,927	$	5,547	$	265,379	$	1,337,563

The following tables set forth information regarding non-accrual loans and loan delinquencies by portfolio segment at September 30, 2021 and December 31, 2020:



													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, 2021
Commercial real estate	$	—	$	—	$	—	$	—	$	423,526	$	423,526	$	—	$	—
Commercial		96		—		1,873		1,969		607,669		609,638		—		2,108
Residential real estate		131		—		633		764		24,336		25,100		—		896
Construction and
land development		—		—		—		—		34,800		34,800		—		—
Consumer		32		4		32		68		2,321		2,389		—		32
Mortgage warehouse		—		—		—		—		250,048		250,048		—		—
Total	$	259	$	4	$	2,538	$	2,801	$	1,342,700	$	1,345,501	$	—	$	3,036

December 31, 2020
Commercial real estate	$	—	$	—	$	—	$	—	$	438,949	$	438,949	$	—	$	—
Commercial		4,358		—		291		4,649		561,327		565,976		—		4,198
Residential real estate		255		346		1,030		1,631		31,154		32,785		—		1,156
Construction and
land development		—		—		—		—		28,927		28,927		—		—
Consumer		61		21		64		146		5,401		5,547		—		65
Mortgage warehouse		—		—		—		—		265,379		265,379		—		—
Total	$	4,674	$	367	$	1,385	$	6,426	$	1,331,137	$	1,337,563	$	—	$	5,419

The following tables provide information with respect to the Company’s impaired loans:


	September 30, 2021						December 31, 2020
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(In thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate	$	20,762	$	20,912	$	—	$	21,039	$	21,312	$	—
Commercial		2,094		2,331		—		434		441		—
Residential real estate		159		159		—		162		162		—
Construction and land development		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—		—
Total impaired with no related allowance		23,015		23,402		—		21,635		21,915		—

With an allowance recorded:
Commercial real estate		—		—		—		—		—		—
Commercial		1,866		3,037		1,257		4,024		4,605		2,024
Residential real estate		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—		—
Total impaired with an allowance recorded		1,866		3,037		1,257		4,024		4,605		2,024

Total
Commercial real estate		20,762		20,912		—		21,039		21,312		—
Commercial		3,960		5,368		1,257		4,458		5,046		2,024
Residential real estate		159		159		—		162		162		—
Construction and land development		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—		—
Total impaired loans	$	24,881	$	26,439	$	1,257	$	25,659	$	26,520	$	2,024



	Three Months Ended September 30,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(In thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial real estate	$	20,785	$	166	$	1,383	$	28
Commercial		2,107		70		354		4
Residential real estate		159		1		163		1
Construction and land development		—		—		—		—
Consumer		—		—		—		—
Mortgage warehouse		—		—		—		—
Total impaired with no related allowance		23,051		237		1,900		33
With an allowance recorded:
Commercial real estate		—		—		20,354		1
Commercial		2,438		—		4,178		—
Residential real estate		—		—		—		—
Construction and land development		—		—		—		—
Consumer		—		—		—		—
Mortgage warehouse		—		—		—		—
Total impaired with an allowance recorded		2,438		—		24,532		1
Total
Commercial real estate		20,785		166		21,737		29
Commercial		4,545		70		4,532		4
Residential real estate		159		1		163		1
Construction and land development		—		—		—		—
Consumer		—		—		—		—
Mortgage warehouse		—		—		—		—
Total impaired loans	$	25,489	$	237	$	26,432	$	34



	Nine Months Ended September 30,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(In thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial real estate	$	20,815	$	509	$	1,455	$	56
Commercial		2,149		123		373		14
Residential real estate		161		6		164		6
Construction and land development		—		—		83		—
Consumer		—		—		—		—
Mortgage warehouse		—		—		—		—
Total impaired with no related allowance		23,125		638		2,075		76
With an allowance recorded:
Commercial real estate		—		—		20,695		253
Commercial		2,689		—		4,454		1
Residential real estate		—		—		—		—
Construction and land development		—		—		—		—
Consumer		—		—		—		—
Mortgage warehouse		—		—		—		—
Total impaired with an allowance recorded		2,689		—		25,149		254
Total
Commercial real estate		20,815		509		22,150		309
Commercial		4,838		123		4,827		15
Residential real estate		161		6		164		6
Construction and land development		—		—		83		—
Consumer		—		—		—		—
Mortgage warehouse		—		—		—		—
Total impaired loans	$	25,814	$	638	$	27,224	$	330

Troubled debt restructurings: Loans are considered to be troubled debt restructurings (“TDRs”) when the Company has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.

The following tables summarize TDRs entered into during the nine months ended September 30, 2021 and 2020:



	Nine Months Ended September 30,
	2021					2020
(Dollars in thousands)	Number of Contracts	Pre- ‎Modification ‎Outstanding ‎Recorded ‎Investment		Post-Modification ‎Outstanding ‎Recorded ‎Investment		Number of Contracts	Pre- ‎Modification ‎Outstanding ‎Recorded ‎Investment		Post-Modification ‎Outstanding ‎Recorded ‎Investment
Troubled debt restructurings:
Commercial real estate	—	$	—	$	—	9	$	18,811	$	20,311
Commercial	3		1,868		1,868	1		81		81
	3	$	1,868	$	1,868	10	$	18,892	$	20,392

There were no new TDRs approved during the three months ended September 30, 2021. During the nine months ended September 30, 2021, the Bank approved three TDRs, all related to one commercial relationship totaling $1.9 million. As of December 31, 2020, this relationship was deemed impaired, placed on non-accrual status and specific reserves of $1.8 million were allocated. A troubled debt restructuring was completed to provide the borrower with a three-month principal and interest deferral through April 2021; upon review in the second quarter an additional three-month principal and interest deferral was granted through August 2021. As of September 30, 2021, $1.6 million relating to this commercial relationship was charged-off. The remaining balance is on non-accrual status with specific reserves of $270,000.

There were no new TDRs approved during the three months ended September 30, 2020. During the nine months ended September 30, 2020, the Bank approved 10 TDRs. Of the 10 troubled debt restructurings, seven were for one commercial real estate loan relationship totaling $20.1 million. The Bank analyzed the relationship and modified the relationship as follows:

$16.5 million was placed on interest-only payments for three years at a reduced rate;

$2.1 million was restructured to amortize and pay out over a 10-year term at a reduced rate; and

$1.5 million was advanced for necessary capital expenditures. The advance was placed on interest-only payments for three years at a reduced rate.

Upon completion of the restructuring in the first quarter of 2020, the commercial relationship was placed on non-accrual status and after demonstrating the ability to pay the loan under the restructured terms, it was taken off non-accrual status in the fourth quarter of 2020 and specific reserves of $1.2 million were removed due to sufficient collateral. As of September 30, 2021, these loans were paying in accordance with the restructured terms and no new specific reserves have been attributed to the relationship.

Also during the nine months ended September 30, 2020, the Bank approved two troubled debt restructurings for another commercial real estate relationship totaling $165,000. These loans have a reduced rate for a period of two years. An impairment analysis was performed and a specific reserve of $8,000 was allocated to this relationship. The Bank also approved one troubled debt restructuring of a commercial loan totaling $81,000. This commercial loan was placed on an extended six month interest-only period with a new term and re-amortization to follow. An impairment analysis was performed and a specific reserve of $40,000 was allocated to this relationship.

The total recorded investment in TDRs was $23.4 million and $23.3 million at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

Additionally, the Company has worked with borrowers impacted by COVID-19 by providing modifications to allow for deferral of interest or principal and interest payments on a case-by-case basis. These modifications are excluded from troubled debt restructuring classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators and will continue to be reported as current during the payment deferral period.

The Company’s policy is to continue to accrue interest during the deferral period. Loans not meeting the CARES Act or regulatory guidance are evaluated for TDR and non-accrual treatment under the Company’s existing policies and procedures. Loan modifications made pursuant to the CARES Act or interagency guidance that were in payment deferral at September 30, 2021 and December 31, 2020 totaled approximately $12.0 million and $44.0 million, respectively. During the three months ended September 30, 2021, no new or additional deferrals were provided to borrowers. At September 30, 2021, there were four commercial and industrial loans that amounted to $2.7 million and one construction loan that amounted to $9.3 million that were in payment deferral pursuant to the CARES Act or interagency guidance. There were no commercial real estate, consumer, residential or mortgage warehouse loans that were in payment deferral at September 30, 2021 based on modifications made pursuant to the CARES Act or interagency guidance. At

December 31, 2020, there were eight commercial real estate loans that amounted to $12.4 million, 28 commercial and industrial loans that amounted to $22.4 million, one construction and land development loan that amounted to $9.0 million, and one residential mortgage loan that amounted to $177,000 that were in payment deferral pursuant to the CARES Act or interagency guidance. There were no consumer or mortgage warehouse loans that were in payment deferral at December 31, 2020 based on modifications made pursuant to the CARES Act or interagency guidance.

The following tables present the Company’s loans by risk rating and portfolio segment at September 30, 2021 and December 31, 2020:



(In thousands)	Commercial Real Estate		Commercial		Residential Real Estate			Construction ‎and Land ‎Development	Consumer		Mortgage Warehouse		Total
September 30, 2021
Grade:
Pass	$	372,620	$	554,143	$	—	$	33,762	$	—	$	250,048	$	1,210,573
Special mention		31,039		46,646		—		—		—		—		77,685
Substandard		19,867		8,274		896		1,038		—		—		30,075
Doubtful		—		575		—		—		—		—		575
Not formally rated		—		—		24,204		—		2,389		—		26,593
Total	$	423,526	$	609,638	$	25,100	$	34,800	$	2,389	$	250,048	$	1,345,501

December 31, 2020
Grade:
Pass	$	401,541	$	538,449	$	—	$	28,927	$	—	$	265,379	$	1,234,296
Special mention		17,702		13,625		—		—		—		—		31,327
Substandard		19,706		13,902		1,560		—		—		—		35,168
Not formally rated		—		—		31,225		—		5,547		—		36,772
Total	$	438,949	$	565,976	$	32,785	$	28,927	$	5,547	$	265,379	$	1,337,563

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.

On an annual basis, or more often if needed, the Company completes a credit recertification on all mortgage warehouse originators.

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. Ongoing monitoring is based upon the borrower’s payment activity.

Consumer loans are not formally rated.

(7) Deposits

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



	September 30,		December 31,
(In thousands)	2021		2020
NOW and demand	$	662,200	$	554,095
Regular savings		152,633		151,341
Money market deposits		454,104		353,793
Total non-certificate accounts		1,268,937		1,059,229

Certificate accounts of $250,000 or more		4,654		5,167
Certificate accounts less than $250,000		87,528		173,032
Total certificate accounts		92,182		178,199
Total deposits	$	1,361,119	$	1,237,428

(8) Borrowings

Advances consist of funds borrowed from the Federal Home Loan Bank (the “FHLB”). Maturities of advances from the FHLB as of September 30, 2021 are summarized as follows:



(In thousands)
Fiscal Year-End
2023	$	8,500
2025		5,000
Total	$	13,500

Borrowings from the FHLB, which aggregated $13.5 million at September 30, 2021, are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain commercial loans and qualified mortgage-backed government securities. The interest rates on FHLB advances ranged from 1.21% to 3.01%, and the weighted average interest rate on FHLB advances was 2.11% at September 30, 2021. All of the FHLB borrowings at September 30, 2021 are long-term with an original maturity of more than one year.

(9) Fair Value Measurements

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

Basis of Fair Value Measurements

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

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

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

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

The Company used the following methods and significant assumptions to estimate fair value:

Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate fair values.

Debt Securities Available-For-Sale: Fair values for investments are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or pricing models.

Loans receivable: Fair values are based on an exit price notion in which an orderly transaction would take place between market participants at the measurement date under current market conditions.

Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.

Deposit liabilities: The fair values disclosed for deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings: Fair values of Federal Reserve Bank (“FRB”) Discount Window and Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portions of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

Fair Values of Assets Measured on a Recurring Basis

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

The following summarizes financial instruments measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020:



	Fair Value Measurements at Reporting Date Using
					Significant		Significant
					Other Observable		Unobservable
					Inputs		Inputs
(In thousands)	Total		Level 1		Level 2		Level 3
September 30, 2021
State and municipal securities	$	9,683	$	—	$	9,683	$	—
Asset-backed securities		8,716		—		8,716		—
Government mortgage-backed securities		17,502		—		17,502		—
Totals	$	35,901	$	—	$	35,901	$	—

December 31, 2020
State and municipal securities	$	10,894	$	—	$	10,894	$	—
Asset-backed securities		4,710		—		4,710		—
Government mortgage-backed securities		16,611		—		16,611		—
Totals	$	32,215	$	—	$	32,215	$	—

Fair Values of Assets Measured on a Non-Recurring Basis

The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or market accounting or write-downs of individual assets.

Certain impaired loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.

The following summarizes assets measured at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020:



	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, 2021
Impaired loans
Commercial	$	684	$	—	$	—	$	684
Totals	$	684	$	—	$	—	$	684

December 31, 2020
Impaired loans
Commercial	$	2,000		—	$	—	$	2,000
Totals	$	2,000	$	—	$	—	$	2,000

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, 2021 and December 31, 2020:



(In thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
September 30, 2021
Impaired loans
Commercial	$	684	Business valuation	Comparable company evaluations	0% - 15%

December 31, 2020
Impaired loans
Commercial	$	2,000	Business valuation	Comparable company evaluations	—

At September 30, 2021, the carrying amount of impaired commercial loans measured at fair value on a nonrecurring basis was $1.9 million, net of specific reserves of $1.3 million and charge offs of $1.6 million. At December 31, 2020, the carrying amount of impaired commercial loans measured at fair value on a nonrecurring basis was $4.0 million, net of specific reserves of $2.0 million.

Fair Values 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, 2021 and December 31, 2020:



	Carrying		Fair Value
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
September 30, 2021
Financial assets:
Cash and cash equivalents	$	191,161	$	191,161	$	—	$	—	$	191,161
Available-for-sale debt securities		35,901		—		35,901		—		35,901
Federal Home Loan Bank of Boston stock		785		N/A		N/A		N/A		N/A
Loans, net		1,322,485		—		—		1,333,877		1,333,877
Accrued interest receivable		5,070		—		5,070		—		5,070
Financial liabilities:
Deposits		1,361,119		—		1,361,213		—		1,361,213
Borrowings		13,500		—		13,852		—		13,852

December 31, 2020
Financial assets:
Cash and cash equivalents	$	83,819	$	83,819	$	—	$	—	$	83,819
Available-for-sale debt securities		32,215		—		32,215		—		32,215
Federal Home Loan Bank of Boston stock		895		N/A		N/A		N/A		N/A
Loans, net		1,314,810		—		—		1,321,143		1,321,143
Accrued interest receivable		6,371		—		6,371		—		6,371
Financial liabilities:
Deposits		1,237,428		—		1,237,867		—		1,237,867
Borrowings		13,500		—		14,016		—		14,016

(10) Regulatory Capital

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

The Bank is subject to capital regulations that require a Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. In order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk-based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. As of September 30, 2021 and December 31, 2020, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

Applicable regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. At September 30, 2021, the Bank exceeded the regulatory requirement for the capital conservation buffer.

In September 2019, the federal banking agencies adopted a final rule to implement Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, effective January 1, 2020, establishing a community bank leverage ratio (“CBLR”) framework for community banking organizations having total consolidated assets of less than $10 billion, having a leverage ratio of greater than 9%, and satisfying other criteria, such as limitations on the amount of off-balance sheet exposures and on trading assets and liabilities. A community banking organization that qualifies for and elects to use the CBLR framework and that maintains a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the banking agencies’ generally applicable capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the Federal Deposit Insurance Act. The CARES Act temporarily lowered the community bank leverage ratio to 8% through 2020. The CBLR requirement transitioned from 8% to 8.5% for calendar year 2021 and will transition to 9% beginning in 2022. As of September 30, 2021, the Bank has not opted into the CBLR framework.

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, 2021
Total Capital (to Risk Weighted Assets)	$	215,349	15.36	%	$	112,173	>	8.0	%	$	140,216	>	10.0	%
Tier 1 Capital (to Risk Weighted Assets)		197,815	14.11			84,129	>	6.0			112,173	>	8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		197,815	14.11			63,097	>	4.5			91,140	>	6.5
Tier 1 Capital (to Average Assets)		197,815	12.45			63,568	>	4.0			79,460	>	5.0
December 31, 2020
Total Capital (to Risk Weighted Assets)	$	199,377	14.60	%	$	109,273	>	8.0	%	$	136,591	>	10.0	%
Tier 1 Capital (to Risk Weighted Assets)		182,286	13.35			81,955	>	6.0			109,273	>	8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		182,286	13.35			61,466	>	4.5			88,784	>	6.5
Tier 1 Capital (to Average Assets)		182,286	12.37			58,926	>	4.0			73,658	>	5.0

Liquidation Accounts

Upon the completion of the Company’s initial stock offering in 2015 and the second step offering in 2019, liquidation accounts were established for the benefit of certain depositors of the Bank in amounts equal to:

1.The product of (i) the percentage of the stock issued in the initial stock offering in 2015 to persons other than MHC and (ii) the net worth of the mid-tier holding company as of the date of the latest balance sheet contained in the prospectus utilized in connection with the offering.

2.The MHC’s ownership interest in the retained earnings of the Company as of the date of the latest balance sheet contained in the 2019 prospectus plus the MHC’s net assets (excluding its ownership of the Company).

The Company and the Bank are not permitted to pay dividends on their capital stock if the shareholders’ equity of the Company, or the shareholder’s equity of the Bank, would be reduced below the amount of the respective liquidation accounts. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts.

Other Restrictions

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Federal and state banking regulations restrict the amount of dividends that may be paid in a year, without prior approval of regulatory agencies, to the net income of the Bank for the year plus the retained net income of the previous two years. For the nine months ended September 30, 2021, net income of the Bank was $12.5 million and for the years ended December 31, 2020 and 2019, $12.1 million and $10.7 million, respectively, of retained earnings was available to pay dividends.

The Company may, at times, repurchase its own shares in the open market. Such transactions are subject to the Federal Reserve Board’s notice provisions for stock repurchases. In October 2020, the Company announced its plan to repurchase 1,000,000 shares of its common stock. The repurchase program was adopted following the receipt of non-objection from the Federal Reserve Bank of Boston, and in compliance with applicable state and federal regulations. The Company completed the repurchase of 1,000,000 shares of its common stock under this repurchase program in February 2021. In March 2021, the Company announced its plan to repurchase 1,400,000 shares of its common stock. The repurchase program was adopted following the receipt of non-objection from the Federal Reserve Bank of Boston, and in compliance with applicable state and federal regulations. During the nine months ended September 30, 2021, the Company had repurchased 1,226,976 shares of its outstanding common stock under these programs.

(11) Employee Stock Ownership Plan

The Bank established an ESOP to provide eligible employees the opportunity to own company stock. The plan is a tax-qualified plan for the benefit of all Bank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax law limits. The ESOP acquired a total of 1,538,868 shares between the initial and second-step stock offerings with the proceeds of a loan totaling $11.8 million. The loan is payable over 15 years at a rate per annum equal to the prime rate (3.25% as of December 31,

2020). Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid. The number of shares committed to be released per year through 2033 is 89,757.

Shares held by the ESOP include the following:



	September 30, 2021		December 31, 2020
Allocated		372,014		282,256
Committed to be released		67,318		89,758
Unallocated		1,099,536		1,166,854
Total		1,538,868		1,538,868

The fair value of unallocated shares was approximately $17.6 million at September 30, 2021.

Total compensation expense recognized in connection with the ESOP for the three months ended September 30, 2021 and 2020 was $362,000 and $177,000, respectively. Total compensation expense recognized for the nine months ended September 30, 2021 and 2020 was $1.0 million and $621,000, respectively.

(12) Earnings Per Common Share

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



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands, except per share amounts)	2021		2020		2021		2020
Net Income attributable to common shareholders	$	5,087	$	3,202	$	12,550	$	7,683

Average number of common shares issued		18,094,729		19,472,310		18,364,754		19,474,495
Less:
average unallocated ESOP shares		(1,107,093)		(1,196,856)		(1,129,315)		(1,219,160)
average unvested restricted stock		(349,784)		(89,459)		(364,765)		(105,590)
Average number of common shares outstanding
to calculate basic earnings per common share		16,637,852		18,185,995		16,870,674		18,149,745

Effect of dilutive unvested restricted stock and stock option awards		598,000		36,771		473,473		34,805
Average number of common shares outstanding
to calculate diluted earnings per common share		17,235,852		18,222,766		17,344,147		18,184,550

Earnings per common share:
Basic	$	0.31	$	0.18	$	0.74	$	0.42
Diluted	$	0.30	$	0.18	$	0.72	$	0.42

Stock options for 150,000 and 813,506 shares of common stock were not considered in computing diluted earnings per common share for the three months ended September 30, 2021 and 2020, respectively, because they were anti-dilutive, meaning the exercise price for such options were higher than the average price for the Company for such period. For the nine months ended September 30, 2021 and 2020, 730,115 and 818,900 shares, respectively, were not considered in the computing diluted earnings per common share because they were anti-dilutive.

(13) Share-Based Compensation

The shareholders of the Company approved the Provident Bancorp, Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”) on November 23, 2020, which is in addition to the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”), (collectively called the “Equity Incentive Plans”). Under the Equity Incentive Plans, the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Incentive Plans, with 902,344 and 1,021,239 shares reserved for options under the 2016 Equity Plan and 2020 Equity Plan, respectively. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. The total number of shares reserved for restricted stock or restricted units is 360,935 and 408,495 under the 2016 Equity Plan and 2020 Equity Plan, respectively. The value of restricted stock grants is based on the market price of the stock on grant date. Options and awards vest ratably over 3 to 5 years.

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

Stock Options

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

Expected volatility is based on historical volatility because the Company’s common stock price.

Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, and the vesting period.

The dividend yield assumption is based on the Company’s expectation of dividend payouts.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

The fair value of options granted in 2021 is based on the following assumptions:



	2021
Vesting period (years)		5
Expiration date (years)		10
Expected volatility		34.41%
Expected life (years)		7.5
Expected dividend yield		1.07%
Risk free interest rate		1.19%
Fair value per option	$	5.06

A summary of the status of the Company’s stock option grants for the nine months ended September 30, 2021 is presented in the table below:



	Stock Option Awards		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2020		1,644,731	$	10.25
Granted		150,000		15.00
Forfeited		—		—
Exercised		(17,264)		8.61
Outstanding at September 30, 2021		1,777,467	$	10.66		7.49	$	9,520,000
Outstanding and expected to vest at September 30, 2021		1,777,467	$	10.66		7.49	$	9,520,000
Vested and Exercisable at September 30, 2021		616,344	$	8.85		5.24	$	4,420,667
Unrecognized compensation cost	$	3,449,000
Weighted average remaining recognition period (years)		4.01

For the three months ended September 30, 2021 and 2020, total expense for the stock options was $316,000 and $110,000, respectively. For the nine months ended September 30, 2021 and 2020, total expense for the stock options was $892,000 and $324,000, respectively.

Restricted Stock

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

The following table presents the activity in restricted stock awards under the Equity Plan for the nine months ended September 30, 2021:



	Unvested Restricted Stock Awards		Weighted Average Grant Date Price
Unvested restricted stock awards at December 31, 2020		387,683	$	11.10
Granted		60,000		15.00
Forfeited		—		—
Vested		(2,776)		13.13
Unvested restricted stock awards at September 30, 2021		444,907	$	11.61
Unrecognized compensation cost	$	3,989,000
Weighted average remaining recognition period (years)		4.01

For the three months ended September 30, 2021 and 2020, total expense for the restricted stock awards was $384,000 and $147,000, respectively. For the nine months ended September 30, 2021 and 2020, total expense for the restricted stock awards was $1.1 million and $436,000, respectively.

(14) Leases

The Company recognized right-of-use assets (“ROU”) totaling $4.1 million and $4.3 million at September 30, 2021 and December 31, 2020, respectively, and operating lease liabilities totaling $4.4 million and $4.5 million at September 30, 2021 and December 31, 2020, respectively. The lease liabilities recognized by the Company represent two leased branch locations and one loan production office.

Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease components, such as fair market value adjustments, are expensed as incurred and are not included in ROU assets and operating lease liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for the leases on a straight-line basis over the lease term. For the nine months ended September 30, 2021 and 2020, rent expense for the operating leases totaled $236,000 and $228,000, respectively.

The following table presents information regarding the Company’s operating leases:



	September 30,		December 31,
	2021		2020
Weighted-average discount rate		3.56%		3.54%
Range of lease expiration dates		2 - 14.5 years		2 - 15 years
Range of lease renewal options		5 - 20 years		5 - 20 years
Weighted-average remaining lease term		27.2 years		27.6 years

The following table presents the undiscounted annual lease payments under the terms of the Company's operating leases at September 30, 2021 and December 31, 2020, including a reconciliation to the present value of operating lease liabilities recognized in the Consolidated Balance Sheets:



	September 30,		December 31,
Fiscal Year-End	2021		2020
(In thousands)		(unaudited)
2021	$	64	$	258
2022		261		261
2023		264		264
2024		270		270
2025		280		280
Thereafter		6,325		6,325
Total lease payments		7,464		7,658
Less imputed interest		(3,051)		(3,170)
Total lease liabilities	$	4,413	$	4,488

The lease liabilities recognized include certain lease extensions as it is expected that the Company will use substantially all lease renewal options.

(15) Revenue Recognition

Revenue from contracts with customers in the scope of Accounting Standards Codification (“ASC Topic 606") is measured based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations.

The Company’s performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.

The Company recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Additionally, revenue is collected from loan fees, such as letters of credit, line renewal fees and application fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction.

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

Management’s discussion and analysis of financial condition and results of operations at September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and 2020 is intended to assist in understanding our financial condition and results of operations. Operating results for the three and nine-month periods ended September 30, 2021 may not be indicative of results for all of 2021 or any other period. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

Forward-Looking Statements

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

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to remain substantially reopened, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend; our cyber security risks are increased as the result of an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experiences additional resolution costs.

The foregoing list of important factors is not exclusive. Readers should carefully review the factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Annual and Quarterly Reports on Forms 10-K and 10-Q, and Current Reports on Form 8-K.

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

Critical Accounting Policies

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

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the size and composition of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired.

The Company classifies a loan as impaired when, based on current information and events, it is probable that it will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment disclosures.

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by all loan segments. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factors are adjusted for the following qualitative factors: levels/trends in delinquencies and non-accruals; economic conditions, portfolio trends, portfolio concentrations, loan grading and management’s discretion. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the nine months ended September 30, 2021 or during the year ended December 31, 2020.

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

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

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

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

Mortgage warehouse: Loans in this segment are primarily facility lines to non-bank mortgage origination companies. The underlying collateral of these loans are residential real estate loans. Loans are originated by the mortgage companies for sale into secondary markets, which is typically within 15 days of the loan closure. The primary source of repayment is the cash flow upon the sale of the loans. The credit risk associated with this type of lending is the risk that the mortgage companies are unable to sell the loans.

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

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

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

Troubled debt restructurings are individually evaluated for impairment and included in the separately identified impairment disclosures. TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired.

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

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

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

Balance Sheet Analysis

Assets. Total assets were $1.63 billion at September 30, 2021, representing an increase of $119.5 million, or 7.9%, from $1.51 billion at December 31, 2020. The increase resulted primarily from increases in cash and cash equivalents of $107.3 million, and net loans of $7.7 million.

Cash and Cash Equivalents. Cash and cash equivalents increased $107.3 million, or 128.1%, to $191.2 million at September 30, 2021 from $83.8 million at December 31, 2020. The increase in cash and cash equivalents was primarily due to an increase in deposits.

Loans. At September 30, 2021, net loans were $1.32 billion, or 81.4% of total assets, compared to $1.31 billion, or 87.3% of total assets, at December 31, 2020. Increases in commercial loans of $43.7 million, or 7.7%, and construction and land development loans of $5.9 million, or 20.3%, were partially offset by decreases in mortgage warehouse loans of $15.3 million, or 5.8%, commercial real estate loans of $15.4 million, or 3.5%, residential real estate loans of $7.7 million, or 23.4%, and consumer loans of $3.2 million, or 56.9%. Our commercial loan growth was primarily due to increases in our cryptocurrency and renewable energy specialty lending portfolios. As of September 30, 2021, renewable energy loans increased $17.4 million, or 46.9%, to $54.6 million compared to $37.2 million at December 31, 2020. Loans to cryptocurrency companies increased $41.0 million, or 273.3%, to $56.0 million at September 30, 2021 compared to $15.0 million at December 31, 2020. In late 2020, the Bank began offering lines of credit to enterprise businesses in the cryptocurrency space. These lines of credit are utilized by these digital asset businesses to further their offerings in crypto-backed lending, margin trading, crypto mining operations, or other growth initiatives in the rapidly expanding industry. These lines of credit are collateralized by the United States dollar (“USD”) value of the digital currency. The Bank uses a custodian to hold the digital currency and monitors the collateral coverage ratio on an ongoing basis. If warranted, the Bank will instruct the custodian to liquidate the collateral and provide us with the USD proceeds of the liquidation. The increase was partially offset by a decrease in PPP loans of $14.4 million, or 34.5%, to $27.4 million at September 30, 2021 compared to $41.8 million at December 31, 2020 and a decrease of $4.7 million, or 1.7%, to $281.4 million at September 30, 2021 compared to $286.1 million at December 30, 2021 in enterprise value loans, which we also refer to as search fund lending, merger and acquisition, re-capitalization, and shareholder/partner buyout loans. Enterprise value loans decreased primarily due to unscheduled loan prepayments. For a detailed discussion of our enterprise value loans, see “Business – Lending Activities – Commercial Business Loans” in our Annual Report on Form 10-K. The decrease in commercial real estate was primarily due to unscheduled loan payoffs.

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



	At			At
	September 30,			December 31,
	2021			2020
	Amount		Percent	Amount		Percent
Commercial real estate	$	423,526	31.47%	$	438,949	32.82%
Commercial		609,638	45.31%		565,976	42.31%
Residential real estate		25,100	1.87%		32,785	2.46%
Construction and land development		34,800	2.59%		28,927	2.16%
Consumer		2,389	0.18%		5,547	0.41%
Mortgage warehouse		250,048	18.58%		265,379	19.84%
		1,345,501	100.00%		1,337,563	100.00%
Allowance for loan losses		(18,142)			(18,518)
Deferred loan fees, net		(4,874)			(4,235)
Net loans	$	1,322,485		$	1,314,810

Deposits. Total deposits increased $123.7 million, or 10.0%, to $1.36 billion at September 30, 2021 from $1.24 billion at December 31, 2020. The increase in deposits was due to an increase of $108.1 million, or 19.5%, in NOW and demand deposits, an increase of $100.3 million, or 28.4%, in money market accounts and an increase of $1.3 million, or 0.9%, in savings accounts, partially offset by a decrease of $86.0 million, or 48.3%, in time deposits. NOW and demand deposits increased primarily due to new and expanded relationships with traditional and digital asset customers. Digital asset deposit balances increased $32.3 million, or 104.5%, and were $63.2 million at September 30, 2021 compared to $30.9 million at December 31, 2020. The expansion in our digital asset relationships are the direct result of initiatives by the Bank to expand our services and customer base in the cryptocurrency space. The Bank serves digital asset customers by providing robust fiat banking products for exchanges, brokers and institutional investors without providing custody solutions or storage of the cryptocurrency. These offerings to digital asset customers have enabled us to focus on growing our non-interest bearing demand deposits. Total noninterest-bearing deposits to total deposits was 36.4% as of September 30, 2021 compared to 31.0% as of December 31, 2020. With the successful increases in our digital asset deposits, we were able to decrease time deposits by not replacing brokered certificates of deposit as they matured. Money market deposits increased primarily due to increased relationships with our traditional commercial customer base. The increase in savings accounts was primarily caused by increased consumer savings.

Shareholders’ Equity. Total shareholders’ equity decreased $4.6 million, or 1.9%, to $231.3 million at September 30, 2021, from $235.9 million at December 31, 2020. The decrease was primarily due to the repurchase of 1,227,178 shares of common stock for $18.1 million, $1.9 million from dividends paid, and a decrease in other comprehensive income of $125,000, partially offset by net income of $12.6 million, stock-based compensation expense of $2.0 million and employee stock ownership plan shares earned of $1.0 million. Book value per share increased to $12.93 at September 30, 2021 from $12.38 at December 31, 2020.

Asset Quality.

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



	At		At
	September 30,		December 31,
(Dollars in thousands)	2021		2020
Non-accrual loans:
Commercial real estate	$	—	$	—
Commercial		2,108		4,198
Residential real estate		896		1,156
Construction and land development		—		—
Consumer		32		65
Mortgage warehouse		—		—
Total non-accrual loans		3,036		5,419

Accruing loans past due 90 days or more		—		—
Other real estate owned		—		—
Total non-performing assets	$	3,036	$	5,419

Total loans (1)	$	1,340,627	$	1,333,328
Total assets	$	1,625,298	$	1,505,781
Total non-performing loans to total loans (1)		0.23%		0.41%
Total non-performing assets to total assets		0.19%		0.36%

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

Non-accrual commercial loan balances decreased for the nine-month period ended September 30, 2021 primarily due to a $1.8 million commercial relationship that was taken off non-accrual status during the second quarter of 2021 after demonstrating the ability to pay and the charge-off a $1.6 million commercial relationship that was on non-accrual status at December 31, 2020. The decrease was partially offset by a $1.3 million relationship that was placed on non-accrual during the second quarter with specific reserves of $956,000 being allocated as of September 30, 2021.

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

The Company established a modification program in accordance with applicable regulations to provide economic relief in response to the COVID-19 pandemic. In working with our borrowers, the Company has provided up to six month payment deferrals. At the completion of the payment deferral, the Company has allowed for deferral extensions on a case-by-case basis. Under agency guidance and Section 4013 of the CARES Act, these modifications are not classified as troubled debt restructurings and are not considered delinquent. As of September 30, 2021, five loans totaling $12.0 million, or 0.9% of total loans, remained modified, compared to 38 loans totaling $43.1 million, or 3.2% of total loans at December 31, 2020.

The extent to which industries, or the tangential impact of those industries to other borrowers or industries are impacted, will likely be in direct proportion to the duration and depth of the COVID-19 pandemic. In determining “at-risk” industries we have used a threshold of 25% when comparing the value of COVID-19 modified loans to total loans within the industry. We identified 6.1% of total commercial real estate loans, 0.2% of total commercial loans and 33.1% of total construction and land development loans as being at-risk at September 30, 2021. Modified loans in industries not considered at risk totaled $2.7 million at September 30, 2021. As of September 30, 2021 total balances within the at-risk industries are as follows:



	Commercial Real Estate				Commercial				Construction and Land Development				Total
(Dollars in thousands)	Total Loans		Total Modified		Total Loans		Total Modified		Total Loans		Total Modified		Total Loans		Total Modified
Hotel/motel/inn	$	25,669	$	—	$	968	$	—	$	11,511	$	9,330	$	38,148	$	9,330

The Economic Aid Act amended the PPP by extending the authority of the SBA to guarantee loans and the ability of PPP lenders to disburse PPP loans until March 31, 2021. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extended the PPP application deadline to May 31, 2021, and provided the SBA additional time to process applications through June 30, 2021. During the first round of the PPP, the Company originated $78.0 million in PPP loans. During the second round of the PPP, the Company originated an additional $46.0 million in PPP loans. The Company continues to work with customers who received PPP loans on applying for loan forgiveness, and as of September 30, 2021, of the $124.0 million in PPP loans issued, only $27.4 million remained outstanding with unaccreted fee income totaling $1.1 million.

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 loan growth, portfolio composition, delinquent and non-accrual loans, national and local business and economic conditions and loss experience and an overall evaluation of the quality of the underlying collateral.

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



	Nine Months Ended
	September 30,
(Dollars in thousands)	2021		2020
Allowance at beginning of period	$	18,518	$	13,844
Provision for loan losses		2,654		4,731
Charge offs:
Commercial real estate		150		118
Commercial		2,979		175
Residential real estate		—		—
Construction and land development		—		24
Consumer		228		609
Mortgage warehouse		—		—
Total charge-offs		3,357		926

Recoveries:
Commercial real estate		81		—
Commercial		185		7
Residential real estate		2		4
Construction and land development		—		—
Consumer		59		128
Mortgage warehouse		—		—
Total recoveries		327		139

Net charge-offs		3,030		787

Allowance at end of period	$	18,142	$	17,788

Non-performing loans at end of period	$	3,036	$	25,206
Total loans outstanding at end of period (1)		1,340,627		1,359,129
Average loans outstanding during the period (1)		1,307,462		1,182,459

Allowance to non-performing loans		597.56%		70.57%
Allowance to total loans outstanding at end of period		1.35%		1.31%
Net charge-offs to average loans outstanding during the period (annualized)		0.31%		0.09%

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

During the nine months ended September 30, 2021, the provision for loan losses was $2.7 million compared to $4.7 million for the same period in 2020. The decrease in the provision was primarily attributable to the impact COVID-19 had on the 2020 provision.

Net charge-offs for the nine months ended September 30, 2021 were $3.0 million compared to $787,000 for the same period in 2020. The primary reason for the increase in net charge-offs was the charge-off of a $1.1 million impaired commercial loan that was previously reserved for during the first quarter and a $1.6 million impaired commercial loan relationship that was charged-off during the third quarter that was previously reserved for in 2020.

Results of Operations for the Three Months Ended September 30, 2021 and 2020

General. Net income increased $1.9 million, or 58.9%, to $5.1 million for the three months ended September 30, 2021 from $3.2 million for the three months ended September 30, 2020. The increase was primarily related to an increase of $1.5 million in net interest and dividend income, a decrease in provision for loan losses of $528,000, and an increase in noninterest income of $912,000, partially offset by increases in noninterest expense of $382,000 and income tax expense of $682,000.

Interest and Dividend Income. Interest and dividend income increased $1.2 million, or 7.6%, to $16.3 million for the three months ended September 30, 2021 from $15.2 million for the three months ended September 30, 2020. This increase was attributable to an increase in interest and fees on loans, which increased $1.1 million, or 7.4%, to $16.1 million for the three months ended September 30, 2021 from $15.0 million for the three months ended September 30, 2020 and an increase in interest on short-term investments, which increased $63,000 to $69,000 for the three months ended September 30, 2021 from $6,000 for the three months ended September 30, 2020. The increases were partially offset by a decrease in interest and dividends on securities of $17,000, or 8.5%, to $183,000 for the three months ended September 30, 2021 from $200,000 for the three months September 30, 2020.

The increase in interest income on loans was due to an increase in the average balance of loans of $32.2 million, or 2.5%, to $1.30 billion for the three months ended September 30, 2021, from $1.27 billion for the three months ended September 30, 2020 as well as the acceleration of income recognition due to early loan payoffs in the enterprise value loan portfolio, which totaled $385,000. The increase in interest income was also attributable to the accretion of fee income related to SBA PPP loans. The amount of income recognized from these fees totaled $611,000 for the three months ended September 30, 2021 compared to $355,000 for the three months ended September 30, 2020.

The increase in interest on short-term investments was due to an increase in the average balance of short-term investments of $148.5 million, or 483.4%, to $179.2 million for the three months ended September 30, 2021, from $30.7 million for the three months ended September 30, 2020. The increase was also due to the yield on short-term investments increasing seven basis points due to an increase in the Federal Reserve interest rate on reserve balances.

The decrease in interest and dividends on securities was due to a decrease in the average balance of investment securities of $608,000, or 1.6%, to $36.6 million for the three months ended September 30, 2021 from $37.2 million for the three months ended September 30, 2020. In addition, interest and dividend income on securities decreased due to the yield on securities decreasing eight basis points due to a decrease in market interest rates.

Interest Expense. Interest expense decreased $351,000, or 29.7%, to $832,000 for the three months ended September 30, 2021 from $1.2 million for the three months ended September 30, 2020. The decrease was caused by decreases in interest expense on deposits and borrowings. Interest expense on deposits decreased $315,000, or 29.3%, to $760,000 for the three months ended September 30, 2021 from $1.1 million for the three months ended September 30, 2020. This was due primarily to the cost of interest-bearing deposits decreasing 21 basis points to 0.35% for the three months ended September 30, 2021 from 0.56% for the three months ended September 30, 2020 due to the lower interest rate environment and the higher percentage of core deposits in the portfolio. The decrease in cost was partially offset by an increase in the average balance of interest-bearing deposits of $91.8 million, or 11.9%, to $859.9 million for the three months ended September 30, 2021 from $768.1 million for the three months ended September 30, 2020. The increase resulted from an increase in the average balance of money market accounts, which increased $128.1 million, or 41.8%, and NOW accounts, which increased $23.3 million, or 17.1%, partially offset by decreases in certificates of deposit, which decreased $57.1 million, or 33.7%, and savings accounts, which decreased $2.6 million, or 1.7%.

Interest expense on borrowings decreased $36,000, or 33.3%, to $72,000 for the three months ended September 30, 2021 from $108,000 for the three months September 30, 2020 due to a decrease in the average balance of borrowings of $14.5 million, or 51.8%, to $13.5 million for the three months ended September 30, 2021 from $28.0 million for the three months ended September 30, 2020. The decrease in average balance was partially offset by an increase in the cost of borrowings of 59 basis points to 2.13% for the three months ended September 30, 2021 from 1.54% for the three months ended September 30, 2020. The increase in the cost of borrowings was primarily due to the long-term borrowings having a higher interest rate.

Net Interest and Dividend Income. Net interest and dividend income increased by $1.5 million, or 10.8%, to $15.5 million for the three months ended September 30, 2021 from $14.0 million for the three months ended September 30, 2020. The growth in net interest and dividend income this quarter over the prior year’s third quarter was primarily the result of an increase in our average interest earning assets of $180.1 million, or 13.5%, offset by an increase in average interest-bearing liabilities of $77.2 million, or 9.7% and a decrease in net interest margin of nine basis points to 4.09%.

Provision for Loan Losses. The provision for loan losses was $232,000 for the three months ended September 30, 2021 compared to $760,000 for the three months ended September 30, 2020, which was a decrease of $528,000, or 69.5%. The changes in the provision were based on loan portfolio growth and composition changes, historical charge-off trends, levels of problem loans including increased specific reserves, and other asset quality trends.

The provision recorded resulted in an allowance for loan losses of $18.1 million, or 1.35% of total loans, at September 30, 2021, compared to $18.5 million, or 1.39% of total loans, at December 31, 2020, and $17.8 million, or 1.31% of total loans, at September 30, 2020. Included in total loans at September 30, 2021 was $27.4 million in PPP loans originated as part of the CARES Act that we believe have no credit risk due to a government guarantee; therefore, we have not provided an allowance for losses for these loans. Excluding PPP loans, the allowance to total loans as of September 30, 2021 was 1.38%. As of September 30, 2021, there was $250.0 million in outstanding mortgage warehouse loans. These loans are assessed at a lower credit risk and do not carry the same allocation as a traditional commercial loan. As of September 30, 2021, $375,000 in reserves were allocated to the mortgage warehouse loans. The largest non-accrual loans as of September 30, 2021 were from two commercial relationships totaling $1.8 million. Impairment was evaluated and specific reserves of $1.2 million were allocated to these impaired loan relationships as of September 30, 2021.

Noninterest Income. Noninterest income increased $912,000, or 100.1%, to $1.8 million for the three months ended September 30, 2021 compared to $911,000 for the three months ended September 30, 2020. The increase was primarily due to an increase in other service charges and fees of $566,000, or 224.6%, an increase in bank owned life insurance income of $275,000, or 117.5%, and an increase in customer service fees on deposit accounts of $103,000, or 27.0%. The increase in other service charges and fees was primarily due to increased late fee charges as well as loan prepayment penalties related to two commercial loan relationships. The increase in bank owned life insurance income was primarily due to the receipt of a death benefit payout during the third quarter. The increase in customer service fees on deposit accounts was primarily due to fees generated from cash vault services for our customers who operate Bitcoin ATMs.

Noninterest Expense. Noninterest expense increased $382,000, or 3.9%, to $10.1 million for the three months ended September 30, 2021 compared to $9.7 million for the three months ended September 30, 2020. The increase was primarily due to an increase in salaries and employee benefits expense, other expense, and directors’ compensation, partially offset by a decrease in write downs of other assets and receivables. The increase of $1.2 million, or 20.4%, in salary and employee benefits was primarily due to increased stock-based compensation expense and an increase in staff to support the development and implementation of new technologies and specialty lending products. The increase of $125,000, or 20.8%, in other expense was primarily due to increased costs associated with conferences and training, which were largely canceled during 2020 because of the COVID-19 pandemic, as well as increased costs related to third-party services for both marketing and information technology. Directors’ compensation increased $82,000, or 46.3%, primarily due to increased stock-based compensation expense. These increases were partially offset by a decrease in write downs of other assets and receivables. In the third quarter of 2020, a write-down of an SBA receivable balance was completed after the Company evaluated the collectability and determined $1.3 million was uncollectible. The decrease in the write-downs was partially offset by a write-down of an SBA receivable in the third quarter of 2021 after the Company evaluated the collectability and determined $195,000 was uncollectible.

Income Tax Provision. We recorded a provision for income taxes of $1.9 million for the three months ended September 30, 2021, reflecting an effective tax rate of 27.6%, compared to a provision of $1.3 million for the three months ended September 30, 2020, reflecting an effective tax rate of 28.2%.

Average Balance Sheet and Related Yields and Rates

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



	For the Three Months Ended September 30,
	2021					2020
			Interest					Interest
	Average		Earned/		Yield/	Average		Earned/		Yield/
(Dollars in thousands)	Balance		Paid		Rate (5)	Balance		Paid		Rate (5)
Assets:
Interest-earning assets:
Loans (1)	$	1,302,218	$	16,084	4.94%	$	1,269,970	$	14,972	4.72%
Short-term investments		179,208		69	0.15%		30,720		6	0.08%
Debt securities available-for-sale		35,819		179	2.00%		36,251		186	2.05%
Federal Home Loan Bank stock		786		4	2.04%		962		14	5.82%
Total interest-earning assets		1,518,031		16,336	4.30%		1,337,903		15,178	4.54%
Non-interest earning assets		74,389					68,244
Total assets	$	1,592,420				$	1,406,147
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts	$	153,239	$	47	0.12%	$	155,865	$	74	0.19%
Money market accounts		434,317		464	0.43%		306,196		460	0.60%
NOW accounts		159,815		96	0.24%		136,466		100	0.29%
Certificates of deposit		112,490		153	0.54%		169,583		441	1.04%
Total interest-bearing deposits		859,861		760	0.35%		768,110		1,075	0.56%
Borrowings		13,511		72	2.13%		28,024		108	1.54%
Total interest-bearing liabilities		873,372		832	0.38%		796,134		1,183	0.59%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		467,137					354,820
Other noninterest-bearing liabilities		18,797					16,483
Total liabilities		1,359,306					1,167,437
Total equity		233,114					238,710
Total liabilities and
equity	$	1,592,420				$	1,406,147
Net interest income			$	15,504				$	13,995
Interest rate spread (2)					3.92%					3.95%
Net interest-earning assets (3)	$	644,659				$	541,769
Net interest margin (4)					4.09%					4.18%
Average interest-earning assets to
interest-bearing liabilities		173.81%					168.05%

(1)Interest earned/paid on loans includes fee income related to SBA loan fee accretion of $611,000 and $355,000 for the three months ended September 30, 2021 and September 30, 2020, respectively. Interest earned/paid on loans also includes mortgage warehouse loan origination fee income of $317,000 and $230,000 for the three months ended September 30, 2021 and September 30, 2020, respectively.

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

(3)Net interest-earning assets represent total interest earning assets less total interest-bearing liabilities.

(4)Net interest margin represents net interest income divided by average total interest-earning assets.

(5)Annualized.

Rate/Volume Analysis

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



	For the Three Months Ended September 30, 2021
	Compared to the Three Months Ended September 30, 2020
	Increase (Decrease) Due to				Total
(In thousands)	Rate		Volume		Increase ‎(Decrease)
Interest-earning assets:
Loans	$	726	$	386	$	1,112
Short-term investments		11		52		63
Debt securities available-for-sale		(5)		(2)		(7)
Federal Home Loan Bank stock		(8)		(2)		(10)
Total interest-earning assets		724		434		1,158
Interest-bearing liabilities:
Savings accounts		(26)		(1)		(27)
Money market accounts		(156)		160		4
NOW accounts		(20)		16		(4)
Certificates of deposit		(169)		(119)		(288)
Total interest-bearing deposits		(371)		56		(315)
Borrowings		32		(68)		(36)
Total interest-bearing liabilities		(339)		(12)		(351)
Change in net interest income	$	1,063	$	446	$	1,509

Results of Operations for the Nine Months Ended September 30, 2021 and 2020

General. Net income increased $4.9 million, or 63.3%, to $12.6 million for the nine months ended September 30, 2021 from $7.7 million for the nine months ended September 30, 2020. The increase was primarily related to an increase of $5.9 million in net interest and dividend income, a decrease in the provision for loan losses of $2.1 million, and an increase in noninterest income of $1.3 million, partially offset by an increase of $2.5 million in noninterest expense and an increase of $2.0 million in the provision for income taxes.

Interest and Dividend Income. Interest and dividend income increased $3.8 million, or 8.7%, to $47.7 million for the nine months ended September 30, 2021 from $43.9 million for the nine months ended September 30, 2020. This increase was attributable to an increase in interest and fees on loans, which increased $4.0 million, or 9.2%, to $47.1 million for the nine months ended September 30, 2021 from $43.1 million for the nine months ended September 30, 2020, partially offset by a decrease in interest and dividends on securities of $179,000, or 25.0%, to $538,000 for the nine months ended September 30, 2021 from $717,000 for the nine months September 30, 2020.

The increase in interest income on loans was due to an increase in the average balance of loans of $125.0 million, or 10.6%, to $1.31 billion for the nine months ended September 30, 2021, from $1.18 billion for the nine months ended September 30, 2020. The increase in interest income was also attributable to the accretion of fee income related to SBA PPP loans. The amount of income recognized from these fees totaled $1.9 million for the nine months ended September 30, 2021 compared to $610,000 for the nine months ended September 30, 2020. The increase was partially offset by a decrease in loan yields of six basis points to 4.80% for the nine months ended September 30, 2021 due to a decrease in market interest rates.

The decrease in interest and dividends on securities was due to a decrease in the average balance of investment securities of $5.9 million, or 14.6%, to $34.5 million for the nine months ended September 30, 2021 from $40.4 million for the nine months ended September 30, 2020. In addition, interest and dividend income decreased due to the yield on securities decreasing 43 basis points due to a decrease in market interest rates.

Interest Expense. Interest expense decreased $2.1 million, or 43.5%, to $2.7 million for the nine months ended September 30, 2021 from $4.8 million for the nine months ended September 30, 2020. The decrease was caused by decreases in interest expense on deposits and borrowings. Interest expense on deposits decreased $1.7 million, or 39.7%, to $2.5 million for the nine months ended September 30, 2021 from $4.2 million for the nine months ended September 30, 2020. This was due primarily to the cost of interest-bearing deposits decreasing 39 basis points to 0.40% for the nine months ended September 30, 2021 from 0.79% for the nine months ended September 30, 2020. The decrease in cost was partially offset by an increase in the average balance of interest-bearing deposits of $143.9 million, or 20.5%, to $844.4 million for the nine months ended September 30, 2021 from $700.5 million for the nine months ended September 30, 2020 due to the lower interest rate environment and the higher percentage of core deposits in the portfolio. The increase resulted from an increase in the average balance of money market accounts, which increased $113.9 million, or 40.5%, NOW accounts, which increased $28.1 million, or 21.8%, and savings accounts, which increased $16.4 million, or 12.1%, partially offset by certificates of deposit which decreased $14.4 million, or 9.3%.

Interest expense on borrowings decreased $442,000, or 67.5%, to $213,000 for the nine months ended September 30, 2021 from $655,000 for the nine months September 30, 2020 due to a decrease in the average balance of borrowings of $39.8 million, or 74.7%, to $13.5 million for the nine months ended September 30, 2021 from $53.4 million for the nine months ended September 30, 2020. The decrease in average balance was partially offset by an increase in the cost of borrowings of 46 basis points to 2.10% for the nine months ended September 30, 2021 from 1.64% for the nine months ended September 30, 2020. The increase in the cost of borrowings was primarily due to the long-term borrowings having a higher interest rate.

Net Interest and Dividend Income. Net interest and dividend income increased by $5.9 million, or 15.1%, to $45.0 million for the nine months ended September 30, 2021 from $39.1 million for the nine months ended September 30, 2020. The growth in net interest and dividend income was primarily the result of an increase in our average interest earning assets of $240.5 million, or 19.3%, offset by an increase in average interest-bearing liabilities of $104.1 million, or 13.8% and a decrease in net interest margin of 14 basis points to 4.04%.

Provision for Loan Losses. The provision for loan losses was $2.7 million for the nine months ended September 30, 2021 compared to $4.7 million for the nine months ended September 30, 2020, which is a decrease of $2.1 million, or 43.9%. The changes in the provision were based on management’s assessment of economic conditions, including the impact of the COVID-19 pandemic, loan portfolio growth and composition changes, historical charge-off trends, levels of problem loans and other asset quality trends.

Noninterest Income. Noninterest income increased $1.3 million, or 50.2%, to $3.9 million for the nine months ended September 30, 2021 compared to $2.6 million for the nine months ended September 30, 2020. The increase was primarily due to an increase in other service charges and fees of $632,000, or 65.0%, an increase in bank owned life insurance income of $367,000, or 62.8%, and an increase in customer service fees on deposit accounts of $299,000 or 30.0%. The increase in other service charges and fees was primarily due to increased late fee charges as well as income from loan payoff charges related to two commercial loan relationships. The increase in bank owned life insurance income was primarily due to the receipt of a death benefit payout during the third quarter as well as the purchase of additional insurance policies in 2020. Customer service fees on deposit accounts increased primarily due to fees generated from cash vault services for our customers who operate Bitcoin ATMs. In addition, 2021 fees reflect higher income compared to 2020 due to fees being waived for customers impacted by COVID-19 in 2020.

Noninterest Expense. Noninterest expense increased $2.5 million, or 9.3%, to $28.8 million for the nine months ended September 30, 2021 compared to $26.4 million for the nine months ended September 30, 2020. The increase was primarily due to an increase in salaries and employee benefits expense, data processing fees, directors’ compensation, other expense, deposit insurance expenses and professional fees, partially offset by a decrease in write downs of other assets and receivables. The increase of $3.2 million, or 18.6%, for the nine months ended September 30, 2021 when compared to the same period in 2020 in salary and employee benefits was primarily due to stock-based compensation expense and an increase in staff to support the development and implementation of new technologies and niche lending products. Data processing fees increased $254,000, or 36.2%, primarily due to new contracts for deposit services. Directors’ compensation increased $232,000, or 42.8%, primarily due to increased stock-based compensation expense. The increase of $183,000, or 8.5%, in other expense was primarily due to increased costs related to third-party services for both marketing and information technology, as well as increased costs associated with conferences and training, which were largely canceled during 2020 due to the COVID-19 pandemic. Deposit insurance expenses increased $99,000, or 40.9%, primarily due to one-time credits that were

recognized in the first quarter of 2020 that resulted in a lower expense. Professional fees increased $93,000, or 7.6%, primarily due to an increase in audit and compliance costs. These increases were offset by a decrease in write downs of other assets and receivables of $1.6 million. In the first quarter of 2020, a write-down of a notes receivable balance was completed after the Company evaluated the collectability and determined that $500,000 was uncollectible and in the third quarter of 2020 a write-down of an SBA receivable balance was completed after the Company evaluated the collectability and determined $1.3 million was uncollectible. The decrease in the write-downs was partially offset by a write-down of an SBA receivable in the third quarter of 2021 after the Company evaluated the collectability and determined $195,000 was uncollectible.

Income Tax Provision. We recorded a provision for income taxes of $4.9 million for the nine months ended September 30, 2021, reflecting an effective tax rate of 28.3%, compared to a provision of $3.0 million for the nine months ended September 30, 2020, reflecting an effective tax rate of 27.8%.

Average Balance Sheet and Related Yields and Rates

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



	For the Nine Months Ended September 30,
	2021					2020
			Interest					Interest
	Average		Earned/		Yield/	Average		Earned/		Yield/
(Dollars in thousands)	Balance		Paid		Rate (5)	Balance		Paid		Rate (5)
Assets:
Interest-earning assets:
Loans (1)	$	1,307,462	$	47,079	4.80%	$	1,182,459	$	43,123	4.86%
Short-term investments		144,376		121	0.11%		22,965		81	0.47%
Investment securities		33,670		528	2.09%		38,586		643	2.22%
Federal Home Loan Bank stock		841		10	1.59%		1,813		74	5.44%
Total interest-earning assets		1,486,349		47,738	4.28%		1,245,823		43,921	4.70%
Non-interest earning assets		70,331					61,590
Total assets	$	1,556,680				$	1,307,413
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts	$	152,005	$	157	0.14%	$	135,649	$	256	0.25%
Money market accounts		395,194		1,388	0.47%		281,270		1,681	0.80%
NOW accounts		157,009		284	0.24%		128,952		368	0.38%
Certificates of deposit		140,181		681	0.65%		154,621		1,859	1.60%
Total interest-bearing deposits		844,389		2,510	0.40%		700,492		4,164	0.79%
Borrowings		13,504		213	2.10%		53,351		655	1.64%
Total interest-bearing liabilities		857,893		2,723	0.42%		753,843		4,819	0.85%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		444,285					302,045
Other noninterest-bearing liabilities		18,508					15,959
Total liabilities		1,320,686					1,071,847
Total equity		235,994					235,566
Total liabilities and
equity	$	1,556,680				$	1,307,413
Net interest income			$	45,015				$	39,102
Interest rate spread (2)					3.86%					3.85%
Net interest-earning assets (3)	$	628,456				$	491,980
Net interest margin (4)					4.04%					4.18%
Average interest-earning assets to
interest-bearing liabilities		173.26%					165.26%

(1)Interest earned/paid on loans includes fee income related to SBA loan fee accretion of $1.9 million and $610,000 for the nine months ended September 30, 2021 and September 30, 2020, respectively. Interest earned/paid on loans also includes mortgage warehouse loan origination fee income of $995,000 and $456,000 for the nine months ended September 30, 2021 and September 30, 2020, respectively.

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

(3)Net interest-earning assets represent total interest earning assets less total interest-bearing liabilities.

(4)Net interest margin represents net interest income divided by average total interest-earning assets.

(5)Annualized.

Rate/Volume Analysis



	For the Nine Months Ended September 30, 2021
	Compared to the Nine Months Ended September 30, 2020
	Increase (Decrease) Due to				Total
	Rate		Volume		Increase ‎(Decrease)
(In thousands)
Interest-earning assets:
Loans	$	(551)	$	4,507	$	3,956
Short-term investments		(103)		143		40
Investment securities		(36)		(79)		(115)
Federal Home Loan Bank stock		(36)		(28)		(64)
Total interest-earning assets		(726)		4,543		3,817
Interest-bearing liabilities:
Savings accounts		(127)		28		(99)
Money market accounts		(835)		542		(293)
NOW accounts		(153)		69		(84)
Certificates of deposit		(1,018)		(160)		(1,178)
Total interest-bearing deposits		(2,133)		479		(1,654)
Borrowings		148		(590)		(442)
Total interest-bearing liabilities		(1,985)		(111)		(2,096)
Change in net interest income	$	1,259	$	4,654	$	5,913

Management of Market Risk

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

The following table presents the estimated changes in net interest income of the Bank, calculated on a bank-only basis, that would result from changes in market interest rates over twelve-month periods beginning September 30, 2021.



	At
	September 30,
	2021
(Dollars in thousands)	Estimated ‎Net Interest Income ‎Over Next 12 Months		Change
Changes in Interest Rates (Basis Points)
200	$	58,650	3.70%
0		56,533	—
-100		56,042	(0.90)%

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

The following table presents the estimated changes in EVE of the Bank, calculated on a bank-only basis, that would result from changes in market interest rates as of September 30, 2021.



	At
	September 30,
	2021
(Dollars in thousands)	Economic ‎Value of ‎Equity		Change
Changes in Interest Rates (Basis Points)
400	$	336,752	11.90%
300		329,945	9.60%
200		321,893	6.90%
100		313,589	4.20%
0		301,053	—
-100		259,878	(13.70)%

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

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities, FHLB advances, and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments and sales of securities 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 and identified volatile deposits, (3) yields available on interest-earning deposits and securities, and (4) the

objectives of our asset/liability management program. Excess liquid assets are primarily invested in mortgage-backed securities backed by government sponsored entities, collateralized mortgage obligations, municipal bonds and asset-backed 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, 2021, cash and cash equivalents totaled $191.2 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $35.9 million at September 30, 2021. Warehouse loans that have a short-term duration also provide additional sources of liquidity. The balance that meets the definition of a liquid assets totaled $234.2 million as of September 30, 2021.

At September 30, 2021, we had the ability to borrow $133.7 million from the Federal Home Loan Bank of Boston. On that date, we had $13.5 million in advances outstanding. At September 30, 2021, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $187.9 million, none of which was outstanding as of that date.

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

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. At September 30, 2021 and December 31, 2020, we had $90.7 million and $31.9 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at September 30, 2021 and December 31, 2020, we had $262.9 million and $202.0 million in unadvanced funds to borrowers, respectively. We also had $1.8 million and $1.7 million in outstanding letters of credit at September 30, 2021 and December 31, 2020, respectively.

A significant decrease in deposits could result in the Company having to seek other sources of funds, including brokered certificates of deposit, QwickRate deposits, and Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay. We believe, however, based on past experience that a significant portion of our deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Non-core deposits, or volatile deposits, are accounts where full banking services are not utilized or there is significant volatility expected. The Company has identified $13.0 million in volatile deposits as of September 30, 2021.

The Company maintains access to multiple sources of liquidity. We have utilized wholesale funding markets and have remained open but with rates that have been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become mor reliant on volatile or more expensive sources of funding.

The Bank is subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. At September 30, 2021, the Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 10 of the Notes to the Unaudited Consolidated Financial Statements for additional information.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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, 2021. 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, 2021, 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

Not applicable.

Item 1A. Risk Factors

Not applicable to a smaller reporting company.

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

(a)Not applicable.

(b)Not applicable.

(c)On March 12, 2021, the Company announced that its Board of Directors had adopted a stock repurchase program under which it would repurchase up to 1,400,000 shares of its common stock, or approximately 7.5% of the then-current outstanding shares. The repurchase program has no expiration date. The Company’s repurchases of common stock for the second quarter of 2021, under the repurchase program is as follows:



Period	Total ‎Number of ‎Shares ‎Purchased	Average Price ‎Paid ‎per Share		Total Number of ‎Shares Purchased as ‎Part of Publicly ‎Announced Plans or ‎Programs	Maximum Number of ‎Shares that May Yet ‎Be Purchased Under ‎the Plans or ‎Programs
July 1, 2021 - July 31, 2021	114,021	$	16.15	114,021	692,139
August 1, 2021 - August 31, 2021	56,679	$	16.03	56,679	635,460
September 1, 2021 - September 30, 2021	187,177	$	16.01	187,177	448,283
Total	357,877	$	16.06	357,877

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

‎

Item 6. Exhibits


3.1	Articles of Incorporation of Provident Bancorp, Inc. (1)
3.2	Bylaws of Provident Bancorp, Inc. (1)
3.3	Amendment to Bylaws (2)
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, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted as iXBRL and contained in exhibit 101).

_________________

(1)Incorporated by reference to the Company’s Registration Statement on Form S-1 (file no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019.

(2)Incorporated by reference to the Company’s Current Report on Form 8-K (file no. 001-39090), filed with the Securities and Exchange Commission on March 29, 2021.

‎

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 10, 2021		/s/ David P. Mansfield
		David P. Mansfield
		President and Chief Executive Officer

Date: November 10, 2021		/s/ Carol L. Houle
		Carol L. Houle
		Executive Vice President and Chief Financial Officer