UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September 30, 2017~~

March 31, 2018

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

For the transition period from _______________ to ______________________

Commission File No. 001-37504

Provident Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

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

~~(978) 834-8555~~

~~(Registrant’s telephone number)~~

(978) 834-8555
(Registrant’s telephone number)

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

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

YESx NO¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESx NO¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	¨x
Non-accelerated filer (Do not check if a smaller reporting company)			¨o
		Smaller reporting company	xo
		Emerging growth company	x

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

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

As of ~~November 8, 2017,~~May 03, 2018, there were ~~9,627,988~~9,628,496 shares of the Registrant’s common stock, no par value per share, outstanding.

Provident Bancorp, Inc.

Form 10-Q

		Page
Part I.	Financial Information

Item 1.	Interim Financial Statements

	Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2018 (unaudited) and December 31, ~~2016~~2017	2

	Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ (unaudited)	3

	Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ (unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ (unaudited)	5

	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	~~Managements~~Management’s Discussion and Analysis of Financial Condition and Results of Operation	2725

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4337

Item 4.	Controls and Procedures	4337

Part II.	Other Information

Item 1.	Legal Proceedings	4337

Item 1A.	Risk Factors	4337

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4438

Item 3.	Defaults upon Senior Securities	4438

Item 4.	Mine Safety Disclosures	4438

Item 5.	Other Information	4438

Item 6.	Exhibits	4438

Signatures		4539

~~Table of Contents~~

Part I.

Financial Information

Item 1.

Financial Statements

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

At At
September 30, December 31,
(Dollars in thousands) 2017 2016
(unaudited)
Assets
Cash and due from banks $ 8,720 $ 7,939
Interest-bearing demand deposits with other banks 8,827 2,637
Money market mutual funds 30 129
Cash and cash equivalents 17,577 10,705
Investments in available-for-sale securities (at fair value) 109,684 117,867
Federal Home Loan Bank stock, at cost 3,737 2,787
Loans, net 748,537 624,425
Bank owned life insurance 25,362 19,395
Premises and equipment, net 11,156 11,587
Assets held-for-sale 3,213 -
Accrued interest receivable 2,635 2,320
Deferred tax asset, net 4,808 4,913
Other assets 1,870 1,544
Total assets $ 928,579 $ 795,543

Liabilities and Equity
Deposits:
Noninterest-bearing $ 170,089 $ 158,075
Interest-bearing 555,184 469,907
Total deposits 725,273 627,982
Federal Home Loan Bank advances 78,365 49,858
Other liabilities 8,887 8,554
Total liabilities 812,525 686,394
Shareholders' equity:
Preferred stock; authorized 50,000 shares: no shares issued and outstanding - -
Common stock, no par value: 30,000,000 shares authorized; 9,652,448 shares issued, 9,627,988 shares outstanding at September 30, 2017 and 9,652,448 issued and outstanding at December 31, 2016 - -
Additional paid-in capital 44,274 43,393
Retained earnings 72,403 66,229
Accumulated other comprehensive income 2,786 2,622
Unearned compensation - ESOP (2,917 ) (3,095 )
Treasury stock: 24,460 shares at September 30, 2017 (492 ) -
Total shareholders' equity 116,054 109,149
Total liabilities and shareholders' equity $ 928,579 $ 795,543

	At			At
	March 31,			December 31,
*(Dollars in thousands)*	2018			2017
		*(unaudited)*
Assets
Cash and due from banks	$	8,809		$	10,326
Interest-bearing demand deposits with other banks		13,511			37,363
Cash and cash equivalents		22,320			47,689
Investments in available-for-sale securities (at fair value)		57,790			61,429
Federal Home Loan Bank stock, at cost		2,166			1,854
Loans, net		759,882			742,138
Assets held-for-sale		-			3,286
Bank owned life insurance		25,711			25,540
Premises and equipment, net		14,287			10,981
Accrued interest receivable		2,270			2,345
Deferred tax asset, net		5,274			4,920
Other assets		1,472			2,083
Total assets	$	891,172		$	902,265

Liabilities and Equity
Deposits:
Noninterest-bearing	$	181,368		$	186,222
Interest-bearing		538,337			563,835
Total deposits		719,705			750,057
Federal Home Loan Bank advances		45,211			26,841
Other liabilities		8,926			9,590
Total liabilities		773,842			786,488
Shareholders' equity:
Preferred stock; authorized 50,000 shares: no shares issued and outstanding		-			-
Common stock, no par value: 30,000,000 shares authorized; 9,657,319 shares issued, 9,628,496 shares outstanding at March 31, 2018 and December 31, 2017		-			-
Additional paid-in capital		44,923			44,592
Retained earnings		76,069			74,047
Accumulated other comprehensive (loss) income		(270	)		589
Unearned compensation - ESOP		(2,798	)		(2,857	)
Treasury stock: 28,823 shares at March 31 ,2018 and December 31, 2017		(594	)		(594	)
Total shareholders' equity		117,330			115,777
Total liabilities and shareholders' equity	$	891,172		$	902,265

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

~~Table of Contents~~

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(Dollars in thousands, except per share data)	2017		2016		2017		2016		2018		2017
	(unaudited)								(unaudited)
Interest and dividend income:
Interest and fees on loans	$	8,403	$	6,611	$	23,547	$	18,861	$	9,276	$	7,233
Interest and dividends on securities		822		807		2,597		2,549		435		873
Interest on interest-bearing deposits		14		8		23		22		42		6
Total interest and dividend income		9,239		7,426		26,167		21,432		9,753		8,112
Interest expense:
Interest on deposits		783		539		2,031		1,623		920		570
Interest on Federal Home Loan Bank advances		222		174		633		468		114		211
Total interest expense		1,005		713		2,664		2,091		1,034		781
Net interest and dividend income		8,234		6,713		23,503		19,341		8,719		7,331
Provision for loan losses		1,012		163		2,467		484		656		563
Net interest and dividend income after provision for loan losses		7,222		6,550		21,036		18,857		8,063		6,768
Noninterest income:
Customer service fees on deposit accounts		380		339		1,064		936		364		338
Service charges and fees - other		488		427		1,471		1,293		453		502
Gain on sale of securities, net		1,851		438		2,391		475		-		482
Bank owned life insurance income		167		147		467		460		171		150
Other income		11		12		75		101		25		30
Total noninterest income		2,897		1,363		5,468		3,265		1,013		1,502
Noninterest expense:
Salaries and employee benefits		3,943		3,219		11,346		9,500		4,158		3,676
Occupancy expense		411		412		1,332		1,194		450		471
Equipment expense		149		162		456		471		122		150
FDIC assessment		75		103		216		293		82		68
Data processing		177		163		543		491		204		190
Marketing expense		81		70		231		178		53		50
Professional fees		227		299		656		876		248		214
Directors' compensation		133		81		433		226		163		145
Other		718		703		2,197		1,987		896		657
Total noninterest expense		5,914		5,212		17,410		15,216		6,376		5,621
Income before income tax expense		4,205		2,701		9,094		6,906		2,700		2,649
Income tax expense		1,434		940		2,920		2,295		678		847
Net income	$	2,771	$	1,761	$	6,174	$	4,611	$	2,022	$	1,802

Income per share:
Earnings per share:
Basic	$	0.30	$	0.19	$	0.67	$	0.50	$	0.22	$	0.20
Diluted	$	0.30	$	0.19	$	0.67	$	0.50	$	0.22	$	0.20

Weighted Average Shares:
Basic		9,201,634		9,179,269		9,196,046		9,173,331		9,219,865		9,192,568
Diluted		9,213,056		9,179,269		9,196,046		9,173,331		9,295,003		9,192,568

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

~~Table of Contents~~

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In thousands)	2017			2016			2017			2016			2018			2017

Net income	$	2,771		$	1,761		$	6,174		$	4,611		$	2,022		$	1,802
Other comprehensive income:
Change in net unrealized holding gains (losses)		315			(296	)		2,660			1,575
Other comprehensive income (loss):
Unrealized holding (losses) gains														(1,213	)		740
Reclassification adjustment for realized gains in net income		(1,851	)		(438	)		(2,391	)		(475	)		-			(482	)
Net change in unrealized (loss) gain		(1,536	)		(734	)		269			1,100
Unrealized (loss) gain														(1,213	)		258
Income tax effect		569			290			(105	)		(376	)		354			(97	)
Net of tax amount		(967	)		(444	)		164			724			(859	)		161
Change in net unrealized holding gains on securities transferred from held-to-maturity to available-for-sale		-			-			-			2,239
Income tax effect		-			-			-			(894	)
Net of tax amount		-			-			-			1,345
Other comprehensive (loss) income		(967	)		(444	)		164			2,069
Total comprehensive income	$	1,804		$	1,317		$	6,338		$	6,680		$	1,163		$	1,963

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

~~Table of Contents~~

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

								Accumulated																		Accumulated
	Shares of			Additional				Other		Unearned									Shares of			Additional				Other			Unearned
	Common			Paid-in		Retained		Comprehensive		Compensation			Treasury						Common			Paid-in		Retained		Comprehensive			Compensation			Treasury
(In thousands, except share data)	Stock			Capital		Earnings		Income		ESOP			Stock			Total			Stock			Capital		Earnings		(Loss) Income			ESOP			Stock			Total

Balance, December 31, 2017																				9,628,496		$	44,592	$	74,047	$	589		$	(2,857	)	$	(594	)	$	115,777
Net income																				-			-		2,022		-			-			-			2,022
Other comprehensive loss																				-			-		-		(859	)		-			-			(859	)
Stock-based compensation expense																				-			240		-		-			-			-			240
ESOP shares earned																				-			91		-		-			59			-			150
Balance, March 31, 2018																				9,628,496		$	44,923	$	76,069	$	(270	)	$	(2,798	)	$	(594	)	$	117,330

Balance, December 31, 2016		9,652,448		$	43,393	$	66,229	$	2,622	$	(3,095	)	$	-		$	109,149			9,652,448		$	43,393	$	66,229	$	2,622		$	(3,095	)	$	-		$	109,149
Net income		-			-		6,174		-		-			-			6,174			-			-		1,802		-			-			-			1,802
Net change in other comprehensive income		-			-		-		164		-			-			164
Other comprehensive income																				-			-		-		161			-			-			161
Stock-based compensation expense		-			691		-		-		-			-			691			-			231		-		-			-			-			231
Treasury stock acquired		(24,460	)		-		-		-		-			(492	)		(492	)		(11,460	)		-		-		-			-			(222	)		(222	)
ESOP shares earned		-			190		-		-		178			-			368			-			55		-		-			59			-			114
Balance, September 30, 2017		9,627,988		$	44,274	$	72,403	$	2,786	$	(2,917	)	$	(492	)	$	116,054

Balance, December 31, 2015		9,498,722		$	43,159	$	59,890	$	1,690	$	(3,333	)	$	-		$	101,406
Net income		-			-		4,611		-		-			-			4,611
Net change in other comprehensive income		-			-		-		2,069		-			-			2,069
ESOP shares earned		-			78		-		-		179			-			257
Balance, September 30, 2016		9,498,722		$	43,237	$	64,501	$	3,759	$	(3,154	)	$	-		$	108,343
Balance, March 31, 2017																				9,640,988		$	43,679	$	68,031	$	2,783		$	(3,036	)	$	(222	)	$	111,235

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

~~Table of Contents~~

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended						Three Months Ended
	September 30,						March 30,
(In thousands)	2017			2016			2018			2017
Cash flows from operating activities:
Net income	$	6,174		$	4,611		$	2,022		$	1,802
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities premiums, net of accretion		618			627			67			192
ESOP expense		368			257			150			114
Gain on sale of securities, net		(2,391	)		(475	)		-			(482	)
Change in deferred loan fees, net		382			(76	)		(27	)		71
Provision for loan losses		2,467			484			656			563
Depreciation and amortization		626			628			185			208
Loss on disposals of premise and equipment		2			-
(Increase) decrease in accrued interest receivable		(315	)		233
Increase in taxes receivable		(299	)		(67	)
Decrease (increase) in accrued interest receivable								75			(13	)
Share-based compensation expense		691			-			240			231
Increase in cash surrender value of life insurance		(467	)		(459	)		(171	)		(150	)
(Increase) decrease in other assets		(27	)		67
Increase in other liabilities		333			737
Decrease (increase) in other assets								611			(295	)
Decrease in other liabilities								(664	)		(315	)
Net cash provided by operating activities		8,162			6,567			3,144			1,926

Cash flows from investing activities:
Purchases of available-for-sale securities		(13,120	)		(1,386	)		-			(11,318	)
Proceeds from sales of available-for-sale securities		11,915			2,912			-			1,555
Proceeds from pay downs, maturities and calls of available-for-sale securities		11,430			11,586			2,359			4,346
Proceeds from pay downs, maturities and calls of held-to-maturity securities		-			220
(Purchase) redemption of Federal Home Loan Bank stock		(950	)		843
Purchase of Federal Home Loan Bank stock								(312	)		(1,107	)
Loan originations and purchases, net of paydowns		(127,011	)		(34,869	)		(18,373	)		(27,083	)
Recoveries of loans previously charged off		50			26
Purchase of bank owned life insurance		(5,500	)		-
Additions to premises and equipment		(3,410	)		(704	)		(58	)		(3,082	)
Additions to assets held-for-sale								(147	)		-
Net cash used in investing activities		(126,596	)		(21,372	)		(16,531	)		(36,689	)

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

~~Table of Contents~~

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

	Nine Months Ended						Three Months Ended
	September 30,						March 30,
(In thousands)	2017			2016			2018			2017
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		55,621			60,202
Net increase (decrease) in time deposits		41,670			(27,106	)
Proceeds from advances from Federal Home Loan Bank		7,000			11,500
Net (decrease) increase in demand deposits, NOW and savings accounts								(22,826	)		6,911
Net (decrease) increase in time deposits								(7,526	)		45,704
Proceeeds from advances from Federal Home Loan Bank								-			7,000
Net change in Federal Home Loan Bank short-term advances		21,507			(27,465	)		18,370			(23,988	)
Purchase of treasury stock		(492	)		-			-			(222	)
Net cash provided by financing activities		125,306			17,131
Net cash (used in) provided by financing activities								(11,982	)		35,405

Net increase in cash and cash equivalents		6,872			2,326
Net (decrease) increase in cash and cash equivalents								(25,369	)		642
Cash and cash equivalents at beginning of period		10,705			20,464			47,689			10,705
Cash and cash equivalents at end of period	$	17,577		$	22,790		$	22,320		$	11,347

Supplemental disclosures:
Interest paid	$	2,653		$	2,095		$	1,098		$	788
Income taxes paid		3,219			2,362			642			100
Fixed assets transferred to assets held-for-sale		3,213			-
Held-to-maturity securities transferred to available-for-sale		-			44,240
Assets held-for-sale transferred to premises and equipment								3,433			-

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

~~Table of Contents~~

PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(1)

Basis of Presentation

The accompanying unaudited financial statements of Provident Bancorp, Inc., a Massachusetts corporation (the “Company”), were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of the financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the ~~three- and nine-month periods~~three-month period ended ~~September 30, 2017~~March 31, 2018 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year.Certain amounts in ~~2016~~2017 have been reclassified to be consistent with the ~~2017~~2018 consolidated financial statement presentation, and had no effect on the net income reported in the consolidated statement of income.These financial statements should be read in conjunction with the annual financial statements and notes thereto included in the annual report on Form 10-K the Company filed with the Securities and Exchange Commission on March ~~16, 2017.~~15, 2018.

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

(2)

Corporate Structure

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

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

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

~~Table of Contents~~

(3)

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issuedAccounting Standards Update (ASU) No. 2014-09 – Revenue from Contracts with Customers (Topic 606).~~The~~This ASU ~~establishes a single comprehensive model for~~supersedes the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue ~~when it transfers~~for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled ~~and will supersede nearly all existing~~in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. In March 2016, the FASB also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09, which reframed the structure of the indicators of when an entity is acting as an agent and focused on evidence that an entity is acting as the principal or agent in a revenue transaction. ASU 2016-08 also eliminated two of the indicators (the entity’s consideration is in the form of a commission, and the entity is not exposed to ~~clarify and converge revenue recognition principles under US GAAP and International Financial Reporting Standards (IFRS). The most significant potential impact~~credit risk) in making that determination. This amendment also clarifies that each indicator may be more or less relevant to ~~banking entities relates to less prescriptive derecognition requirements~~the assessment depending on the ~~sale~~terms and conditions of ~~other real estate owned (OREO) property.~~the contract. In ~~August 2015,~~May 2016, the FASB issued ASU ~~No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral~~2016-12, an amendment to ASU 2014-09, which provided practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on transition, collectability, non-cash consideration and presentation of sales and other similar taxes. The amendments, collectively, should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the ~~Effective Date. The amendments in ASU 2015-14 defer the effective~~ date of adoption (modified retrospective approach).

This ASU ~~2014-09 for all entities by one year. Accordingly, the amendments are~~was effective for ~~annual~~the Company on January 1, 2018. Because the ASU does not apply to revenue associated with leases and ~~interim periods beginning after December 15, 2017. Early adoption was permitted for annual~~financial instruments (including loans and ~~interim reporting periods beginning after December 15, 2016. An entity may elect either a full retrospective or a modified retrospective application.~~securities), the Company concluded that the new guidance did not impact the elements of its consolidated statements of income most closely associated with leases and financial instruments (such as interest income, interest expense and securities gains). The Company completed its identification of all revenue streams included in its financial statements and has identified its deposit- related fees, service charges, debit and prepaid card interchange income and other fee income to be within the scope of the standard. The Company has also completed its review of the related contracts. The Company's overall assessment indicates that adoption of this ASU did not ~~elect to early adopt this ASU. The Company does not expect~~materially change its current method and timing of recognizing revenue for the ~~application~~identified revenue streams and therefore, the adoption of this ~~guidance will~~ASU on January 1, 2018, did not have a ~~material~~significant impact onto the Company's financial condition, results of operations and consolidated financial statements.

In January 2016, the FASB issuedASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.”The ASU has been issued to improve the recognition and measurement of financial instruments by requiring 1) equity investments (except those accounted for under the equity method of accounting, those without readily determinable fair values, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 3) the use of the exit price notion when measuring fair value of financial instruments for disclosure purposes; and 4) separate presentation by the reporting organization in other comprehensive income for the portion of the total change in the fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The standard iswas effective for the Company ~~beginning~~ on January 1, 2018. The Company ~~holds a portfolio of marketable equity securities; depending on the size and composition of the portfolio at the adoption date,~~evaluated the impact of this pronouncement and divested its entire marketable equity securities portfolio in 2017. The Company’s investment in Federal Home Loan Bank Stock is not included in the ~~ASU could be~~scope of this pronouncement. Upon adoption, the fair value of the Company's loan portfolio is now presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial assets and liabilities that are not measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update did not have a material toimpact on the ~~Company’s~~Company's consolidated financial statements.

In February 2016, the FASB issuedASU 2016-02, Leases (Topic 842).The amendments in this update require lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases. Accounting by lessors will remain largely unchanged. The guidance will be effective for the Company on January 1, 2019, with early adoption permitted. Adoption will require a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.

~~In March 2016, the FASB issued~~~~ASU 2016-09, Compensation Stock – Compensation (Topic 718): “Improvements to Employee Share Based Payment Accounting.”~~This ASU changes how companies account for certain aspects of share based payments to employees. Specifically, some of the requirements under the amendments include: (1) excess tax benefits and/or tax deficiencies, determined as the difference between compensation cost recognized for financial reporting purposes and the deduction for tax, be recognized in the income statement as income tax expense or benefit in the period in which they occur, removing historical equity treatment; (2) excess tax benefits are no longer separately classified as a financing activity but rather should be classified with other income tax cash flows as an operating activity on the statement of cash flows; (3) cash paid by an employer when withholding shares for tax withholding purposes should be classified as a financing activity. Additionally, regarding forfeitures, this guidance permits a company to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. The amendments in this update were effective for the Company on January 1, 2017. The adoption of this ASU did not have a material impact on the Company’s financial statements.

~~Table of Contents~~

In June 2016, the FASB issuedASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.”The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The amendments in this update will be effective for the Company on January 1, 2020. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is currently evaluating the impact of its pending adoption of this guidance on the Company’s financial statements.

In August 2016, the FASB issuedASU No. 2016-15, Statement of Cash Flows (Topic 230): “Classification of Certain Cash Receipts and Cash Payments.”This ASU changes how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The amendments address the classification of the following eight items in the statement of cash flows: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the Predominance Principle. The amendments in this update ~~are~~were effective for the Company on January 1, 2018. As the guidance only affects the classification within the statement of cash flows, the ~~Company does not expect the application~~adoption of this guidance ~~will~~did not have a material impact on the Company’s financial statements.

In March 2017, the FASB issuedASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (subtopic 310-20): “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments will be effective for the Company on January 1, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements.

~~Table of Contents~~

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Investment Securities

The following summarizes the amortized cost of investment securities classified as available-for-sale and their approximate fair values at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

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

September 30, 2017
State and municipal $ 51,871 $ 1,611 $ 15 $ 53,467
Asset-backed securities 7,682 38 15 7,705
Government mortgage-backed securities 34,459 440 159 34,740
Trust preferred securities 1,351 - 145 1,206
Marketable equity securities 9,878 2,918 200 12,596
105,241 5,007 534 109,714
Money market mutual funds included in cash and cash equivalents (30 ) - - (30 )
Total available-for-sale securities $ 105,211 $ 5,007 $ 534 $ 109,684

December 31, 2016
State and municipal $ 49,367 $ 1,281 $ 68 $ 50,580
Corporate debt 1,000 31 - 1,031
Asset-backed securities 8,747 - 69 8,678
Government mortgage-backed securities 41,818 435 339 41,914
Trust preferred securities 1,368 - 400 968
Marketable equity securities 11,492 3,551 218 14,825
113,792 5,298 1,094 117,996
Money market mutual funds included in cash and cash equivalents (129 ) - - (129 )
Total available-for-sale securities $ 113,663 $ 5,298 $ 1,094 $ 117,867

~~Table of Contents~~

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

March 31, 2018
State and municipal securities	$	20,199	$	304	$	200	$	20,303
Asset-backed securities		7,327		-		129		7,198
Government mortgage-backed securities		30,719		196		626		30,289
Total available-for-sale securities	$	58,245	$	500	$	955	$	57,790

December 31, 2017
State and municipal securities	$	20,726	$	745	$	17	$	21,454
Asset-backed securities		7,524		30		37		7,517
Government mortgage-backed securities		32,421		317		280		32,458
Total available-for-sale securities	$	60,671	$	1,092	$	334	$	61,429

The scheduled maturities of debt securities were as follows at ~~September 30, 2017:~~March 31, 2018:

	Available-for-Sale				Available-for-Sale
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value

Due within one year	$	1,347	$	1,367
Due after one year through five years		1,387		1,419	$	419	$	427
Due after five years through ten years		8,635		8,934		2,396		2,441
Due after ten years		41,853		42,953		17,384		17,435
Government mortgage-backed securities		34,459		34,740		30,719		30,289
Asset-backed securities		7,682		7,705		7,327		7,198
	$	95,363	$	97,118	$	58,245	$	57,790

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, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

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

September 30, 2017
March 31, 2018
Temporarily impaired securities:
State and municipal	$	1,552	$	12	$	160	$	3	$	1,712	$	15
State and municipal securities													$	7,790	$	170	$	595	$	30	$	8,385	$	200
Asset-backed securities		2,775		11		329		4		3,104		15		5,948		96		1,250		33		7,198		129
Government mortgage-backed securities		12,998		92		3,046		67		16,044		159		10,206		149		12,757		477		22,963		626
Trust preferred securities		15		29		1,191		116		1,206		145
Marketable equity securities		913		72		947		128		1,860		200
Total temporarily impaired securities	$	18,253	$	216	$	5,673	$	318	$	23,926	$	534	$	23,944	$	415	$	14,602	$	540	$	38,546	$	955

December 31, 2016
December 31, 2017
Temporarily impaired securities:
State and municipal	$	6,413	$	63	$	160	$	5	$	6,573	$	68
State and municipal securities													$	-	$	-	$	611	$	17	$	611	$	17
Asset-backed securities		8,104		60		574		9		8,678		69		1,745		13		1,335		24		3,080		37
Government mortgage-backed securities		20,868		247		2,770		92		23,638		339		5,231		20		13,584		260		18,815		280
Trust preferred securities		26		18		942		382		968		400
Marketable equity securities		1,942		104		768		114		2,710		218
Total temporarily impaired securities	$	37,353	$	492	$	5,214	$	602	$	42,567	$	1,094	$	6,976	$	33	$	15,530	$	301	$	22,506	$	334

Government mortgage-backed securities, state and municipal securities and asset-backed securities: Management believes that no individual unrealized loss at ~~September 30, 2017~~March 31, 2018 represents an other-than-temporarily impairment (OTTI) because the decline in fair value of these securities is primarily attributable to changes in interest rates and not credit quality, and because the Company has the intent and ability to hold these investments until market price recovery or maturity.

~~Table of Contents~~

~~Marketable equity securities~~: Management continuously monitors equity securities for impairment by reviewing the financial condition of the issuer, company-specific events, industry developments, and general economic conditions. Management reviews corporate financial reports, credit agency reports and other publicly available information. Based on these reviews, none of these securities are considered to be other-than-temporarily impaired.

~~Trust preferred securities~~: Management monitors its pooled trust preferred securities for possible other-than-temporary impairment on a quarterly basis. This review includes an analysis of collateral reports, cash flows, stress default levels and financial ratios of the underlying issuers. Management utilizes a third party to compile this data and perform other-than-temporary impairment cash flow testing. Critical assumptions that go into the other-than-temporary impairment cash flow testing are prepayment speeds, default rates of the underlying issuers and discount margins. The result of the third-party other-than-temporary impairment cash flow testing indicated no other-than-temporary impairment as of September 30, 2017.

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Loans

A summary of loans is as follows:

	At						At						At						At
	September 30,						December 31,						March 31,						December 31,
(Dollars in thousands)	2017						2016						2018						2017
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
Commercial real estate	$	386,062			50.78	%	$	336,102			53.07	%	$	372,955			48.38	%	$	371,510			49.35	%
Commercial		232,511			30.58	%		166,157			26.23	%		259,994			33.72	%		240,223			31.91	%
Residential real estate		70,960			9.33	%		76,850			12.13	%		65,777			8.53	%		67,724			9.00	%
Construction and land development		55,915			7.35	%		48,161			7.60	%		53,875			6.99	%		55,828			7.42	%
Consumer		14,830			1.95	%		6,172			0.97	%		18,335			2.38	%		17,455			2.32	%
		760,278			100.00	%		633,442			100.00	%		770,936			100.00	%		752,740			100.00	%
Allowance for loan losses		(10,932	)					(8,590	)					(10,236	)					(9,757	)
Deferred loan fees, net		(809	)					(427	)					(818	)					(845	)
Net loans	$	748,537					$	624,425					$	759,882					$	742,138

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~~Table of Contents~~

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, 2017~~March 31, 2018 and ~~2016:~~2017:

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

Balance at June 30, 2017 $ 4,640 $ 3,281 $ 318 $ 1,141 $ 472 $ 100 $ 9,952
Charge-offs - (2 ) - - (80 ) - (82 )
Recoveries - 45 - - 5 - 50
Provision (benefit) 1,029 60 (22 ) (177 ) 172 (50 ) 1,012
Balance at September 30, 2017 $ 5,669 $ 3,384 $ 296 $ 964 $ 569 $ 50 $ 10,932

Balance at June 30, 2016 $ 4,001 $ 2,297 $ 364 $ 1,286 $ 102 $ 181 $ 8,231
Charge-offs - - - - (11 ) - (11 )
Recoveries - - - - 3 - 3
Provision (benefit) 168 101 (12 ) (189 ) 6 89 163
Balance at September 30, 2016 $ 4,169 $ 2,398 $ 352 $ 1,097 $ 100 $ 270 $ 8,386

																						For the three months ended March 31,
																															Construction
	For the nine months ended September 30,																					Commercial						Residential			and Land
(In thousands)	Commercial Real Estate			Commercial			Residential Real Estate			Construction and Land Development			Consumer			Unallocated			Total			Real Estate			Commercial			Real Estate			Development			Consumer			Unallocated			Total
Allowance for loan losses:

Balance at December 31, 2017																						$	4,483		$	3,280		$	300		$	965		$	649		$	80		$	9,757
Charge-offs																							-			(20	)		-			-			(166	)		-			(186	)
Recoveries																							-			1			-			-			8			-			9
Provision (benefit)																							124			407			(8	)		(26	)		187			(28	)		656
Balance at March 31, 2018																						$	4,607		$	3,668		$	292		$	939		$	678		$	52		$	10,236

Balance at December 31, 2016	$	4,503		$	2,513		$	328		$	882		$	279		$	85		$	8,590		$	4,503		$	2,513		$	328		$	882		$	279		$	85		$	8,590
Charge-offs		(6	)		(63	)		-			-			(106	)		-			(175	)		(6	)		-			-			-			(8	)		-			(14	)
Recoveries		-			45			-			-			5			-			50			-			-			-			-			-			-			-
Provision (benefit)		1,172			889			(32	)		82			391			(35	)		2,467			16			267			(8	)		159			104			25			563
Balance at September 30, 2017	$	5,669		$	3,384		$	296		$	964		$	569		$	50		$	10,932

Balance at December 31, 2015	$	3,827		$	2,138		$	412		$	1,236		$	119		$	173		$	7,905
Charge-offs		-			-			-			-			(29	)		-			(29	)
Recoveries		-			1			12			-			13			-			26
Provision (benefit)		342			259			(72	)		(139	)		(3	)		97			484
Balance at September 30, 2016	$	4,169		$	2,398		$	352		$	1,097		$	100		$	270		$	8,386
Balance at March 31, 2017																						$	4,513		$	2,780		$	320		$	1,041		$	375		$	110		$	9,139

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~~Table of Contents~~

The following table sets forth information regarding the allowance for loan losses and related loan balances by segment at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

																					Construction
															Commercial				Residential		and Land
(In thousands)	Commercial Real Estate		Commercial		Residential Real Estate		Construction and Land Development		Consumer		Unallocated		Total		Real Estate		Commercial		Real Estate		Development		Consumer		Unallocated		Total
September 30, 2017
March 31, 2018
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment	$	809	$	-	$	-	$	-	$	-	$	-	$	809	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance:
Collectively evaluated for impairment		4,860		3,384		296		964		569		50		10,123		4,607		3,668		292		939		678		52		10,236
Total allowance for loan losses ending balance	$	5,669	$	3,384	$	296	$	964	$	569	$	50	$	10,932	$	4,607	$	3,668	$	292	$	939	$	678	$	52	$	10,236

Loans:
Ending balance:
Individually evaluated for impairment	$	6,738	$	1,761	$	408	$	-	$	-	$	-	$	8,907	$	8,610	$	3,209	$	400	$	-	$	-	$	-	$	12,219
Ending balance:
Collectively evaluated for impairment		379,324		230,750		70,552		55,915		14,830		-		751,371		364,345		256,785		65,377		53,875		18,335		-		758,717
Total loans ending balance	$	386,062	$	232,511	$	70,960	$	55,915	$	14,830	$	-	$	760,278	$	372,955	$	259,994	$	65,777	$	53,875	$	18,335	$	-	$	770,936

December 31, 2016
December 31, 2017
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment	$	-	$	46	$	-	$	-	$	-	$	-	$	46	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance:
Collectively evaluated for impairment		4,503		2,467		328		882		279		85		8,544		4,483		3,280		300		965		649		80		9,757
Total allowance for loan losses ending balance	$	4,503	$	2,513	$	328	$	882	$	279	$	85	$	8,590	$	4,483	$	3,280	$	300	$	965	$	649	$	80	$	9,757

Loans:
Ending balance:
Individually evaluated for impairment	$	1,956	$	1,660	$	422	$	-	$	-	$	-	$	4,038	$	8,623	$	3,202	$	404	$	-	$	-	$	-	$	12,229
Ending balance:
Collectively evaluated for impairment		334,146		164,497		76,428		48,161		6,172		-		629,404		362,887		237,021		67,320		55,828		17,455		-		740,511
Total loans ending balance	$	336,102	$	166,157	$	76,850	$	48,161	$	6,172	$	-	$	633,442	$	371,510	$	240,223	$	67,724	$	55,828	$	17,455	$	-	$	752,740

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~~Table of Contents~~

The following tables set forth information regarding non-accrual loans and loan delinquencies by portfolio segment at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

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

September 30, 2017
March 31, 2018
Commercial real estate	$	-	$	-	$	-	$	-	$	386,062	$	386,062	$	-	$	5,185	$	820	$	3,577	$	3,670	$	8,067	$	364,888	$	372,955	$	-	$	7,102
Commercial		3		-		-		3		232,508		232,511		-		68		235		2,906		-		3,141		256,853		259,994		-		1,501
Residential real estate		-		117		156		273		70,687		70,960		-		361		549		101		-		650		65,127		65,777		-		920
Construction and land development		-		-		-		-		55,915		55,915		-		-		-		-		-		-		53,875		53,875		-		-
Consumer		57		10		33		100		14,730		14,830		-		33		70		85		58		213		18,122		18,335		-		61
Total	$	60	$	127	$	189	$	376	$	759,902	$	760,278	$	-	$	5,647	$	1,674	$	6,669	$	3,728	$	12,071	$	758,865	$	770,936	$	-	$	9,584

December 31, 2016
December 31, 2017
Commercial real estate	$	-	$	-	$	346	$	346	$	335,756	$	336,102	$	-	$	346	$	-	$	3,669	$	-	$	3,669	$	367,841	$	371,510	$	-	$	7,102
Commercial		29		-		-		29		166,128		166,157		-		933		12		-		-		12		240,211		240,223		-		1,505
Residential real estate		-		-		-		-		76,850		76,850				303		699		178		81		958		66,766		67,724				364
Construction and land development		-		-		-		-		48,161		48,161		-		-		-		-		-		-		55,828		55,828		-		-
Consumer		-		-		-		-		6,172		6,172		-		-		63		45		60		168		17,287		17,455		-		62
Total	$	29	$	-	$	346	$	375	$	633,067	$	633,442	$	-	$	1,582	$	774	$	3,892	$	141	$	4,807	$	747,933	$	752,740	$	-	$	9,033

1615

~~Table of Contents~~

Information about the Company’s impaired loans by portfolio segment was as follows at and for the period ended ~~September 30, 2017~~March 31, 2018 and at and for the year ended December 31, ~~2016:~~2017:

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

September 30, 2017
March 31, 2018
With no related allowance recorded:
Commercial real estate	$	1,553	$	1,553	$	-	$	1,584	$	52	$	8,610	$	10,125	$	-	$	8,616	$	24
Commercial		1,761		1,761		-		1,767		57		3,209		3,209		-		3,206		52
Residential real estate		408		408		-		415		16		400		400		-		402		4
Construction and land development		-		-		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-		-		-
Total impaired with no related allowance		3,722		3,722		-		3,766		125		12,219		13,734		-		12,224		80

With an allowance recorded:
Commercial real estate		5,185		5,185		809		1,963		-		-		-		-		-		-
Commercial		-		-		-		-		-		-		-		-		-		-
Residential real estate		-		-		-		-		-		-		-		-		-		-
Construction and land development		-		-		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-		-		-
Total impaired with an allowance recorded		5,185		5,185		809		1,963		-		-		-		-		-		-

Total
Commercial real estate		6,738		6,738		809		3,547		52		8,610		10,125		-		8,616		24
Commercial		1,761		1,761		-		1,767		57		3,209		3,209		-		3,206		52
Residential real estate		408		408		-		415		16		400		400		-		402		4
Construction and land development		-		-		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-		-		-
Total impaired loans	$	8,907	$	8,907	$	809	$	5,729	$	125	$	12,219	$	13,734	$	-	$	12,224	$	80

December 31, 2016
December 31, 2017
With no related allowance recorded:
Commercial real estate	$	1,956	$	1,956	$	-	$	2,744	$	188	$	8,623	$	10,139	$	-	$	4,562	$	70
Commercial		799		799		-		794		42		3,202		3,202		-		2,054		123
Residential real estate		422		422		-		429		20		404		404		-		412		20
Construction and land development		-		-		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-		-		-
Total impaired with no related allowance		3,177		3,177		-		3,967		250		12,229		13,745		-		7,028		213

With an allowance recorded:
Commercial real estate		-		-		-		-		-		-		-		-		-		-
Commercial		861		861		46		886		-		-		-		-		-		-
Residential real estate		-		-		-		-		-		-		-		-		-		-
Construction and land development		-		-		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-		-		-
Total impaired with an allowance recorded		861		861		46		886		-		-		-		-		-		-

Total
Commercial real estate		1,956		1,956		-		2,744		188		8,623		10,139		-		4,562		70
Commercial		1,660		1,660		46		1,680		42		3,202		3,202		-		2,054		123
Residential real estate		422		422		-		429		20		404		404		-		412		20
Construction and land development		-		-		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-		-		-
Total impaired loans	$	4,038	$	4,038	$	46	$	4,853	$	250	$	12,229	$	13,745	$	-	$	7,028	$	213

1716

~~Table of Contents~~

There were no troubled debt restructurings during the three months ended March 31, 2018.

The following summarizes troubled debt restructurings entered into during the ~~nine~~three months ended ~~September 30,~~March 31, 2017:

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

September 30, 2017
March 31, 2017
Troubled debt restructurings:
Commercial		1	$	249	$	249		1	$	249	$	249
		1	$	249	$	249		1	$	249	$	249

September 30, 2016
Troubled debt restructurings:
Commercial		1	$	58	$	58
		1	$	58	$	58

In the three months ended March 31 2017, the Company approved one troubled debt restructure totaling $249,000, with no specific reserve required based on an analysis of the borrower’s collateral coverage. The term of this commercial loan was extended to a three-year term.

The following tables present the Company’s loans by risk rating and portfolio segment at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

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

September 30, 2017
March 31, 2018
Grade:
Pass	$	368,586	$	216,388	$	-	$	55,915	$	-	$	640,889	$	355,967	$	236,485	$	-	$	53,875	$	-	$	646,327
Special mention		7,218		9,105		-		-		-		16,323		6,791		11,219		-		-		-		18,010
Substandard		10,258		7,018		421		-		-		17,697		10,197		12,290		633		-		-		23,120
Not formally rated		-		-		70,539		-		14,830		85,369		-		-		65,144		-		18,335		83,479
Total	$	386,062	$	232,511	$	70,960	$	55,915	$	14,830	$	760,278	$	372,955	$	259,994	$	65,777	$	53,875	$	18,335	$	770,936

December 31, 2016
December 31, 2017
Grade:
Pass	$	319,712	$	157,306	$	-	$	48,161	$	-	$	525,179	$	355,623	$	224,190	$	-	$	55,828	$	-	$	635,641
Special mention		4,471		1,668		-		-		-		6,139		6,852		9,155		-		-		-		16,007
Substandard		11,919		7,183		729		-		-		19,831		9,035		6,878		679		-		-		16,592
Not formally rated		-		-		76,121		-		6,172		82,293		-		-		67,045		-		17,455		84,500
Total	$	336,102	$	166,157	$	76,850	$	48,161	$	6,172	$	633,442	$	371,510	$	240,223	$	67,724	$	55,828	$	17,455	$	752,740

1817

~~Table of Contents~~

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~~“loss” and of such little value that their continuance as loans is not warranted.

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

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

(6)

Deposits

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

	March 31,		December 31,
(In thousands)	2018		2017

NOW and demand	$	289,868	$	309,514
Regular savings		115,144		112,610
Money market deposits		220,020		225,735
Total non-certificate accounts		625,032		647,859

Certificate accounts of $250,000 or more		5,785		5,061
Certificate accounts less than $250,000		88,888		97,137
Total certificate accounts		94,673		102,198
Total deposits	$	719,705	$	750,057

(7)

Federal Home Loan Bank Advances

Borrowings from the Federal Home Loan Bank (the “FHLB”) are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain commercial real estate loans and other qualified assets.

Maturities of advances from the FHLB as of ~~September 30, 2017~~March 31, 2018 are summarized as follows:

(In thousands)
Fiscal Year-End Dollar Amount
2017 $ 51,545
2018 12,000
2019 4,927
2020 6,393
Thereafter 3,500
Total $ 78,365

~~Table of Contents~~

(In thousands)
Fiscal Year-End	Dollar Amount
2018	$	30,350
2019		4,945
2020		6,416
2023		3,500
Total	$	45,211

~~(7)~~(8)

Fair Value Measurements

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

Basis of Fair Value Measurements

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

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

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

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

Fair Values of ~~Financial Instruments~~Assets Measured on a Recurring Basis

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

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

2019

~~Table of Contents~~

The following summarizes financial instruments measured at fair value on a recurring basis at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

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

September 30, 2017
State and municipal $ 53,467 $ - $ 53,467 $ -
Asset-backed securities 7,705 - 7,705 -
Mortgage-backed securities 34,740 - 34,740 -
Trust preferred securities 1,206 - - 1,206
Marketable equity securities 12,566 12,566 - -
Totals $ 109,684 $ 12,566 $ 95,912 $ 1,206

December 31, 2016
State and municipal $ 50,580 $ - $ 50,580 $ -
Corporate debt 1,031 - 1,031 -
Asset-backed securities 8,678 - 8,678 -
Mortgage-backed securities 41,914 - 41,914 -
Trust preferred securities 968 - - 968
Marketable equity securities 14,696 14,696 - -
Totals $ 117,867 $ 14,696 $ 102,203 $ 968

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

March 31, 2018
State and municipal securities	$	20,303	$	-	$	20,303	$	-
Asset-backed securities		7,198		-		7,198		-
Mortgage-backed securities		30,289		-		30,289		-
Totals	$	57,790	$	-	$	57,790	$	-

December 31, 2017
State and municipal securities	$	21,454	$	-	$	21,454	$	-
Asset-backed securities		7,517		-		7,517		-
Mortgage-backed securities		32,458		-		32,458		-
Totals	$	61,429	$	-	$	61,429	$	-

~~The following is a summary of activity for Level 3 financial instruments measured at fair value on a recurring basis for the nine-month periods ended September 30, 2017 and 2016.~~

(In thousands) Available-for-
Sale Securities

Balance beginning January 1, 2017 $ 968
Total gains or (losses) (realized/unrealized)
Included in earnings -
Included in other comprehensive income 255
Paydowns (17 )
Ending balance, September 30, 2017 $ 1,206

Balance beginning January 1, 2016 $ 1,116
Total gains or (losses) (realized/unrealized)
Included in earnings -
Included in other comprehensive income (105 )
Paydowns -
Ending balance, September 30, 2016 $ 1,011

~~Table of Contents~~

Fair Values of ~~Financial Instruments~~Assets Measured on a Non-Recurring Basis

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

The following summarizes ~~financial instruments~~assets measured at fair value on a nonrecurring basis at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

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

September 30, 2017
March 31, 2018
Impaired loan	$	4,376	$	-	$	-	$	4,376	$	3,670	$	-	$	-	$	3,670

December 31, 2016
December 31, 2017
Impaired loan	$	815	$	-	$	-	$	815	$	3,670	$	-	$	-	$	3,670

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, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

(In thousands) Fair Value Valuation Technique Unobservable Input
September 30, 2017
Impaired loan $ 4,376 Business valuation Comparable company valuations
December 31, 2016
Impaired loan $ 815 Business valuation Comparable company valuations

~~Table of Contents~~

(In thousands)	Fair Value		Valuation Technique	Unobservable Input
March 31, 2018
Impaired loan	$	3,670	Real estate appraisals	Discount for dated appraisals
December 31, 2017
Impaired loan	$	3,670	Real estate appraisals	Discount for dated appraisals

~~(8)~~(9)

Fair Value of Financial Instruments

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

The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016:~~2017:

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

September 30, 2017
Financial assets:
Cash and cash equivalents	$	17,577	$	17,577	$	-	$	-	$	17,577
Available-for-sale securities		109,684		12,566		95,912		1,206		109,684
Federal Home Loan Bank of Boston stock		3,737		3,737		-		-		3,737
Loans, net		748,537		-		-		758,964		758,964
Assets held-for-sale		3,213		-		3,213		-		3,213
Accrued interest receivable		2,635		-		2,635		-		2,635
Financial liabilities:
Deposits		725,273		-		-		725,170		725,170
Federal Home Loan Bank advances		78,365		-		78,343		-		78,343

December 31, 2016
March 31, 2018
Financial assets:
Cash and cash equivalents	$	10,705	$	10,705	$	-	$	-	$	10,705	$	22,320	$	22,320	$	-	$	-	$	22,320
Available-for-sale securities		117,867		14,696		102,203		968		117,867		57,790		-		57,790		-		57,790
Federal Home Loan Bank of Boston stock		2,787		2,787		-		-		2,787		2,166		2,166		-		-		2,166
Loans, net		624,425		-		-		632,278		632,278		759,882		-		-		751,501		751,501
Accrued interest receivable		2,320		-		2,320		-		2,320		2,270		-		2,270		-		2,270
Financial liabilities:
Deposits		627,982		-		-		628,060		628,060		719,705		-		-		719,605		719,605
Federal Home Loan Bank advances		49,858		-		49,901		-		49,901		45,211		-		44,849		-		44,849

December 31, 2017
Financial assets:
Cash and cash equivalents											$	47,689	$	47,689	$	-	$	-	$	47,689
Available-for-sale securities												61,429		-		61,429		-		61,429
Federal Home Loan Bank of Boston stock												1,854		1,854		-		-		1,854
Loans, net												742,138		-		-		745,637		745,637
Accrued interest receivable												2,345		-		2,345		-		2,345
Financial liabilities:
Deposits												750,057		-		-		749,898		749,898
Federal Home Loan Bank advances												26,841		-		26,655		-		26,655

2321

~~Table of Contents~~

~~(9)~~(10)

Regulatory Capital

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

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to capital regulations adopted by the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that started phasing in on January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. ~~Beginning January 1, 2016, failure~~At March 31, 2018, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer. Failure to maintain the capital conservation buffer limits the ability of the Bank and the Company to pay dividends, repurchases shares or pay discretionary bonuses.

As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

~~Table of Contents~~

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

												To Be Well																	To Be Well
												Capitalized Under																	Capitalized Under
						For Capital						Prompt Corrective											For Capital						Prompt Corrective
	Actual					Adequacy Purposes						Action Provisions						Actual					Adequacy Purposes						Action Provisions
(dollars in thousands)	Amount		Ratio			Amount			Ratio			Amount			Ratio			Amount		Ratio			Amount			Ratio			Amount			Ratio
September 30, 2017
March 31, 2018
Total Capital (to Risk Weighted Assets)	$	116,289		15.2	%	$	64,500	>		8.0	%	$	80,626	>		10.0	%	$	119,362		15.0	%	$	63,651	>		8.0	%	$	79,564	>		10.0	%
Tier 1 Capital (to Risk Weighted Assets)		104,978		13.7			48,375	>		6.0			64,500	>		8.0			109,413		13.8			47,738	>		6.0			63,651	>		8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		104,978		13.7			36,282	>		4.5			52,407	>		6.5			109,413		13.8			35,804	>		4.5			51,716	>		6.5
Tier 1 Capital (to Average Assets)		104,978		12.4			35,529	>		4.0			44,411	>		5.0			109,413		12.4			35,418	>		4.0			44,273	>		5.0
December 31, 2016
December 31, 2017
Total Capital (to Risk Weighted Assets)	$	107,731		15.9	%	$	54,272	>		8.0	%	$	67,840	>		10.0	%	$	116,869		15.0	%	$	62,514	>		8.0	%	$	78,142	>		10.0	%
Tier 1 Capital (to Risk Weighted Assets)		97,750		14.4			40,704	>		6.0			54,272	>		8.0			107,112		13.7			46,885	>		6.0			62,514	>		8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)		97,750		14.4			30,528	>		4.5			44,096	>		6.5			107,112		13.7			35,164	>		4.5			50,792	>		6.5
Tier 1 Capital (to Average Assets)		97,750		12.6			31,058	>		4.0			38,822	>		5.0			107,112		11.8			36,299	>		4.0			45,374	>		5.0

The Company may use capital management tools such as cash dividends and common share repurchases. Massachusetts regulations restrict repurchases for the first three years following the stock offering except where compelling and valid business reasons are established to the satisfaction of the Massachusetts Commissioner of Banks, and except to fund stock benefit plans. The Company is also subject to the Federal Reserve Board’s notice provisions for stock repurchases. In January 2017, the Company received a non-objection from the Federal Reserve Board to adopt a stock repurchase program for up to 6.6% of its common stock. As of ~~September 30, 2017,~~March 31, 2018, the Company had repurchased ~~24,460~~28,823 shares of its stock at an average price of ~~$20.07~~$20.59 per share, or ~~3.9%~~4.6% of the 625,015 shares authorized for repurchase under the Company’s repurchase program.

~~(10)~~(11)

Employee Stock Ownership Plan

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

The Company contributed funds to a subsidiary to loan to the ESOP to purchase 357,152 shares of the Company’s common stock at a price of $10.00 per share. The loan is payable annually over 15 years at a rate per annum equal to the Prime Rate as of December 31 ~~(3.75%~~(4.50% at December 31, ~~2016)~~2017). Loan payments are principally funded by cash contributions from the Bank.

	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Allocated		47,620		23,810		71,430		47,620
Committed to be allocated		17,858		23,810		5,952		23,810
Unallocated		291,674		309,532		279,770		285,722
Total		357,152		357,152		357,152		357,152

The fair value of unallocated shares was approximately ~~$6.8~~$7.4 million at ~~September 30, 2017.~~March 31 2018.

Total compensation expense recognized in connection with the ESOP for the three months ended ~~September 30,~~March 31, 2018 and 2017 was $150,000 and ~~September 30, 2016 was $126,000 and $95,000,~~$114,000, respectively. ~~Total compensation expense recognized for the nine months ended September 30, 2017 and September 30, 2016 was $368,000 and $257,000, respectively.~~

~~Table of Contents~~

~~(11)~~(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						Three Months Ended
	September 30,						September 30,						March 31,
(Dollars in thousands)	2017			2016			2017			2016
(Dollars in thousands, except per share amounts)													2018			2017
Net Income attributable to common shareholders	$	2,771		$	1,761		$	6,174		$	4,611		$	2,022		$	1,802

Average number of common shares issued		9,652,448			9,498,722			9,652,448			9,498,722			9,657,319			9,652,448
Less:
average unallocated ESOP shares		(296,398	)		(319,453	)		(301,342	)		(325,391	)		(286,226	)		(306,254	)
average unvested restricted stock		(133,258	)		-			(140,869	)		-			(122,405	)		(148,602	)
average treasury stock acquired		(21,158	)		-			(14,191	)		-			(28,823	)		(5,024	)
Average number of common shares outstanding to calculate basic earnings per common share		9,201,634			9,179,269			9,196,046			9,173,331
Average number of common shares outstanding														9,219,865			9,192,568
to calculate basic earnings per common share

Effect of dilutive unvested restricted stock and stock option awards		11,422			-			-			-			75,138			-
Average number of common shares outstanding to calculate diluted earnings per common share		9,213,056			9,179,269			9,196,046			9,173,331
Average number of common shares outstanding														9,295,003			9,192,568
to calculate diluted earnings per common share

Earnings per common share:
Basic	$	0.30		$	0.19		$	0.67		$	0.50		$	0.22		$	0.20
Diluted	$	0.30		$	0.19		$	0.67		$	0.50		$	0.22		$	0.20

~~(12)~~(13)

Share-Based Compensation

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

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

Stock Options

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

Volatility is based on peer group volatility because the Company does not have a sufficient trading history.

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

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

~~Table of Contents~~

A summary of the status of the Company’s stock option grants for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, is presented in the table below:

Stock Option
Awards Weighted
Average
Exercise
Price Weighted Average
Remaining
Contractual Term
(years) Aggregate
Intrinsic
Value
Balance at December 31, 2016 384,268 $ 17.40
Granted - -
Balance at September 30, 2017 384,268 $ 17.40 9.13 $ 1,364,151
Outstanding and expected to vest
at September 30, 2017 384,268 $ 17.40 9.13 $ 1,364,151
Exercisable at September 30, 2017 - - - -
Unrecognized compensation cost $ 1,594,000
Weighted average remaining
recognition period (years) 4.13

	Stock Option Awards		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017		396,443	$	17.61
Granted		-		-
Outstanding at March 31, 2018		396,443	$	17.61		8.68	$	3,544,000
Outstanding and expected to vest at March 31, 2018		396,443	$	17.59		8.68	$	3,544,000
Vested and Exercisable at March 31, 2018		76,854		17.40		8.64	$	703,000
Unrecognized compensation cost	$	1,481,000
Weighted average remaining recognition period (years)		3.68

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, total expense for the stock options was $101,000 and $97,000, ~~and $290,000,~~ respectively. ~~There was no stock-based compensation expense for the three and nine months ended September 30, 2016.~~

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~~three months ~~September 30, 2017:~~March 31, 2018:

	Outstanding Restricted Stock Awards		Weighted Average Grant Price		Unvested Restricted Stock Awards		Weighted Average Grant Date Price
Restricted stock awards at December 31, 2016		153,726	$	17.40
Unvested restricted stock awards at January 1, 2018						127,852	$	17.59
Granted		-		-		-		-
Restricted stock awards at September 30, 2017		153,726	$	17.40
Vested						-		-
Unvested restricted stock awards at March 31 , 2018						127,852	$	17.59
Unrecognized compensation cost	$	2,208,000			$	2,046,000
Weighted average remaining recognition period (years)		4.13				3.68

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, total expense for the restricted stock awards was $139,000 and $134,000, ~~and $401,000,~~ respectively. ~~There was no stock-based compensation expense for the three and nine months ended September 30, 2016.~~

(14)

Subsequent Event

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

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, 2017~~March 31, 2018 and December 31, ~~2016~~2017 and for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ is intended to assist in understanding our financial condition and results of operations. Operating results for the ~~three and nine month periods~~three-month period ended ~~September 30, 2017~~March 31, 2018 may not be indicative of results for all of ~~2017~~2018 or any other period. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

~~Table of Contents~~

Forward-Looking Statements

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

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

Critical Accounting Policies

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

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

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

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.

~~Table of Contents~~

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction and land development, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in our policies or methodology pertaining to the general component of the allowance for loan losses during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 or during the twelve months ended December 31, ~~2016.~~2017.

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

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

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

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

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

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

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

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

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

~~Table of Contents~~

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

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

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

Balance Sheet Analysis

Assets. Total assets were ~~$928.6~~$891.2 million at ~~September 30, 2017, an increase~~March 31, 2018, a decrease of ~~$133.0~~$11.1 million, or ~~16.7%~~1.2%, from ~~$795.5~~$902.3 million at December 31, ~~2016.~~2017. The ~~increase~~decrease resulted primarily from ~~increases~~decreases in ~~net loans of $124.1 million,~~ cash and cash equivalents of ~~$6.9 million, bank owned life insurance of $6.0~~$25.4 million, and ~~assets held-for-sale~~available-for-sale investment securities of ~~$3.2~~$3.6 million. These ~~increases~~decreases were partially offset by an increase in net loans of $17.7 million.

Cash and Cash Equivalents.Cash and cash equivalents decreased $25.4 million, or 53.2%, to $22.3 million at March 31, 2018 from $47.7 million at December 31, 2017. The decrease is primarily due to utilizing funds for loan growth and a decrease in ~~available-for-sale investment securities of $8.2 million.~~deposits, offset by an increase in borrowed funds.

Loans. At ~~September 30, 2017,~~March 31, 2018, net loans were ~~$748.5~~$759.9 million, or ~~80.6%~~85.3% of total assets, compared to ~~$624.4~~$742.1 million, or ~~78.5%~~82.3% of total assets, at December 31, ~~2016. An increase~~2017. Increases in commercial loans of ~~$66.4~~$19.8 million, or ~~39.9%~~8.2%, ~~an increase in~~ commercial real estate loans of ~~$50.0~~$1.4 million, or ~~14.9%, an increase in construction and land development loans of $7.8 million, or 16.1%~~0.4%, and ~~an increase~~ in consumer loans of ~~$8.7 million,~~$880,000, or ~~140.3%~~5.0%, were partially offset by a decrease in construction and land development loans of $2.0 million, or 3.5%, and residential real estate loans of ~~$5.9~~$1.9 million, or ~~7.7%~~2.9%. Our commercial loan growth is attributed to adding lenders and a continued assessment of other opportunities in our expanded market area. The consumer loan growth is primarily due to loan ~~purchases.~~purchases via the BancAlliance Lending Club Program that the Bank entered into an agreement with in 2016.

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

	At						At						At						At
	September 30,						December 31,						March 31,						December 31,
(Dollars in thousands)	2017						2016						2018						2017
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
Commercial real estate	$	386,062			50.78	%	$	336,102			53.07	%	$	372,955			48.38	%	$	371,510			49.35	%
Commercial		232,511			30.58	%		166,157			26.23	%		259,994			33.72	%		240,223			31.91	%
Residential real estate		70,960			9.33	%		76,850			12.13	%		65,777			8.53	%		67,724			9.00	%
Construction and land development		55,915			7.35	%		48,161			7.60	%		53,875			6.99	%		55,828			7.42	%
Consumer		14,830			1.95	%		6,172			0.97	%		18,335			2.38	%		17,455			2.32	%
		760,278			100.00	%		633,442			100.00	%		770,936			100.00	%		752,740			100.00	%
Allowance for loan losses		(10,932	)					(8,590	)					(10,236	)					(9,757	)
Deferred loan fees, net		(809	)					(427	)					(818	)					(845	)
Net loans	$	748,537					$	624,425					$	759,882					$	742,138

~~Table of Contents~~

Assets ~~held-for-sale.~~Held-for-Sale.~~Assets held-for-sale increased to $3.2 million at September 30, 2017 from zero at December 31, 2016. A~~The Company purchased a building in Portsmouth, New Hampshire ~~was purchased by the Bank~~ in January ~~2017.~~2017 with the intention of using a majority of the space for banking operations. The cost of this building and the related improvements ~~is $3.2~~was $3.3 million as of ~~September 30,~~December 31, 2017. ~~The Bank has~~During 2017, the Company entered into an agreement to sell the building for $3.3 million, with the building to be developed into a mixed used commercial building, ~~for $3.2 million.~~and transferred the building into the held-for-sale category. During the first quarter of 2018, the Company transferred the assets back into the premises and equipment category as the Company terminated the agreement to sell the building, and entered into a new agreement with a third party to construct the commercial building, in which the Company will occupy space. The Company ~~intends to buy back a portion of the building to provide space for future additional employees as we grow.~~will then sell any unused units.

Deposits. Total deposits ~~increased $97.3~~decreased $30.4 million, or ~~15.5%~~4.0%, to ~~$725.3~~$719.7 million at ~~September 30, 2017~~March 31, 2018 from ~~$628.0~~$750.1 million at December 31, ~~2016.~~ 2017.The primary reason for the decrease in deposits was due to a decrease of $19.6 million, or 6.3%, in NOW and demand deposits, a decrease of $7.5 million, or 7.4%, time deposits, and a decrease in money market deposits of $5.7 million, or 2.5%. The decrease in the NOW and demand deposits is primarily from municipal deposits. We expect these deposits to increase ~~was~~in the June 30, 2018 quarter. Time deposits decreased primarily due to ~~an increase in time deposits~~the roll-off of ~~$41.7 million, an increase in money market accounts of $50.8 million, and an increase in savings accounts of $6.5 million. Increases in time deposits were primarily due to increases in~~ brokered certificates of deposit of $32.4 million and an increase of $11.1 million in QwickRate certificates of deposit, where we gather certificates of deposit nationwide by posting online rates we will pay on these deposits. The increase in money market accounts is primarily due to targeting larger deposit relationships at premium pricing.CDs.

Borrowings. Borrowings at both ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 consisted entirely of Federal Home Loan Bank advances. Borrowings increased ~~$28.5~~$18.4 million, or ~~57.2%~~68.4%, to ~~$78.4~~$45.2 million at ~~September 30, 2017~~March 31, 2018 from ~~$49.9~~$26.8 million at December 31, ~~2016.~~2017. The increase was primarily due to ~~fund loan growth.~~the decrease in deposits.

Shareholders’ Equity. Total shareholders’ equity increased ~~$6.9~~$1.6 million, or ~~6.3%~~1.3%, to ~~$116.1~~$117.3 million at ~~September 30, 2017,~~March 31, 2018, from ~~$109.1~~$115.8 million at December 31, ~~2016.~~2017. The increase was primarily due to year-to-date net income of ~~$6.2~~$2.0 million; ~~increases~~partially offset by decreases of ~~$164,000~~$859,000 in year-to-date accumulated other comprehensive income, reflecting ~~an increase~~a decrease in the fair value of available-for-sale ~~securities, and a $691,000 increase in additional paid-in capital related to stock based compensation; partially offset by common stock repurchases totaling $492,000.~~securities. Book value per share increased to ~~$12.05~~$12.19 at ~~September 30, 2017~~March 31, 2018 from ~~$11.31~~$12.02 at December 31, ~~2016.~~2017.

~~Table of Contents~~

Asset Quality.

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

	At			At			At			At
	September 30,			December 31,			March 31,			December 31,
(Dollars in thousands)	2017			2016			2018			2017
Non-accrual loans:
Real estate:
Commercial	$	5,185		$	346		$	7,102		$	7,102
Residential		361			303			920			364
Construction and land development		-			-			-			-
Commercial		68			933			1,501			1,505
Consumer		33			-			61			62
Total non-accrual loans		5,647			1,582			9,584			9,033

Accruing loans past due 90 days or more		-			-			-			-
Real estate owned		-			-			-			-
Total non-performing assets	$	5,647		$	1,582		$	9,584		$	9,033

Total loans (1)	$	759,469		$	633,015		$	770,118		$	751,895
Total assets	$	928,579		$	795,543		$	891,172		$	902,265
Total non-performing loans to total loans (1)		0.74	%		0.25	%		1.24	%		1.20	%
Total non-performing assets to total assets		0.61	%		0.20	%		1.08	%		1.00	%

~~(1)~~

~~Loans are presented before the allowance for loan losses but include deferred fees/costs~~

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

The increase in non-performing assets at ~~September 30, 2017~~March 31, 2018 compared to December 31, ~~2016~~2017 was primarily due to an increase of $556,000 in non-accrual one- to four-family loans. The Company has cooperative relationships with the ~~addition~~vast majority of ~~one commercial~~its nonperforming loan customers. Substantially all non-performing loans are collateralized by real estate ~~lending relationship, consisting~~and the repayment is largely dependent on the return of ~~two~~such loans ~~totaling $5.2 million. Although we have continued~~ to ~~receive payments due under~~performing status or the ~~terms~~liquidation of the underlying real estate collateral. The Company pursues the resolution of all non-performing loans ~~we placed~~through collections, restructures, voluntary liquidation of collateral by the ~~loans on non-accrual~~borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, ~~due~~including restructuring the loan, are unsuccessful, the Company will initiate appropriate legal action seeking to ~~the financial performance~~acquire property by deed in lieu of ~~the borrower. Based on management’s most recent evaluation, the Bank has assigned a specific reserve of $809,000 as of September 30, 2017~~foreclosure or through foreclosure, or to ~~this lending relationship.~~

liquidate business assets.

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

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

	Nine Months Ended September 30,						Three Months Ended March 31,
(Dollars in thousands)	2017			2016			2018			2017
Allowance at beginning of period	$	8,590		$	7,905		$	9,757		$	8,590
Provision for loan losses		2,467			484			656			563
Charge offs:
Real estate:
Commercial		6			-			-			6
Residential		-			-			-			-
Construction and land development		-			-			-			-
Commercial		63			-			20			-
Consumer		106			29			166			8
Total charge-offs		175			29			186			14

Recoveries:
Real estate:
Commercial		-			-			-			-
Residential		-			12			-			-
Construction and land development		-			-			-			-
Commercial		45			1			1			-
Consumer		5			13			8			-
Total recoveries		50			26			9			-

Net charge-offs		125			3			177			14

Allowance at end of period	$	10,932		$	8,386		$	10,236		$	9,139

Non-performing loans at end of period	$	5,647		$	1,420		$	9,584		$	1,379
Total loans outstanding at end of period (1)		759,469			597,750			770,118			660,013
Average loans outstanding during the period (1)		681,034			574,655			766,968			646,136

Allowance to non-performing loans		193.59	%		590.56	%		106.80	%		662.73	%
Allowance to total loans outstanding at end of period		1.44	%		1.40	%		1.33	%		1.38	%
Net charge-offs to average loans outstanding during the during the period (annualized)		0.02	%		0.00	%		0.09	%		0.01	%

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

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Results of Operations for the Three Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~

General. Net income increased ~~$1.0 million~~$220,000 to ~~$2.8~~$2.0 million for the three months ended ~~September 30, 2017~~March 31, 2018 from $1.8 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase was related to an increase of ~~$1.5~~$1.4 million in net interest and dividend income, ~~and~~partially offset by a ~~$1.5 million increase~~$489,000 decrease in noninterest income ~~partially offset by an increase in provision for loan losses of $849,000~~ and an increase in noninterest expense of ~~$702,000.~~$755,000. In addition, the provision for income taxes decreased by $169,000 due to the decrease in the federal tax rate from 35% to 21%.

Interest and Dividend Income. Interest and dividend income ~~which includes Federal Home Loan Bank stock dividends,~~ increased ~~$1.8~~$1.6 million, or ~~24.4%~~20.2%, to ~~$9.2~~$9.8 million for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$7.4~~$8.1 million for the three months ended ~~September 30, 2016.~~March 31, 2017. This increase was primarily attributable to an increase in interest and fees on loans, which increased ~~$1.8~~$2.0 million, or ~~27.1%~~28.2%, to ~~$8.4~~$9.3 million for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$6.6~~$7.2 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase in interest and fees on loans was partially offset by a decrease in interest and dividends on securities, which decreased $438,000, or 50.2%, to $435,000 for the three months ended March 31, 2017 from $873,000 for the three months ended March 31, 2017.

The increase in interest income on loans was due to an increase in the average balance of loans of ~~$129.8~~$120.8 million, or ~~22.0%~~18.7%, to ~~$719.1~~$767.0 million for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$589.3~~$646.1 million for the three months ended ~~September 30, 2016.~~March 31, 2017. Interest income increased to a lesser extent due to the yield on loans increasing 1836 basis points to ~~4.67%~~4.84% for the three months ended ~~September 30, 2017~~March 31, 2018 due to our continued focus on higher-yielding commercial lending. The decrease in interest and dividends on securities was due to the Company selling $30.6 million of state and municipal securities and divesting of all equity securities during the third and fourth quarters of 2017.

Interest Expense. Interest expense increased ~~$292,000,~~$253,000, or ~~41.0%~~32.4%, to $1.0 million for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$713,000~~$781,000 for the three months ended ~~September 30, 2016,~~March 31, 2017, caused by an increase in interest expense on deposits ~~and~~partially offset by a decrease in interest expense on borrowings. Interest expense on deposits increased ~~$244,000,~~$350,000, or ~~45.3%~~61.4%, to ~~$783,000~~$920,000 for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$539,000~~$570,000 for the three months ended ~~September 30, 2016,~~March 31, 2017, due to an increase in the average rate paid on interest-bearing deposits of 1019 basis points to ~~0.58%~~0.66% for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~0.48%~~0.47% for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase in the average rate was primarily the result of increases in the average rate paid on money market accounts and certificates of deposit. The average rate paid on money market accounts and certificates of deposit increased due to changes in the rate environment. Interest expense on deposits also increased due to an increase in the average balance of interest-bearing deposits of ~~$93.2~~$71.0 million, or ~~20.8%~~14.6%, to ~~$542.2~~$556.3 million for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$449.0~~$485.3 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase resulted primarily from an increase in the average balance of money market accounts, which increased ~~$62.6~~$75.1 million, or ~~52.9%, and an increase in the average balance of certificates of deposit, which increased $24.2 million, or 23.9%~~50.2%.

Interest expense on borrowings ~~increased $48,000,~~decreased $97,000, or ~~27.6%~~46.0%, to ~~$222,000~~$114,000 for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$174,000~~$211,000 for the three months ended ~~September 30, 2016.~~March 31, 2017. The interest expense on borrowings ~~increased~~decreased due to the ~~increase~~decrease in average outstanding balance of ~~$21.9~~$38.8 million, or ~~61.8%~~63.0% to ~~$57.4~~$22.8 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The ~~increase~~decrease in the average outstanding balance was partially offset by a 4163 basis point ~~decrease~~increase in the cost of borrowings to ~~1.55%~~2.0% for the three months ended ~~September 30, 2017. The average balance in borrowings increased during the three months ended September 30, 2017 to support funding loan growth.~~March 31, 2018.

Net Interest and Dividend Income. Net interest and dividend income increased ~~$1.5~~$1.4 million, or ~~22.7%~~18.9%, to ~~$8.2~~$8.7 million for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$6.7~~$7.3 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The increase was due to both higher balances of earning assets and expanding margins. Our net interest rate spread increased 1733 basis points to ~~3.70%~~3.95% for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~3.53%~~3.62% for the three months ended ~~September 30, 2016.~~March 31, 2017. Our net interest margin increased 1738 basis points to ~~3.89%~~4.17% for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~3.72%~~3.79% for the three months ended ~~September 30, 2016.~~March 31, 2017.

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Provision for Loan Losses. The provision for loan losses was ~~$1.0 million~~$656,000 for the three months ended ~~September 30, 2017~~March 31, 2018 compared to ~~$163,000~~$563,000 for the three months ended ~~September 30, 2016.~~March 31, 2017. The provision recorded resulted in an allowance for loan losses of ~~$10.9~~$10.2 million, or ~~1.44%~~1.33% of total loans at ~~September 30, 2017,~~March 31, 2018, compared to ~~$8.6~~$9.8 million, or ~~1.36%~~1.30% of total loans, at December 31, ~~2016~~2017 and ~~$8.4~~$9.1 million, or ~~1.40%~~1.38% of total loans, at ~~September 30, 2016.~~March 31, 2017. The changes in the provision and allowance for loan losses were based on management’s assessment of loan portfolio growth and composition trends, historical charge-off trends, levels of problem loans and other asset quality trends. ~~The non-accrual~~Non-accrual loans as of ~~September 30, 2017~~March 31, 2018 was primarily composed of ~~one commercial real estate lending relationship totaling $5.2~~two loan relationships with a carrying value of $8.5 million. ~~Based on management’s most recent evaluation, the Bank has assigned a specific reserve of $809,000 to this lending relationship as of September 30, 2017.~~

Noninterest Income. Noninterest income ~~increased $1.5 million,~~decreased $489,000, or ~~112.5%~~32.6%, to ~~$2.9~~$1.0 million for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$1.4~~$1.5 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The ~~increase~~decrease was primarily caused by ~~an increase~~a decrease in the gain on sales of ~~securities and an increase in income from service fees.~~securities. Gains on sales of securities ~~increased $1.4 million, or 322.6%, to $1.9~~was zero for the three months ended ~~September 30, 2017 from $438,000~~March 31, 2018 compared to $482,000 for the three months ended ~~September 30, 2016. Effective January 2018, the Company is adopting~~~~ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.”~~This standard will require us to measure our equity investments at fair value with changes in fair value recognized in net income. In order to reduce the potential quarterly volatility, the Company may divest more equity securities. As of September 30, 2017,the Company’s marketable equity securities portfolio had a total fair value of $12.6 million including a net unrealized gain of $2.7 million. Income from service charges increased $61,000, or 14.3%, to $488,000 for the three months ended September 30, 2017 from $427,000 for the three months ended September 30, 2016. Service fees increased due to an increase in loans.March 31, 2017.

Noninterest Expense. Noninterest expense increased ~~$702,000,~~$755,000, or ~~13.5%~~13.4%, to ~~$5.9~~$6.4 million for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$5.2~~$5.6 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The largest increases were related to the salaries and employee benefits expense, and ~~directors’ compensation.~~other expense. The increase in salary and employee benefits of ~~$724,000,~~$482,000, or ~~22.5%~~13.1%, to ~~$3.9~~$4.2 million for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$3.2~~$3.7 million for the three months ended ~~September 30, 2016~~March 31, 2017 was primarily related to an increased ~~employee base and stock-based compensation expense in 2017 compared to no stock based compensation expense in the prior period.~~number of lenders. The increase in ~~directors’ fees~~other expense of ~~$52,000,~~$239,000, or ~~64.2%~~36.4%, to ~~$133,000~~$896,000 for the three months ended ~~September 30, 2017~~March 31, 2018 from ~~$81,000~~$657,000 for the three months ended ~~September 30, 2016~~March 31, 2017 was primarily related to costs incurred working out nonperforming loans and an increase in ~~directors’ stock-based compensation~~contributions expense. The noninterest expense increases were partially offset by decreases in professional fees and the FDIC assessment expense. The decrease in professional fees of $72,000, or 24.1%, to $227,000 for the three months ended September 30, 2017 from $299,000 for the three months ended September 30, 2016 was due to one-time services incurred in 2016 for the development of equity compensation plans. The decrease in the FDIC assessment expense was $28,000, or 27.2%, to $75,000 for the three months ended September 30, 2017 from $103,000 for the three months ended September 30, 2016. The decrease was related to a change in the FDIC reserve calculation.

Income Tax Provision. We recorded a provision for income taxes of ~~$1.4 million~~$678,000 for the three months ended ~~September 30,~~March 31, 2018, reflecting an effective tax rate of 25.1%, compared to a provision of $847,000 for the three months ended March 31, 2017, reflecting an effective tax rate of ~~34.1%, compared to a provision of $940,000 for the three months ended September 30, 2016, reflecting an effective tax rate of 34.8%~~32.0%. The changes in the income tax provision were primarily due to a reduction of the ~~purchase~~federal corporate income tax rate from 35% to 21%.

Subsequent Event. On April 3, 2018, the Bank conducted a foreclosure sale of ~~tax credits~~certain collateral consisting of both real and personal property which secured four non-accruing loans originally made by the Bank having an aggregate principal outstanding balance of approximately $7.5 million of which $4.9 million is outstanding at the Bank with the remaining $2.6 million participated out to another institution. The Bank received $8.3 million in ~~2017. Our effective tax rates~~cash from this foreclosure sale. Certain subordinated lienholders are ~~below statutory federal~~now disputing the priority of the Bank’s liens and ~~state rates due primarily~~the right of the Bank to ~~tax-exempt income related~~retain approximately $2.1 million of the proceeds from this foreclosure sale, but have not yet filed a formal claim. Until the dispute is resolved, the Bank has deposited, and will continue to ~~investments~~hold, the disputed proceeds (i.e., approximately $2.1 million which includes $543,000 that is participated out to another institution) in ~~bank owned life insurance and municipal securities.~~a suspense deposit account at the Bank. At this time, we cannot reasonably estimate a range of potential loss, if any, to the Bank, with respect to this matter.

3532

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Average Balance Sheet and Related Yields and Rates

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

	For the Three Months Ended September 30,																For the Three Months Ended March 31,
	2017								2016								2018								2017
				Interest								Interest								Interest								Interest
	Average			Earned/		Yield/			Average			Earned/		Yield/			Average			Earned/		Yield/			Average			Earned/		Yield/
	Balance			Paid		Rate			Balance			Paid		Rate			Balance			Paid		Rate			Balance			Paid		Rate
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	719,116		$	8,403		4.67	%	$	589,335		$	6,611		4.49	%	$	766,968		$	9,276		4.84	%	$	646,136		$	7,233		4.48	%
Interest-earning deposits		4,897			14		1.14	%		7,864			8		0.41	%		8,680			42		1.94	%		3,686			6		0.65	%
Investment securities		118,672			793		2.67	%		121,596			785		2.58	%		59,761			408		2.73	%		121,303			848		2.80	%
Federal Home Loan Bank stock		3,028			29		3.83	%		2,369			22		3.71	%		1,670			27		6.47	%		3,511			25		2.85	%
Total interest-earning assets		845,713			9,239		4.37	%		721,164			7,426		4.12	%		837,079			9,753		4.66	%		774,636			8,112		4.19	%
Non-interest earning assets		45,951								38,970								49,958								48,499

Total assets	$	891,664							$	760,134							$	887,037							$	823,135


Interest-bearing liabilities:
Savings accounts	$	117,049			51		0.17	%	$	116,685			55		0.19	%	$	118,382			70		0.24	%	$	118,296			59		0.20	%
Money market accounts		181,064			234		0.52	%		118,439			88		0.30	%		224,681			401		0.71	%		149,545			126		0.34	%
NOW accounts		118,469			172		0.58	%		112,446			171		0.61	%		110,907			154		0.56	%		114,529			168		0.59	%
Certificates of deposit		125,645			326		1.04	%		101,426			225		0.89	%		102,325			295		1.15	%		102,884			217		0.84	%
Total interest-bearing deposits		542,227			783		0.58	%		448,996			539		0.48	%		556,295			920		0.66	%		485,254			570		0.47	%
Federal Home Loan Bank advances		57,446			222		1.55	%		35,512			174		1.96	%		22,814			114		2.00	%		61,597			211		1.37	%
Total interest-bearing liabilities		599,673			1,005		0.67	%		484,508			713		0.59	%		579,109			1,034		0.71	%		546,851			781		0.57	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		168,129								160,070								180,850								151,522
Other noninterest-bearing liabilities		8,230								7,504								9,244								8,330
Total liabilities		776,032								652,082								769,203								706,703
Total equity		115,632								108,052								116,834								116,432
Total liabilities and equity	$	891,664							$	760,134							$	886,037							$	823,135

Net interest income				$	8,234							$	6,713							$	8,719							$	7,331
Interest rate spread (1)							3.70	%							3.53	%							3.95	%							3.62	%
Net interest-earning assets (2)	$	246,040							$	236,656							$	257,970							$	227,785
Net interest margin (3)							3.89	%							3.72	%							4.17	%							3.79	%
Average interest-earning assets to interest-bearing liabilities		141.03	%							148.84	%							144.55	%							141.65	%

~~(1) Net interest rate spread represents the difference between the weighted average yield on interest-bearing assets and the weighted average rate of interest-bearing liabilities.~~

~~(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.~~

~~(3) Net interest margin represents net interest income divided by average total interest-earning assets~~

(1)

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

(2)

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

(3)

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

3633

~~Table of Contents~~

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, 2017									For the Three Months Ended March 31, 2018
	Compared to the Three Months Ended September 30, 2016									Compared to the Three Months Ended March 31, 2017
	Increase (Decrease) Due to						Total			Increase (Decrease) Due to						Total
	Rate			Volume			Increase (Decrease)			Rate			Volume			Increase (Decrease)
(In thousands)
Interest-earning assets:
Loans	$	285		$	1,507		$	1,792		$	614		$	1,429		$	2,043
Interest-earning deposits		10			(4	)		6			21			15			36
Investment securities		27			(19	)		8			(19	)		(421	)		(440	)
Federal Home Loan Bank stock		1			6			7			20			(18	)		2

Total interest-earning assets		323			1,490			1,813			636			1,005			1,641

Interest-bearing liabilities:
Savings accounts		(4	)		0			(4	)		11			0			11
Money Market accounts		85			61			146			190			85			275
Now accounts		(8	)		9			1			(9	)		(5	)		(14	)
Certificates of deposit		42			59			101			79			(1	)		78

Total interest-bearing deposits		115			129			244			271			79			350

Federal Home Loan Bank advances		(43	)		91			48			71			(168	)		(97	)

Total interest-bearing liabilities		72			220			292			342			(89	)		253

Change in net interest income	$	251		$	1,270		$	1,521		$	294		$	1,094		$	1,388

3734

~~Table of Contents~~

~~Results~~Management of ~~Operations for the Nine Months Ended September 30, 2017 and 2016~~

Market Risk

~~General~~. Net income increased $1.6 million to $6.2 million for the nine months ended September 30, 2017 from $4.6 million for the nine months ended September 30, 2016. The increase was related to an increase of $4.2 million in net interest income and a $2.2 million increase in noninterest income, partially offset by an increase in provision for loan losses of $2.0 million and an increase in noninterest expense of $2.2 million.

~~Interest and Dividend Income~~. Interest and dividend income, which includes Federal Home Loan Bank stock dividends, increased $4.7 million, or 22.1%, to $26.2 million for the nine months ended September 30, 2017 from $21.4 million for the nine months ended September 30, 2016. This increase was primarily attributable to an increase in interest and fees on loans, which increased $4.7 million, or 24.8%, to $23.5 million for the nine months ended September 30, 2017 from $18.9 million for the nine months ended September 30, 2016.

The increase in interest income on loans was due to an increase in the average balance of loans of $106.4 million, or 18.5%, to $681.0 million for the nine months ended September 30, 2017 from $574.7 million for the nine months ended September 30, 2016. Interest income increased to a lesser extent due to a higher yield on loans, which increased 23 basis points to 4.61% for the nine months ended September 30, 2017 due to our continued focus on higher-yielding commercial lending.

~~Interest Expense~~. Interest expense increased $573,000, or 27.4%, to $2.7 million for the nine months ended September 30, 2017 from $2.1 million for the nine months ended September 30, 2016, caused by an increase in interest expense on deposits and on borrowings. Interest expense on deposits increased $408,000, or 25.1%, to $2.0 million for the nine months ended September 30, 2017 from $1.6 million for the nine months ended September 30, 2016, due to an increase in average rate paid on interest-bearing deposits by four basis points to 0.53% for the nine months ended September 30, 2017 from 0.49% for the nine months ended September 30, 2016. The increase in the average rate was primarily the result of increases in the average rate paid on money market accounts and certificates of deposit. The average rate paid on money market accounts and certificates of deposit increased due to changes in the rate environment. Interest expense also increased due to higher average balances of interest-bearing deposits, which increased $67.8 million, or 15.2%, to $513.3 million for the nine months ended September 30, 2017 from $445.5 million for the nine months ended September 30, 2016. The increase resulted primarily from an increase in the average balance of money market accounts, which increased $50.3 million, or 44.9%.

Interest expense on borrowings increased $165,000, or 35.3%, to $633,000 for the nine months ended September 30, 2017 from $468,000 for the nine months ended September 30, 2016. The interest expense on borrowings increased due to the increase in average outstanding balance of $22.4 million, or 63.9% to $57.5 million for the nine months ended September 30, 2017. The increase in the average outstanding balance was partially offset by the decrease in the average rate paid of 31 basis points to 1.47% for the nine months ended September 30, 2017 due to restructuring borrowings at a lower interest rate. The average balance of borrowings increased during the nine months ended September 30, 2017 to support funding loan growth.

Net Interest ~~and Dividend~~ Income Simulation.. We analyze our sensitivity to changes in interest rates through a net interest income simulation model. Net interest ~~and dividend~~ income increased $4.2 million, or 21.5%, to $23.5 million for the nine months ended September 30, 2017 from $19.3 million for the nine months ended September 30, 2016. The increase was due to both higher balances of earning assets and expanding margins. Our net interest rate spread increased 23 basis points to 3.69% for the nine months ended September 30, 2017 from 3.46% for the nine months ended September 30, 2016. Our net interest margin increased 23 basis points to 3.87% for the nine months ended September 30, 2017 from 3.64% for the nine months ended September 30, 2016.

~~Table of Contents~~

~~Provision for Loan Losses~~. The provision for loan losses was $2.5 million for the nine months ended September 30, 2017 compared to $484,000 for the nine months ended September 30, 2016. The provision recorded resulted in an allowance for loan losses of $10.9 million, or 1.44% of total loans at September 30, 2017, compared to $8.6 million, or 1.36% of total loans, at December 31, 2016 and $8.4 million, or 1.40% of total loans, at September 30, 2016. The changes in the provision and allowance for loan losses were based on management’s assessment of loan portfolio growth and composition trends, historical charge-off trends, levels of problem loans and other asset quality trends. The non-accrual loans as of September 30, 2017 was primarily composed of one commercial real estate relationship totaling $5.2 million. Based on management’s most recent evaluation, the Bank has assigned a specific reserve of $809,000 to this lending relationship as of September 30, 2017.

~~Noninterest Income~~. Noninterest income increased $2.2 million, or 67.5%, to $5.5 million for the nine months ended September 30, 2017 from $3.3 million for the nine months ended September 30, 2016. The increase was primarily caused by an increase in the gain on sales of marketable equity securities and an increase in income from service fees. Gains on sales of securities increased $1.9 million to $2.4 million for the nine months ended September 30, 2017 from $475,000 for the nine months ended September 30, 2016. Effective January 2018, the Company is ~~adopting~~~~ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.”~~This standard will require us to measure our equity investments at fair value with changes in fair value recognized in net income. In order to reduce the potential quarterly volatility, the Company may divest more equity securities.Income from service fees increased $178,000, or 13.8%, to $1.5 million for the nine months ended September 30, 2017 from $1.3 million for the nine months ended September 30, 2016. Service fees increased due to an increase in loans.

~~Noninterest Expense~~. Noninterest expense increased $2.2 million, or 14.4%, to $17.4 million for the nine months ended September 30, 2017 from $15.2 million for the nine months ended September 30, 2016. The largest increases were related to salaries and employee benefits expense, marketing expense, and directors’ compensation. The increase in salary and employee benefits of $1.8 million, or 19.4%, to $11.3 million for the nine months ended September 30, 2017 from $9.5 million for the nine months ended September 30, 2016 was primarily related to an increased employee base and an increase in stock-based compensation expense in 2017 compared to 2016. Marketing expenses increased $53,000, or 29.8%, to $231,000 for the nine months ended September 30, 2017 from $178,000 for the nine months ended September 30, 2016. The primary reason the marketing expense increased was due to strategic target marketing within the Company’s footprint. The increase in directors’ compensation of $207,000, or 91.6%, to $433,000 for the nine months ended September 30, 2017 from $226,000 for the nine months ended September 30, 2016 was primarily related to stock-based compensation expense incurred in 2017 compared to no expense in 2016. The noninterest expense increases were partially offset by decreases in professional fees and the FDIC assessment expense. The decrease in professional fees of $220,000, or 25.1%, to $656,000 for the nine months ended September 30, 2017 from $876,000 for the nine months ended September 30, 2016 was due to one-time services incurred in 2016 for the development of equity compensation plans. The decrease in the FDIC assessment expense was $77,000, or 26.3%, to $216,000 for the nine months ended September 30, 2017 from $293,000 for the nine months ended September 30, 2016. The decrease was related to a change in the FDIC reserve calculation.

~~Income Tax Provision~~. We recorded a provision for income taxes of $2.9 million for the nine months ended September 30, 2017, reflecting an effective tax rate of 32.1%, compared to a provision of $2.3 million for the nine months ended September 30, 2016, reflecting an effective tax rate of 33.2%. The changes in the income tax provision were primarily due to the purchase of tax credits in 2017. Our effective tax rates are below statutory federal and state rates due primarily to tax-exempt income related to investments in bank owned life insurance and municipal securities.

~~Table of Contents~~

~~Average Balance Sheet and Related Yields and Rates~~

For the Nine Months Ended September 30,
2017 2016
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
(dollars in thousands)
Assets:
Interest-earning assets:
Loans $ 681,034 $ 23,547 4.61 % $ 574,655 $ 18,861 4.38 %
Interest-earning deposits 3,406 23 0.90 % 7,260 22 0.40 %
Investment securities 121,377 2,507 2.75 % 123,230 2,481 2.68 %
Federal Home Loan Bank stock 3,108 90 3.86 % 2,607 68 3.48 %
Total interest-earning assets 808,925 26,167 4.31 % 707,752 21,432 4.04 %
Non-interest earning assets 45,916 39,368

Total assets $ 854,841 $ 747,120

Interest-bearing liabilities:
Savings accounts $ 116,481 160 0.18 % $ 109,936 140 0.17 %
Money market accounts 162,204 511 0.42 % 111,912 229 0.27 %
NOW accounts 115,038 506 0.59 % 110,492 490 0.59 %
Certificates of deposit 119,571 854 0.95 % 113,134 764 0.90 %
Total interest-bearing deposits 513,294 2,031 0.53 % 445,474 1,623 0.49 %
Federal Home Loan Bank advances 57,500 633 1.47 % 35,082 468 1.78 %
Total interest-bearing liabilities 570,794 2,664 0.62 % 480,556 2,091 0.58 %
Noninterest-bearing liabilities:
Noninterest-bearing deposits 161,043 154,379
Other noninterest-bearing liabilities 8,052 7,063
Total liabilities 739,889 641,998
Total equity 114,952 105,122
Total liabilities and equity $ 854,841 $ 747,120

Net interest income $ 23,503 $ 19,341
Interest rate spread (1) 3.69 % 3.46 %
Net interest-earning assets (2) $ 238,131 $ 227,196
Net interest margin (3) 3.87 % 3.64 %
Average interest-earning assets to interest-bearing liabilities 141.72 % 147.28 %

~~(1) Net interest rate spread represents~~ the difference between the ~~weighted average yield~~interest income we earn on ~~interest-bearing~~our interest-earning assets, such as loans and securities, and the ~~weighted average rate of~~interest we pay on our interest-bearing ~~liabilities.~~

~~(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.~~

~~(3) Net interest margin represents~~liabilities, such as deposits and borrowings. We estimate what our net interest income ~~divided by average total interest-earning assets~~

~~Table of Contents~~

~~Rate/Volume Analysis~~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 ratesincrease 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 ratesrepresenting immediate and permanent, parallel shifts in the yield curve.

The following table ~~sets forth~~presents the ~~effects of changing rates and volumes on our~~estimated changes in net interest ~~income.~~income of The ~~rate column shows the effects attributable~~Provident Bank, calculated on a bank-only basis, that would result from changes in market interest rates over twelve-month periods beginning March 31, 2018.

	At March 31,
(Dollars in thousands)	2018
Changes in	Estimated
Interest Rates	Net Interest Income
(Basis Points)	Over Next 12 Months		Change
200	$	37,855		(0.04	)%
0		37,869		-
-100		36,886		(2.60	)%

Economic Value of Equity Simulation.We also analyze our sensitivity to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The EVE ratio represents the dollar amount of our EVE divided by the present value of our total assets for a given interest rate ~~(changes~~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 ~~rate multiplied by prior volume).~~ 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 thatinterest rates decrease 100 basis points from current market rates.

The ~~volume column shows~~following table presents the ~~effect attributable to~~estimated changes in ~~volume (changes in volume multiplied by prior rate).~~EVE of The ~~total column represents the sum of the prior columns. For purposes of this table, changes attributable to~~Provident Bank, calculated on a bank-only basis, that would result from 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.~~market interest rates as of March 31, 2018.

For the Nine Months Ended September 30, 2017
Compared to the Nine Months Ended September 30, 2016
Increase (Decrease) Due to Total
Rate Volume Increase (Decrease)
(in thousands)
Interest-earning assets:
Loans $ 1,050 $ 3,636 $ 4,686
Interest-earning deposits 17 (16 ) 1
Investment securities 64 (38 ) 26
Federal Home Loan Bank stock 8 14 22

Total interest-earning assets 1,139 2,596 4,735

Interest-bearing liabilities:
Savings accounts 11 9 20
Money Market Accounts 154 128 282
Now Accounts (4 ) 20 16
Certificates of deposit 45 45 90

Total interest-bearing deposits 206 201 408

Federal Home Loan Bank advances (93 ) 258 165

Total interest-bearing liabilities 113 459 573

Change in net interest income $ 1,026 $ 2,137 $ 4,162

	At March 31,
(Dollars in thousands)	2018
Changes in	Economic
Interest Rates	Value of
(Basis Points)	Equity		Change

400	$	139,898		(1.00	)%
300		140,688		(0.10	)%
200		141,637		0.60	%
100		142,270		1.00	%
0		140,812		-
-100		129,130		(8.30	)%

4135

~~Table~~

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 ~~Contents~~our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At ~~September 30, 2017,~~March 31, 2018, cash and cash equivalents totaled ~~$17.6~~$22.3 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled ~~$109.7~~$57.8 million at ~~September 30, 2017.~~March 31, 2018.

At ~~September 30, 2017,~~March 31, 2018, we had the ability to borrow a total of ~~$195.8~~$194.1 million from the Federal Home Loan Bank of Boston. On that date, we had ~~$78.4~~$45.2 million in advances outstanding. At ~~September 30, 2017,~~March 31, 2018, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of ~~$178.6~~$194.3 million, none of which was outstanding as of that date.

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

At ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, we had ~~$14.7~~$11.2 million and ~~$25.4~~$18.6 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, we had ~~$164.8~~$172.2 million and ~~$202.0~~$166.0 million in unadvanced funds to borrowers, respectively. We also had ~~$2.7~~$1.9 million and ~~$5.2~~$2.0 million in outstanding letters of credit at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively.

Certificates of deposit due within one year of ~~September 30, 2017~~March 31, 2018 totaled ~~$110.4~~$82.9 million, or ~~15.2%~~11.5% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank of Boston advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of securities. During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, we originated ~~$208.5 million of loans, all of which were intended to be held in our portfolio. We also purchased $13.1 million in loans and $13.1 million in securities.During the nine months ended September 30, 2016, we originated $141.4~~$58.9 million of loans, all of which were intended to be held in our portfolio and we purchased $1.0 million in loans. We did not purchase any ~~loans.~~securities.During the three months ended March 31, 2017, we originated $56.5 million of loans, all of which were intended to be held in our portfolio.We also purchased ~~$1.4~~$4.4 million in ~~securities during the nine months ended September 30, 2016.~~loans and $11.3 million in securities.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net ~~increases~~decrease in total deposits of ~~$97.3~~$30.4 million and ~~$33.1~~a net increase of $52.6 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Federal Home Loan Bank advances increased ~~$28.5~~$18.4 million and decreased ~~$16.0~~$17.0 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively.

~~Table of Contents~~

The Provident Bank is subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. At ~~September 30, 2017,~~March 31, 2018, The Provident Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 9 of the Notes to the Unaudited Consolidated Financial Statements for additional information.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

~~Not applicable, as the Company is a smaller reporting company.~~See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operation”.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of ~~September 30, 2017.~~March 31, 2018. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended ~~September 30, 2017,~~March 31, 2018, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

~~Not applicable,~~There have been no material changes to the risk factors disclosed in the Company’s Annual Report on form 10-K for the year ended December 31, 2017, as filed with the ~~Company is a smaller reporting company.~~Securities and Exchange Commission.

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~~Table of Contents~~

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

(a)

Not applicable.

(b)

Not applicable.

(c)

The Company’s repurchases of common stock for the three months ended ~~September 30, 2017~~March 31, 2018 were as follows:

Total Number of Maximum Number of
Total Shares Purchased as Shares that May Yet
Number of Average Price Part of Publicly Be Purchased Under
Shares Paid Announced Plans or the Plans or
Period Purchased per Share Programs Programs (1)
July 1, 2017 through July 31, 2017 - $ - - 605,855
August 1, 2017 through August 31, 2017 800 20.25 800 605,055
September 1, 2017 through September 30, 2017 4,500 20.61 4,500 600,555
Total 5,300 $ 20.55 5,300

					Total Number of		Maximum Number of
	Total				Shares Purchased as		Shares that May Yet
	Number of		Average Price		Part of Publicly		Be Purchased Under
	Shares		Paid		Announced Plans or		the Plans or
Period	Purchased		per Share		Programs		Programs (1)
January 1, 2018 - January 31, 2018		-	$	-		-		605,855
February 1, 2018 -Febraury 28, 2018		-		-		-		605,855
March 1, 2018 - March 31, 2018		-		-		-		605,855
Total		-	$	-		-

(1) On January 26, 2017, the Company announced a repurchase program under which it would repurchase up to 6.6% of the then-outstanding shares of the Company’s common stock (625,015 shares) from time to time, depending on market conditions. The repurchase program would continue until it is completed or terminated by the Company’s Board of Directors.

~~Item 3.~~

~~Defaults Upon Senior Securities~~

Item 3. Defaults Upon Senior Securities

None.

~~Item 4.~~

~~Mine Safety Disclosures~~

Item 4. Mine Safety Disclosures

Not applicable.

~~Item 5.~~

~~Other Information~~

Item 5. Other Information

None.

~~Item 6.~~

~~Exhibits~~

Item 6. Exhibits

3.1	Amended and Restated Articles of Organization of Provident Bancorp, Inc. (1)
3.2	By-Laws of Provident Bancorp, Inc. (1)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2017,~~March 31, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.

(1)

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

4438

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SIGNATURES

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

		PROVIDENT BANCORP, INC.

Date: ~~November 13, 2017~~	May 10, 2018	/s/ David P. Mansfield

	David P. Mansfield

	President and Chief Executive Officer

Date: ~~November 13, 2017~~	May 10, 2018	/s/ Carol L. Houle

	Carol L. Houle

	Executive Vice President and Chief Financial Officer

4539

(In thousands)	Available-for- Sale Securities

Balance beginning January 1, 2017	$	968
Total gains or (losses) (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		255
Paydowns		(17	)
Ending balance, September 30, 2017	$	1,206

Balance beginning January 1, 2016	$	1,116
Total gains or (losses) (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		(105	)
Paydowns		-
Ending balance, September 30, 2016	$	1,011

	For the Nine Months Ended September 30, 2017
	Compared to the Nine Months Ended September 30, 2016
	Increase (Decrease) Due to						Total
	Rate			Volume			Increase (Decrease)
(in thousands)
Interest-earning assets:
Loans	$	1,050		$	3,636		$	4,686
Interest-earning deposits		17			(16	)		1
Investment securities		64			(38	)		26
Federal Home Loan Bank stock		8			14			22

Total interest-earning assets		1,139			2,596			4,735

Interest-bearing liabilities:
Savings accounts		11			9			20
Money Market Accounts		154			128			282
Now Accounts		(4	)		20			16
Certificates of deposit		45			45			90

Total interest-bearing deposits		206			201			408

Federal Home Loan Bank advances		(93	)		258			165

Total interest-bearing liabilities		113			459			573

Change in net interest income	$	1,026		$	2,137		$	4,162