Part I.         Financial Information

Item 1.         Financial Statements

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

 

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

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

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

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

 

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

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)

(Unaudited)

 

 

PROVIDENT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

PROVIDENT BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(1)    Basis of Presentation

 

The accompanying unaudited financial statements of Provident Bancorp, Inc. (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 six-month periods ended  June 30, 2024 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. These financial statements should be read in conjunction with the annual financial statements and notes thereto included in the annual report on Form 10-K the Company filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2024.

 

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiary BankProv (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.

(2)    Corporate Structure

 

The Company is a Maryland corporation whose primary purpose is to act as the holding company for the Bank. The Bank, headquartered in Amesbury, Massachusetts, operates its business from its main office in Amesbury, Massachusetts, as well as two branch offices in the Northeastern Massachusetts area, three branch offices in Southeastern New Hampshire and one branch located in Bedford, New Hampshire. The Bank also has a loan production office in Ponte Vedra, Florida. BankProv is a Massachusetts-chartered stock savings bank that offers both traditional and technology-driven banking solutions to its consumer and commercial customers. The Bank’s primary deposit products are checking, savings, and term certificate accounts and its primary lending products are commercial real estate, commercial, and mortgage warehouse loans.

(3)    Risks and Uncertainties

 

Current Banking Environment

 

Industry events have led to a greater focus by financial institutions, investors and regulators on liquidity positions of and funding sources for financial institutions, the composition of their deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management.

 

The Company believes it is well insulated from the fallout resulting from the market turmoil due to the following considerations:

●

The Bank’s deposit and loan portfolios were and continue to be well-diversified;

●

The Bank is a member of the Depositors Insurance Fund, a private industry-sponsored insurance fund that insures all deposits above Federal Deposit Insurance Corporation limits;

●

We have access to multiple funding sources and sufficient capacity to borrow, if needed. As of  June 30, 2024, between the Federal Home Loan Bank of Boston and the Federal Reserve Bank of Boston’s ("the FRB") borrower-in-custody (“BIC”) program, we had the ability to borrow $465.4 million, of which $147.6 million was outstanding as of that date;

●

Our securities portfolio represented 1.7% of total assets as of  June 30, 2024 and the accumulated other comprehensive loss on the portfolio was $1.6 million, or 0.7% of shareholders’ equity as of that date. Management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Based on our ability to borrow, cash position and low deposit outflows there is no expected reliance on security sales to meet operational needs.

 

---

 

(4)    Recent Accounting Pronouncements

  

In  December 2023, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures (“ASU 2023-09”), to enhance the transparency and decision usefulness of income tax disclosures. ASU 2023-09 requires annual disclosure of specific categories in the rate reconciliation table and separate disclosure for reconciling items that exceed a quantitative threshold. ASU 2023-09 also requires annual disclosure of the amount of income taxes paid disaggregated by federal, state, and foreign taxes, and separately, the amount of income taxes paid disaggregated by individual taxing jurisdictions in which income taxes paid exceed a quantitative threshold. ASU 2023-09 is effective for the Company for fiscal years beginning after December 15, 2024 with early adoption permitted. The Company is currently evaluating the impact of this Accounting Standard Update with respect to its consolidated financial statements.

(5)    Debt Securities

 

Debt securities are classified as available-for-sale when they might be sold before maturity. Debt securities available-for-sale are valued at fair value, with unrealized holding gains and losses reported in other comprehensive (loss) income, net of tax.

 

The following table summarizes the amortized cost, allowance for credit losses, and fair value of debt securities available-for-sale at June 30, 2024 and  December 31, 2023 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:

 

		Amortized				Gross				Gross				Allowance
		Cost				Unrealized				Unrealized				for Credit				Fair
(In thousands)		Basis				Gains				Losses				Losses				Value
June 30, 2024
State and municipal securities		$	11,730			$	2			$	537			$	—			$	11,195
Asset-backed securities			8,181				—				778				—				7,403
Government mortgage-backed securities			9,537				—				807				—				8,730
Total debt securities available-for-sale		$	29,448			$	2			$	2,122			$	—			$	27,328
December 31, 2023
State and municipal securities		$	11,785			$	14			$	399			$	—			$	11,400
Asset-backed securities			8,319				—				784				—				7,535
Government mortgage-backed securities			10,405				—				769				—				9,636
Total debt securities available-for-sale		$	30,509			$	14			$	1,952			$	—			$	28,571

 

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

 

There were no realized gains or losses on sales and calls of securities during the six months ended June 30, 2024 or June 30, 2023.

 

Securities with carrying amounts of $7.3 million and $8.1 million were pledged to secure available borrowings with the Federal Home Loan Bank at June 30, 2024 and December 31, 2023, respectively.

 

The scheduled maturities of debt securities at June 30, 2024 are summarized in the table below. Actual maturities of asset and mortgage-backed securities may differ from contractual maturities because the assets and mortgages underlying the securities may be repaid without any penalties. Because asset- and mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

 

		Available-for-Sale
		Amortized				Fair
(In thousands)		Cost				Value
Due in one year		$	550			$	545
Due after one year through five years			599				601
Due after five years through ten years			1,424				1,414
Due after ten years			9,157				8,635
Government mortgage-backed securities			9,537				8,730
Asset-backed securities			8,181				7,403
		$	29,448			$	27,328

 

---

 

At the time a debt security is placed on non-accrual status, generally when any principal or interest payments become 90 days or more delinquent or if full collection of interest or principal becomes uncertain, interest accrued but not received is reversed against interest income. There were no debt securities on non-accrual status and therefore there was no accrued interest related to debt securities reversed against interest income for the six months ended June 30, 2024 or June 30, 2023.

 

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 June 30, 2024 and December 31, 2023:

 

		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In thousands)		Value				Losses				Value				Losses				Value				Losses
June 30, 2024
Temporarily impaired securities:
State and municipal securities		$	3,480			$	31			$	7,114			$	506			$	10,594			$	537
Asset-backed securities			1,788				36				5,615				742				7,403				778
Government mortgage-backed securities			1,320				12				7,410				795				8,730				807
Total temporarily impaired debt securities		$	6,588			$	79			$	20,139			$	2,043			$	26,727			$	2,122
December 31, 2023
Temporarily impaired securities:
State and municipal		$	—			$	—			$	7,269			$	399			$	7,269			$	399
Asset-backed securities			1,802				16				5,733				768				7,535				784
Government mortgage-backed securities			—				—				9,574				769				9,574				769
Total temporarily impaired debt securities		$	1,802			$	16			$	22,576			$	1,936			$	24,378			$	1,952

 

The Company expects to recover its amortized cost basis on all debt securities. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell these securities in an unrealized loss position as of June 30, 2024, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’ strong capital and liquidity positions as well as its historically low portfolio turnover.

 

The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position were not other-than-temporarily impaired at June 30, 2024:

 

State and municipal securities: At June 30, 2024, 17 of the 19 securities in the Company’s portfolio of state and municipal securities were in unrealized loss positions. Aggregate unrealized losses represented 4.6% of the amortized cost of state and municipal securities in unrealized loss positions. The Company continually monitors the state and municipal securities sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the securities in this portfolio carry minimal risk of default and the Company is appropriately compensated for that risk. There were no material underlying downgrades during the quarter. All securities are performing.

 

Asset-backed securities: At June 30, 2024, all five of the securities in the Company’s portfolio of asset-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 9.5% of the amortized cost of asset-backed securities in unrealized loss positions. The U.S. Small Business Administration guarantees the contractual cash flows of all of the Company’s asset-backed securities. The securities are investment grade rated and there are no material underlying credit downgrades during the quarter. All securities are performing.

 

Government mortgage-backed securities: At June 30, 2024, all 29 of the securities in the Company’s portfolio of government mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 8.5% of the amortized cost of government mortgage-backed securities in unrealized loss positions. The Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association guarantee the contractual cash flows of all of the Company’s mortgage-backed securities. The securities are investment grade rated and there are no material underlying credit downgrades during the quarter. All securities are performing.

 

---

 

Allowance for Credit Losses – Available-For-Sale Securities:

 

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charged to earnings. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive (loss) income.

 

Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes an available for sale security is uncollectible, or when either of the criteria regarding intent or requirement to sell is met.

 

Accrued interest receivable on available-for-sale debt securities totaled $189,000 and $192,000 at  June 30, 2024 and December 31, 2023, respectively, and was included in accrued interest receivable on the Consolidated Balance Sheets and was excluded from the estimate of credit losses.

(6)    Loans and Allowance for Credit Losses for Loans

 

Loans:

 

A summary of loans is as follows:

 

		At				At
		June 30,				December 31,
(In thousands)		2024				2023
Commercial real estate		$	510,395			$	468,928
Construction and land development			57,145				77,851
Residential real estate			6,671				7,169
Mortgage warehouse			256,516				166,567
Commercial			144,700				176,124
Enterprise value			394,177				433,633
Digital asset			—				12,289
Consumer			92				168
Total loans			1,369,696				1,342,729
Allowance for credit losses on loans			(20,341	)			(21,571	)
Net loans		$	1,349,355			$	1,321,158

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost net of the allowance for credit losses for loans. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred loan fees and costs. Accrued interest receivable on loans totaled $6.2 million and $5.9 million at  June 30, 2024 and December 31, 2023, respectively, and was included in accrued interest receivable on the Consolidated Balance Sheets and is excluded from the estimate of credit losses. Interest income is accrued on unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using either the level-yield or straight-line method without anticipating prepayments.

 

At the time a loan is placed on non-accrual, generally at 90 days past due, or earlier if collection of principal or interest is considered doubtful, all interest accrued but not received is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

---

 

Allowance for Credit Losses for Loans:

 

The allowance for credit losses for loans (“ACLL”) is a valuation account that is deducted from the amortized cost basis of the loans to present the net amount expected to be collected. Loans are charged off against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance and do not exceed the aggregate of amounts previously charged-off. The Company employs a process and methodology to estimate the ACLL that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors involves pooling loans into portfolio segments for loans that share similar risk characteristics.

 

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments:

 

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 can be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, can 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, inaccurate estimates of the value of the completed project, and market conditions.

 

Residential real estate: 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. We no longer originate residential real estate loans, and previously we did not typically originate loans with a loan-to-value ratio greater than 80% or grant subprime loans. Loans with loan to value ratios greater than 80% required the purchase of private mortgage insurance.

 

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

 

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

 

Enterprise value: Loans in this segment are made to small- and medium-size businesses in a senior secure position and are generally secured by the enterprise value of the business. The enterprise value consists of the going concern value of the business and takes into account the value of business assets (both tangible and intangible). Repayment is expected from the cash flows of the business. Economic and industry specific conditions can have an effect on the credit quality of this segment.

 

Digital asset: We no longer originate or hold digital asset loans. Loans in this segment were made to businesses in the digital asset space and were generally secured by digital asset mining equipment or by the United States dollar value of digital currency assets of the business. Repayment was expected from the cash flows of the business. A weakened economy, resultant decreased consumer spending as well as decreases in the value of digital currency could have an effect on the credit quality of this segment.

 

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

 

---

 

Management estimates the ACLL balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as portfolio mix, delinquency levels, or term as well as for changes in economic conditions, such as changes in unemployment rates, property values, gross domestic product (“GDP”), home pricing index (“HPI”), or other relevant factors. Incorporated in the estimate for the ACLL is consideration of qualitative factors, which include the following for all loan pools:

 

●

Changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices;

●

Changes in the experience, depth, and ability of lending management;

●

Changes in the quality of the organization's loan review system;

●

The existence and effect of any concentrations of credit and changes in the levels of such concentrations; and

●

The effect of other external factors (i.e. legal and regulatory requirements) on the level of estimated credit losses.

 

In addition to the above, the mortgage warehouse pool includes a qualitative factor for changes in international, national, regional, and local conditions as the ACLL model for this loan pool does not apply an economic regression model in the calculation of the historical loss rate. The determination of qualitative factors involves significant judgment.

 

The allowance for unfunded commitments is maintained by the Company at a level determined to be sufficient to absorb expected lifetime losses related to unfunded credit facilities (including unfunded loan commitments and letters of credit).

 

The Company measures the ACLL using the following methods:

 

Portfolio Segment		Measurement Method		Loss Driver
Commercial real estate		Discounted cash flow		National unemployment rate, national GDP
Construction and land development		Discounted cash flow		National unemployment rate, national GDP
Residential real estate		Discounted cash flow		National unemployment rate, national HPI
Mortgage warehouse		Remaining life method		Not applicable
Commercial		Discounted cash flow		National unemployment rate, national GDP
Enterprise value		Discounted cash flow		National unemployment rate, national GDP
Digital asset		Discounted cash flow		National unemployment rate, national GDP
Consumer		Discounted cash flow		National unemployment rate, national GDP

 

When the discounted cash flow method is used to determine the allowance for credit losses, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

 

When the remaining life method is used to determine the allowance for credit losses, a calculated loss rate is applied to the pool of loans based on the remaining life expectation of the pool. The remaining life expectation is based on management’s reasonable expectation at the reporting date.

 

Loans that do not share risk characteristics, whether or not they are performing in accordance with their loan terms, are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. The Company will individually evaluate a loan 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 making this determination include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Insignificant payment delays and payment shortfalls generally are not considered reason enough to individually analyze a loan. 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. When management determines that a loan should be individually analyzed, expected credit losses are based on either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral at the reporting date, adjusted for selling costs, as appropriate.

 

---

 

The following table presents the activity in the allowance for credit losses for loans by portfolio segment for the three and six months ended June 30, 2024 and 2023:

 

(In thousands)		Commercial Real Estate				Construction and land development				Residential real estate				Mortgage warehouse				Commercial				Enterprise value				Digital asset				Consumer				Total
Balance at March 31, 2024		$	4,521			$	389			$	72			$	54			$	2,278			$	6,567			$	2,124			$	1			$	16,006
Charge-offs			—				—				—				—				—				—				(2,124	)			(11	)			(2,135	)
Recoveries			—				—				2				—				—				—				—				1				3
Provision (credit)			322				(117	)			(5	)			11				(302	)			6,548				—				10				6,467
Balance at June 30, 2024		$	4,843			$	272			$	69			$	65			$	1,976			$	13,115			$	—			$	1			$	20,341
Balance at March 31, 2023		$	4,249			$	470			$	57			$	38			$	2,615			$	10,161			$	7,219			$	3			$	24,812
Charge-offs			—				—				—				—				(126	)			—				—				(13	)			(139	)
Recoveries			—				—				—				—				—				45				—				3				48
(Credit) provision			(180	)			51				(2	)			6				(112	)			(512	)			—				9				(740	)
Balance at June 30, 2023		$	4,069			$	521			$	55			$	44			$	2,377			$	9,694			$	7,219			$	2			$	23,981

 

(In thousands)		Commercial Real Estate				Construction and land development				Residential real estate				Mortgage warehouse				Commercial				Enterprise value				Digital asset				Consumer				Total
Balance at December 31, 2023		$	4,471			$	407			$	75			$	42			$	2,493			$	8,166			$	5,915			$	2			$	21,571
Charge-offs			—				—				—				—				(5	)			—				(2,124	)			(29	)			(2,158	)
Recoveries			—				—				2				—				—				—				—				2				4
Provision (credit)			372				(135	)			(8	)			23				(512	)			4,949				(3,791	)			26				924
Balance at June 30, 2024		$	4,843			$	272			$	69			$	65			$	1,976			$	13,115			$	—			$	1			$	20,341
Balance at December 31, 2022		$	5,062			$	909			$	43			$	213			$	3,582			$	7,712			$	10,493			$	55			$	28,069
Impact of adopting ASC 326			(745	)			(513	)			18				(159	)			(711	)			(270	)			(157	)			(51	)			(2,588	)
Charge-offs			—				—				—				—				(167	)			(3,560	)			—				(29	)			(3,756	)
Recoveries			—				—				—				—				10				45				—				6				61
(Credit) provision			(248	)			125				(6	)			(10	)			(337	)			5,767				(3,117	)			21				2,195
Balance at June 30, 2023		$	4,069			$	521			$	55			$	44			$	2,377			$	9,694			$	7,219			$	2			$	23,981

 

The following table presents loan delinquencies by portfolio segment at June 30, 2024 and December 31, 2023:

 

										90 Days				Total
		30 - 59 Days				60 - 89 Days				or More				Past				Total				Total
(In thousands)		Past Due				Past Due				Past Due				Due				Current				Loans
June 30, 2024
Commercial real estate		$	441			$	—			$	—			$	441			$	509,954			$	510,395
Construction and land development			—				—				—				—				57,145				57,145
Residential real estate			32				—				210				242				6,429				6,671
Mortgage warehouse			—				—				—				—				256,516				256,516
Commercial			—				—				1,817				1,817				142,883				144,700
Enterprise value			—				—				—				—				394,177				394,177
Digital asset			—				—				—				—				—				—
Consumer			2				—				2				4				88				92
Total		$	475			$	—			$	2,029			$	2,504			$	1,367,192			$	1,369,696
December 31, 2023
Commercial real estate		$	18,226			$	—			$	—			$	18,226			$	450,702			$	468,928
Construction and land development			—				—				—				—				77,851				77,851
Residential real estate			—				—				236				236				6,933				7,169
Mortgage warehouse			—				—				—				—				166,567				166,567
Commercial			5				100				1,813				1,918				174,206				176,124
Enterprise value			3,348				—				—				3,348				430,285				433,633
Digital asset			—				—				—				—				12,289				12,289
Consumer			2				3				4				9				159				168
Total		$	21,581			$	103			$	2,053			$	23,737			$	1,318,992			$	1,342,729

 

---

 

The following table presents the amortized cost basis of loans on non-accrual and loans past due over 89 days but still accruing as of June 30, 2024 and December 31, 2023:

 

		Non-accrual								Loans 90 Days
		Loans With No								or More
		Allowance				Non-accrual				Past Due
(In thousands)		for Credit Loss				Loans				and Accruing
June 30, 2024
Commercial real estate		$	60			$	60			$	—
Residential real estate			—				352				—
Commercial			1,864				1,864				—
Enterprise value			1,448				19,038				—
Consumer			—				2				—
Total		$	3,372			$	21,316			$	—
December 31, 2023
Residential real estate			—				376				—
Commercial			1,857				1,857				—
Enterprise value			—				1,991				—
Digital asset			—				12,289				—
Consumer			—				4				—
Total		$	1,857			$	16,517			$	—

 

The Company did not recognize interest income on non-accrual loans during the six months ended June 30, 2024 or 2023.

 

---

 

The following tables present the amortized cost basis of collateral-dependent loans by class as of June 30, 2024 and  December 31, 2023:

 

		Commercial								Business
		Real				Business				Enterprise
(In thousands)		Estate				Assets				Value
June 30, 2024
Commercial real estate		$	19,756			$	—			$	—
Commercial			—				1,659				—
Enterprise value			—				—				19,038
Total		$	19,756			$	1,659			$	19,038
December 31, 2023
Commercial real estate		$	19,693			$	—			$	—
Commercial			—				1,652				—
Enterprise value			—				1,991				—
Digital asset (1)			—				12,289				—
Total		$	19,693			$	15,932			$	—

 

(1)	Business assets include the United States dollar value of Bitcoin held in control accounts, an interest in a joint venture partnership, as well as cash accounts held at the Bank.

 

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing the following modifications: principal forgiveness, other-than-insignificant payment delays, term extensions, interest rate reductions, or a combination of these modifications. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses on loans.

 

In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

 

The following table presents the amortized cost basis of loans at June 30, 2024 and 2023 that were both experiencing financial difficulty and modified during the three months ended June 30, 2024 and 2023, respectively, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below:

 

(Dollars in thousands)		Other-Than-Insignificant Payment Delay				Term Extension				Combination Term Extension and Interest Rate Reduction				Combination Term Extension and Other-Than-Insignificant Payment Delay				Total Class of Financing Receivable $				Total Class of Financing Receivable %
June 30, 2024
Commercial real estate		$	1,467			$	—			$	—			$	18,228			$	19,695				3.86	%
Enterprise value			21,600				960				—				—				22,560				5.72
Total		$	23,067			$	960			$	—			$	18,228			$	42,255				3.08	%
June 30, 2023
Commercial		$	—			$	—			$	21			$	—			$	21				0.01	%
Enterprise value			17,585				—				—				—				17,585				4.03
Digital asset			—				16,580				—				—				16,580				98.88
Total		$	17,585			$	16,580			$	21			$	—			$	34,186				2.52	%

 

---

 

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty during the three months ended  June 30, 2024 and 2023:

 

		Weighted-Average Other-Than-Insignificant Payment Delay				Weighted-Average Term Extension				Weighted-Average Term Extension and Interest Rate Reduction								Weighted-Average Term Extension and Other-Than-Insignificant Payment Delay
		Months				Months				Months				Percentage points				Months				Months
June 30, 2024
Commercial real estate			3.00				—				—				—	%			3.00				3.00
Enterprise value			4.00				3.00				—				—				—				—
June 30, 2023
Commercial			—				—				4.00				3.25	%			—				—
Enterprise value			4.00				—				—				—				—				—
Digital asset			—				3.00				—				—				—				—

 

The following table presents the amortized cost basis of loans at June 30, 2024 and 2023 that were both experiencing financial difficulty and modified during the six months ended June 30, 2024 and 2023, respectively, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below:

 

(Dollars in thousands)		Other-Than-Insignificant Payment Delay				Term Extension				Combination Term Extension and Other-Than-Insignificant Payment Delay				Combination Term Extension and Interest Rate Reduction				Total Class of Financing Receivable $				Total Class of Financing Receivable %
June 30, 2024
Commercial real estate		$	1,783			$	—			$	18,228			$	—			$	20,011				3.92	%
Commercial			1,575				—				—				—				1,575				1.09
Enterprise value			21,600				960				—				—				22,560				5.72
Total		$	24,958			$	960			$	18,228			$	—			$	44,146				3.22	%
June 30, 2023
Commercial		$	—			$	—			$	—			$	21			$	21				0.01	%
Enterprise value			21,023				—				—				—				21,023				4.82
Digital asset			—				16,580				—				—				16,580				98.88
Total		$	21,023			$	16,580			$	—			$	21			$	37,624				2.77	%

 

---

 

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty during the six months ended June 30, 2024 and 2023:

 

		Weighted-Average Other-Than-Insignificant Payment Delay				Weighted-Average Term Extension				Weighted-Average Term Extension and Other-Than-Insignificant Payment Delay								Weighted-Average Term Extension and Interest Rate Reduction
		Months				Months				Months				Months				Months				Percentage Points
June 30, 2024
Commercial real estate			7.94				—				9.00				9.00				—				—	%
Commercial			3.00				—				—				—				—				—
Enterprise value			4.00				3.00				—				—				—				—
June 30, 2023
Commercial			—				—				—				—				4.00				3.25	%
Enterprise value			5.31				—				—				—				—				—
Digital asset			—				3.00				—				—				—				—

 

The Company has not committed to lend any additional funds to borrowers experiencing financial difficulty whose loans had been modified during the six months ended June 30, 2024. The Company had committed to lend $50,000 based on fund availability through a then existing line of credit to a borrower experiencing financial difficulty whose loan had been modified during the six months ended June 30, 2023.

 

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. As of  June 30, 2024 and 2023, there were no amounts past due or subsequent defaults related to loans modified to borrowers experiencing financial difficulty within the preceding 12 months. 

 

Credit Quality Information

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

---

 

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

 

For residential real estate loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Ongoing monitoring is based upon the borrower’s payment activity.

 

Consumer loans are not formally rated.

 

Based on the most recent analysis performed, the risk category of loans by class of loans and their corresponding gross write-offs for the six months ended June 30, 2024 is as follows:

 

		Term Loans at Amortized Cost by Origination Year
(In thousands)		2024				2023				2022				2021				2020				Prior				Revolving Loans Amortized Cost				Revolving Loans Converted to Term Loans				Total
Commercial real estate
Pass		$	37,518			$	35,330			$	59,249			$	121,337			$	25,268			$	179,781			$	18,876			$	144			$	477,503
Special mention			—				—				—				—				—				6,136				—				—				6,136
Substandard			—				—				—				—				1,048				25,708				—				—				26,756
Total commercial real estate			37,518				35,330				59,249				121,337				26,316				211,625				18,876				144				510,395
Commercial real estate
Current period gross write-offs			—				—				—				—				—				—				—				—				—
Construction and land development
Pass			1,151				6,148				46,257				650				—				1,420				1,519				—				57,145
Total construction and land development			1,151				6,148				46,257				650				—				1,420				1,519				—				57,145
Construction and land development
Current period gross write-offs			—				—				—				—				—				—				—				—				—
Residential real estate
Pass			—				—				—				—				4				3,892				2,413				19				6,328
Substandard			—				—				—				—				—				277				66				—				343
Total residential real estate			—				—				—				—				4				4,169				2,479				19				6,671
Residential real estate
Current period gross write-offs			—				—				—				—				—				—				—				—				—
Mortgage warehouse
Pass			—				—				—				—				—				—				256,516				—				256,516
Total mortgage warehouse			—				—				—				—				—				—				256,516				—				256,516
Mortgage warehouse
Current period gross write-offs			—				—				—				—				—				—				—				—				—
Commercial
Pass			1,869				5,574				13,716				44,575				8,159				28,230				29,979				—				132,102
Special mention			—				—				—				—				—				6,910				2,028				—				8,938
Substandard			—				—				—				205				—				3,230				225				—				3,660
Total commercial			1,869				5,574				13,716				44,780				8,159				38,370				32,232				—				144,700
Commercial
Current period gross write-offs			—				—				—				—				—				5				—				—				5
Enterprise Value
Pass			14,107				82,303				79,863				102,249				38,541				21,106				7,444				—				345,613
Special mention			—				—				3,025				5,689				5,498				2,656				848				—				17,716
Substandard			—				—				12,870				5,326				1,736				1,429				9,487				—				30,848
Total enterprise value			14,107				82,303				95,758				113,264				45,775				25,191				17,779				—				394,177
Enterprise value
Current period gross write-offs			—				—				—				—				—				—				—				—				—
Digital asset
Current period gross write-offs			—				—				2,124				—				—				—				—				—				2,124
Consumer
Not formally rated			—				—				—				—				—				42				50				—				92
Total consumer			—				—				—				—				—				42				50				—				92
Consumer
Current period gross write-offs			22				—				—				—				—				7				—				—				29
Total loans		$	54,645			$	129,355			$	214,980			$	280,031			$	80,254			$	280,817			$	329,451			$	163			$	1,369,696
Total current period gross write-offs		$	22			$	—			$	2,124			$	—			$	—			$	12			$	—			$	—			$	2,158

 

---

 

The following table presents the risk category of loans by class of loans as of December 31, 2023 and their corresponding gross write-offs for the year then ended:

 

(In thousands)		2023				2022				2021				2020				2019				Prior				Revolving Loans Amortized Cost				Revolving Loans Converted to Term Loans				Total
Commercial real estate
Pass		$	35,966			$	50,608			$	107,593			$	30,236			$	59,578			$	132,219			$	19,617			$	—			$	435,817
Special mention			—				—				—				—				2,898				3,373				—				—				6,271
Substandard			—				—				—				1,048				4,436				21,356				—				—				26,840
Total commercial real estate			35,966				50,608				107,593				31,284				66,912				156,948				19,617				—				468,928
Commercial real estate
Current period gross write-offs			—				—				1				—				—				—				—				—				1
Construction and land development
Pass			3,701				54,925				17,015				—				—				1,429				781				—				77,851
Total construction and land development			3,701				54,925				17,015				—				—				1,429				781				—				77,851
Construction and land development
Current period gross write-offs			—				—				—				—				—				—				—				—				—
Residential real estate
Pass			—				—				—				5				179				3,183				2,579				871				6,817
Substandard			—				—				—				—				—				284				68				—				352
Total residential real estate			—				—				—				5				179				3,467				2,647				871				7,169
Residential real estate
Current period gross write-offs			—				—				—				—				—				—				—				—				—
Mortgage warehouse
Pass			—				—				—				—				—				—				166,567				—				166,567
Total mortgage warehouse			—				—				—				—				—				—				166,567				—				166,567
Mortgage warehouse
Current period gross write-offs			—				—				—				—				—				—				—				—				—
Commercial
Pass			6,398				14,000				48,922				13,233				16,491				22,483				37,920				28				159,475
Special mention			—				—				—				—				—				9,932				2,674				—				12,606
Substandard			—				—				205				—				1,815				1,798				225				—				4,043
Total commercial			6,398				14,000				49,127				13,233				18,306				34,213				40,819				28				176,124
Commercial
Current period gross write-offs			—				—				—				—				102				67				—				—				169
Enterprise Value
Pass			85,412				97,942				119,126				48,427				23,186				3,346				16,026				—				393,465
Special mention			—				11,768				4,838				2,424				753				3,001				1,619				—				24,403
Substandard			1,991				790				1,464				1,870				1,595				—				8,055				—				15,765
Total enterprise value			87,403				110,500				125,428				52,721				25,534				6,347				25,700				—				433,633
Enterprise value
Current period gross write-offs			—				3,561				—				2				—				1,225				—				—				4,788
Digital asset
Substandard			—				12,289				—				—				—				—				—				—				12,289
Total digital asset			—				12,289				—				—				—				—				—				—				12,289
Digital asset
Current period gross write-offs			—				—				—				—				—				—				—				—				—
Consumer
Not formally rated			—				—				—				—				—				121				45				2				168
Total consumer			—				—				—				—				—				121				45				2				168
Consumer
Current period gross write-offs			30				—				—				—				—				15				—				—				45
Total loans		$	133,468			$	242,322			$	299,163			$	97,243			$	110,931			$	202,525			$	256,176			$	901			$	1,342,729
Total current period gross write-offs		$	30			$	3,561			$	1			$	2			$	102			$	1,307			$	—			$	—			$	5,003

 

---

(7)    Deposits

 

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

 

		At				At
		June 30,				December 31,
(In thousands)		2024				2023
Noninterest-bearing:
Demand		$	311,814			$	308,769
Interest-bearing:
NOW			84,811				93,812
Regular savings			168,387				231,593
Money market deposits			452,139				456,408
Certificates of deposit:
Certificate accounts of $250,000 or more			39,184				24,680
Certificate accounts less than $250,000			208,320				215,960
Total interest-bearing			952,841				1,022,453
Total deposits		$	1,264,655			$	1,331,222

 

At  June 30, 2024 and December 31, 2023, the aggregate amount of brokered certificates of deposit was $160.0 million and $180.0 million, respectively. All the Company’s brokered certificates of deposit are in amounts less than $250,000 as of both periods presented.

 

---

(8)    Borrowings

 

Advances consist of funds borrowed from the Federal Home Loan Bank (the “FHLB”) and the Federal Reserve Bank of Boston's ("FRB") borrower-in-custody ("BIC") program. Maturities of advances from the FHLB and FRB as of June 30, 2024 are summarized as follows:

 

(In thousands)
Fiscal Year-End
2024		$	138,067
2025			5,136
2026			138
2027			139
2028			141
Thereafter			4,009
Total		$	147,630

 

Borrowings from the FHLB are secured by qualified collateral, consisting primarily of certain commercial real estate loans, qualified mortgage-backed government securities and certain loans with mortgages secured by one- to four-family properties. At June 30, 2024, borrowings from the FHLB consisted of overnight advances of $130.0 million and advances with original maturities more than one year of $9.6 million. The interest rate on overnight advances from the FHLB ranged from 5.51% to 5.54% at June 30, 2024, with a weighted average interest rate of 5.52%. The interest rates on FHLB long-term advances ranged from 1.21% to 1.32%, with a weighted average interest rate of 1.26% at  June 30, 2024. At  June 30, 2024, the Company had the ability to borrow $142.6 million from the FHLB, of which $139.6 million was outstanding as of that date.

 

Borrowings from the FRB BIC program are secured by a Uniform Commercial Code financing statement on qualified collateral, consisting of certain commercial loans. The Company had the ability to borrow $322.8 million from the FRB, of which $8.0 million was outstanding as of  June 30, 2024, comprised of an overnight advance with an interest rate of 5.50%.

(9)    Fair Value Measurements

 

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

 

Basis of Fair Value Measurements

 

●

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

●

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

●

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

 

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

 

Fair Values of Assets Measured on a Recurring Basis

 

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

 

The following summarizes financial instruments measured at fair value on a recurring basis at June 30, 2024 and December 31, 2023:

 

		Fair Value Measurements at Reporting Date Using
										Significant				Significant
										Other Observable				Unobservable
										Inputs				Inputs
(In thousands)		Total				Level 1				Level 2				Level 3
June 30, 2024
State and municipal securities		$	11,195			$	—			$	11,195			$	—
Asset-backed securities			7,403				—				7,403				—
Government mortgage-backed securities			8,730				—				8,730				—
Total		$	27,328			$	—			$	27,328			$	—
December 31, 2023
State and municipal securities		$	11,400			$	—			$	11,400			$	—
Asset-backed securities			7,535				—				7,535				—
Government mortgage-backed securities			9,636				—				9,636				—
Total		$	28,571			$	—			$	28,571			$	—

 

Fair Values of Assets Measured on a Non-Recurring Basis

 

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

 

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

 

---

 

The following summarizes assets measured at fair value on a nonrecurring basis at June 30, 2024 and December 31, 2023:

 

		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
June 30, 2024
Loans
Enterprise value		$	10,510			$	—			$	—			$	10,510
Total		$	10,510			$	—			$	—			$	10,510
December 31, 2023
Loans
Enterprise value		$	891			$	—			$	—			$	891
Digital asset			6,373				—				—				6,373
Total		$	7,264			$	—			$	—			$	7,264

 

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 June 30, 2024 and December 31, 2023:

 

(In thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

June 30, 2024

Loans

Enterprise value

$

10,510

Business valuation

Company earnings and market assumptions

0% - 4%

December 31, 2023

Loans

Enterprise value

$

891

Business or collateral valuation

Comparable company or collateral evaluations

0% - 26%

Digital asset

6,373

Asset valuation

Comparable asset evaluations

0% - 25%

 

At June 30, 2024, the contractual balance of enterprise value loans measured at fair value on a nonrecurring basis was $17.7 million, net of reserves of $7.1 million and deferred fees and costs of $124,000. At December 31, 2023, the contractual balance of loans measured at fair value on a nonrecurring basis was $2.0 million, net of reserves of $1.1 million, interest paid to principal of $12,000, and deferred fees and costs of $3,000 for the enterprise value segment and $14.4 million, net of reserves of $5.9 million, interest paid to principal of $2.1 million, and deferred fees and costs of $101,000 for the digital asset segment.

 

Fair Values of Financial Instruments

 

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

 

---

 

The carrying amounts and estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, are as follows at June 30, 2024 and December 31, 2023:

 

		Carrying				Fair Value
(In thousands)		Amount				Level 1				Level 2				Level 3				Total
June 30, 2024
Financial assets:
Cash and cash equivalents		$	171,617			$	171,617			$	—			$	—			$	171,617
Available-for-sale debt securities			27,328				—				27,328				—				27,328
Federal Home Loan Bank of Boston stock			5,121				N/A				N/A				N/A				N/A
Loans, net			1,349,355				—				—				1,300,067				1,300,067
Accrued interest receivable			6,396				—				6,396				—				6,396
Financial liabilities:
Deposits			1,264,655				—				1,264,789				—				1,264,789
Borrowings			147,630				—				147,821				—				147,821
December 31, 2023
Financial assets:
Cash and cash equivalents		$	220,332			$	220,332			$	—			$	—			$	220,332
Available-for-sale debt securities			28,571				—				28,571				—				28,571
Federal Home Loan Bank of Boston stock			4,056				N/A				N/A				N/A				N/A
Loans, net			1,321,158				—				—				1,279,421				1,279,421
Accrued interest receivable			6,090				—				6,090				—				6,090
Financial liabilities:
Deposits			1,331,222				—				1,331,701				—				1,331,701
Borrowings			104,697				—				104,765				—				104,765

(10)    Regulatory Capital

 

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

 

The Bank is subject to capital regulations that require a Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. In order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk-based capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. As of June 30, 2024 and December 31, 2023, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

 

Applicable regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. At June 30, 2024, the Bank exceeded the regulatory requirement for the capital conservation buffer.

 

Federal banking agencies’ regulations establish a community bank leverage ratio (“CBLR”) framework for community banking organizations having total consolidated assets of less than $10 billion, having a leverage ratio of greater than 9%, and satisfying other criteria, such as limitations on the amount of off-balance sheet exposures and on trading assets and liabilities. A community banking organization that qualifies for and elects to use the CBLR framework and that maintains a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the banking agencies’ generally applicable capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for federal law. As of June 30, 2024, the Bank has not opted into the CBLR framework.

 

---

 

The Bank’s actual capital amounts and ratios at  June 30, 2024 and  December 31, 2023 are summarized as follows:

 

																			To Be Well
																			Capitalized Under
										For Capital									Prompt Corrective
		Actual								Adequacy Purposes									Action Provisions
(Dollars in thousands)		Amount				Ratio				Amount			Ratio						Amount			Ratio
June 30, 2024
Total Capital (to Risk Weighted Assets)		$	215,572				13.89	%		$	124,127		>			8.0	%		$	155,159		>			10.0	%
Tier 1 Capital (to Risk Weighted Assets)			196,163				12.64				93,095		>			6.0				124,127		>			8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)			196,163				12.64				69,821		>			4.5				100,853		>			6.5
Tier 1 Capital (to Average Assets)			196,163				12.52				62,691		>			4.0				78,364		>			5.0
December 31, 2023
Total Capital (to Risk Weighted Assets)		$	212,992				14.02	%		$	121,525		>			8.0	%		$	151,907		>			10.0	%
Tier 1 Capital (to Risk Weighted Assets)			193,968				12.77				91,144		>			6.0				121,525		>			8.0
Common Equity Tier 1 Capital (to Risk Weighted Assets)			193,968				12.77				68,358		>			4.5				98,739		>			6.5
Tier 1 Capital (to Average Assets)			193,968				11.59				66,924		>			4.0				83,655		>			5.0

 

Liquidation Accounts

 

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

1.

The product of (i) the percentage of the stock issued in the initial stock offering in 2015 to persons other than Provident Bancorp, the top tier mutual holding company (“MHC”) of the Company and (ii) the net worth of the mid-tier holding company as of the date of the latest balance sheet contained in the prospectus utilized in connection with the offering; and

2.

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

 

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

 

Other Restrictions

 

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Federal and state banking regulations restrict the amount of dividends that may be paid by the Bank in a year, without prior approval of regulatory agencies, to the amount by which net income of the Bank for the year plus the retained net income of the previous two years exceeds any net loss reported in those respective periods. For the six months ended June 30, 2024, the Bank reported net income of $1.6 million. For the years ended December 31, 2023 and 2022, the Bank reported net income of $10.7 million and a net loss of $21.5 million, respectively. There were no dividends paid during the six months ended June 30, 2024.

(11)    Employee Stock Ownership Plan

 

The Bank established an employee stock ownership plan (the “ESOP”) to provide eligible employees the opportunity to own Company stock. The plan is a tax-qualified plan for the benefit of all Bank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax law limits. The ESOP acquired 1,538,868 shares between the initial and second-step stock offerings with the proceeds of a loan totaling $11.8 million. The loan is payable over 15 years at a rate per annum equal to 5.00%. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid. The number of shares committed to be released per year through 2033 is 89,758.

 

---

 

Shares held by the ESOP include the following:

 

		June 30, 2024				December 31, 2023
Allocated			641,288				551,530
Committed to be allocated			44,879				89,758
Unallocated			852,701				897,580
Total			1,538,868				1,538,868

 

The fair value of unallocated shares was approximately $8.7 million at June 30, 2024.

 

Total compensation expense recognized in connection with the ESOP for the three months ended  June 30, 2024 and 2023 was $208,000 and $169,000, respectively. Total compensation expense recognized for the six months ended June 30, 2024 and 2023 was $433,000 and $356,000, respectively.

(12) (Loss) Earnings Per Common Share

 

Basic (loss) earnings per share represents (loss) income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted (loss) earnings per share is computed in a manner similar to that of basic (loss) 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 are not deemed outstanding for (loss) earnings per share calculations.

 

		Three Months Ended								Six Months Ended
(Dollars in thousands, except per share		June 30,				June 30,				June 30,				June 30,
dollar amounts)		2024				2023				2024				2023
Net (loss) income attributable to common shareholders		$	(3,308	)		$	3,461			$	1,673			$	5,564
Average number of common shares issued			17,663,303				17,688,826				17,664,347				17,687,448
Less:
Average unallocated ESOP shares			(860,183	)			(949,941	)			(871,403	)			(961,098	)
Average unvested restricted stock			(96,327	)			(170,221	)			(104,822	)			(176,599	)
Average number of common shares outstanding to calculate basic earnings per common share			16,706,793				16,568,664				16,688,122				16,549,751
Effect of dilutive unvested restricted stock and stock option awards			—				1,353				35,641				915
Average number of common shares outstanding to calculate diluted earnings per common share			16,706,793				16,570,017				16,723,763				16,550,666
(Loss) earnings per common share:
Basic		$	(0.20	)		$	0.21			$	0.10			$	0.34
Diluted		$	(0.20	)		$	0.21			$	0.10			$	0.34

 

For periods in which the Company has reported net loss, diluted loss per share attributable to common shareholders is the same as basic net loss per share attributable to common shareholders, because dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. Stock options for 1,235,342 shares of common stock were not considered in computing diluted earnings per common share for the three months ended June 30, 2023, because they were anti-dilutive, meaning the exercise price for such options were higher than the average price for the Company for such period. For the six months ended June 30, 2024 and 2023, stock options for 817,070, and 1,360,013 shares, respectively, were not considered in computing diluted earnings per common share because they were anti-dilutive.

 

---

(13)    Share-Based Compensation

 

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

 

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

 

Stock Options

 

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

 

●

Expected volatility is based on historical volatility of the Company’s common stock price;

●

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

●

The dividend yield assumption is based on the Company’s expectation of dividend payouts; and

●

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.

 

There were no options granted during the six months ended June 30, 2024.

 

---

 

A summary of the status of the Company’s stock options for the six months ended June 30, 2024 is presented below:

 

		Stock Option Awards				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value
Outstanding at December 31, 2023			1,188,763			$	10.99
Granted			—				—
Forfeited			(45,850	)			12.26
Expired			(71,475	)			11.71
Exercised			(124,346	)			8.61
Outstanding at June 30, 2024			947,092			$	11.19				5.91			$	411,000
Outstanding and expected to vest at June 30, 2024			947,092			$	11.19				5.91			$	411,000
Vested and Exercisable at June 30, 2024			601,020			$	10.96				4.98			$	330,000
Unrecognized compensation cost		$	1,166,000
Weighted average remaining recognition period (years)			2.60

 

For the three months ended June 30, 2024 and 2023, expense for the stock options was $131,000 and $164,000, respectively. For the six months ended June 30, 2024 and 2023, expense for the stock options was $261,000 and $320,000, respectively. There were 124,346 stock options exercised during the three months ended  June 30, 2024 with an intrinsic value of $144,000. There were no stock options exercised during the three months ended June 30, 2023. There were 124,346 stock options exercised during the six months ended June 30, 2024 with an intrinsic value of $144,000 and there were 225,565 stock options exercised during the six months ended June 30, 2023 with an intrinsic value of $97,000. 

 

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 Plans. 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 Plans for the six months ended June 30, 2024:

 

		Unvested Restricted Stock Awards				Weighted Average Grant Date Price
Unvested restricted stock awards at December 31, 2023			145,921			$	12.37
Granted			—				—
Forfeited			(18,340	)			12.26
Vested			(17,645	)			13.54
Unvested restricted stock awards at June 30, 2024			109,936			$	12.20
Unrecognized compensation cost		$	1,092,000
Weighted average remaining recognition period (years)			2.39

 

For the three months ended June 30, 2024 and 2023, expense for the restricted stock awards was $131,000 and $168,000, respectively. For the six months ended June 30, 2024 and 2023, expense for the restricted stock awards was $262,000 and $331,000, respectively. The tax benefit from restricted awards was $37,000 and $50,000 for the three months ended June 30, 2024 and 2023, respectively. The tax benefit from restricted awards was $77,000 and $101,000 for the six months ended June 30, 2024 and 2023, respectively. The total fair value of shares vested during the three months ended June 30, 2024 and 2023 was $79,000 and $77,000, respectively. The total fair value of shares vested during the six months ended June 30, 2024 and 2023 was $163,000 and $121,000, respectively.

 

---

(14)    Leases

 

The Company recognized right-of-use assets (“ROU”) totaling $3.7 million at June 30, 2024 and $3.8 million at  December 31, 2023, and operating lease liabilities totaling $4.1 million and $4.2 million at June 30, 2024 and December 31, 2023, respectively. The lease liabilities recognized by the Company represent two leased branch locations and one loan production office.

 

Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease components, such as fair market value adjustments, are expensed as incurred and are not included in ROU assets and operating lease liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are expensed as incurred. For the six months ended June 30, 2024 and 2023, rent expense for the operating leases totaled $173,000 and $157,000.

 

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

 

		June 30,				December 31,
		2024				2023
Weighted-average discount rate			3.63	%			3.62	%
Range of lease expiration dates (in years)			0 - 11 years				1 - 12 years
Range of lease renewal options (in years)			0 - 30 years				0 - 20 years
Weighted-average remaining lease term (in years)			25.4 years				25.8 years

 

The following table presents the undiscounted annual lease payments under the terms of the Company’s operating leases at June 30, 2024 and December 31, 2023, including a reconciliation to the present value of operating lease liabilities recognized in the Consolidated Balance Sheets:

 

		June 30,				December 31,
Fiscal Year-End		2024				2023
(In thousands)
2024		$	138			$	270
2025			281				280
2026			292				291
2027			295				293
2028			208				208
Thereafter			5,533				5,533
Total lease payments			6,747				6,875
Less imputed interest			(2,629	)			(2,704	)
Total lease liabilities		$	4,118			$	4,171

 

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

(15)    Revenue Recognition

 

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

 

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

 

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

 

---

(16)    Qualified Affordable Housing Project Investments

 

The Bank invests in qualified affordable housing projects. At  June 30, 2024 and December 31, 2023, the balance of the investment for qualified affordable housing projects was $5.7 million and $6.1 million, respectively. These balances are reflected in the other assets line on the Consolidated Balance Sheets. Under the proportional amortization method, the Company recognized amortization expense of $178,000 and tax credits of $218,000 for the three months ended June 30, 2024. For the three months ended June 30, 2023, the Company recognized amortization expense of $179,000 and tax credits of $219,000. The Company recognized amortization expense of $356,000 and tax credits of $437,000 for the six months ended June 30, 2024. The Company recognized amortization expense of $1.4 million and tax credits of $1.7 million for the six months ended June 30, 2023.

 

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 June 30, 2024 and December 31, 2023 and for the three and six months ended June 30, 2024 and 2023 is intended to assist in understanding our financial condition and results of operations. Operating results for the three- and six-month periods ended June 30, 2024 may not be indicative of results for all of 2024 or any other period. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

 

Forward-Looking Statements

 

This document may contain certain forward-looking statements, such as statements of the Company’s or the Bank’s plans, objectives, expectations, estimates and intentions. Forward-looking statements may be identified by the use of words such as “expects,” “subject,” “believes,” “will,” “intends,” “may,” “will be,” “would” or similar expressions. 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. Accordingly, readers should not place any undue reliance on any forward-looking statements (which reflect management’s analysis of factors only as of the date of which they are given). These factors include: general economic conditions; interest rates; inflation; levels of unemployment; legislative, regulatory and accounting changes; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve Bank; deposit flows; our ability to access cost-effective funding; changes in liquidity, including the size and composition of our deposit portfolio; changes in consumer spending, borrowing and savings habits; competition; real estate values in the market area; loan demand; the adequacy of our level of and methodology for calculating our allowance for credit losses; changes in the quality of our loan and securities portfolios; the ability of our borrowers to repay their loans; an unexpected adverse financial, regulatory or bankruptcy event experienced by our cryptocurrency, digital asset or financial technology (“fintech”) customers; our ability to retain key employees; failures or breaches of our IT systems, including cyberattacks; the failure to maintain current technologies; the ability of the Company or the Bank to effectively manage its growth; global and national war and terrorism; the impact of the COVID-19 pandemic or any other pandemic on our operations and financial results and those of our customers; 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 Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.

 

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

 

Critical Accounting Policies

 

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

 

Allowance for Credit Losses for Loans. The allowance for credit losses represents management’s estimate of expected losses over the life of the loan portfolio. Loan losses are charged against the allowance when management believes the loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. See Note 6 - Loans and Allowance for Credit Losses for Loans of the Notes to the Unaudited Consolidated Financial Statements for additional information.

 

 

Balance Sheet Analysis

 

The Bank has adjusted its risk appetite to reduce the overall risk profile of the balance sheet, by limiting asset growth to five percent annually and transforming the mix of the loan portfolio towards traditional real estate and in-market commercial lending, while decreasing our exposure to enterprise value lending and eliminating our digital asset portfolio. This quarter, the Bank recognized a reserve of $7.1 million on an enterprise value relationship of $17.6 million, overshadowing a quarter of otherwise positive trends in executing the aforementioned balance sheet management strategy. These improvements reflect our continued efforts to shift the mix in the loan portfolio and reduce the reliance on high-cost deposits as a primary source of liquidity. While funding cost reductions, as reflected by current yields, have yet to be realized, the Bank has successfully shortened its funding duration to maintain optionality in the event of an easing in rates.

 

Assets. Total assets were $1.65 billion at June 30, 2024, a decrease of $23.5 million, or 1.4%, from $1.67 billion at December 31, 2023. The decrease resulted primarily from a decrease in cash and cash equivalents, partially offset by an increase in net loans.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $48.7 million, or 22.1%, to $171.6 million at June 30, 2024 compared to $220.3 million at December 31, 2023, primarily due to a decrease in deposits and an increase in net loans, partially offset by an increase in borrowings. For more information on cash sources and uses please refer to “– Liquidity and Capital Resources”.

 

Loan Portfolio Analysis. Net loans were $1.35 billion at June 30, 2024, an increase of $28.2 million, or 2.1%, from $1.32 billion at December 31, 2023, primarily due to an increase in mortgage warehouse loans of $89.9 million, or 54.0%, and an increase in commercial real estate loans of $41.5 million, or 8.8%, partially offset by a decrease in enterprise value loans of $39.5 million, or 9.1%, a decrease in commercial loans of $31.4 million, or 17.8%, a decrease in construction and land development loans of $20.7 million, or 26.6%, and a $12.3 million decrease resulting from the settlement and partial charge-off of the Bank's last digital asset loan. The changing mix in the loan portfolio is consistent with the Bank’s strategy to focus on traditional community bank lending segments.

 

Loan Portfolio Concentrations. The following table provides information with respect to our loan portfolio concentrations at June 30, 2024 and December 31, 2023:

 

		At June 30, 2024								At December 31, 2023
(In thousands)		Amount				Percent of total loans				Amount				Percent of total loans
Commercial real estate		$	510,395				37.26	%		$	468,928				34.92	%
Construction and land development			57,145				4.17				77,851				5.80
Residential real estate			6,671				0.49				7,169				0.53
Mortgage warehouse			256,516				18.73				166,567				12.41
Commercial			144,700				10.56				176,124				13.12
Enterprise value			394,177				28.78				433,633				32.29
Digital asset			—				—				12,289				0.92
Consumer			92				0.01				168				0.01
			1,369,696				100.00	%			1,342,729				100.00	%
Allowance for credit losses on loans			(20,341	)							(21,571	)
Net loans		$	1,349,355							$	1,321,158

 

Commercial Real Estate Concentrations. The following table provides information with respect to our commercial real estate concentrations at June 30, 2024 and December 31, 2023:

 

		At June 30, 2024												At December 31, 2023
						Percent of				Percent of								Percent of				Percent of
(Dollars in thousands)		Amortized cost				commercial real estate				total loans				Amortized cost				commercial real estate				total loans
Multifamily		$	82,711				16.21	%			6.04	%		$	56,523				12.05	%			4.21	%
Industrial/manufacturing/warehouse			79,084				15.49				5.77				80,220				17.11				5.97
Self-storage facility			66,228				12.98				4.84				56,620				12.07				4.22
Office			62,848				12.31				4.59				56,482				12.04				4.21
Residential one-to-four family			49,026				9.61				3.58				30,341				6.47				2.26
Hotel/motel/inn			47,772				9.36				3.49				17,809				3.80				1.32
Mobile home/park			32,404				6.35				2.37				32,763				6.99				2.44
Retail			22,379				4.38				1.63				23,912				5.10				1.78
Mixed use			7,301				1.43				0.52				45,241				9.65				3.37
Other commercial real estate			60,642				11.88				4.43				69,017				14.72				5.14
Total		$	510,395				100.00	%			37.26	%		$	468,928				100.00	%			34.92	%

 

Enterprise Value Concentrations. The following table provides information with respect to our enterprise value concentrations at June 30, 2024 and December 31, 2023:

 

		At June 30, 2024												At December 31, 2023
						Percent of				Percent of								Percent of				Percent of
(Dollars in thousands)		Amortized cost				enterprise value				total loans				Amortized cost				enterprise value				total loans
Advertising		$	59,634				15.13	%			4.35	%		$	68,221				15.73	%			5.08	%
Consulting services			54,319				13.78				3.97				63,394				14.62				4.72
Professional services			46,456				11.79				3.39				53,516				12.34				3.99
Company management			34,146				8.66				2.49				16,856				3.89				1.26
Industrial/manufacturing/warehouse			31,631				8.02				2.31				37,241				8.59				2.77
Construction			31,416				7.97				2.29				32,989				7.61				2.46
Real estate services			30,654				7.78				2.24				33,153				7.64				2.47
Healthcare and social assistance			23,617				5.99				1.72				36,427				8.40				2.71
Personal services			23,088				5.86				1.69				28,860				6.66				2.15
Wholesale			21,172				5.37				1.55				23,097				5.33				1.72
Other			38,044				9.65				2.78				39,879				9.19				2.96
Total		$	394,177				100.00	%			28.78	%		$	433,633				100.00	%			32.29	%

 

Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies, uniform underwriting criteria, and providing prompt attention to potential problem loans. Management of asset quality is accomplished through strong internal controls, monitoring and reporting of key risk indicators, and both internal and independent third-party loan reviews. The primary objective of our loan review process is to measure borrower performance and assess risk to identify loan weakness in order to minimize loan loss exposure. From the time of loan origination through final repayment, commercial real estate, construction and land development, commercial, and enterprise value loans are assigned a risk rating. We use an internal loan grading system and formally review the ratings annually for most loans, in addition to independent third-party review.

 

Internal and independent third-party loan reviews vary by loan type and, depending on the size and complexity of the loan, some loans may warrant detailed individual review. Other loans may have less risk, which based upon size, or inclusion in a homogeneous pool, reduces the need for detailed individual analysis. Assets with these characteristics, such as consumer loans and residential mortgages, may be individually reviewed based on risk indicators such as delinquency or credit rating. In cases of significant concern, a total re-evaluation of a loan and its associated risks are documented. We may re-evaluate the fair market value or net realizable value to determine the likelihood of potential loss exposure and, consequently, the adequacy of specific and general credit loss reserves.

 

When a borrower fails to make a required loan payment, we take steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the property securing the loan generally is sold at foreclosure. On a monthly and/or quarterly basis, management provides the Board of Directors delinquency reports and analysis, including information on any foreclosures, if applicable.

 

 

Delinquencies. Total past due loans decreased $21.2 million, or 89.5%, to $2.5 million at June 30, 2024 from $23.7 million at December 31, 2023. The decrease was primarily driven by modifications to a borrower experiencing financial difficulty related to a $19.7 million loan relationship in the commercial real estate portfolio. The relationship consists of seven loans and the modifications provided for term extensions, other-than-insignificant payment delays, or a combination of the two.

 

Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status and real estate and other loan collateral acquired through foreclosure and repossession. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at fair value less costs to sell, establishing a new cost basis. Declines in fair value subsequent to foreclosure will result in charges against income, while operating costs after acquisition are expensed.

 

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

 

		At				At
		June 30,				December 31,
(Dollars in thousands)		2024				2023
Non-accrual loans:
Commercial real estate		$	60			$	—
Residential real estate			352				376
Commercial			1,864				1,857
Enterprise value			19,038				1,991
Digital asset			—				12,289
Consumer			2				4
Total non-accrual loans			21,316				16,517
Total non-performing assets		$	21,316			$	16,517
Allowance for credit losses on loans as a percent of non-performing loans			95.43	%			130.60	%
Non-performing loans as a percent of total loans (1)			1.56	%			1.23	%
Non-performing loans as a percent of total assets			1.29	%			0.99	%

 

(1)	Loans are presented at amortized cost.

 

Non-accrual loans increased $4.8 million, or 29.1%, to $21.3 million, or 1.56% of total loans outstanding at June 30, 2024, from $16.5 million, or 1.23% of total loans outstanding at December 31, 2023. The increase in non-accrual loans was primarily due to a $17.6 million enterprise value loan relationship that transitioned to non-accrual status, partially offset by a $12.3 million reduction in non-accrual loans due to the settlement and partial charge-off of the Bank's last digital asset loan relationship, both occurring during the quarter ended June 30, 2024. The enterprise value relationship is a wellness and pain management practice, currently in a period of transition with key personnel. The Bank is in close contact with the company’s management team and tightly monitoring the execution of their plan to restore the successful operations of the practice. The Bank will be diligent in its efforts to secure its position, work out the loan to perform under its original terms, or seek to exit the relationship under terms acceptable to the Bank.

 

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

 

 

Allowance for Credit Losses for Loans. The allowance for credit losses on loans (“ACLL”) represents management’s estimate of expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the ACLL is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACLL in those future periods.

 

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

 

		Six Months Ended
		June 30,
(Dollars in thousands)		2024				2023
Allowance at beginning of period		$	21,571			$	28,069
Impact of adopting ASC 326			—				(2,588	)
Credit loss expense - loans			924				2,195
Charge-offs:
Commercial			5				167
Enterprise value			—				3,560
Digital asset			2,124				—
Consumer			29				29
Total charge-offs			2,158				3,756
Recoveries:
Residential real estate			2				—
Commercial			—				10
Enterprise value			—				45
Consumer			2				6
Total recoveries			4				61
Net charge-offs			2,154				3,695
Allowance at end of period		$	20,341			$	23,981
Allowance to total loans outstanding at end of period			1.49	%			1.77	%
Net charge-offs to average loans outstanding during the period (annualized)			0.32	%			0.54	%

 

The decrease in the allowance between June 30, 2024 and June 30, 2023 is primarily due to a decrease in reserves on individually analyzed loans resulting from a payoff in an enterprise value loan which carried a $2.5 million reserve at June 30, 2023 and the settlement and partial charge-off of the last digital asset loan which carried a $7.2 million reserve at June 30, 2023. The decrease related to these two workouts was partially offset by the recognition of a $7.1 million reserve on an individually analyzed loan in the enterprise value portfolio during as of June 30, 2024.

 

 

Deposits. Total deposits were $1.27 billion at June 30, 2024, a decrease of $66.6 million, or 5.0%, from $1.33 billion at December 31, 2023. The decreases in deposits were primarily due to decreases in savings deposits obtained through a national exchange, which decreased $53.3 million, or 38.9%, from December 31, 2023. The Bank is continuing to achieve stability in its core deposits, with reductions in higher-yielding deposits from the wholesale market and listing services. The Bank will continue to seek opportunities to drive core deposit generation, focusing on leveraging its commercial relationships and increasing its market share within its retail footprint.

 

The following table is a summary of deposit balances by account type at the dates indicated: 

 

		At				At
		June 30,				December 31,
(In thousands)		2024				2023
Noninterest-bearing:
Demand		$	311,814			$	308,769
Interest-bearing:
NOW			84,811				93,812
Regular savings			168,387				231,593
Money market deposits			452,139				456,408
Certificates of deposit:
Certificate accounts of $250,000 or more			39,184				24,680
Certificate accounts less than $250,000			208,320				215,960
Total interest-bearing			952,841				1,022,453
Total deposits		$	1,264,655			$	1,331,222

 

Borrowings. The Bank primarily utilizes borrowings to supplement its supply of investable funds. Total borrowings were $147.6 million at June 30, 2024, an increase of $42.9 million, or 41.0%, when compared to December 31, 2023. The increase was primarily driven by overnight borrowings used to temporarily fund increases in the mortgage warehouse portfolio.

 

Shareholders’ Equity. As of June 30, 2024, shareholders’ equity increased $2.4 million, or 1.1%, to $224.3 million compared to $221.9 million at December 31, 2023. The increase was primarily due to net income of $1.7 million. Shareholders’ equity to total assets was 13.6% at June 30, 2024, compared to 13.3% at December 31, 2023. Book value per share increased to $12.70 at June 30, 2024, from $12.55 at December 31, 2023. Market value per share increased 1.2% to $10.19 at June 30, 2024, from $10.07 at December 31, 2023. As of June 30, 2024, the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

 

 

Results of Operations for the Three Months Ended June 30, 2024 and 2023

 

General. The Company recorded a credit loss provision of $6.5 million, leading to a net loss for the quarter ended June 30, 2024 of $3.3 million, or $0.20 per diluted share, compared to net income of $3.5 million, or $0.21 per diluted share, for the quarter ended June 30, 2023, which represents a decrease of $6.8 million, or 195.6%. The credit loss provision was primarily due to a $7.1 million reserve on a $17.6 million enterprise value relationship. The Company’s loss on average assets was 0.85% for the quarter ended June 30, 2024, compared to a return on average assets of 0.81% for the quarter ended June 30, 2023. The Company’s loss on average equity was 5.80% for the quarter ended June 30, 2024, compared to a return on average equity of 6.49% for the quarter ended June 30, 2023.

 

Net Interest and Dividend Income. Net interest and dividend income was $12.0 million for the quarter ended June 30, 2024, a decrease of $2.9 million, or 19.8%, compared to the quarter ended June 30, 2023. The net interest margin was 3.27% for the quarter ended June 30, 2024, compared to 3.69% for the quarter ended June 30, 2023. The decreases in net interest income and margin for the quarter ended June 30, 2024, compared to the quarter ended June 30, 2023, were primarily due to funding costs, highlighting challenges of operating in a persistent rate-driven, highly-competitive deposit market.

 

Average Balance Sheet and Related Yields and Rates. The following table sets forth the average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the amount of tax-free interest-earning assets was 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
		June 30, 2024												June 30, 2023
						Interest												Interest
		Average				Earned/				Yield/				Average				Earned/				Yield/
(Dollars in thousands)		Balance				Paid				Rate (5)				Balance				Paid				Rate (5)
Assets:
Interest-earning assets:
Loans (1)		$	1,328,650			$	20,311				6.11	%		$	1,346,654			$	19,652				5.84	%
Short-term investments			102,395				1,318				5.15	%			236,367				2,978				5.04	%
Debt securities available-for-sale			27,485				206				3.00	%			28,278				197				2.79	%
Federal Home Loan Bank stock			1,865				37				7.94	%			2,254				49				8.70	%
Total interest-earning assets			1,460,395				21,872				5.99	%			1,613,553				22,876				5.67	%
Noninterest earning assets			104,388												99,685
Total assets		$	1,564,783											$	1,713,238
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts		$	215,344			$	1,646				3.06	%		$	149,625			$	408				1.09	%
Money market accounts			456,566				4,499				3.94	%			513,348				4,550				3.55	%
NOW accounts			69,737				225				1.29	%			115,869				202				0.70	%
Certificates of deposit			251,361				3,237				5.15	%			230,023				2,510				4.36	%
Total interest-bearing deposits			993,008				9,607				3.87	%			1,008,865				7,670				3.04	%
Borrowings
Short-term borrowings			17,439				281				6.45	%			18,352				230				5.01	%
Long-term borrowings			9,642				31				1.29	%			16,148				74				1.83	%
Total borrowings			27,081				312				4.61	%			34,500				304				3.52	%
Total interest-bearing liabilities			1,020,089				9,919				3.89	%			1,043,365				7,974				3.06	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			306,081												437,167
Other noninterest-bearing liabilities			10,519												19,380
Total liabilities			1,336,689												1,499,912
Total equity			228,094												213,326
Total liabilities and equity		$	1,564,783											$	1,713,238
Net interest income						$	11,953											$	14,902
Interest rate spread (2)											2.10	%											2.61	%
Net interest-earning assets (3)		$	440,306											$	570,188
Net interest margin (4)											3.27	%											3.69	%
Average interest-earning assets to interest-bearing liabilities			143.16	%											154.65	%

 

(1)	Interest earned/paid on loans includes $660,000 and $956,000 in loan fee income for the three months ended June 30, 2024 and June 30, 2023, respectively.

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

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

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

(5)	Annualized.

 

 

Rate/Volume Analysis

 

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

 

		For the Three Months Ended June 30, 2024
		Compared to the Three Months Ended June 30, 2023
		Increase (Decrease) Due to								Total
(In thousands)		Rate				Volume				Increase (Decrease)
Interest-earning assets:
Loans		$	924			$	(265	)		$	659
Short-term investments			63				(1,723	)			(1,660	)
Debt securities available-for-sale			15				(6	)			9
Federal Home Loan Bank stock			(4	)			(8	)			(12	)
Total interest-earning assets			998				(2,002	)			(1,004	)
Interest-bearing liabilities:
Savings accounts			996				242				1,238
Money market accounts			480				(531	)			(51	)
NOW accounts			125				(102	)			23
Certificates of deposit			480				247				727
Total interest-bearing deposits			2,081				(144	)			1,937
Borrowings
Short-term borrowings			63				(12	)			51
Long-term borrowings			(18	)			(25	)			(43	)
Total borrowings			45				(37	)			8
Total interest-bearing liabilities			2,126				(181	)			1,945
Change in net interest income		$	(1,128	)		$	(1,821	)		$	(2,949	)

 

Interest and Dividend Income. Total interest and dividend income was $21.9 million for the quarter ended June 30, 2024, a decrease of $1.0 million, or 4.4%, from $22.9 million the quarter ended June 30, 2023. The decrease was primarily due to a decrease in the average balance of short-term investments of $134.0 million, or 56.7%, to $102.4 million for the quarter ended June 30, 2024, compared to $236.4 million for the quarter ended June 30, 2023. The yield on interest-earning assets increased 32 basis points to 5.99% for the quarter ended June 30, 2024, compared to 5.67% for the quarter ended June 30, 2023. The Bank continues to produce a high-yielding loan portfolio at 6.11% for the quarter ended June 30, 2024, an increase of 27 basis points from the quarter ended June 30, 2023.

 

Interest Expense. Total interest expense was $9.9 million for the quarter ended June 30, 2024, an increase of $1.9 million, or 24.4%, from $8.0 million for the quarter ended June 30, 2023. Interest expense on deposits was $9.6 million for the quarter ended June 30, 2024, an increase of $1.9 million, or 25.3%, from the quarter ended June 30, 2023, primarily driven by an increase in the cost of interest-bearing deposits of 83 basis points, partially offset by a decrease in the average balance of interest-bearing deposits of $15.9 million or 1.6%. Interest expense on borrowings totaled $312,000 for the quarter ended June 30, 2024, an increase of $8,000, or 2.6%, from the quarter ended June 30, 2023, primarily driven by an increase in the cost of borrowings of 109 basis points, partially offset by a decrease in the average balance of borrowings of $7.4 million, or 21.5%. The Company’s total cost of interest-bearing liabilities was 3.89% for the quarter ended June 30, 2024, which is an increase of 83 basis points from 3.06% for the quarter ended June 30, 2023.

 

Provision for Credit Losses. The Company recognized a $6.5 million provision for credit losses for the quarter ended June 30, 2024, compared to a $1.1 million credit loss benefit recognized for the quarter ended June 30, 2023. The increase in the provision for the quarter ended June 30, 2024 was primarily due to a $7.1 million individually analyzed reserve on a $17.6 million enterprise value relationship, partially offset by a reduction in the general allowance due primarily to decreases in the commercial, construction and land development, and enterprise value portfolios. 

 

Noninterest Income. Noninterest income was $1.5 million for the quarter ended June 30, 2024, compared to $1.7 million for the quarter ended June 30, 2023. The decrease of $200,000, or 10.5%, from the prior year quarter was primarily due to decreases in fee income generated by product offerings to which the Bank has significantly reduced its exposure or has discontinued.

 

Noninterest Expense. Noninterest expense was $11.6 million for the quarter ended June 30, 2024, compared to $12.8 million for the quarter ended June 30, 2023. The decrease in noninterest expense of $1.2 million, or 9.1%, from the prior year quarter was primarily due to a decrease in salaries and employee benefits. Salaries and employee benefits decreased $816,000, or 10.1%, to $7.3 million for the quarter ended June 30, 2024, compared to $8.1 million for the quarter ended June 30, 2023, primarily due to the realization of savings resulting from a reduction in force in the second half of 2023. The Bank also realized significant reductions in costs associated with marketing, insurance, and other expenses.

 

Income Tax Expense. The Company recorded an income tax benefit of $1.3 million for the quarter ended June 30, 2024, reflecting an effective tax rate of 27.7%, compared to a provision of $1.5 million, or an effective tax rate of 29.7% for the quarter ended June 30, 2023. The lower effective tax rate was due to fluctuations in pre-tax income.

 

Results of Operations for the Six Months Ended June 30, 2024 and 2023

 

General. Net income for the six months ended June 30, 2024 was $1.7 million, or $0.10 per diluted share, compared to $5.6 million, or $0.34 per diluted share, for the six months ended June 30, 2023, which represents a decrease of $3.9 million, or 69.9%. The Company’s return on average assets was 0.21% for the six months ended June 30, 2024, compared to 0.68% for the six months ended June 30, 2023. The Company’s return on average equity was 1.48% for the six months ended June 30, 2024, compared to 5.26% for the six months ended June 30, 2023.

 

Net Interest and Dividend Income. Net interest and dividend income was $24.4 million for the six months ended June 30, 2024, a decrease of $6.3 million, or 20.4%, compared to the six months ended June 30, 2023. The net interest margin was 3.33% for the six months ended June 30, 2024, compared to 3.99% for the six months ended June 30, 2023. The decreases in net interest income and margin for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, were primarily due to funding costs, highlighting the challenges of operating in a persistent rate-driven, highly-competitive deposit market.

 

Average Balance Sheet and Related Yields and Rates

 

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

 

		For the Six Months Ended
		June 30, 2024												June 30, 2023
						Interest												Interest
		Average				Earned/				Yield/				Average				Earned/				Yield/
(Dollars in thousands)		Balance				Paid				Rate (5)				Balance				Paid				Rate (5)
Assets:
Interest-earning assets:
Loans (1)		$	1,325,955			$	40,380				6.09	%		$	1,369,172			$	39,658				5.79	%
Short-term investments			112,971				3,047				5.39	%			139,189				3,361				4.83	%
Debt securities available-for-sale			27,859				411				2.95	%			28,501				389				2.73	%
Federal Home Loan Bank stock			1,824				69				7.57	%			2,445				95				7.77	%
Total interest-earning assets			1,468,609				43,907				5.98	%			1,539,307				43,503				5.65	%
Noninterest earning assets			101,639												108,385
Total assets		$	1,570,248											$	1,647,692
Liabilities and shareholders' equity:
Interest-bearing liabilities:
Savings accounts		$	229,746			$	3,607				3.14	%		$	146,061			$	519				0.71	%
Money market accounts			455,724				8,737				3.83	%			413,765				6,463				3.12	%
NOW accounts			76,284				408				1.07	%			121,466				348				0.57	%
Certificates of deposit			240,989				6,195				5.14	%			207,870				4,241				4.08	%
Total interest-bearing deposits			1,002,743				18,947				3.78	%			889,162				11,571				2.60	%
Borrowings
Short-term borrowings			14,811				459				6.20	%			43,857				1,054				4.81	%
Long-term borrowings			9,658				62				1.28	%			17,222				160				1.86	%
Total borrowings			24,469				521				4.26	%			61,079				1,214				3.98	%
Total interest-bearing liabilities			1,027,212				19,468				3.79	%			950,241				12,785				2.69	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			306,215												465,958
Other noninterest-bearing liabilities			11,280												19,921
Total liabilities			1,344,707												1,436,120
Total equity			225,541												211,572
Total liabilities and equity		$	1,570,248											$	1,647,692
Net interest income						$	24,439											$	30,718
Interest rate spread (2)											2.19	%											2.96	%
Net interest-earning assets (3)		$	441,397											$	589,066
Net interest margin (4)											3.33	%											3.99	%
Average interest-earning assets to interest-bearing liabilities			142.97	%											161.99	%

 

(1)	Interest earned/paid on loans includes $1.4 million and $2.1 million in loan fee income for the six months ended June 30, 2024 and 2023, respectively.

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

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

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

(5)	Annualized.

 

 

Rate/Volume Analysis

 

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

 

		For the Six Months Ended June 30, 2024
		Compared to the Six Months Ended June 30, 2023
		Increase (Decrease) Due to								Total
(In thousands)		Rate				Volume				Increase (Decrease)
Interest-earning assets:
Loans		$	1,998			$	(1,276	)		$	722
Short-term investments			365				(679	)			(314	)
Debt securities available-for-sale			31				(9	)			22
Federal Home Loan Bank stock			(2	)			(24	)			(26	)
Total interest-earning assets			2,392				(1,988	)			404
Interest-bearing liabilities:
Savings accounts			2,645				443				3,088
Money Market accounts			1,573				701				2,274
NOW accounts			223				(163	)			60
Certificates of deposit			1,212				742				1,954
Total interest-bearing deposits			5,653				1,723				7,376
Borrowings
Short-term borrowings			244				(839	)			(595	)
Long-term borrowings			(40	)			(58	)			(98	)
Total borrowings			204				(897	)			(693	)
Total interest-bearing liabilities			5,857				826				6,683
Change in net interest income		$	(3,465	)		$	(2,814	)		$	(6,279	)

 

Interest and Dividend Income. Total interest and dividend income was $43.9 million for the six months ended June 30, 2024, an increase of $404,000, or 0.9%, from $43.5 million for the six months ended June 30, 2023. The Company's yield on interest-earning assets was 5.98% for the six months ended June 30, 2024, an increase of 33 basis points from the six months ended June 30, 2023. The Bank continues to produce a high-yielding loan portfolio, at 6.09% for the six months ended June 30, 2024, an increase of 30 basis points from the six months ended June 30, 2023.

 

Interest Expense. Total interest expense increased $6.7 million, or 52.3%, to $19.5 million for the six months ended June 30, 2024, compared to $12.8 million for the six months ended June 30, 2023. Interest expense on deposits was $18.9 million for the six months ended June 30, 2024, an increase of $7.3 million, or 63.7%, from $11.6 million for the six months ended June 30, 2023. This increase was primarily driven by an increase in average interest-bearing deposits of $113.6 million, or 12.8%, and an increase in the cost of average interest-bearing deposits of 118 basis points, to 3.78%. For the six months ended June 30, 2024, interest expense on borrowings decreased $693,000, or 57.1%, primarily due to a decrease in average total borrowings of $36.6 million, or 59.9%, partially offset by an increase in the cost of average total borrowings of 28 basis points, to 4.26%. The Company's total cost of interest-bearing liabilities was 3.79% for the six months ended June 30, 2024, which is an increase of 110 basis points, from 2.69% for the six months ended June 30, 2023.

 

Provision for Credit Losses. For the six months ended June 30, 2024, the Company recognized a provision for credit losses of $877,000, compared to $712,000 for the six months ended June 30, 2023. The provision recognized for the six months ended June 30, 2024 was primarily driven by the $7.1 million individually analyzed reserve in the enterprise value portfolio, partially offset by the first quarter payoff of an enterprise value loan that resulted in the elimination of $1.1 million in related reserves, a settlement with a digital asset lending customer which resulted in a $3.8 million reduction in related reserves and reductions in the general allowance due primarily to decreases in the enterprise value and commercial portfolios which each carry a higher rate of reserve than other segments of the portfolio. 

 

Noninterest Income. Noninterest income was $2.9 million for the six months ended June 30, 2024, compared to $3.6 million for the six months ended June 30, 2023. The decrease of $770,000, or 21.1%, from the six months ended June 30, 2023 was primarily due to decreases in fee income generated by product offerings to which the Bank has significantly reduced its exposure or has discontinued.

 

Noninterest Expense. Noninterest expense was $24.3 million for the six months ended June 30, 2024, a decrease of $1.6 million, or 6.3%, from $26.0 million for the six months ended June 30, 2023 primarily due to a decrease in salaries and employee benefits of $1.2 million, or 7.3%. The reduction in salary and benefits was primarily due to the realization of savings resulting from a reduction in force in the second half of 2023. The Bank also realized significant reductions in costs associated with marketing, insurance and other expenses.

 

Income Tax Expense. The Company recorded a provision for income taxes of $439,000 for the six months ended June 30, 2024, reflecting an effective tax rate of 20.8%, compared to $2.1 million, or an effective tax rate of 27.7% for the six months ended June 30, 2023. The lower effective tax rate for the six months ended June 30, 2024 was due to fluctuations in pre-tax income.

 

Management of Market Risk

 

Net Interest Income Simulation. We analyze our sensitivity to changes in interest rates through a net interest income simulation model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period in the current interest rate environment. We then calculate what the net interest income would be for the same period under the assumption that interest rates increase 100, 200, and 300 basis points from current market rates and under the assumption that interest rates decrease 100, 200 and 300 basis points from current market rates, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

 

 

The following table presents the estimated changes in net interest income of the Company that would result from changes in market interest rates over the twelve-month period beginning June 30, 2024:

 

		At
		June 30,
		2024
(Dollars in thousands)		Estimated Net Interest Income Over Next 12 Months				Change
Changes in Interest Rates (Basis Points)
300		$	48,505				(8.70	)%
200			50,084				(5.70	)%
100			51,624				(2.80	)%
0			53,102				—
(100)			53,577				0.90	%
(200)			53,704				1.10	%
(300)			53,402				0.60	%

 

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

 

The following table presents the estimated changes in EVE of the Company that would result from changes in market interest rates as of June 30, 2024:

 

		At
		June 30,
		2024
(Dollars in thousands)		Economic Value of Equity				Change
Changes in Interest Rates (Basis Points)
300		$	241,011				(10.60	)%
200			249,235				(7.50	)%
100			259,710				(3.60	)%
0			269,510				—
(100)			272,300				1.00	%
(200)			271,063				0.60	%
(300)			263,956				(2.10	)%

 

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

 

 

Liquidity and Capital Resources

 

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

 

We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are generally invested 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 June 30, 2024, cash and cash equivalents totaled $171.6 million. Debt securities classified as available-for-sale, which provide additional sources of liquidity, totaled $27.3 million at June 30, 2024. Warehouse loans that have a short-term duration, which totaled $208.4 million as of June 30, 2024, also provide additional sources of liquidity.

 

At June 30, 2024, we had a borrowing capacity of $142.6 million with the Federal Home Loan Bank of Boston, of which $130.0 million in overnight advances and $9.6 million in advances with original maturities greater than one year were outstanding. At June 30, 2024, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $322.8 million, of which $8.0 million in overnight advances were outstanding.

 

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

 

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. At June 30, 2024 and December 31, 2023, we had $18.0 million and $8.6 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at June 30, 2024 and December 31, 2023, we had $159.4 million and $178.2 million in unadvanced funds to borrowers, respectively. We also had $1.6 million and $1.7 million in outstanding letters of credit at June 30, 2024 and December 31, 2023, respectively.

 

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

 

The Company maintains access to multiple sources of liquidity. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

 

BankProv is subject to various regulatory capital requirements administered by Massachusetts Commissioner of Banks and the FDIC. At June 30, 2024, BankProv exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 10 – Regulatory Capital of the Notes to the Unaudited Consolidated Financial Statements for additional information.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

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 June 30, 2024. 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 June 30, 2024, 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 There have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

 

 

Part II – Other Information

 

Item 1. Legal Proceedings

 

Not applicable.

 

Item 1A. Risk Factors

 

 

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

 

(a)

Not applicable.

 

(b)

Not applicable.

 

(c)

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

Item 5. Other Information

 

Director and Section 16 Officer Rule 10b5-1 Trading Arrangements

 

During the three months ended June 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

 

---

      

Item 6. Exhibits

 

3.1	Articles of Incorporation of Provident Bancorp, Inc. (1)
3.2	Bylaws of Provident Bancorp, Inc. (1)
3.3	Amendment to Bylaws of Provident Bancorp, Inc. (2)
3.4	Amendment to Bylaws of Provident Bancorp, Inc. (3)
10.1	Amendment to Standstill Agreement by and among Provident Bancorp, Inc., Stillwell Activist Fund, L.P., Stillwell Activist Investments, L.P., Stillwell Partners, L.P., Stillwell Valve LLC., Joseph Stillwell and Dennis Pollack, dated as of May 21, 2024 (4)
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 June 30, 2024, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive (Loss) Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted as iXBRL and contained in exhibit 101).

 

---

(1)	Incorporated by reference to the Company’s Registration Statement on Form S-1 (file no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019.
(2)	Incorporated by reference to the Company’s Current Report on Form 8-K (file no. 001-39090), filed with the Securities and Exchange Commission on March 29, 2021.
(3)	Incorporated by reference to the Company’s Current Report on Form 8-K (file no. 001-39090), filed with the Securities and Exchange Commission on January 26, 2024.
(4)	Incorporated by reference to the Company’s Current Report on Form 8-K (file no. 001-39090), filed with the Securities and Exchange Commission on May 22, 2024.

 

 

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:   August 8, 2024	/s/ Joseph B. Reilly
	Joseph B. Reilly
	President and Chief Executive Officer
Date:   August 8, 2024	/s/ Kenneth R. Fisher
	Kenneth R. Fisher
	Executive Vice President and Chief Financial Officer