P ROVIDENT BANCORP, INC .
annual
report.
2 0 2 3
a letter from the ceo.
To Our Shareholders,
We entered 2023 with the clear and focused goal of
realigning our strategy to reinforce our dedication
to traditional banking practices while prudently
reducing our exposure in higher-risk areas. I am
pleased to report that our concerted efforts have
yielded positive results. Through decisive actions
and strategic initiatives, we have restored the bank
to profitability and cultivated a team that is resilient,
adaptable and ready to lend strength and stability
to the institution during challenging periods.
To chart the course of our new direction, we deployed
a comprehensive 3-year strategic plan in the first
quarter of 2023. In line with this revised strategy,
we recalibrated our lending practices, emphasizing
prudence and risk management, and pivoted our
focus towards nurturing stronger community ties
by increasing our involvement in local business
and charitable gatherings. As part of our execution
of this strategy we reduced our exposure in the
digital asset lending space by nearly 70% year over
year and participated in over 100 local business/
charitable events which reaffirms our dedication to
the communities we serve.
through
foundation and navigating
Our focus is now directed towards 2024 and
beyond and we remain steadfast in strengthening
our
the
headwinds posed by the current economic and
banking climates. We are confronted with industry
challenges caused by the fallout from the 2023
liquidity crisis and prevailing high interest rates.
Like many other banks, we are in fierce competition
for deposits and battling with narrowing net interest
margins.
these challenges
Addressing
involves several
strategic initiatives. In late 2023 we engaged
CETO, a renowned industry expert, to conduct a
comprehensive review of our products and fee
schedule. The evaluation was aimed to identify
areas where adjustments can be made to enhance
our competitiveness and unlock revenue potential.
Changes related to this review are scheduled to go
live May 1, 2024. Additionally, the entire team has
been tasked with conducting a thorough review
of our expenses, aiming to identify and eliminate
unnecessary costs to help us maintain financial
resilience in the face of ongoing economic pressures.
In line with our commitment to supporting the
community, after a four-year hiatus, we have made
the decision to reopen the branch at our main office
to meet the evolving needs of our customers and
enhance accessibility to our services. Lastly, we are
laser-focused on growing deposits, recognizing their
pivotal role in strengthening our liquidity position
and fueling future growth.
While the challenges of the past couple years have
been formidable, they also served as catalysts for
transformation. We take immense pride in our
turnaround accomplishments in 2023, achieved
through strategic planning, decisive action, and
unwavering commitment. As a result, we feel well
equipped to tackle any challenges that may lie
ahead. We extend our sincere gratitude to our
shareholders, directors, colleagues, and clients
whose support and trust have been instrumental in
our journey.
Thank you for your continued belief in our
vision and our ability to overcome adversity.
Joe Reilly
Chief Executive Officer
courage. innovation. collaboration. empathy.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to______________
Commission File Number: 001-39090
PROVIDENT BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
5 Market Street, Amesbury, Massachusetts
(Address of Principal Executive Offices)
84-4132422
(I.R.S. Employer
Identification Number)
01913
Zip Code
(978) 834-8555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Trading Symbol
PVBC
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:95)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (cid:95) No (cid:133)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes (cid:95) No (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-accelerated Filer
(cid:134)
(cid:95)
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
(cid:134)
(cid:95)
(cid:134)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:134)
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. (cid:134)
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in
the filing reflect the correction of an error to previously issued financial statements. (cid:133)
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes (cid:133) No (cid:95)
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the last sale
price as of June 30, 2023, as reported by the Nasdaq Capital Market, was approximately $130.4 million.
The number of shares outstanding of the registrant’s common stock as of March 21, 2024 was 17,659,146.
Portions of the Registrant’s proxy statement for the 2024 Annual Meeting of Stockholders (Part III).
DOCUMENTS INCORPORATED BY REFERENCE:
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C. Cybersecurity
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
INDEX
Part I
Part II
[Reserved]
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Part IV
Page
2
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i
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,”
“believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but
are not limited to:
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statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to
significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition,
these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to
change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations
expressed in the forward-looking statements:
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general economic conditions, either nationally or in our market areas, that are worse than expected;
any concentration risk within our lending and deposit portfolio;
changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the
allowance for credit losses;
our ability to access cost-effective funding;
fluctuations in real estate values and commercial real estate market conditions;
demand for loans and deposits in our market area;
changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board;
cyber attacks, computer viruses and other technological risks that may breach the security of our websites or other systems, or
those of third parties upon which we rely, to obtain unauthorized access to confidential information and destroy data or disable
our systems;
technological changes that may be more difficult or expensive than expected;
the ability of third-party providers to perform their obligations to us;
the ability of the U.S. Government to manage federal debt limits;
our ability to continue to implement or change our business strategies;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial
instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments
on loans we have made and make whether held in portfolio or sold in the secondary markets;
adverse changes in the securities markets;
changes in and impacts of laws or government regulations or policies affecting financial institutions, including changes in
regulatory fees, tax policy and rates, and capital requirements, and our ability to comply with such laws and regulations;
our ability to address any issues raised in regulatory examinations;
our ability to remediate any material weakness in our internal controls over financial reporting;
our ability to manage market risk, credit risk and operational risk;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we may acquire into
our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any
goodwill charges related thereto;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting
Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
the ability to raise capital to implement our business plan, if necessary;
our ability to retain key employees;
1
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effects of natural disasters and global pandemics;
changes in our ability to pay dividends;
the effects of any U.S. government shutdown;
the effects of climate change and societal, investor and governmental responses to climate change;
the effects of social and governance change and societal and investor sentiment and governmental responses to social and
governance matters;
the effects of domestic and international hostilities, including terrorism;
our ability to control costs and expenses, particularly in relation to the non-discretionary costs associated with operating as a
publicly traded company;
our compensation expense associated with equity allocated or awarded to our employees; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-
looking statements.
PART I
ITEM 1.
BUSINESS
Provident Bancorp, Inc.
Provident Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in 2019 to act as the holding company for
BankProv (the “Bank”). At December 31, 2023, Provident Bancorp, Inc. had total assets of $1.67 billion, deposits of $1.33 billion and
shareholders’ equity of $221.9 million on a consolidated basis.
The Company’s executive offices are located at 5 Market Street, Amesbury, Massachusetts 01913, and the telephone number is
(877) 487-2977. The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System and
the Massachusetts Commissioner of Banks.
BankProv
BankProv, founded in 1828, is a Massachusetts-chartered stock savings bank that offers both traditional and technology-driven banking
solutions to its commercial and consumer clients.
BankProv operates from its main office and two branch offices in the Northeastern Massachusetts area, three branch offices in
Southeastern New Hampshire and one branch located in Bedford, New Hampshire. The Bank also has a loan production office in Ponte
Vedra, Florida. Our primary lending and deposit-gathering area encompasses the Seacoast Region of Northeastern Massachusetts and
Southeastern New Hampshire. However, we also receive deposits from our business customers who are located nationwide in addition
to our enterprise value and mortgage warehouse loans which are offered nationwide. We attract deposits from the general public and
use those funds to originate primarily commercial real estate and commercial business loans, and to invest in securities.
BankProv is subject to regulation and examination by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance
Corporation (“FDIC”).
Our website address is www.bankprov.com. Information on this website is not and should not be considered a part of this Annual Report.
Available Information
The Company is a public company and files interim, quarterly and annual reports with the Securities and Exchange Commission. These
reports are on file and a matter of public record with the Securities and Exchange Commission. The Securities and Exchange Commission
maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC (http://www.sec.gov). The Company’s reports can also be obtained for free on our website,
www.bankprov.com.
2
Market Area and Competition
The Bank faces significant competition both in generating loans and attracting deposits from other commercial banks, savings banks,
credit unions, mortgage banking companies, finance companies, online lenders or online banks, and other institutional lenders.
Competitive factors considered for loan generation include interest rates, terms offered, loan products offered, services provided and
geographic locations. In attracting deposits, the Bank’s primary competitors are savings banks, commercial and co-operative banks,
credit unions, internet banks, as well as other nonbank institutions that offer financial alternatives such as brokerage firms and insurance
companies. Competitive factors considered in attracting and retaining deposits include deposit and investment products and their
respective rates of return, liquidity, and risk, among other factors, such as convenient branch locations, personalized customer service,
online and mobile access to accounts and automated teller machines. The Bank’s market area is attractive and entry into the market area
by financial institutions previously not competing there has occurred and may continue to occur, which could impact the Bank’s growth
or profitability. The Bank’s primary footprint is generally comprised of the Seacoast Region of northeastern Massachusetts and
southeastern New Hampshire, as well as the Manchester and Concord region in central New Hampshire. The Bank also performs lending
activities and generates related deposits in certain segments, including mortgage warehouse and enterprise value lending, nationwide.
Lending Activities
Commercial Business Loans. We make commercial business loans primarily in our market area to a variety of small- and medium-
sized businesses, including professional and nonprofit organizations, and, to a lesser extent, sole proprietorships. At December 31, 2023,
commercial business loans were $176.1 million, or 13.1% of our total loan portfolio. As part of our relationship driven focus, we
encourage our commercial business borrowers to maintain their primary deposit accounts with us, generally enhancing the overall
profitability of the relationship.
Commercial lending products include term loans and revolving lines of credit, which are made with either variable or fixed rates of
interest. Variable rates and rates on Small Business Administration (“SBA”) loans (with the exception of SBA Payment Protection
Program (“PPP”) loans) are generally based on the prime rate as published in The Wall Street Journal, plus a margin. Initial rates on
non-SBA fixed-rate business loans are generally based on a corresponding Federal Home Loan Bank rate, plus a margin. Commercial
business loans typically have shorter maturity terms and higher interest rates than commercial real estate loans but may involve more
credit risk due to the nature of the collateral. We focus our efforts on originating such loans to experienced borrowers in our growing
small- to medium-sized market, including privately-held companies with local or regional businesses and non-profit entities that operate
in our market area.
When making commercial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt
service capabilities and global cash flows of the borrower and other guarantors, the projected cash flows of the business and the value
of the collateral, accounts receivable, inventory and equipment. These loans are generally secured by the assets of the respective
borrowers.
A portion of our commercial business loans are guaranteed by the SBA through the SBA 7(a) loan program. The SBA 7(a) loan program
supports, through a U.S. Government guarantee, some portion of the traditional commercial loan underwriting that might not be fully
covered absent the guarantee. A typical example would be a business acquiring another business, where the value purchased is an
enterprise value (as opposed to tangible assets), which results in a collateral shortfall under traditional loan underwriting requirements.
In addition, SBA 7(a) loans, through term loans, can provide a good source of permanent working capital for growing companies.
BankProv is a Preferred Lender under the SBA’s PLP Program, which allows expedited underwriting and approval of SBA 7(a) loans.
Our largest commercial business loan at December 31, 2023 totaled $10.7 million, was originated in 2019 and is a renewable energy
loan that as of December 31, 2023 was performing in accordance with its original repayment terms. Our second largest commercial
business loan totaled $9.9 million, was originated in 2021 and is a commercial line of credit that as of December 31, 2023 was performing
in accordance with its original repayment terms. The third largest commercial loan totaled $7.9 million, was originated in 2022 and is a
renewable energy loan that as of December 31, 2023 was performing in accordance with its original repayment terms.
Enterprise Value Loans. As of December 31, 2023, enterprise value loans, which we also refer to as search fund lending, merger and
acquisition, re-capitalization, and shareholder/partner buyout loans, totaled $433.6 million, or 32.3% of our total loan portfolio, with
relationships spanning 28 states. We originate these loans to small- and medium-size businesses in a senior secured position; relying
largely on the enterprise value of the business and ongoing cash flow to support operational and debt service requirements. These are
fully amortizing term loans (up to seven years) with material levels of equity and/or combination of seller financing behind our senior
secured lending.
3
Our largest enterprise value loan at December 31, 2023 totaled $21.6 million, was originated in 2021 and as of December 31, 2023 was
performing in accordance with its original repayment terms. Our second largest enterprise value loan totaled $13.0 million, was
originated in 2020 and as of December 31, 2023 was performing in accordance with its original repayment terms. Our third largest
enterprise value loan totaled $11.8 million, was originated in 2022 and is part of a larger relationship totaling $17.6 million as of
December 31, 2023. The relationship received a modification due to financial difficulty during 2023, which deferred principal payments
until the end of the modification period and, as of December 31, 2023, was performing in accordance with its modified repayment terms.
The following table provides information with respect to our enterprise value loans by type at December 31, 2023.
Type of Industry
Advertising
Consulting services
Industrial/manufacturing/warehouse
Information technology and software
Retail
Real estate services
Research and development
Other
Total
Balance
(In thousands)
$
$
68,221
63,395
66,697
27,846
71,211
33,152
10,921
92,190
433,633
Commercial Real Estate Loans. At December 31, 2023, commercial real estate loans were $468.9 million, or 34.9% of our total loan
portfolio. This amount includes $56.5 million of multi-family loans, which we consider a subset of commercial real estate loans, and
are described below. Our commercial real estate loans are generally secured by properties used for business purposes such as industrial
facilities, retail facilities and office buildings. At December 31, 2023, $167.2 million of our commercial real estate portfolio was secured
by owner-occupied commercial real estate, and $301.7 million was secured by non-owner occupied commercial real estate. We currently
target new commercial real estate loan originations to experienced investors in our market area. The average outstanding loan in our
commercial real estate portfolio was $787,000 as of December 31, 2023, although we originate significantly larger commercial real
estate loans, with our ten largest commercial real estate loans having an average balance of $10.8 million at December 31, 2023.
We focus our commercial real estate lending on properties within our primary market areas, but we will originate commercial real estate
loans on properties located outside the area based on an established relationship with a strong borrower. We intend to continue to grow
our commercial real estate loan portfolio while maintaining prudent underwriting standards. In addition to originating these loans, we
occasionally will participate in commercial real estate loans with other financial institutions. We ensure such participations are
underwritten in accordance with our policies before we will participate in such loans.
We originate a variety of fixed- and adjustable-rate commercial real estate loans with terms and amortization periods generally up to 20
years, although our Loan Policy permits longer terms and amortization periods depending on the risk profile, which may include balloon
loans. Interest rates and payments on our adjustable-rate loans adjust every three, five or seven years and generally are indexed to the
corresponding Federal Home Loan Bank borrowing rate plus a margin. Most of our adjustable-rate commercial real estate loans adjust
every five years and amortize over terms of 20 years. We generally include pre-payment penalties on commercial real estate loans we
originate.
The following table provides information with respect to our commercial real estate loans by type at December 31, 2023. The table
excludes multi-family loans, discussed below.
Type of Loan
Residential one-to-four family
Mixed use
Office
Retail
Industrial/manufacturing/warehouse
Hotel/motel/inn
Mobile home/park
Self-storage facility
Other commercial real estate
(cid:3029)(cid:3029)(cid:3029)(cid:3029)(cid:3029)(cid:3029)Total
4
Balance
(In thousands)
30,341
45,241
56,482
23,912
80,220
17,809
32,763
56,620
69,017
412,405
$
$
If we foreclose on a commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be
lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective
buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property
to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate loans
can be unpredictable and substantial.
Our largest commercial real estate loan at December 31, 2023 was $17.2 million, was originated in 2021 and is secured by a self-storage
facility. Our second largest commercial real estate loan at December 31, 2023 was $15.8 million, was originated in 2013 and is secured
by an office building. Our third largest commercial real estate loan at December 31, 2023 was $15.4 million, was originated in 2019 and
is secured by a cooperative housing complex. All of the collateral securing these loans is located in our primary lending area. At
December 31, 2023, all of these loans were performing in accordance with their original repayment terms.
Multi-Family Loans. At December 31, 2023, multi-family loans were $56.5 million, or 4.2% of our total loan portfolio. We seek to
originate new multi-family loans to experienced investors in our market area. Our multi-family loans are generally secured by properties
consisting of five to fifteen units. The average outstanding loan size in our multi-family portfolio was $665,000 as of December 31,
2023. We generally do not make multi-family loans outside our primary market areas. In addition to originating these loans, we also
participate in multi-family loans with other financial institutions. We verify whether such participations are underwritten in accordance
with our policies before we will participate in such loans.
We originate a variety of fixed- and adjustable-rate multi-family loans for terms up to 30 years. Interest rates and payments on our
adjustable-rate loans adjust every three, five or seven years and generally are indexed to the corresponding Federal Home Loan Bank
borrowing rate plus a margin. Most of our adjustable-rate multi-family loans adjust every five years and amortize over terms of 20 to
25 years. We generally include pre-payment penalties on multi-family loans we originate.
If we foreclose on a multi-family loan, the marketing and liquidation period to convert the real estate asset to cash can be lengthy with
substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers
expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to
profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on multi-family loans can be
unpredictable and substantial.
Our largest multi-family loan at December 31, 2023 was $7.7 million and was originated in 2021. At December 31, 2023, this loan was
performing in accordance with its original repayment terms.
Construction and Land Development Loans. At December 31, 2023, construction and land development loans were $77.9 million, or
5.8% of our total loan portfolio, primarily consisting of $74.1 million of commercial real estate and multi-family construction loans. At
December 31, 2023, $74.1 million of our commercial and multi-family construction loans are expected to convert to permanent loans
upon completion of the construction phase. The majority of the balance of these loans is secured by properties located in our primary
lending area.
We primarily make construction loans for commercial development projects, including hotels, condominiums and single-family
residences, small industrial buildings, retail and office buildings and apartment buildings. Most of our construction loans are interest-
only loans that provide for the payment of interest during the construction phase, which is usually up to 12 to 24 months, although some
construction loans are renewed, generally for one or two additional years. At the end of the construction phase, the loan may convert to
a permanent mortgage loan or the loan may be repaid in full.
We also originate construction and site development loans to contractors and builders to finance the construction of single-family homes
and subdivisions. We actively monitor the number of unsold homes in our construction loan portfolio and local housing markets to
maintain an appropriate balance between home sales and new loan originations. We generally limit the maximum number of speculative
units (units that are not pre-sold) approved for each project to two units and we diversify the risk associated with speculative construction
lending by doing business with experienced builders in our market area.
Residential construction loans include single-family tract construction loans for the construction of entry-level residential homes. While
maturity dates for residential construction loans are largely a function of the estimated construction period of the project, and generally
do not exceed one year, land development loans generally are for 18 to 24 months. Substantially all of our residential construction loans
have adjustable rates of interest based on The Wall Street Journal prime rate plus a margin. Construction loan proceeds are disbursed
periodically in increments as construction progresses and as inspections by our approved inspectors warrant.
Our largest construction and land development loan at December 31, 2023 was $16.1 million, was originated in 2021 and is secured by
an entertainment resort. At December 31, 2023, this loan was performing in accordance with its original repayment terms.
5
Mortgage Warehouse Loans. Our mortgage warehouse lending business has a national platform with relationship managers across the
United States that offers Master Repurchase Agreement facilities (“facilities”) to independent non-bank mortgage origination
companies, which allow them to fund the closing of residential mortgage loans. Each facility advance is fully collateralized by a security
interest in one- to four-family residential mortgage loans and is further enhanced by deposit balances. The primary source of repayment
of the facilities is the sale of the underlying mortgage loans to outside investors, which typically occurs within 15 days, with the exception
of construction loans which generally take longer to pay off due to the nature of the loan. These investors can include Federal National
Mortgage Association/Federal Home Loan Mortgage Corporation and Government National Mortgage Association, as well as other
large financial institutions.
We approve facilities to non-bank mortgage origination borrowers by conducting a thorough due diligence review of the company and
its ownership to assess their financial liquidity and regulatory risk profiles. We use a proprietary risk based scoring model to underwrite
the companies which correlates to our internal regulatory loan risk grading system and continually monitor companies’ performance
through both internal and external financial management and quality reviews. At December 31, 2023, mortgage warehouse loans were
$166.6 million, or 12.4% of our total loan portfolio.
Digital Asset Loans. The Bank has ceased originating loans to digital asset customers. At December 31, 2023 the outstanding balance
of digital asset loans was $12.2 million, or 0.9% of our total loan portfolio, and consisted of one portfolio loan. This loan is secured by
cryptocurrency mining equipment, the United States dollar value of Bitcoin held in control accounts, an interest in a joint venture
partnership, and cash held at the Bank.
Loan Underwriting Risks
Commercial Business Loans. Commercial business loans are made on the basis of the borrower’s ability to make repayment from the
cash flow of the borrower’s business and the collateral securing these loans may fluctuate in value, and thus have a higher risk profile
than a typical real estate-secured loan. Our commercial business loans are originated primarily based on the identified cash flow of the
borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of accounts
receivable, inventory or equipment, the value of which may depreciate over time, may be more difficult to appraise and may be more
susceptible to fluctuation in value. Credit support provided by the borrower for most of these loans and the probability of repayment is
based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, the availability of funds
for the repayment of commercial business loans may depend substantially on the success of the business itself. These types of loans are
generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict.
Enterprise Value Loans. Enterprise value loans may expose us to a greater risk of non-payment and loss than traditional commercial
business loans because: (1) repayment of such loans may be dependent upon the successful execution of the borrower’s business plan,
which may include new management and be based on projected cash flows that may include business synergies, cost savings, and
revenue growth that have yet to be realized; (2) they may require additional financing from their private equity sponsors or others, a
successful sale to a third party, a public offering, or some other form of liquidity event; or (3) in the event of default and liquidation,
there may be reliance on the sale of intangible assets that may have insufficient value to repay the debt in full.
Commercial Real Estate and Multi-Family Loans. Loans secured by commercial real estate and multi-family properties generally have
larger balances and thus involve a greater degree of risk. In addition, many of our commercial borrowers have more than one loan
outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to
significantly greater risk of loss. A primary concern in commercial real estate and multi-family lending is the borrower’s creditworthiness
and the feasibility and cash flow potential of the project. Payments on loans secured by income producing properties often depend on
successful operation and management of the properties. As a result, repayment of such loans may be impacted by adverse conditions in
the real estate market or the economy. We monitor cash flows on income producing properties by requiring borrowers and loan
guarantors, if any, to provide annual financial statements on commercial real estate and multi-family loans. We also consider and review
a global cash flow analysis of the borrower, the net operating income of the property, the borrower’s expertise, credit history, and the
value of the underlying property. We have generally required that the properties securing these real estate loans have debt service
coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.20x.
In accordance with our loan policy, an environmental phase one report may be obtained when the possibility exists that hazardous
materials may have existed on a site, or a site may have been impacted by adjoining properties that handled hazardous materials. These
types of loans are generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. In
addition, some of our commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity. These
balloon payments may require the borrower to either sell or refinance the underlying property in order to make the balloon payment,
which may increase the risk of default or non-payment.
Further, if we foreclose on a commercial real estate or multi-family loan, our holding period for the collateral may be longer because
there are fewer potential purchasers of the collateral, which can result in substantial holding costs. In addition, vacancies, deferred
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maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived
economic losses for the time it takes them to return the property to profitability.
Construction and Land Development Loans. Our construction loans are based upon estimates of costs and values associated with the
completed project. Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a
quality product and effectively market and manage their operations. All construction loans for which the builder does not have a binding
purchase agreement must be approved by senior loan officers.
Construction lending involves additional risks because funds are advanced upon the security of the project, which is of uncertain value
prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the
completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total
funds required to complete a project and the related loan-to-value ratio. This type of lending also typically involves higher loan principal
amounts and is often concentrated with a small number of builders. In addition, generally during the term of a construction loan, interest
may be funded by the borrower or disbursed from an interest reserve set aside from the construction loan budget. These loans often
involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the
ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or
guarantor to repay principal and interest. If the appraised value of a completed project proves to be overstated, we may have inadequate
security for the repayment of the loan upon completion of construction of the project and may incur a loss. A discounted cash flow
analysis is utilized for determining the value of any construction project of five or more units. Our ability to continue to originate a
significant amount of construction loans is dependent on the strength of the housing market in our market areas.
Land loans secured by improved lots generally involve greater risks because land loans are difficult to evaluate. If the estimate of value
proves to be inaccurate, in the event of default and foreclosure, we may be confronted with a property the value of which is insufficient
to assure full payment. These types of loans are generally more sensitive to regional and local economic conditions, making loss levels
more difficult to predict.
Mortgage Warehouse Loans. Mortgage warehouse loans are primarily facilities to non-bank mortgage origination companies. The risk
of fraud associated with this type of lending includes, but is not limited to, settlement process risks, the risk of financing nonexistent
loans or fictitious mortgage loan transactions, or the risk that collateral delivered is fraudulent or non-existent, creating a risk of loss of
the full amount financed on the underlying residential mortgage loan, or in the settlement processes. In addition to fraud risk, there is
also the risk of the mortgage companies being unable to sell the loans.
Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest
rates as compared to fixed-rate loans, an increased monthly payment required of adjustable-rate loan borrowers in a rising interest rate
environment could cause an increase in delinquencies and defaults. The marketability of the underlying collateral also may be adversely
affected in a high interest rate environment. In addition, although adjustable-rate loans make our asset base more responsive to changes
in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment caps.
Loan Originations, Purchases and Sales
We have grown our loan portfolio by developing expertise for customers who typically have not been supported by larger financial
institutions but whose business needs are usually too complex for smaller institutions. Loan originations come from a variety of sources,
including current customers, business development by our relationship managers, walk-in traffic, our website, networking events and
referrals from customers, employees, directors, business owners, investors, entrepreneurs, builders, realtors, and other professional third
parties, including brokers. Loan originations are further supported by lending services offered through cross-selling and employees’
community service.
Historically, we generally originated loans for our portfolio. We occasionally sell participation interests in commercial real estate loans
and commercial business loans to local financial institutions, primarily on the portion of loans exceeding our borrowing limits. We sold
portions of loans totaling $3.0 million and $6.2 million for the years ended December 31, 2023 and 2022, respectively, and as of
December 31, 2023 we were servicing $17.3 million of commercial real estate and commercial business loans for others.
We purchased $4.6 million in loan participations during the year ended December 31, 2023 and as of that date had outstanding purchased
loan participations totaling $24.2 million. We did not have any loan participation purchases for the year ended December 31, 2022.
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by
BankProv’s Board of Directors and management. BankProv’s Board of Directors has granted loan approval authority to certain officers
up to prescribed limits, depending on the officer’s experience, the type of loan and whether the loan is secured or unsecured. All loans
require the approval of a minimum of two lending officers, one of which must be a Senior Vice President or above (the exceptions are
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borrowing relationships of $25,000 and below, as well as borrowing relationships that are 100% cash secured, which can be approved
by one officer with sufficient authority for that loan type). For loan relationships below $2.0 million, approval is required by designated
individuals with delegated loan authority as identified within our loan policy. Our loan policy dictates that for loan relationships between
$2.0 million and $3.0 million approval is required by two of the following members of our Credit Committee: Chief Executive Officer,
Chief Financial Officer, Chief Lending Officer and/or Chief Credit Officer. Loan relationships exceeding $3.0 million in exposure that
do not involve exceptions to policy must be authorized by the Credit Committee. Loan relationships exceeding $3.0 million in exposure
that involve exceptions to policy, including loans in excess of our internal loans-to-one borrower limitation, must be authorized by
BankProv’s Risk Committee of the Board of Directors. Exceptions are fully disclosed to the approving authority, either an individual
officer or the appropriate management or board committee prior to commitment. Exceptions are reported to the Board of Directors
quarterly.
Loans-to-One Borrower Limit and Loan Category Concentration
The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by statute, to 20% of
our capital, which is defined under Massachusetts law as the sum of our capital stock, surplus account and undivided profits. Our
regulatory limit on loans-to-one borrower is assessed quarterly and was $40.9 million at December 31, 2023. In addition, we generally
establish our internal loans-to-one borrower limit as 90% of our regulatory limit. This amount was $36.8 million as of
December 31, 2023, with loans greater than this amount requiring approval by BankProv’s Risk Committee of the Board of Directors.
At December 31, 2023, our largest lending relationship consisted of four enterprise value commercial loans with a total exposure of
$36.4 million, secured by all business assets. The loans in this relationship were performing in accordance with their original repayment
terms at December 31, 2023. Our second largest lending relationship had a total exposure of $31.3 million and consisted of $14.7 million
in exposure on eight construction and land development loans, $16.3 million in exposure on eight commercial real estate loans, and one
commercial business loan with a total exposure of $328,000. This relationship was performing in accordance with its original repayment
terms at December 31, 2023. Our third largest lending relationship had a total exposure of $27.9 million and consisted of $24.7 million
in exposure on eight commercial business loans and $3.2 million on one commercial real estate loan. This relationship was performing
in accordance with its original repayment terms at December 31, 2023.
Investment Activities
We have legal authority to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations,
securities of various government-sponsored enterprises, residential mortgage-backed securities and municipal government bonds,
deposits at the Federal Home Loan Bank of Boston, certificates of deposit of federally insured institutions, investment grade corporate
bonds and investment grade marketable equity securities, including common stock and money market mutual funds. We also are required
to maintain an investment in Federal Home Loan Bank of Boston stock, which investment is based on the level of our Federal Home
Loan Bank borrowings. While we have the authority under applicable law to invest in derivative securities, we had no investments in
derivative securities at December 31, 2023.
At December 31, 2023, our investment portfolio had a fair value of $28.6 million, and consisted of U.S. Government Agency asset- and
mortgage-backed securities, and state and municipal bonds.
Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide
a use of funds when demand for loans is weak and to generate a favorable return. Our Board of Directors has the overall responsibility
for the investment portfolio, including approval of our investment policy. The Risk Committee of the Board of Directors and
management are responsible for implementation of the investment policy and monitoring our investment performance. Our Risk
Committee reviews the status of our investment portfolio quarterly.
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 income.
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Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance
when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding
intent or requirement to sell is met.
Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use
borrowings, primarily Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston (“FRB”), brokered deposits, and listing
services, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and manage our cost of funds.
In addition, funds are derived from scheduled loan payments, investment securities maturities and sales, loan prepayments, retained
earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of
funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of
competition.
Deposit Accounts. The majority of our deposits are from depositors who reside in our primary market areas. However, a significant
portion of our brokered deposits and listing service deposits, described below, are from depositors located outside our primary market
areas. We also receive out-of-market deposits from our nationwide business customers. Deposits are attracted through the offering of a
broad selection of deposit instruments, including noninterest-bearing demand deposits (such as checking accounts), interest-bearing
demand accounts (such as NOW and money market accounts), savings accounts and certificates of deposit. In addition to accounts for
individuals, we also offer several commercial checking accounts designed for the businesses operating in our market area, and we
encourage our commercial borrowing customers to maintain their deposit relationships with us.
The Bank’s growth efforts for core deposits (which we define as all deposits except for certificates of deposit) include a variety of
strategies, primarily centered on proactive engagement with our customers. Our investment in technology has enabled us to better serve
commercial customers who demand faster processing times and simplified online interaction. Deposit account terms vary according to
the minimum balance required, the time period that funds must remain on deposit, and the interest rate, among other factors. In
determining the terms of our deposit accounts, we consider the rates offered by our competition, balance sheet liquidity needs,
profitability, and relationship preferences. We generally review our deposit mix and pricing on a weekly basis. Our deposit pricing
strategy has generally been to offer competitive rates and services and to periodically offer special rates in order to attract deposits of a
specific type or term. We do not price our deposit products to be among the highest rate paying institution in our market area, but instead
focus on providing a comprehensive offering of services, accompanied by expertise across our product portfolios, to gather deposits.
Borrowings. We primarily utilize advances from the Federal Home Loan Bank of Boston to supplement our supply of investable funds.
The Federal Home Loan Bank functions as a central reserve bank providing credit for its member financial institutions. As a member,
we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such
stock, certain loans and other assets, provided certain standards related to creditworthiness have been met. Advances are made under
several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the
amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment
of the institution’s creditworthiness. As of December 31, 2023, we had a borrowing capacity of $126.3 million with the Federal Home
Loan Bank of Boston, including an available line of credit of $2.0 million, with $104.7 million in advances outstanding. All of our
borrowings from the Federal Home Loan Bank are secured by investment securities and qualified collateral, including one- to four-
family loans and multi-family and commercial real estate loans held in our portfolio.
We also may utilize the FRB Borrower In Custody (“BIC”) program as a source of overnight borrowings. As of December 31, 2023,
we had a borrowing capacity of $282.4 million with the FRB with none outstanding.
Personnel
As of December 31, 2023, we had 188 full-time and seven part-time employees, none of whom is represented by a collective bargaining
unit. We believe we have a good working relationship with our employees.
Subsidiaries
BankProv’s subsidiaries include Provident Security Corporation, 5 Market Street Security Corporation and Prov 1, LLC. Provident
Security Corporation and 5 Market Street Security Corporation were established to buy, sell, and hold investments for their own account.
Prov 1, LLC was established to engage in any lawful act or activity for which limited liability companies may be organized. A certificate
of cancellation for Prov 1 LLC was executed in 2023.
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Federal Taxation
General. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income
tax matters and is not a comprehensive description of the tax rules applicable to the Company and the Bank.
Method of Accounting. For federal income tax purposes, we currently report our income and expenses on a calendar year basis using
the accrual method of accounting for filing federal income tax returns. The Small Business Protection Act of 1996 eliminated the use of
the reserve method of accounting for bad debt reserves by savings institutions considered “large banks,” effective for taxable years
beginning after 1995. The Bank is considered a “large bank” and therefore uses the charge-off method of accounting for bad debt
reserves.
Minimum Tax. The alternative minimum tax (“AMT”) for corporations has been repealed for tax years beginning after December 31,
2017. Any unused minimum tax credit of a corporation may be used to offset regular tax liability for any tax year. At December 31,
2023 we had no minimum tax credit carryforward.
Net Operating Loss Carryovers. Generally, a corporation may carry forward net operating losses generated in tax years beginning after
December 31, 2017 indefinitely and can offset up to 80% of taxable income. At December 31, 2023, we had $14.8 million of net
operating loss carry forward.
Capital Loss Carryovers. Generally, a corporation may carry back capital losses to the preceding three taxable years and forward to the
succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is
carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any
undeducted loss remaining after the five-year carryover period is not deductible. At December 31, 2023, we had no capital loss
carryovers.
Corporate Dividends. The Company may generally exclude from income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations.
Audit of Tax Returns. Our federal income tax returns have not been audited in the most recent five-year period.
State Taxation
Financial institutions in Massachusetts are required to file combined income tax returns. The Massachusetts excise tax rate for savings
banks is currently 9.0% of federal taxable income, adjusted for certain items. Taxable income includes gross income as defined under
the Internal Revenue Code, plus interest from bonds, notes and evidences of indebtedness of any state, including Massachusetts, less
deductions, but not the credits, allowable under the provisions of the Internal Revenue Code, except for those deductions relating to
dividends received and income or franchise taxes imposed by a state or political subdivision. Carryforwards and carrybacks of net
operating losses and capital losses are not allowed. The Company’ state tax returns, as well as those of its subsidiaries, are not currently
under audit.
A financial institution or business corporation is generally entitled to special tax treatment as a “security corporation” under
Massachusetts law provided that: (a) its activities are limited to buying, selling, dealing in or holding securities on its own behalf and
not as a broker; and (b) it has applied for, and received, classification as a “security corporation” by the Commissioner of the
Massachusetts Department of Revenue. A security corporation that is also a bank holding company under the Internal Revenue Code
must pay a tax equal to 0.33% of its gross income. A security corporation that is not a bank holding company under the Internal Revenue
Code must pay a tax equal to 1.32% of its gross income. The Bank’s subsidiaries, Provident Security Corporation and 5 Market Street
Security Corporation, which engage in securities transactions on their own behalf, are qualified as security corporations. As such, each
has received security corporation classification by the Massachusetts Department of Revenue; and does not conduct any activities
deemed impermissible under the governing statutes and the various regulations, directives, letter rulings and administrative
pronouncements issued by the Massachusetts Department of Revenue.
The New Hampshire Business Profits tax is assessed at the rate of 7.5%. For this purpose, gross business profits generally mean federal
taxable income subject to certain modifications provided for in New Hampshire law. The New Hampshire Business Enterprise tax is
assessed at 0.55% of the total amount of payroll and certain employee benefits expense, interest expense, and dividends paid to
shareholders. The New Hampshire Business Enterprise tax is applied as a credit towards the New Hampshire Business Profits tax.
As a Maryland business corporation, the Company is required to file an annual report with and pay franchise taxes to the state of
Maryland.
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In addition, we operate in other states, primarily due to our nationwide lending operations. However, the tax obligations in other states
related to those operations are not material to our financial condition or results of operations.
SUPERVISION AND REGULATION
General
BankProv is a Massachusetts-chartered stock savings bank. The Bank’s deposits are insured up to applicable limits by the Federal
Deposit Insurance Corporation and by the Depositors Insurance Fund for amounts in excess of the Federal Deposit Insurance Corporation
insurance limits. BankProv is subject to extensive regulation by the Massachusetts Commissioner of Banks, as its chartering agency,
and by the Federal Deposit Insurance Corporation, as its primary federal regulator and primary deposit insurer. BankProv is required to
file reports with, and is periodically examined by, the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of
Banks concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions,
including, but not limited to, mergers with or acquisitions of other financial institutions. BankProv is a member of the Federal Home
Loan Bank of Boston.
The system of regulation and supervision of BankProv establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of depositors and borrowers and, for purposes of the Federal Deposit Insurance
Corporation, the protection of the insurance fund. The regulatory structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
As a bank holding company, Provident Bancorp, Inc. is required to comply with the rules and regulations of the Federal Reserve Board.
It is required to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement authority of
the Federal Reserve Board. Provident Bancorp, Inc. is also subject to the rules and regulations of the Securities and Exchange
Commission under the federal securities laws.
Any change in applicable laws or regulations, whether by Congress, the Massachusetts legislature, the Massachusetts Commissioner of
Banks, the Federal Deposit Insurance Corporation, or the Federal Reserve Board could have a material adverse impact on the operations
and financial performance of Provident Bancorp, Inc. and BankProv. In addition, Provident Bancorp, Inc. and BankProv are affected by
the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve Board. In view of
changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future
changes in monetary policy or the effect of such changes on the business or financial condition of Provident Bancorp, Inc. and BankProv.
Set forth below is a brief description of material regulatory requirements that are or will be applicable to BankProv and Provident
Bancorp, Inc. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a
complete description of such statutes and regulations and their effects on BankProv and Provident Bancorp, Inc.
Massachusetts Banking Laws and Supervision
BankProv, as a Massachusetts-chartered stock savings bank, is regulated and supervised by the Massachusetts Commissioner of Banks.
The Massachusetts Commissioner of Banks is required to regularly examine each state-chartered bank. The approval of the
Massachusetts Commissioner of Banks is required to establish or close branches, to merge with another bank, to issue stock and to
undertake many other activities. Any Massachusetts savings bank that does not operate in accordance with the regulations, policies and
directives of the Massachusetts Commissioner of Banks may be subject to enforcement or supervisory actions. The Massachusetts
Commissioner of Banks may suspend or remove directors or officers of a savings bank who have violated the law, conducted a bank’s
business in a manner that is unsafe, unsound or contrary to the depositors’ interests, or been negligent in the performance of their duties.
In addition, the Massachusetts Commissioner of Banks has the authority to appoint a receiver or conservator if it is determined that a
bank is conducting its business in an unsafe or unauthorized manner, and under certain other circumstances.
The powers that Massachusetts-chartered savings banks can exercise under these laws include, but are not limited to, the following.
Lending Activities. A Massachusetts-chartered savings bank may make a wide variety of mortgage loans including fixed-rate loans,
adjustable-rate loans, variable-rate loans, participation loans, graduated payment loans, construction and development loans,
condominium and co-operative loans, second mortgage loans and other types of loans that may be made in accordance with applicable
law and regulations. Commercial loans may be made to corporations and other commercial enterprises with or without security.
Consumer and personal loans may also be made with or without security.
Insurance Sales. Massachusetts savings banks may engage in insurance sales activities if the Massachusetts Commissioner of Banks
has approved a plan of operation for insurance activities and the bank obtains a license from the Massachusetts Division of Insurance.
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A savings bank may be licensed directly or indirectly through an affiliate or a subsidiary corporation established for this purpose.
Although BankProv has received approval for insurance sales activities, it does not offer insurance products.
Investment Activities. In general, a Massachusetts-chartered savings bank may invest in preferred and common stock of any corporation
organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do
not, in the aggregate, exceed 4.0% of the bank’s deposits. Massachusetts-chartered savings banks may in addition invest an amount
equal to 1.0% of their deposits in stocks of Massachusetts corporations or companies with substantial employment in the Commonwealth
which have pledged to the Massachusetts Commissioner of Banks that such monies will be used for further development within the
Commonwealth. At the present time, BankProv has the authority to invest in equity securities. However, such investment authority is
constrained by federal law. See “—Federal Bank Regulation—Investment Activities” for such federal restrictions.
Dividends. A Massachusetts stock savings bank may declare from net profits cash dividends not more frequently than quarterly and
non-cash dividends at any time. No dividends may be declared, credited or paid if the bank’s capital stock is impaired. A Massachusetts
savings bank with outstanding preferred stock may not, without the prior approval of the Commissioner of Banks, declare dividends to
the common stock without also declaring dividends to the preferred stock. The approval of the Massachusetts Commissioner of Banks
is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its
retained net profits of the preceding two years, less any required transfer to surplus or to a fund for the retirement of any preferred stock.
For this purpose, net profits mean the remainder of all earnings from current operations plus actual recoveries on loans and investments
and other assets after deducting current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal
and state taxes.
Protection of Personal Information. Massachusetts has adopted regulatory requirements intended to protect personal information. The
requirements are similar to existing federal laws such as the Gramm-Leach-Bliley Act, discussed below under “—Federal Bank
Regulation—Privacy Regulations.” They require organizations to establish written information security programs to prevent identity
theft. The Massachusetts regulation also contains technology system requirements, especially for the encryption of personal information
sent over wireless or public networks or stored on portable devices.
Parity Approval. A Massachusetts bank may, in accordance with Massachusetts law, exercise any power and engage in any activity that
has been authorized for national banks, federal thrifts or state banks in a state other than Massachusetts, provided that the activity is
permissible under applicable federal law and not specifically prohibited by Massachusetts law. Such powers and activities must be
subject to the same limitations and restrictions imposed on the national bank, federal thrift or out-of-state bank that exercised the power
or activity. A Massachusetts bank may exercise such power and engage in such activities by providing 30 days’ advanced written notice
to the Massachusetts Commissioner of Banks.
Loans-to-One Borrower Limitations. Massachusetts banking law grants broad lending authority. However, with certain limited
exceptions, total obligations of one borrower to a bank may not exceed 20.0% of the total of the bank’s capital, which is defined under
Massachusetts law as the sum of the bank’s capital stock, surplus account and undivided profits.
Loans to a Bank’s Insiders. Massachusetts law provides that a Massachusetts financial institution shall comply with Regulation O of
the Federal Reserve Board, which generally requires that extensions of credit to insiders and insiders’ related interests:
(cid:120)
(cid:120)
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than,
those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features; and
not exceed certain limitations on the amount of credit extended to such persons and their related interests, individually and in
the aggregate, which limits are based, in part, on the amount of the Massachusetts financial institution’s capital.
Regulatory Enforcement Authority. Any Massachusetts bank that does not operate in accordance with the regulations, policies and
directives of the Massachusetts Commissioner of Banks may be subject to enforcement actions for non-compliance, including seizure
of the property and business of the bank and suspension or revocation of its charter. The Massachusetts Commissioner of Banks may,
under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the bank’s business in a
manner which is unsafe, unsound, or contrary to the depositors’ interests, or been negligent in the performance of their duties. In addition,
upon finding that a bank has engaged in an unfair or deceptive act or practice, the Massachusetts Commissioner of Banks may issue an
order to cease and desist and impose a fine on the bank concerned. Massachusetts consumer protection and civil rights statutes applicable
to BankProv permit private individual and class action lawsuits and provide for the rescission of consumer transactions, including loans,
and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.
Depositors Insurance Fund. BankProv is a member of the Depositors Insurance Fund, a corporation that insures Massachusetts savings
bank deposits in excess of federal deposit insurance coverage. The Depositors Insurance Fund is authorized to charge savings banks a
risk-based assessment on deposit balances in excess of the amounts insured by the Federal Deposit Insurance Corporation.
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Massachusetts has other statutes and regulations that are similar to the federal provisions discussed below.
Federal Bank Regulation
Capital Requirements. Federal regulations require Federal Deposit Insurance Corporation-insured depository institutions to meet
several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based
assets ratio of 6.0%, a total capital to risk-based assets ratio of 8.0%, and a Tier 1 capital to average assets leverage ratio of 4.0%.
For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders’ equity
and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital
includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated
subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2
capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred
stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.
Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for
institutions that made such an election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of
net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not
exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on
available-for-sale-securities). BankProv has exercised the opt-out and therefore does not include AOCI in its regulatory capital
determinations. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-
balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned
by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories
believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of
50% is generally assigned to prudently underwritten first lien one to four- family residential mortgages, a risk weight of 100% is assigned
to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600%
is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain
discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of
common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.
At December 31, 2023, BankProv exceeded the fully phased in regulatory requirement for the capital conservation buffer.
The federal banking agencies, including the Federal Deposit Insurance Corporation, have established a “community bank leverage ratio”
of between 8 to 10% of average total consolidated assets for qualifying institutions with assets of less than $10 billion. Institutions with
capital meeting the specified requirements and electing to follow the alternative framework are deemed to comply with the applicable
regulatory capital requirements, including the risk-based requirements. A qualifying institution may opt in and out of the community
bank leverage ratio on its quarterly call report.
The optional community bank leverage ratio has currently been established at 9%.
As of December 31, 2023, the Bank has not opted into the community bank leverage ratio framework.
The Federal Deposit Insurance Corporation Improvement Act required each federal banking agency to revise its risk-based capital
standards for insured institutions to ensure that those standards take adequate account of interest rate risk, concentration of credit risk,
and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family loans. The
Federal Deposit Insurance Corporation, along with the other federal banking agencies, adopted a regulation providing that the agencies
will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital
adequacy. The Federal Deposit Insurance Corporation also has authority to establish individual minimum capital requirements in
appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular
circumstances.
Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted final regulations and
Interagency Guidelines Establishing Standards for Safety and Soundness that set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines
address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate
exposure, asset growth, asset quality, earnings and compensation, fees and benefits. The agencies have also established standards for
safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard
prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance
with the standard.
13
Investment Activities. All state-chartered Federal Deposit Insurance Corporation-insured banks, including savings banks, are generally
limited in their activities as principal and equity investments to activities and equity investments of the type and in the amount authorized
for national banks, notwithstanding state law, subject to certain exceptions. For example, state-chartered banks may, with Federal
Deposit Insurance Corporation approval, continue to exercise state authority to invest in common or preferred stocks listed on a national
securities exchange and in the shares of an investment company registered under the Investment Company Act of 1940, as amended.
The maximum permissible investment is 100% of Tier 1 Capital, as specified by the Federal Deposit Insurance Corporation’s
regulations, or the maximum amount permitted by Massachusetts law, whichever is less.
In addition, the Federal Deposit Insurance Corporation is authorized to permit a state bank to engage in state-authorized activities or
investments not permissible for national banks (other than non-subsidiary equity investments) if it meets all applicable capital
requirements and it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund. The
Federal Deposit Insurance Corporation has adopted procedures for institutions seeking approval to engage in such activities or
investments. In addition, a state nonmember bank may control a subsidiary that engages in activities as principal that would only be
permitted for a national bank to conduct in a “financial subsidiary” if the bank meets specified conditions and deducts its investment in
the subsidiary for regulatory capital purposes.
Interstate Banking and Branching. Federal law permits well capitalized and well managed bank holding companies to acquire banks
in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers
of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, amendments made by the Dodd-
Frank Act permit banks to establish de novo branches on an interstate basis to the extent that branching is authorized by the law of the
host state for the banks chartered by that state.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective
action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital
categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The Federal Deposit Insurance Corporation has adopted regulations to implement the prompt corrective action legislation. An institution
is deemed to be “well capitalized” if it has a community bank leverage ratio leverage ratio of 9.0% or greater, or if it has a total risk-
based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater, and a
common equity Tier 1 capital ratio of 6.5% or greater. An institution is deemed to be “adequately capitalized” if it has a total risk-based
capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater, and a common
equity Tier 1 capital ratio of 4.5% or greater. An institution is deemed to be “undercapitalized” if it has a total risk-based capital ratio of
less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0%, or a common equity Tier 1 capital
ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than
6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0%, or a common equity Tier 1 capital ratio of
less than 3.0%. An institution is deemed to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations)
to total assets that is equal to or less than 2.0%. As of December 31, 2023, BankProv was a “well capitalized” institution under the
Federal Deposit Insurance Corporation prompt corrective action regulations.
At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including
restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions
on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized
categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the institution’s holding
company must guarantee the performance of that plan in an amount equal to the lesser of 5.0% of the institution’s total assets when
deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. Based upon its capital levels, a bank
that is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital
category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound
condition, or an unsafe or unsound practice, warrants such treatment. If an “undercapitalized” bank fails to submit an acceptable capital
restoration plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or
more of a number of additional restrictions, including but not limited to: an order by the Federal Deposit Insurance Corporation to sell
sufficient voting stock to become adequately capitalized; requirements to reduce total assets, cease receipt of deposits from
correspondent banks or to dismiss directors or officers; and restrictions on interest rates paid on deposits, compensation of executive
officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional
measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such
status.
The previously referenced rulemaking to establish a “community bank leverage ratio” adjusted the referenced categories for qualifying
institutions that opt into the alternative framework for regulatory capital requirements. Institutions that exceed the community bank
leverage ratio would be considered to have met the capital ratio requirements to be “well capitalized” for the agencies’ prompt corrective
regulations.
14
Transaction with Affiliates and the Federal Reserve’s Regulation W. Transactions between banks and their affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act, as made applicable to BankProv through Section 18(j) of the Federal Deposit
Insurance Act, and Regulation W, as made applicable through Federal Deposit Insurance Corporation regulation. Under Sections 23A
and 23B and Regulation W, an affiliate of a bank includes any company or entity that controls, is controlled by or is under common
control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such
parent holding company are affiliates of the bank (although subsidiaries of the bank itself, except depository institutions and financial
subsidiaries, are generally not considered affiliates). Generally, Section 23A of the Federal Reserve Act and Regulation W limit the
extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of
such bank’s capital stock and surplus, and with all such covered transactions with all affiliates to an amount equal to 20.0% of such
bank’s capital stock and surplus. The term “covered transaction” includes the making of loans to, purchase of assets from, and issuance
of a guarantee to an affiliate, and other similar transactions. In addition, loans or other extensions of credit by the financial institution to
an affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act.
Section 23B of the Federal Reserve Act applies to “covered transactions” as well as to certain other transactions, including the provision
of services and the sale of assets by a bank to an affiliate, and requires that all such transactions be on terms and under circumstances
that are substantially the same, or at least as favorable, to the institution or its subsidiary as prevailing at the time for comparable
transactions with or involving a non-affiliate.
Loans to Insiders. Sections 22(h) and (g) of the Federal Reserve Act, as made applicable to BankProv through Section 18(j) of the
Federal Deposit Insurance Act, and Regulation O, made applicable to BankProv through Federal Deposit Insurance Corporation
regulation, place restrictions on loans to a bank’s and its affiliates’ insiders, i.e., executive officers, directors and principal shareholders,
and those insiders’ related interests. Under Section 22(h) of the Federal Reserve Act and Regulation O, loans to a director, an executive
officer and to a greater than 10.0% shareholder of a financial institution, and these individuals’ related interests, together with all other
outstanding loans to such person and his or her related interests, may not exceed specified limits. Section 22(h) of the Federal Reserve
Act also requires that loans to directors, executive officers and principal shareholders be made on terms and conditions substantially the
same as offered in comparable transactions to persons who are not insiders and also requires prior approval by a majority of the board
for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed the
institution’s unimpaired capital and unimpaired surplus. Section 22(g) of the Federal Reserve Act and Regulation O place additional
restrictions on loans to executive officers.
Enforcement. The Federal Deposit Insurance Corporation has extensive enforcement authority over insured state savings banks,
including BankProv. The enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease
and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of
laws and regulations, breaches of fiduciary duty and unsafe or unsound practices. The Federal Deposit Insurance Corporation is required,
with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically
undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically
undercapitalized.” The Federal Deposit Insurance Corporation may also appoint itself as conservator or receiver for an insured state
non-member bank under specified circumstances, including: (1) insolvency; (2) substantial dissipation of assets or earnings through
violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; (4) insufficient
capital; or (5) the incurrence of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of
replenishment without federal assistance.
Federal Insurance of Deposit Accounts. BankProv is a member of the Deposit Insurance Fund, which is administered by the Federal
Deposit Insurance Corporation. Deposit accounts in BankProv are insured up to a maximum of $250,000 for each separately insured
depositor per account ownership category.
The Federal Deposit Insurance Corporation imposes an assessment for deposit insurance on all depository institutions. Under the Federal
Deposit Insurance Corporation’s risk-based assessment system, insured institutions deemed less risky of failure pay lower assessments.
Assessment rates (inclusive of possible adjustments) for most banks with less than $10 billion of assets are based on a formula using
financial data and supervisory ratings, and currently range from 2.5 to 32 basis points of each institution’s total assets less tangible
capital.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance
premiums would likely have an adverse effect on the operating expenses and results of operations of BankProv. Future insurance
assessment rates cannot be predicted.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation,
order or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination
of deposit insurance.
15
Privacy Regulations. Federal regulations generally require that BankProv disclose its privacy policy, including identifying with whom
it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually
thereafter. In addition, BankProv is required to provide its customers with the ability to “opt-out” of having their personal information
shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing
purposes. BankProv currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.
Community Reinvestment Act. Under the Community Reinvestment Act, (“CRA”), as implemented by Federal Deposit Insurance
Corporation regulations, a state non-member bank has a continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop
the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA does
require the Federal Deposit Insurance Corporation, in connection with its examination of a state non-member bank, to assess the
institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain
applications by such institution, including applications to acquire branches and other financial institutions. The CRA currently requires
the Federal Deposit Insurance Corporation to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered
descriptive rating system. BankProv’s latest Federal Deposit Insurance Corporation CRA rating was “Satisfactory.”
On October 24, 2023, the Federal Deposit Insurance Corporation and the other federal banking agencies issued a final rule to strengthen
and modernize the CRA regulations. Under the final rule, banks with assets of at least $600 million as of December 31 in both of the
prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years will be an “intermediate
bank.” The agencies will evaluate intermediate banks under the Retail Lending Test and either the current community development test,
referred to in the final rule as the Intermediate Bank Community Development Test, or, at the bank’s option, the Community
Development Financing Test. The applicability date for the majority of the provisions in the updated CRA regulations is January 1,
2026, and additional requirements will be applicable on January 1, 2027.
Massachusetts has its own statutory counterpart to the CRA which is also applicable to BankProv. The Massachusetts version is generally
similar to the CRA but utilizes a five-tiered descriptive rating system. Massachusetts law requires the Massachusetts Commissioner of
Banks to consider, but not be limited to, a bank’s record of performance under Massachusetts law in considering any application by the
bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or acquire the assets and
assume the liabilities of any other banking institution. BankProv’s most recent rating under Massachusetts law was “Satisfactory.”
Consumer Protection and Fair Lending Regulations. Massachusetts savings banks are subject to a variety of federal and Massachusetts
statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and
regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and
remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive
relief. Certain of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive
damages and attorneys’ fees for certain types of violations.
Bank Secrecy Act, USA PATRIOT Act, and Anti-Money Laundering Regulations. BankProv is subject to federal anti-money
laundering and anti-terrorist financing laws, including the Bank Secrecy Act (“BSA”) and the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), and those laws’
implementing regulations issued by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The
USA PATRIOT Act gives the federal government powers to address money laundering and terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements.
By way of amendments to the BSA, Title III of the USA PATRIOT Act implemented measures intended to encourage information
sharing among bank regulatory agencies and law enforcement bodies. Together, the BSA and USA PATRIOT Act impose affirmative
obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and
parties registered under the Commodity Exchange Act. Among other things, of the BSA and the USA PATRIOT Act, and their
implementing regulations require banks to: establish anti-money laundering compliance programs that include policies, procedures, and
internal controls, the appointment of an anti-money laundering compliance officer, a training program, independent testing, and customer
due diligence; file certain reports with FinCEN and law enforcement that are designed to assist in the detection and prevention of money
laundering and terrorist financing activities; establish programs specifying procedures for obtaining and maintaining certain records
from customers seeking to open new accounts, including verifying the identity of customers; in certain circumstances, comply with
enhanced due diligence policies, procedures and controls designed to detect and report money-laundering, terrorist financing and other
suspicious activity; monitor account activity for suspicious transactions; and conduct heightened level of review for certain high risk
customers or accounts. The USA PATRIOT Act also includes prohibitions on correspondent accounts for foreign shell banks and
requires compliance with record keeping obligations with respect to correspondent accounts of foreign banks.
16
Other Applicable Federal and State Laws and Regulations
Interest and other charges collected or contracted for by BankProv are subject to state usury laws and federal laws concerning interest
rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public
and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in
extending credit;
Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
Massachusetts Debt Collection Regulations, establishing standards, by defining unfair or deceptive acts or practices,
for the collection of debts from persons within the Commonwealth of Massachusetts;
The General Laws of Massachusetts, Chapter 167E, which governs BankProv’s lending powers; and
Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such
federal and state laws.
The deposit operations of BankProv also are subject to, among others, the:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital
check images and copies made from that image, the same legal standing as the original paper check;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller
machines and other electronic banking services; and
General Laws of Massachusetts, Chapter 167D, which governs deposit powers.
Federal Home Loan Bank System
BankProv is a member of the Federal Home Loan Bank System, which consists of eleven regional Federal Home Loan Banks. The
Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank
are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. BankProv was in compliance with this
requirement at December 31, 2023. Based on redemption provisions of the Federal Home Loan Bank of Boston, the stock has no quoted
market value and is carried at cost.
At its discretion, the Federal Home Loan Bank of Boston may declare dividends on their stock. The Federal Home Loan Banks are
required to provide funds for certain purposes including, for example, contributing funds for affordable housing programs. These
requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal
Home Loan Banks imposing a higher rate of interest on advances to their members. In 2023, the Federal Home Loan Bank of Boston
paid dividends equal to an annual yield of 7.67%. There can be no assurance that such dividends will continue in the future.
Holding Company Regulation
Provident Bancorp, Inc. is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as
amended, as administered by the Federal Reserve Board. Provident Bancorp, Inc. is required to obtain the prior approval of the Federal
Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board
approval would be required for Provident Bancorp, Inc. to acquire direct or indirect ownership or control of any voting securities of any
bank or bank holding company if, after such acquisition, it would, directly or indirectly, own or control more than 5% of any class of
voting shares of the bank or bank holding company. In addition to the approval of the Federal Reserve Board, prior approval may also
be necessary from other agencies having supervisory jurisdiction over the bank to be acquired before any bank acquisition can be
completed.
A bank holding company is generally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more
than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition
is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely
related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage
services; (iv) acting as a fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in
corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose
direct and indirect activities are limited to those permitted for bank holding companies.
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The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well
capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial
activities than previously permitted. Such activities can include insurance underwriting and investment banking. We have not opted into
financial holding company status.
A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of
then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration
paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the holding company’s
consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any
condition imposed by, or written agreement with, the Federal Reserve Board. There is an exception to this approval requirement for well
capitalized bank holding companies that meet certain other conditions.
The Federal Reserve Board has issued a policy statement regarding capital distributions, including dividends, by bank holding
companies. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only
if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset
quality and overall financial condition. The Federal Reserve Board’s policies also require that a bank holding company serve as a source
of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks
during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength doctrine. Under the
prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes
undercapitalized. In addition, the Federal Reserve Board has issued guidance that requires consultation with the agency prior to a bank
holding company’s payment of dividends or repurchase of stock under certain circumstances. These regulatory policies could affect the
ability of Provident Bancorp, Inc. to pay dividends, repurchase its stock or otherwise engage in capital distributions.
Under the Federal Deposit Insurance Act, depository institutions are liable to the Federal Deposit Insurance Corporation for losses
suffered or anticipated by the Federal Deposit Insurance Corporation in connection with the default of a commonly controlled depository
institution or any assistance provided by the Federal Deposit Insurance Corporation to such an institution in danger of default.
The status of Provident Bancorp, Inc. as a registered bank holding company under the Bank Holding Company Act will not exempt it
from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions
of the federal securities laws.
Massachusetts Holding Company Regulation. Under the Massachusetts banking laws, a company owning or controlling two or more
banking institutions, including a savings bank, is regulated as a bank holding company. The term “company” is defined by the
Massachusetts banking laws similarly to the definition of “company” under the Bank Holding Company Act. Each Massachusetts bank
holding company: (i) must obtain the approval of the Massachusetts Board of Bank Incorporation before engaging in certain transactions,
such as the acquisition of more than 5% of the voting stock of another banking institution; (ii) must register, and file reports, with the
Massachusetts Commissioner of Banks; and (iii) is subject to examination by the Massachusetts Commissioner of Banks. Provident
Bancorp, Inc. is not a “bank holding company” under the Massachusetts banking laws.
Federal Securities Laws
Provident Bancorp, Inc.’s common stock is registered with the Securities and Exchange Commission. Provident Bancorp, Inc. is subject
to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Acquisition of the Company
Under the Change in Bank Control Act, no person, or group of persons acting in concert, may acquire control of a bank holding company
such as Provident Bancorp, Inc. unless the Federal Reserve Board has been given 60 days’ prior written notice and not disapproved the
proposed acquisition. The Federal Reserve Board considers several factors in evaluating a notice, including the financial and managerial
resources of the acquirer and competitive effects. Control, as defined under the Change in Bank Control Act and applicable regulations,
means the power, directly or indirectly, to direct the management or policies of the company or to vote 25% or more of any class of
voting securities of the company. Acquisition of more than 10% of any class of a bank holding company’s voting securities constitutes
a rebuttable presumption of control under certain circumstances, including where, as is the case with Provident Bancorp, Inc., the issuer
has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control of a bank holding company without the prior approval of
the Federal Reserve Board. Control, as defined under the Bank Holding Company Act and Federal Reserve Board regulations, means
ownership, control or power to vote 25% or more of any class of voting stock, control in any manner over the election of a majority of
the company’s directors, or a determination by the regulator that the acquiror has the power to exercise, directly or indirectly, a
18
controlling influence over the management or policies of the company. Any company that acquires such control becomes a “bank
holding company” subject to registration, examination and regulation by the Federal Reserve Board. In 2020, the Federal Reserve Board
amended its regulations concerning when a company exercises a controlling influence over a bank or bank holding company for purposes
of the Bank Holding Company Act. Relevant factors include the company’s voting and nonvoting equity investment in the bank or bank
holding company, director, officer and employee overlap, and the scope of business relationships between the company and bank or
bank holding company.
ITEM 1A.
RISK FACTORS
An investment in common stock involves risks. Stockholders should carefully consider the risks described below, together with other
information contained in this Annual Report on Form 10-K and other documents that we have filed with the Securities and Exchange
Commission (“SEC”), before making any purchase or sale decisions regarding the Company’s common stock. If any of the following
risks actually occur, the Company’s financial condition or operating results may be harmed. In that case, the trading price of the
Company’s common stock may decline and stockholders may lose part or all of their investment in the Company’s common stock.
Risks Related to Our Lending Activities
Our emphasis on commercial business, commercial real estate, real estate, construction and land development lending involves risks
that could adversely affect our financial condition and results of operations.
We have a focus on commercial business loans, while continuing to originate commercial real estate, multi-family and construction and
land development loans. As of December 31, 2023, our commercial loan portfolio, which includes commercial real estate, enterprise
value, commercial business, multi-family, construction and land development and digital asset loans, totaled $1.17 billion, or 87.0% of
total loans. As a result, our credit risk profile may be higher than traditional savings institutions that have higher concentrations of one-
to four-family residential loans. These types of commercial lending activities, while potentially more profitable than one- to four-family
residential lending, are generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict.
These loans also generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, any charge-
offs may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. Collateral evaluation and
financial statement analysis of these types of loans also requires a more detailed analysis at the time of loan underwriting and on an
ongoing basis.
Commercial business, enterprise value and digital asset loans expose us to additional risks since they typically are made on the basis of
the borrower’s ability to make repayments from the cash flows of the borrower’s business and are secured by non-real estate collateral
that may depreciate over time, may be illiquid and may fluctuate in value based on the success of the business, guarantor, or market
conditions.
The credit risk related to commercial real estate and multi-family loans is considered to be greater than the risk related to one- to four-
family residential or consumer loans because they typically have larger balances and are more affected by adverse conditions in the
economy. Because payments on commercial real estate loans and multi-family loans typically often depend on the successful operation
of the borrower’s business or the income stream of the real estate securing the loan as collateral, repayment of such loans may be affected
by factors outside the borrower’s control, such as adverse conditions in the real estate market or in the economy, changes in government
regulations or changes in the level of interest rates. Federal banking regulatory agencies have issued advisories on managing commercial
real estate concentrations in a challenging economic environment. Failures in our risk management policies, procedures and controls
could adversely affect our ability to manage this portfolio going forward and could result in an increased rate of delinquencies in, and
increased losses from, this portfolio, which, accordingly, could have a material adverse effect on our business, financial condition and
results of operations.
In addition, some of our commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity. These
balloon payments may require the borrower to either sell or refinance the underlying property in order to make the balloon payment,
which may increase the risk of default or non-payment. Further, if we foreclose on a commercial real estate or multi-family loan, our
holding period for the collateral may be longer than for one- to four-family residential mortgage loans because there are fewer potential
purchasers of the collateral, which can result in substantial holding costs. In addition, vacancies, deferred maintenance, repairs and
market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the
time it takes them to return the property to profitability.
Construction and land development lending involves additional risks when compared to one- to four-family residential real estate lending
because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the
uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of
governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project
and the related loan-to-value ratio. This type of lending also typically involves higher loan principal amounts and is often concentrated
with a small number of builders. In addition, generally during the term of a construction loan, interest may be funded by the borrower
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or disbursed from an interest reserve set aside from the construction loan budget. These loans often involve the disbursement of
substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or
lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and
interest.
A secondary market for most types of commercial real estate, enterprise value, commercial business, multi-family, construction and
land development, and digital asset loans is not readily available, so we generally do not have an economically feasible opportunity to
mitigate credit risk by selling part or all of our interest in these loans.
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
Regulators have promulgated guidance that provides that a financial institution that, like us, is actively involved in commercial real
estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in
commercial real estate lending if, among other factors, (1) total reported loans for construction, land acquisition and development, and
other land represent 100% or more of total capital, or (2) total reported loans secured by multi-family and non-owner occupied, non-
farm, non-residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive
to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total
capital. As of December 31, 2023, our loans of the type described in (2) above represented 256.71% of total Bank capital. The particular
focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flows from the real estate held as
collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral
held as a secondary source of repayment or as an abundance of caution). The guidance assists banks in developing risk management
practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management
should employ heightened risk management practices including board and management oversight and strategic planning, development
of underwriting standards, risk assessment and monitoring through market analysis and stress testing. Although we believe we have
implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, our
regulators could require us to implement additional policies and procedures that may result in additional costs to us, may result in a
curtailment of our multi-family and commercial real estate lending and/or require that we maintain higher levels of regulatory capital,
any of which would adversely affect our loan originations and results of operations.
If our allowance for credit losses for loans is not sufficient to cover actual loan losses, our earnings could decrease.
The Company has an allowance for current expected credit losses on loans maintained through a provision for credit losses charged to
expense. This represents our estimate of current expected credit losses based on an evaluation of risks within the portfolio of loans. The
level of the allowance represents management’s estimate of current expected credit losses over the contractual life of the existing loan
portfolio. The determination of the appropriate level of the allowance inherently involves a degree of subjectivity and requires that we
make significant estimates of current credit risks and current trends and reasonable and supportable forecasts of future economic
conditions, all of which may undergo frequent and material changes. Changes in economic and other conditions affecting borrowers,
including inflation and interest rates, along with new information regarding existing loans other factors, may indicate the need for a
future increase in the allowance. In addition, federal and state regulators periodically review our allowance for credit losses, and as a
result of these reviews we may increase our credit loss expense or recognize further loan charge-offs. Material additions to the allowance
would materially decrease our net income.
The foreclosure process may adversely impact our recoveries on non-performing loans
The judicial foreclosure process is protracted, which delays our ability to resolve non-performing loans through the sale of the underlying
collateral. The longer timelines have been the result of many factors including additional consumer protection initiatives related to the
foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under
which lenders may consider loan modifications or other alternatives to foreclosure. These reasons and the legal and regulatory responses
have impacted the foreclosure process and completion time of foreclosures for residential mortgage lenders. This may result in a material
adverse effect on collateral values and our ability to minimize its losses.
Changes in the secondary mortgage market may impede our ability to collect repayment on the mortgage warehouse facility lines.
Mortgage warehouse loans are facility lines to non-bank mortgage origination companies. The underlying collateral of these facility
lines are residential real estate loans. Loans are originated by the mortgage companies for sale into secondary markets. The primary
source of repayment of the facility lines is the cash flow upon sale of the loans. Changes in the secondary mortgage market may result
in the mortgage companies’ inability to sell the loans and repay their facility lines. Such events could result in an increase to our provision
for loan losses, which could decrease our net income.
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Risks Related to Our BaaS Activities
Regulatory scrutiny of BaaS solutions and related technology considerations has recently increased.
We provide banking products and services to our financial technology company (“fintech”) partners, which includes providing certain
financial services, including payments infrastructure and deposit services. Recently, federal bank regulators have increasingly focused
on the risks related to bank and fintech partnerships, raising concerns regarding risk management, oversight, internal controls,
information security, change management, and information technology operational resilience. This focus is demonstrated by recent
regulatory enforcement actions against other banks that have allegedly not adequately addressed these concerns while growing their
BaaS offerings. We could be subject to additional regulatory scrutiny with respect to that portion of our business that could have a
material adverse effect on the business, financial condition, results of operations and growth prospects of the Company.
Furthermore, while a financial institution can benefit from a fintech’s products and technology to reach new customers and previously
underserved communities, the financial institution bears ultimate accountability for its partners’ compliance and risk management,
including with respect to penalties, fines, and other measures that bank regulatory agencies take in the event of non-compliant activity
or risks that are not well controlled. In addition, end customers of fintech may not conduct deposit activity in the same manner as other
customers or the fintech itself. In recognition of this risk, in February 2023, the bank regulatory agencies issued joint guidance on
liquidity risks related to crypto-asset-related entities, including guidance that financial institutions should actively monitor the liquidity
risks inherent in such funding sources and establish and maintain effective risk management and controls commensurate with the level
of liquidity risks from such funding sources. Our failure to properly monitor such liquidity risks and/or manage such risk from a
regulatory standpoint could subject us to regulatory fines or other penalties, or business or reputational harm, and could adversely affect
our financial condition and results of operations.
Risks Related to Laws and Regulations
Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of
operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the monetary and related policies
of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions.
Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S.
government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These
instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans,
investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary and related policies of the Federal Reserve Board have had a significant effect on the operating results of financial
institutions in the past and are expected to continue to do so in the future. Changes in any of these policies are influenced by
macroeconomic conditions and other factors that are beyond BankProv’s control and the effects of such policies upon our business,
financial condition and results of operations cannot be predicted.
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our
operations and/or increase our costs of operations.
We are subject to extensive regulation, supervision and examination by the Massachusetts Commissioner of Banks, the Federal Deposit
Insurance Corporation and the Federal Reserve Board. Such regulation and supervision governs the activities in which an institution and
its holding company may engage and are intended primarily for the protection of insurance funds and the depositors and borrowers of
BankProv rather than for holders of our common stock.
Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions
on our operations, the classification of our assets and determination of the level of our allowance for credit losses. These regulations,
along with the currently existing tax, accounting, securities, insurance, monetary laws, rules, standards, policies, and interpretations
control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern
financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both
difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firm. These changes
could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our
interpretation of those changes.
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Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from
being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file
suspicious activity reports with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network. Rules issued consistent
with these laws and their implementing regulations require financial institutions to establish procedures for identifying and verifying
the identity of customers seeking to open new financial accounts. We also provide services to non-traditional deposit customers, such
as digital currency customers, which require an enhanced Bank Secrecy Act program and enhanced Know Your Customer and
compliance policies and procedures. We may become subject to additional regulatory scrutiny as a result of providing products and
services to digital currency industry customers. Our primary banking regulators may be less familiar with the digital currency industry,
or may consider the industry to involve greater risks than more established industries.
Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or
establishing new branches. Although we have developed policies and procedures designed to assist in compliance with these laws and
regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations. We have not been
subject to fines or other penalties, or suffered business or reputational harm with respect to potential money laundering activities or
related laws and regulations, in the past.
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material
penalties.
The Community Reinvestment Act (“CRA”), the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and
regulations impose nondiscriminatory lending requirements on financial institutions.
A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a
wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of
restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an
institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on
our business, financial condition and results of operations.
We could become subject to more stringent capital requirements, which could adversely impact our return on equity, require us to raise
additional capital, or constrain us from paying dividends or repurchasing shares.
Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital
and leverage ratios, and define “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1
capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio
of 4%. Unrealized gains and losses on certain “available-for-sale” securities holdings are to be included for purposes of calculating
regulatory capital requirements unless a one-time opt-out was exercised. We exercised this one-time opt-out option. The regulations
also establish a “capital conservation buffer” of 2.5% and the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7%,
(ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations
on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.
These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
At December 31, 2023, BankProv met all of these requirements, including the full 2.5% capital conservation buffer.
The application of more stringent capital requirements could, among other things, result in lower returns on equity, require raising of
additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition
of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our
funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk
weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital
conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions,
including paying dividends or repurchasing shares. Specifically, BankProv’s ability to pay dividends will be limited if it does not have
the capital conservation buffer required by the capital rules, which may limit our ability to pay dividends to stockholders.
If deposits in excess of Federal Deposit Insurance Corporation insurance limits exceed thresholds established by the Depositors
Insurance Fund, we may lose the benefits of excess deposit insurance provided by the Depositors Insurance Fund.
As a Massachusetts savings bank, our deposits are insured in full beyond federal deposit insurance coverage limits by the Depositors
Insurance Fund, a private excess deposit insurer created under Massachusetts law. We believe offering full deposit insurance gives us a
competitive advantage for individual, corporate and municipal depositors having deposit balances in excess of Federal Deposit Insurance
Corporation insurance limits. However, the Depositors Insurance Fund may require member savings banks that pose greater than normal
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loss exposure risk to the Depositors Insurance Fund to take certain risk-mitigating measures or withdraw from the Depositors Insurance
Fund and become a Massachusetts trust company by operation of law, subject to the Commissioner of Banks’ approval. In such an
event, we may be required to reduce our level of excess deposits, pay for the reinsurance of our excess deposits, make an additional
capital contribution to the Depositors Insurance Fund, provide collateral or take other risk-mitigating measures that the Depositors
Insurance Fund may require, which may include entering into reciprocal deposit programs. Reducing our excess deposits by taking any
of the above risk-mitigating measures, which allows deposits to run off, reduces our overall level of deposits and increases the extent to
which we may need to rely in the future on other, more expensive or less stable sources for funding, including Federal Home Loan Bank
advances, which would reduce net income. Shifting excess deposits into reciprocal deposit programs may result in higher funding costs,
which also would reduce net income.
The Federal Reserve Board may require us to commit capital resources to support BankProv.
Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit
resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding
company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and
unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding
company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a
holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding
company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims
based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors,
including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required capital injection
becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.
Risk Related to Market Interest Rates
Future changes in interest rates could negatively affect our operating results and asset values.
Our profitability, like that of most financial institutions, depends to a large extent upon our net interest income, which is the difference
between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing
liabilities, such as deposits and borrowed funds. Accordingly, our results of operations depend largely on movements in market interest
rates and our ability to manage our interest-rate-sensitive assets and liabilities in response to these movements. Factors such as inflation,
recession and instability in financial markets, among other factors beyond our control, may affect interest rates.
As a result of recent increases in interest rates, the rates on our deposits have repriced upwards faster than the rates on our long-term
loans and investments, which has resulted in compression of our interest rate spread, which has had a negative effect on our profitability.
Furthermore, increases in interest rates may adversely affect the ability of our borrowers to make loan repayments on adjustable-rate
loans, as the interest owed on such loans would increase as interest rates increase. Conversely, decreases in interest rates can result in
increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these
circumstances, we are subject to reinvestment risk as we may have to redeploy such loan or securities proceeds into lower-yielding
assets, which might also negatively impact our income.
In addition, as a result of rising interest rates, we have experienced a shift in deposits from lower-cost NOW and demand accounts to
higher-cost savings accounts and certificates of deposit. However, the rates we earn on our loans did not increase as rapidly during the
year ended December 31, 2023 due to fixed-rate loans where the interest rates did not increase commensurately with the increase in
market interest rates.
Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition,
liquidity and results of operations. While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest
rates, changes in interest rates can still have a material adverse effect on our financial condition and results of operations. Changes in
the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to
realize gains from the sale of our assets, all of which ultimately affect our earnings. Also, our interest rate risk modeling techniques and
assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating
results.
Risks Related to Our Cryptocurrency Activities
Regulation of the cryptocurrency industry continues to evolve and is subject to change. Moreover, securities and commodities laws and
regulations and other bodies of laws can apply to certain cryptocurrency businesses. These laws and regulations are complex, were
frequently not designed or crafted with cryptocurrency technology in mind or with a sufficient understanding of cryptocurrency use
cases and our interpretations of them may be subject to challenge by the relevant regulators. Future regulatory developments are
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impossible to predict with certainty, and if we are unable to properly characterize our activities with respect to a crypto asset, we may
be subject to regulatory scrutiny, inquiries, investigations, fines, and other penalties, which may adversely affect our business, operating
results, and financial condition.
The SEC and its staff have taken the position that certain crypto assets fall within the definition of a “security” under the U.S. federal
securities laws. The legal test for determining whether any given crypto asset is a security is a highly complex, fact-driven analysis that
evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance or confirmation on the
status of any particular crypto asset as a security. Furthermore, the SEC’s views in this area have evolved over time and it is difficult to
predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the
appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. For example, Chair Gary Gensler
has repeatedly remarked on the need for further regulatory oversight on crypto assets, crypto trading, and lending platforms by the SEC.
Public statements by senior officials at the SEC indicate that the SEC does not intend to take the position that Bitcoin or Ethereum are
securities (in their current form). Bitcoin and Ethereum are the only crypto assets as to which senior officials at the SEC have publicly
expressed such a view. However, such statements are not official policy statements by the SEC and reflect only the speakers’ views,
which are not binding on the SEC or any other agency or court and cannot be generalized to any other crypto asset. With respect to all
other crypto assets, there is currently no certainty under the applicable legal test that such assets are not securities, notwithstanding the
conclusions we may draw based on our risk-based assessment regarding the likelihood that a particular crypto asset could be deemed a
“security” under applicable laws. Similarly, though the SEC’s Strategic Hub for Innovation and Financial Technology published a
framework for analyzing whether any given crypto asset is a security in 2019, this framework is also not a rule, regulation or statement
of the SEC and is not binding on the SEC.
Several foreign jurisdictions have taken a broad-based approach to classifying crypto assets as “securities,” while other foreign
jurisdictions, such as Switzerland, Malta, and Singapore, have adopted a narrower approach. As a result, certain crypto assets may be
deemed to be a “security” under the laws of some jurisdictions but not others. Various foreign jurisdictions may, in the future, adopt
additional laws, regulations, or directives that affect the characterization of crypto assets as “securities.”
The classification of a crypto asset as a security under applicable law has wide-ranging implications for the regulatory obligations that
flow from the offer, sale, trading, and clearing of such assets. For example, a crypto asset that is a security in the United States may
generally only be offered or sold in the United States pursuant to a registration statement filed with the SEC or in an offering that
qualifies for an exemption from registration. Persons that effect transactions in crypto assets that are securities in the United States may
be subject to registration with the SEC as a “broker” or “dealer.” Persons facilitating clearing and settlement of securities may be subject
to registration with the SEC as a clearing agency. Foreign jurisdictions may have similar licensing, registration, and qualification
requirements.
We have policies and procedures to analyze whether the crypto assets underlying certain of our lending and deposit activities could be
deemed to be a “security” under applicable laws. Our policies and procedures do not constitute a legal standard, but rather represent our
company-developed model, which permits us to make a risk-based assessment regarding the likelihood that we are facilitating, or
engaging in, transactions in unregistered securities. Regardless of our conclusions, we could be subject to legal or regulatory action in
the event the SEC, a state or foreign regulatory authority, or a court were to determine that our activities involve a supported crypto
asset “security” currently offered, sold, or traded under applicable laws. We believe that our processes reflect a comprehensive and
thoughtful analysis and is reasonably designed to facilitate consistent application of available legal guidance to crypto assets to facilitate
informed risk-based business judgment. However, we recognize that the application of securities laws to the specific facts and
circumstances of crypto assets may be complex and subject to change, and that a listing determination does not guarantee any conclusion
under the U.S. federal securities laws.
We may not properly characterize our activities with respect to any given crypto asset, or that the SEC, foreign regulatory authority, or
a court, if the question were presented to it, would agree with our assessment. If the SEC, state or foreign regulatory authority, or a court
were to determine that we were facilitating, or engaging in, transactions in unregistered securities, we would not be able to continue
such activity, and may determine not to continue similar activities. In addition, we could be subject to judicial or administrative sanctions
for our actions in failing to offer or sell the crypto asset in compliance with the registration requirements, or for acting as a broker,
dealer, or national securities exchange without appropriate registration. Such an action could result in injunctions, cease and desist
orders, as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm.
Further, if Bitcoin, Ether, or any other supported crypto asset is deemed to be a security under any U.S. federal, state, or foreign
jurisdiction, or in a proceeding in a court of law or otherwise, it may have adverse consequences for such supported crypto asset. For
instance, all transactions in such supported crypto asset would have to be registered with the SEC or other foreign authority, or conducted
in accordance with an exemption from registration, which could severely limit its liquidity, usability and transactability. Moreover, the
networks on which such supported crypto assets are utilized may be required to be regulated as securities intermediaries, and subject to
applicable rules, which could effectively render the network impracticable for its existing purposes. Further, it could draw negative
publicity and a decline in the general acceptance of the crypto asset. Also, it may make it difficult for such supported crypto asset to be
traded, cleared, and custodied as compared to other crypto asset that are not considered to be securities. Specifically, even if transactions
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in a crypto asset were registered with the SEC or conducted in accordance with an exemption from registration, the current intermediary-
based framework for securities trading, clearance and settlement is not consistent with the operations of the crypto asset market. For
example, under current SEC guidance, crypto asset securities cannot be held on behalf of customers by broker-dealers that also support
custody of traditional securities; and the SEC has not permitted public permissionless blockchain-based clearance and settlement systems
for securities.
Our use of crypto assets as collateral for loans, and the custodial arrangements with such collateral, involves risks that could adversely
affect our financial condition and results of operations.
In 2021, the Bank began offering term loans for companies purchasing specialized digital asset mining equipment but discontinued this
type of lending in 2022. As of December 31, 2023 we had $12.3 million of these loans outstanding, compared to $40.8 at December 31,
2022. Under the loan terms the Bank maintains a security in the purchased mining equipment as well as a security interest in the digital
assets and cash collateral held in a collateral account to which the borrower is required to allocate a portion of the digital assets that they
obtain using the mining equipment, up until the USD-equivalent amounts in the collateral account are equal to or greater than the unpaid
balance of the loan. In the event of default the Bank can require the third-party custodian to liquidate the digital assets in the collateral
account in United States dollar (“USD”) and repay the respective loan with such proceeds.
These loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from
the cash flows of the borrower’s business and are secured by crypto asset collateral that may be illiquid and may fluctuate significantly
in value. Failure to properly monitor the value of the collateral may result in our being under-collateralized. In addition, a failure by the
custodian to properly or timely liquidate the collateral and/or to properly or timely remit the proceeds of the liquidation to us may result
in our recognizing losses. Moreover, collateral held by a custodian or other third-party is subject to theft and/or mis-reporting of the
possession of such collateral or the value thereof, which may further result in our recognizing losses.
In addition, these loans are subject to additional risks with respect to the short-term life of the mining equipment securing them. The
failure to properly and timely monitor the production from the mining equipment, significant changes in the collateral valuations,
casualty losses, or our inability to liquidate the equipment, could increase our potential losses in the event the Bank is required to
repossess and sell the equipment to other mining operators.
Our lending activities in the cryptocurrency business space are covered by our insurance policies to the same extent as our other lending
activities, such as with respect to certain acts of fraud, forgery or dishonesty. However, these lending activities, like our other lending
activities, are subject to the risk that insurance coverage may not be available for certain losses, or, where available, such losses may
exceed insurance limits. A similar risk applies to insurance coverage with respect to custodians we engage to hold collateral related to
this lending activity. Losses with respect to insurance matters could have a material impact on our financial condition or results of
operations.
The characteristics of digital currency have been, and may in the future continue to be, exploited to facilitate illegal activity such as
fraud, money laundering, tax evasion and ransomware scams; if any of our customers do so or are alleged to have done so, it could
adversely affect us.
Digital currencies and the digital currency industry are relatively new and, in many cases, lightly regulated or largely unregulated. Some
types of digital currency have characteristics, such as the speed with which digital currency transactions can be conducted, the ability to
conduct transactions without the involvement of regulated intermediaries, the ability to engage in transactions across multiple
jurisdictions, the irreversible nature of certain digital currency transactions and encryption technology that anonymizes these
transactions, that make digital currency particularly susceptible to use in illegal activity such as fraud, money laundering, tax evasion
and ransomware scams. Two prominent examples of marketplaces that accepted digital currency payments for illegal activities include
Silk Road, an online marketplace on the dark web that, among other things, facilitated the sale of illegal drugs and forged legal documents
using digital currencies and AlphaBay, another darknet market that utilized digital currencies to hide the locations of its servers and
identities of its users. Both of these marketplaces were investigated and closed by U.S. law enforcement authorities. U.S. regulators,
including the SEC, Commodity Futures Trading Commission (the “CFTC”), and Federal Trade Commission (the “FTC”), as well as
non-U.S. regulators, have taken legal action against persons alleged to be engaged in Ponzi schemes and other fraudulent schemes
involving digital currencies. In addition, the Federal Bureau of Investigation has noted the increasing use of digital currency in various
ransomware scams.
While we believe that our risk management and compliance framework, which includes thorough reviews we conduct as part of our due
diligence process (either in connection with onboarding new customers or monitoring existing customers), is reasonably designed to
detect any such illicit activities conducted by our potential or existing customers (or, in the case of digital currency exchanges, their
customers), we may not be able to detect such illegal activity in all instances. Because the speed, irreversibility and anonymity of certain
digital currency transactions make them more difficult to track, fraudulent transactions may be more likely to occur. We may be
specifically targeted by individuals seeking to conduct fraudulent transfers, and it may be difficult or impossible for us to detect and
avoid such transactions in certain circumstances. If one of our customers were to engage in or be accused of engaging in illegal activities
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using digital currency, we could be subject to various fines and sanctions, including limitations on our activities, which could also cause
reputational damage and adversely affect our business, financial condition and results of operations.
Risks Related to our Business Strategy
Strong competition for banking services could hurt our profits and slow growth.
We face intense competition in making loans and attracting deposits. Price competition for loans and deposits sometimes results in us
charging lower interest rates on our loans and paying higher interest rates on our deposits and may reduce our net interest income.
Competition also makes it more difficult and costly to attract and retain qualified employees. Many of the institutions with which we
compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. In addition,
we face increasing competition for investors’ funds and banking services from other financial service companies such as fintech
companies, brokerage firms, money market funds, mutual funds and other corporate and government securities. We may have difficulty
entering into new lines of business or new markets that are already served by existing financial institutions or other entities. Conversely,
our competitors often aggressively price loan and deposit products when they enter into new lines of business or new market areas.
Competitive factors driven by consumer sentiment or otherwise can also reduce our ability to generate fee income, such as through
overdraft fees. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the
continuing trend of consolidation in the financial services industry. If we are not able to effectively compete, our results of operations
may be negatively affected. The greater resources and broader offering of deposit and loan products of some of our competitors may
also limit our ability to increase our interest-earning assets.
New lines of business or new products and services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new products and services within existing lines of business. In
addition, we will continue to make investments in research, development, and marketing for new products and services. There are
substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In
developing and marketing new lines of business and/or new products and services we may invest significant time and resources. Initial
timetables for the development and introduction of new lines of business and/or new products or services may not be achieved and price
and profitability targets may not prove feasible. Furthermore, if customers do not perceive our new offerings as providing significant
value, they may fail to accept our new products and services. External factors, such as compliance with regulations, competitive
alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product
or service. Furthermore, the burden on management and our information technology of introducing any new line of business and/or new
product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage
these risks in the development and implementation of new lines of business or new products or services could have a material adverse
effect on our business, financial condition and results of operations.
Risk Related to Economic Conditions
A worsening of economic conditions could reduce demand for our products and services and/or result in increases in our level of non-
performing loans, which could have an adverse effect on our results of operations.
Our real estate lending, and a large portion of our commercial business lending, depends primarily on the general economic conditions
in Northeastern Massachusetts and Southern New Hampshire. Certain types of our commercial business loans are originated nationally
and will be impacted by national or regional economic conditions. Economic conditions have a significant impact on the ability of the
borrowers to repay loans and the value of the collateral securing these loans.
A deterioration in economic conditions, could result in the following consequences, any of which could have a material adverse effect
on our business, financial condition, liquidity and results of operations:
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demand for our products and services may decline;
loan delinquencies, problem assets and foreclosures may increase;
collateral for loans, especially real estate, may decline in value, in turn reducing customers’ future borrowing power,
and reducing the value of assets and collateral associated with existing loans;
we may be required to increase our allowance for credit losses;
the value of our securities portfolio may decline; and
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities
or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local
economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary
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pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business
borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Further, a U.S. government debt default could have a material adverse impact on our business and financial performance. Other negative
impacts could be volatile capital markets, an adverse impact on the U.S. economy and the U.S. dollar, as well as increased default rates
among borrowers in light of increased economic uncertainty. Some of these impacts might occur even in the absence of an actual default
but as a consequence of extended political negotiations around the threat of such a default and a government shutdown.
Inflation can have an adverse impact on our business and on our customers.
Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the
value of money. Over the past two years, in response to a pronounced rise in inflation, the Federal Reserve Board has raised certain
benchmark interest rates to combat inflation. As inflation increases and market interest rates rise the value of our investment securities,
particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In
addition, inflation generally increases the cost of goods and services we use in our business operations, such as electricity and other
utilities, which increases our non-interest expenses. Furthermore, our customers are also affected by inflation and the rising costs of
goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with
us. Sustained higher interest rates by the Federal Reserve Board to tame persistent inflationary price pressures could also push down
asset prices and weaken economic activity. A deterioration in economic conditions in the United States and our markets could result in
an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our
products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations.
Unrelated bank failures could subject us to increased regulatory scrutiny and higher deposit insurance costs. Additionally, our stock
price may be negatively impacted by negative depositor confidence in depository institutions resulting from these failures. Further, if
we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, which have come under greater scrutiny
in light of recent bank failures, it may have a material adverse effect on our financial condition and results of operations.
On March 9, 2023, Silvergate Bank, La Jolla, California, announced its decision to voluntarily liquidate its assets and wind down
operations. On March 10, 2023, Silicon Valley Bank, Santa Clara, California, was closed by the California Department of Financial
Protection and Innovation. On March 12, 2023, Signature Bank, New York, New York, was closed by the New York State Department
of Financial Services, and on May 1, 2023, First Republic Bank, San Francisco, California, was closed by the California Department of
Financial Protection and Innovation. These banks also had elevated levels of uninsured deposits, which may be less likely to remain at
the bank over time and less stable as a source of funding than insured deposits. These failures led to volatility and declines in the market
for bank stocks and questions about depositor confidence in depository institutions.
These events have led to a greater focus by institutions, investors and regulators on the on-balance sheet liquidity of and funding sources
for financial institutions, the composition of its deposits, including the amount of uninsured deposits, the amount of accumulated other
comprehensive loss, capital levels and interest rate risk management. If we are unable to adequately manage our liquidity, deposits,
capital levels and interest rate risk, it may have a material adverse effect on our financial condition and results of operations.
The premiums of the FDICs deposit insurance program are subject to increases based on claims on the fund related to bank failures.
Banking regulators have signaled further review of regulatory requirements and the potential for changes to laws or regulations
governing banks and bank holding companies. Changes resulting from these events could include increased regulatory oversight, higher
capital requirements or changes in the way regulatory capital is calculated, and the imposition of additional restrictions through
regulatory changes or supervisory or enforcement activities, each of which could have a material impact on our business.
Risks Related to Operational Matters
System failure or breaches of our network security could materially and adversely affect our business, as well as subject us to increased
operating costs as well as litigation and other liabilities.
Our ability to provide reliable service to customers and other network participants, as well as our internal operations, depend on the
efficient and uninterrupted operation of our computer network systems and data centers as well as those of our retail distributors, network
acceptance members and third-party processors, including our ability to protect our computer equipment against damage from physical
theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service
attacks, viruses, worms and other disruptive problems caused by hackers. Our business involves the movement of large sums of money,
processing large numbers of transactions and managing the data necessary to do both. Interruptions in our service may result for a
number of reasons. For example, the data center hosting facilities that we use could be closed without adequate notice or suffer
unanticipated problems resulting in lengthy interruptions in our service. Any damage or failure that causes an interruption in our
operations could cause customers, retail distributors and other partners to become dissatisfied with our products and services or obligate
us to issue credits or pay fines or other penalties to them and could have a material adverse effect on our financial condition and results
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of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and
transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause
existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers,
continue to implement security technology and establish operational procedures designed to prevent such damage, our security measures
may not be successful. A failure of such security measures could have a material adverse effect on our financial condition and results of
operations.
A significant amount of time and money may be spent to rectify the harm caused by a breach or hack. Our general liability insurance
and business interruption insurance have limitations on coverage and may not be adequate to cover the losses or damages that we incur.
Furthermore, cyber incidents carry a greater risk of injury to our reputation. Finally, depending on the type of incident, banking regulators
can impose restrictions on our business and consumer laws may require customer reporting and/or reimbursement of customer loss.
Customer or employee fraud subjects us to additional operational risks.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm
our reputation. Our loans to businesses and individuals and our deposit relationships and related transactions are also subject to exposure
to the risk of loss due to fraud and other financial crimes. Misconduct by our employees could include hiding unauthorized activities
from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always
possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective
in all cases. Employee errors could also subject us to financial claims for negligence. Any failure of our internal controls to prevent or
promptly detect an occurrence, or any resulting loss that is not insured or exceeds applicable insurance limits, could have a material
adverse effect on our financial condition and results of operations.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our
results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to
optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report and analyze
the types of risk to which we are subject, including credit, liquidity, operational, regulatory compliance and reputational. However, as
with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in
the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could
suffer unexpected losses and our business and results of operations could be materially adversely affected.
Our continued development of innovative and highly specialized deposit products, which is central to our strategic plan, will require us
to devote management time and financial resources to making corresponding refinements to our enterprise risk management framework.
We may not be successful in designing or implementing adjustments to our enterprise risk management to address changes in one or
more of our businesses.
A lack of liquidity could adversely affect the Company’s financial condition and results of operations.
Liquidity is essential to the Company’s business. The Company relies on its ability to generate deposits and effectively manage the
repayment and maturity schedules of loans to ensure that there is adequate liquidity to fund its operations. An inability to raise funds
through deposits, borrowings, the sale and maturities of loans and securities and other sources could have a substantial negative effect
on liquidity. The Company’s most important source of funds is deposits. Deposit balances can decrease when customers perceive
alternative investments as providing a better risk/return tradeoff, which are strongly influenced by such external factors as the direction
of interest rates, local and national economic conditions and the availability and attractiveness of alternative investments. Further, the
demand for deposits may be reduced due to a variety of factors such as demographic patterns, changes in customer preferences,
reductions in consumers’ disposable income, the monetary policy of the FRB or regulatory actions that decrease customer access to
particular products. If customers move money out of bank deposits and into other investments such as money market funds, the Company
would lose a relatively low-cost source of funds, which would increase its funding costs and reduce net interest income. Any changes
made to the rates offered on deposits to remain competitive with other financial institutions may also adversely affect profitability and
liquidity.
Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities and borrowings from
the FHLB of Boston. The Company also has an available line of credit with the FRB Boston discount window. The Company also may
borrow funds from third-party lenders, such as other financial institutions. The Company’s access to funding sources in amounts
adequate to finance or capitalize its activities, or on terms that are acceptable, could be impaired by factors that affect the Company
directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and
expectations about the prospects for the financial services industry, a decrease in the level of the Company’s business activity as a result
of a downturn in markets or by one or more adverse regulatory actions against the Company.
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Any decline in available funding could adversely impact the Company’s ability to originate loans, invest in securities, meet expenses,
or to fulfill obligations such as repaying borrowings or meeting deposit withdrawal demands, any of which could have a material adverse
impact on its liquidity, business, financial condition and results of operations.
Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use
a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These additional
sources consist primarily of Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased, brokered
certificates of deposit, listing service deposits, and other lines of credit. As we continue to grow, we are likely to become more dependent
on these sources. Adverse operating results or changes in industry conditions could lead to difficulty or an inability in accessing these
additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if
adequate financing is not available to accommodate future growth at acceptable interest rates. Our business model may be more highly
susceptible than comparably sized banks to fluctuations in our liquidity levels, due to cash needs of customers such as payroll providers,
or a decrease in the number of smaller businesses that we service. If we are required to rely more heavily on more expensive funding
sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins
and results of operations would be adversely affected.
Deterioration in the performance or financial position of the Federal Home Loan Bank of Boston or the Federal Reserve Bank of Boston
might restrict our ability to meet our funding needs. Additionally, the deterioration in the performance or financial position of the
Federal Home Loan Bank of Boston could cause a suspension of its dividend and cause its stock to be deemed impaired.
Significant components of BankProv’s liquidity needs are met through its access to funding pursuant to its membership in the Federal
Home Loan Bank of Boston and the Federal Reserve Bank of Boston. Any deterioration in their performance or financial condition may
affect our ability to access funding. If we are not able to access funding, we may not be able to meet our liquidity needs, which could
have an adverse effect on the results of operations or financial condition. The purchase of stock in the Federal Home Loan Bank of
Boston is a requirement for a member to gain access to funding. Any deterioration in their performance or financial condition may also
require us to deem the required investment in Federal Home Loan Bank of Boston stock to be impaired. If we deem all or part of our
investment in Federal Home Loan Bank of Boston stock impaired, such action could have a material adverse effect on our results of
operations or financial condition.
Risks Related to Environmental and Other Global Matters
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect
to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing
defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions
or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property
damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular
property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the
affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or regulations or more stringent
interpretations or enforcement policies with respect to existing laws and regulations may increase our exposure to environmental
liability, and heightened pressure from investors and other stakeholders may require us to incur additional expenses with respect to
environmental matters. Although we have policies and procedures to perform an environmental review before initiating any foreclosure
action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation
costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.
Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our
customers.
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to
mitigate those impacts. Consumers and businesses may also change their behavior on their own as a result of these concerns. We and
our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate
change concerns. We and our customers may face cost increases, asset value reductions, operating process changes and other issues.
The impact on our customers will likely vary depending on their specific attributes, including reliance on carbon intensive activities.
Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could
face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks
into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be
effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
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Our business, financial condition, and results of operations could be adversely affected by natural disasters, health epidemics, and other
catastrophic events.
We could be adversely affected if key personnel or a significant number of employees were to become unavailable due to a pandemic,
natural disaster, war, act of terrorism, accident, or other reason. Any of these events could result in the temporary reduction of operations,
employees, and customers, which could limit our ability to provide services. Additionally, many of our borrowers may suffer property
damage, experience interruption of their businesses or lose their jobs after such events. Those borrowers might not be able to repay their
loans, and the collateral for such loans may decline significantly in value.
Risks Related to Accounting Matters
Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our
financial condition or operating results.
In preparing our periodic reports that we file under the Securities Exchange Act of 1934, including our consolidated financial statements,
our management is required to make estimates and assumptions as of a specified date. These estimates and assumptions are based on
management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results
may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions
by management include our valuation of our stock-based compensation plans, our determination of our income tax provision, and our
evaluation of the adequacy of our allowance for credit losses.
Other Risks Related to Our Business
Legal and regulatory proceedings and related matters could adversely affect us or the financial services industry in general.
We, and other participants in the financial services industry upon whom we rely on to operate, have been and may in the future become
involved in legal and regulatory proceedings. Most of the proceedings we consider to be in the normal course of our business or typical
for the industry; however, it is inherently difficult to assess the outcome of these matters, and other participants in the financial services
industry or we may not prevail in any proceeding or litigation. There could be substantial cost and management diversion in such
litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our
financial condition and results of our operations.
Our success depends on hiring, retaining and motivating certain key personnel.
Our performance largely depends on the talents and efforts of highly skilled individuals. We rely on key personnel to manage and operate
our business, including major revenue generating functions such as loan and deposit generation. The loss of key staff may adversely
affect our ability to maintain and manage these functions effectively, which could negatively affect our revenues. In addition, loss of
key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income. Our continued
ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.
Managing reputational risk is important to attracting and maintaining customers, investors and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical
practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable
or fraudulent activities of our customers, employees, or directors. We have policies and procedures in place to protect our reputation
and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business,
employees, or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased
governmental regulation, all of which could adversely affect our operating results.
A protracted government shutdown could negatively affect our financial condition and results of operations.
A protracted federal government shutdown could result in reduced income for government employees or employees of companies that
engage in business with the federal government, which could result in greater loan delinquencies, increases in our nonperforming,
criticized and classified assets and a decline in demand for our products and services.
Various factors may make takeover attempts more difficult to achieve.
Certain provisions of our articles of incorporation and state and federal banking laws, including regulatory approval requirements, could
make it more difficult for a third party to acquire control of Provident Bancorp, Inc. without our Board of Directors’ approval. Under
federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board before acquiring control of
a bank holding company. Acquisition of 10% or more of any class of voting stock of a bank holding company, including shares of our
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common stock or shares of our preferred stock were those shares to become entitled to vote upon the election of two directors because
of missed dividends, creates a rebuttable presumption that the acquirer “controls” the bank holding company. Also, a bank holding
company must obtain the prior approval of the Federal Reserve Board before, among other things, acquiring direct or indirect ownership
or control of more than 5% of any class of voting shares of any bank, including BankProv.
There also are provisions in our articles of incorporation that may be used to delay or block a takeover attempt, including a provision
that prohibits any person from voting more than 10% of the shares of common stock outstanding. Furthermore, shares of restricted stock
and stock options that we have granted or may grant to employees and directors, stock ownership by our management and directors,
employment agreements that we have entered into with our executive officers and other factors may make it more difficult for companies
or persons to acquire control of Provident Bancorp, Inc. without the consent of our Board of Directors. Taken as a whole, these statutory
provisions and provisions in our articles of incorporation could result in our being less attractive to a potential acquirer and thus could
adversely affect the market price of our common stock.
Our articles of incorporation provide that state and federal courts located in the state of Maryland are the exclusive forum for
substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us or our directors, officers or employees.
Our articles of incorporation generally provide that, unless we consent in writing to the selection of an alternative forum, Maryland is
the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a
fiduciary duty, any action asserting a claim arising pursuant to any provision of Maryland corporate law, or any action asserting a claim
governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial
forum that it finds favorable for disputes with us or our directors and officers or other employees, which may discourage such lawsuits
against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained
in our articles of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving
such action in other jurisdictions, which could adversely affect our business and financial condition.
Potential downgrades of U.S. government securities by one or more of the credit ratings agencies could have a material adverse effect
on our operations, earnings and financial condition.
A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the perceived creditworthiness of
U.S. government-related obligations could impact our ability to obtain funding that is collateralized by affected instruments, as well as
affect the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments. We
cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic
conditions. Such ratings actions could result in a significant adverse impact on us. Among other things, a downgrade in the U.S.
government’s credit rating could adversely impact the value of our securities portfolio and may trigger requirements that we post
additional collateral for trades relative to these securities. A downgrade of the sovereign credit ratings of the U.S. government or the
credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which we are subject and
any related adverse effects on the business, financial condition and results of operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 1C.
CYBERSECURITY
Risk Management and Strategy
As part of our overall Enterprise Risk Management strategy, we maintain a robust Information Technology and Security Management
Program (“ITSM”) which includes processes to assess, identify, monitor and manage cybersecurity risks. The program includes
provisions for annual cybersecurity risk assessments, ongoing monitoring and testing, as well as annual training for employees,
executives, and Board Members. We use the Federal Financial Institutions Examination Council’s (“FFIEC”) cybersecurity assessment
tool to identify risks and ascertain cybersecurity preparedness and the National Institute of Standards and Technology’s (“NIST”)
Cybersecurity Framework to benchmark our internal policies and procedures against best practices. We engage consultants and auditors
to assist in the completion of our annual risk assessment and review of controls related to the ITSM.
The Company also maintains a robust Vendor Risk Management program to manage risks related to third-party relationships in a manner
that is consistent with the Company’s strategic goals, organizational objectives, and risk appetite. This includes comprehensive risk and
control assessments with respect to the appropriate safeguarding of sensitive information.
To date, there have been no cybersecurity threats or incidents that have materially affected or are reasonably likely to materially affect
the Company, the Bank, our business strategy, results of operations, or financial condition.
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Governance
The Board of Directors is responsible for overseeing the development, approval, implementation and maintenance of the ITSM,
including overseeing the program’s execution in accordance with the overall strategic goals of the Bank. The Board conducts oversight,
in part, through the use of committees. The Risk Management Committee (“RMC”) of the Board of Directors is charged with monitoring
and reviewing risk assessments, assurance, testing, and training as well as overseeing the correction of identified deficiencies as they
relate to the ITSM. The Company’s Information Security team, with input from the Information Technology and Risk departments, is
responsible for incident management, disaster recovery, business continuity and cybersecurity programs and policies. The Bank’s
Incident Response Manual and Cyber Incident Policy outline how potential cybersecurity threats or incidents are communicated to the
RMC. The RMC is responsible for determining if cybersecurity incidents or threats should be escalated to the Board of Directors. The
information security team and the RMC work together to mitigate cybersecurity threats or incidents.
The information security officer (“ISO”) is responsible for cybersecurity under the ITSM and is a licensed Certified Internal Auditor,
who has experience with the Massachusetts Division of Banks specializing in information technology examinations. The ISO reports
directly to the VP, Operational Risk who was a former Chief Information Security Officer (“CISO”) for the United States segment of a
multi-national bank. The Chief Operating Officer, who is a member of the executive team and RMC, is a former CISO and holds both
a Certified Fraud Examiner and Certified Information Security Manager certification. The Chair of the RMC of the Board also has
multiple certifications in information and cybersecurity, including a Certified Information Systems Security Professional certification.
ITEM 2.
PROPERTIES
At December 31, 2023, we conducted business through our main office and six branch offices located in Amesbury and Newburyport,
Massachusetts and Bedford, Exeter, Portsmouth and Seabrook, New Hampshire, as well as a loan production office located in Ponte
Vedra, Florida. We own five of our offices, including our main office, and lease two of our branch offices as well as a loan production
office. At December 31, 2023, the total net book value of our land, buildings, furniture, fixtures, equipment and lease right-of-use assets
was $16.8 million.
ITEM 3.
LEGAL PROCEEDINGS
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
(a) Market, Holder and Dividend Information. Our common stock is traded on the NASDAQ Capital Market under the symbol
“PVBC.” The approximate number of holders of record of Provident Bancorp Inc.’s common stock as of March 22, 2023, was
679. Certain shares of Provident Bancorp Inc. are held in “nominee” or “street” name and, accordingly, the number of beneficial owners
of such shares is not known or included in the foregoing number.
(b) Sales of Unregistered Securities. Not applicable.
(c) Use of Proceeds. Not applicable.
(e) Stock Repurchases. On March 12, 2021, the Company announced that its Board of Directors had adopted a stock repurchase program
under which it would repurchase up to 1,400,000 shares of its common stock, or approximately 7.5% of the then-outstanding shares.
The repurchase program has no expiration date. As of December 31, 2023, the Company had repurchased 1,145,479 shares of its
outstanding common stock under this program, however, the Company did not repurchase any shares of its outstanding common stock
under this program during the year ended December 31, 2023.
ITEM 6.
RESERVED
ITEM 7.
OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance
your understanding of our financial condition and results of operations. You should read the information in this section in conjunction
with the business and financial information regarding Provident Bancorp, Inc., including the financial statements, provided in this
Annual Report.
Critical Accounting Policies
A summary of our accounting policies is described in Note 2 to the Consolidated Financial Statements included in this Annual Report.
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly
susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by
management that are inherently uncertain and that could have a material impact on the carrying value of certain assets or on income
under different assumptions or conditions. Management believes that the most critical accounting policies, which involve the most
complex or subjective decisions or assessments, are as follows:
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Allowance for Credit Losses for Loans.
On January 1, 2023, the company adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, as amended (“ASC 326”), which replaces the incurred loss methodology
with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of
expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan
receivables. It also applies to off-balance-sheet (“OBS”) credit exposures such as loan commitments and standby letters of credit. The
Company adopted ASC 326 using the modified retrospective method, therefore, the results for reporting periods beginning after January
1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable
GAAP.
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 appropriateness of the ACLL could change significantly because current economic conditions and forecasts can change and future
events are inherently difficult to predict. It is difficult to estimate how potential changes in any one economic factor or input might affect
the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those
factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes
in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. One of
the most significant judgments used in determining the allowance for credit losses is the macroeconomic forecast provided by a third
party. Changes in the macroeconomic forecast, especially for the national unemployment rate, could significantly impact the calculated
estimated credit losses.
While management utilizes its best judgment and information available, the ultimate adequacy of our ACLL is dependent upon a variety
of factors beyond our control, including the performance of our portfolios, the economy, and changes in interest rates.
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
characters.
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.
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 digital asset loans. Loans in this segment were made to businesses in the digital asset space and
are generally secured by digital asset mining equipment or by the United States dollar value of digital currency assets of the business.
Repayment is 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 can have an effect on the credit quality of this segment.
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.
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, the accuracy of estimates of the value of the
property upon completion, time to sell at an adequate price, and market conditions.
34
Consumer: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
Mortgage warehouse: Loans in this segment are primarily facility lines to non-bank mortgage origination companies. The underlying
collateral of these loans are residential real estate loans. Loans are originated by the mortgage companies for sale into secondary markets,
which is typically within 15 days of the loan closing, with the exception of construction loans which generally take longer to pay off
due to the nature of the loan. 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.
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:
(cid:120) Changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and
recovery practices.
(cid:120) Changes in the experience, depth, and ability of lending management.
(cid:120) Changes in the quality of the organization’s loan review system.
(cid:120) The existence and effect of any concentrations of credit and changes in the levels of such concentrations.
(cid:120) 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 allowance for unfunded commitments is maintained at a level by the Company to be sufficient to absorb expected lifetime losses
related to unfunded credit facilities (including unfunded loan commitments and letters of credit).
35
The Company measures the ACLL using the following methods:
Portfolio Segment
Measurement Method
Loss Driver
Commercial real estate
Commercial
Enterprise value
Digital asset
Residential real estate
Construction and land development
Consumer
Mortgage warehouse
Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Remaining life method
National unemployment rate, national GDP
(cid:3) National unemployment rate, national GDP
(cid:3) National unemployment rate, national GDP
(cid:3) National unemployment rate, national GDP
(cid:3) National unemployment rate, national HPI
(cid:3) National unemployment rate, national GDP
(cid:3) National unemployment rate, national GDP
(cid:3) Not applicable
When the discounted cash flow method is used to determine the ACLL, 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 ACLL, 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.
Selected Financial Data
The following tables set forth selected consolidated historical financial and other data of Provident Bancorp, Inc. for the years ended
and at the dates indicated. The following is only a summary and you should read it in conjunction with the business and financial
information regarding Provident Bancorp, Inc. contained elsewhere in this Annual Report. The information at December 31, 2023 and
2022, and for the years ended December 31, 2023 and 2022, is derived in part from the audited consolidated financial statements that
appear in this Annual Report.
36
$
Financial Condition Data:
Total assets
Cash and cash equivalents
Debt securities available-for-sale (at fair
value)
Federal Home Loan Bank stock, at cost
Loans held for sale
Loans, net of allowance for credit losses (1)
Bank-owned life insurance
Deposits
Borrowings
Total shareholders' equity (2)
Operating Data:
Interest and dividend income
Interest expense
Net interest and dividend income
Total credit loss (benefit) expense
$
Net interest and dividend income after
credit loss (benefit) expense
Gains on sales of securities, net
Other noninterest income
Write down of other assets and receivables
Noninterest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per common share:
Basic
Diluted
$
$
$
2023
2022
At December 31,
2021
(In thousands)
2020
2019
1,670,309 $
220,332
1,636,381 $
80,629
1,729,283 $
153,115
1,505,781 $
83,819
1,121,788
59,658
28,571
4,056
—
1,321,158
44,735
1,331,222
104,697
221,902
2023
28,600
4,266
—
1,416,047
43,615
1,279,582
126,829
207,542
36,837
785
22,846
1,433,803
42,569
1,459,895
13,500
233,782
32,215
895
—
1,314,810
36,684
1,237,428
13,500
235,856
2022
For the Year Ended December 31,
2021
(In thousands, except per share data)
2020
90,297 $
32,126
58,171
(678)
58,849
—
7,061
—
51,133
14,777
3,823
10,954 $
79,327 $
4,297
75,030
56,428
18,602
—
6,149
395
51,614
(27,258)
(5,790)
(21,468) $
64,803 $
3,370
61,433
3,887
57,546
—
5,166
225
40,394
22,093
5,954
16,139 $
60,403 $
5,931
54,472
5,597
48,875
—
3,543
2,207
33,601
16,610
4,625
11,985 $
0.66 $
0.66 $
(1.30) $
(1.30) $
0.96 $
0.93 $
0.66
0.66
41,790
1,416
—
959,286
26,925
849,905
24,998
230,933
2019
51,538
8,148
43,390
5,326
38,064
113
3,998
—
27,556
14,619
3,811
10,808
0.60
0.60
(1) Excludes loans held-for-sale.
(2) Includes retained earnings and accumulated other comprehensive income/loss.
37
Performance Ratios:
Return (loss) on average assets
Return (loss) on average equity
Interest rate spread (1)
Net interest margin (2)
Efficiency ratio (3)
Dividend payout ratio
Average interest-earning assets to
average interest-bearing liabilities
Average equity to average assets
Regulatory Capital Ratios:
Total capital to risk weighted assets (bank
Tier 1 capital to risk weighted assets (bank
Tier 1 capital to average assets (bank only)
Common equity tier 1 capital (bank only)
Total capital to total assets (company)
Asset Quality Ratios:
Allowance for credit losses - loans as a
of total loans (4)
Allowance for credit losses - loans as a
of non-performing loans
Net charge-offs to average
outstanding loans during the year
Non-performing loans as a percentage of
total loans (4)
Non-performing loans as a percentage of
total assets
Total non-performing assets as a percentage of
total assets
Other:
Number of offices
Number of full-time equivalent employees
2023
0.66%
5.10%
2.63%
3.71%
78.39%
—%
At or For the Year Ended December 31,
2020
2021
2022
(1.24)%
(9.26)%
4.34%
4.61%
64.07%
(9.26)%
1.02%
6.86%
3.89%
4.06%
60.99%
15.86%
0.89%
5.05%
3.93%
4.23%
61.72%
13.65%
2019
1.04%
7.38%
4.05%
4.44%
58.15%
—%
152.87%
12.85%
199.92%
13.43%
176.80%
14.82%
165.71%
17.58%
146.87%
14.08%
14.02%
12.77%
11.59%
12.77%
13.29%
12.62%
11.37%
11.17%
11.37%
12.68%
14.18%
12.93%
12.07%
12.93%
13.52%
14.60%
13.35%
12.37%
13.35%
15.66%
17.62%
16.37%
15.18%
16.37%
20.59%
1.61%
1.94%
1.34%
1.39%
1.42%
130.60%
102.51%
674.14%
341.72%
237.58%
0.35%
3.24%
0.22%
0.08%
0.35%
1.23%
1.90%
0.20%
0.41%
0.60%
0.99%
1.67%
0.17%
0.36%
0.52%
0.99%
2.04%
0.17%
0.36%
0.52%
7
192
7
203
7
175
7
158
7
139
(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(2) Represents net interest income as a percent of average interest-earning assets.
(3) Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains on
securities available-for-sale, net.
(4) Loans are presented at amortized cost before the allowance for credit losses.
Comparison of Financial Condition at December 31, 2023 and December 31, 2022
Results for the year ended December 31, 2023 reflect the Bank’s continued focus on its revised business plan, increasing its commitment
to traditional banking activities and reducing its exposure to areas with increased risk. In this regard, the Bank re-established metrics
and limitations to better manage and monitor the Bank’s overall risk position, including generally managing overall growth to 5% per
year, and adopting more comprehensive capital management policies and procedures. The Bank was successful in its endeavors to
implement business practices that better manage and monitor its risk position, including capital, liquidity, asset quality and growth
segments. This success was evidenced by improved capital ratios, asset quality ratios and liquidity position as of December 31, 2023
when compared to December 31, 2022.
Assets. Total assets increased $33.9 million, or 2.1%, to $1.67 billion at December 31, 2023, compared to $1.64 billion at December 31,
2022, due primarily to an increase in cash and cash equivalents, partially offset by a decrease in net loans.
38
Cash and Cash Equivalents. Cash and cash equivalents increased $139.7 million, or 173.3%, to $220.3 million primarily due to an
effort to improve our liquidity position as a result of market events, and to support certain deposit products that are subject to heightened
volatility.
Loan Portfolio Analysis. At December 31, 2023, total loans were $1.34 billion, a decrease of $101.4 million, or 7.0%, when compared
to $1.44 billion at December 31, 2022. The decrease in total loans was primarily driven by decreases in mortgage warehouse loans of
$46.7 million, commercial loans of $40.8 million, and the digital asset loan portfolio of $28.5 million, partially offset by an increase in
commercial real estate loans of $15.3 million. The decrease in total loans was primarily driven by a shift in strategy to decrease the
overall risk profile of our loan portfolio by allowing attrition in our commercial business and enterprise value segments, reduced balances
in our mortgage warehouse segment, as well as a concerted effort to reduce our exposure to digital assets lending. We plan to continue
to focus our growth on more traditional lending segments, including commercial real estate, while decreasing or maintaining our levels
in the commercial business and enterprise value portfolio segments. These efforts to reduce our risk profile also resulted in a reduction
of our ACLL, primarily due to decreases in loan balances, diversifying our portfolio concentrations and the exiting of loans carrying
individual reserves.
The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated, excluding loans held for sale.
$
(Dollars in thousands)
Commercial real estate (1)
Commercial
Enterprise value
Digital asset
Residential real estate (2)
Construction and land development
Consumer
Mortgage warehouse
Total loans
Allowance for credit losses - loans
Net Loans
$
2023
At December 31,
2022
2021
Amount
Percent
Amount
Percent
Amount
Percent
468,928
176,124
433,633
12,289
7,169
77,851
168
166,567
1,342,729
(21,571)
1,321,158
34.92 % $
13.12
32.29
0.92
0.53
5.80
0.01
12.41
100.00 %
$
453,592
216,931
438,745
40,781
8,165
72,267
391
213,244
1,444,116
(28,069)
1,416,047
31.41 % $
15.02
30.38
2.82
0.57
5.00
0.03
14.77
100.00 %
$
428,202
239,736
365,769
121,299
570
42,553
1,519
253,651
1,453,299
(19,496)
1,433,803
29.46 %
16.50
25.17
8.35
0.04
2.93
0.10
17.45
100.00 %
(1) Includes multi-family loans.
(2) Includes home equity loans and lines of credit.
Loan Maturity. The following table sets forth certain information at December 31, 2023 regarding the contractual maturity of our loan
portfolio. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one
year or less. The table does not include any estimate of prepayments that could significantly shorten the average life of all loans and
may cause our actual repayment experience to differ from that shown below.
(In thousands)
Amounts due in:
One year or less
More than one year to
five years
More than five years
through 15 years
More than 15 years
Total
Commercial
Real Estate Commercial
Enterprise
Value
Digital
Asset
Residential
Real
Estate
Construction
and Land
Development Consumer
Mortgage
Warehouse Total Loans
$ 32,839 $ 41,084 $ 27,353 $ 12,289 $
13 $
4,050 $
168 $ 166,567 $ 284,363
29,331
50,220
263,337
—
191
26,817
—
—
369,896
137,326
269,432
$ 468,928 $ 176,124 $ 433,633 $ 12,289 $ 7,169 $
142,943
—
68,800
16,020
3,330
3,635
—
—
32,908
14,076
77,851 $
385,307
—
—
—
303,163
—
168 $ 166,567 $ 1,342,729
39
The following table sets forth our fixed and adjustable-rate loans at December 31, 2023 that are contractually due after December 31,
2024.
(In thousands)
Commercial real estate
Commercial
Enterprise value
Residential real estate
Construction and land development
Total loans
Asset Quality
Fixed Rates
Floating or
Adjustable Rates
Total Due After
December 31,
2024
$
$
42,312 $
35,460
389,845
1,961
26,771
496,349 $
393,777 $
99,580
16,435
5,195
47,030
562,017 $
436,089
135,040
406,280
7,156
73,801
1,058,366
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 for the purpose of identifying loan weakness
in order to minimize loan loss exposure. From the time of loan origination through final repayment, commercial real estate, enterprise
value, construction and land development and commercial 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, based upon size, or inclusion in a homogeneous pool, reducing
the need for detailed individual analysis. Assets with these characteristics, such as consumer loans and residential mortgages, may be
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.
Delinquent Loans. The following tables set forth our loan delinquencies by type and amount at the dates indicated.
2023
60-89
Days
At December 31,
2022
60-89
Days
2021
60-89
Days
(In thousands)
Commercial real estate
Commercial
Enterprise Value
Residential real estate
Consumer
Total
30-59
Days
90 Days
30-59
or more Days
90 Days
30-59
or more Days
90 Days
or more
Past Due Past Due Past Due Past Due Past Due Past Due Past Due Past Due Past Due
$ 18,226 $
—
1,362
5
491
3,348
—
345
—
2
2,198
— $
111
—
—
11
122 $
240 $
—
—
—
—
240 $
— $
100
—
—
3
103 $
— $
1,813
—
236
4
1 $
41
92
73
—
207 $
— $
13
—
—
15
28 $
— $
—
—
—
9
9 $
$ 21,581 $
2,053 $
The increase in delinquencies was primarily related to an increase in commercial real estate loan delinquencies, related to one
relationship, which was briefly overdue as it was in the process of being modified at December 31, 2023.
Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status, including loans
that have been modified due to the financial difficulty of the borrower, and real estate and other loan collateral acquired through
foreclosure and repossession. The Company modifies loans to borrowers experiencing financial difficulty by providing the following
types of modifications: principal forgiveness, other-than-insignificant payment delays, term extensions, interest rate reductions, or a
combination of these modifications. All interest accrued but not received for loans placed on non-accrual is reversed against interest
40
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.
(Dollars in thousands)
Non-accrual loans:
Commercial real estate
Commercial
Enterprise value
Digital asset
Residential real estate
Consumer
Total non-accrual loans
Other repossessed assets
Total non-performing assets
Total loans (1)
Total assets
Total non-performing loans to total loans (1)
Total non-performing assets to total assets
2023
At December 31,
2022
2021
$
$
$
$
$
—
1,857
1,991
12,289
376
4
16,517
—
16,517
1,342,729
1,670,309
1.23%
0.99%
$
$
$
$
56
101
92
26,488
227
—
26,964
6,051
33,015
1,444,116
1,636,381
1.87%
2.02%
—
1,582
491
—
602
—
2,675
—
2,675
1,453,299
1,729,283
0.18%
0.15%
(1) Loans are presented at amortized cost before the allowance for credit losses.
The decrease in our non-performing loans and changes in the related ratios were primarily due to a reduction in digital asset non-accrual
balances at December 31, 2023, as compared to the prior year. This decline was primarily due to the cessation of any new lending in
this segment and several large paydowns and payoffs as we actively worked to reduce our exposure.
Loans modified during 2023 to borrows experiencing financial difficulty totaled $29.9 million or 2.23% of total loans at December 31,
2023. See Note 4 – Loans and Allowance for Credit Losses for Loans of the Notes to the Consolidated Financial Statements for additional
information. 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 December 31, 2023, there were no past due balances or subsequent
defaults related to loans modified during the year, nor had the Company committed to lend any additional funds to borrowers
experiencing financial difficulty whose loans had been modified during the year ended December 31, 2023.
Prior to the Company’s adoption of ASU 2022-02 on January 1, 2023, loans were considered troubled debt restructuring (“TDRs”) when
the Company granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered.
There were no new TDRs entered into during the year ended December 31, 2022, and the total recorded investment as of that date was
$20.4 million. There were no commitments to lend additional funds to borrowers whose loans were modified in troubled debt
restructurings as of December 31, 2022.
Potential Problem Loans. We classify certain commercial real estate, enterprise value, commercial, construction and land development,
and digital asset loans as “special mention”, “substandard”, or “doubtful”, based on criteria consistent with guidelines provided by our
banking regulators. Certain potential problem loans represent loans that are currently performing, but for which known information
about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply
with the present loan repayment terms and which may result in such loans becoming non-performing at some time in the future. Potential
problem loans also include non-accrual or modified loans to borrowers experiencing financial difficulty presented above. We expect the
levels of non-performing assets and potential problem loans to fluctuate in response to changing economic and market conditions, and
the relative sizes of the respective loan portfolios, along with our degree of success in resolving problem assets.
Other potential problem loans are those loans that are currently performing, but possible credit problems of the borrowers could threaten
their ability to comply with contractual loan repayment terms. At December 31, 2023, other potential problem loans totaled
41
$42.8 million, spanning six relationships, primarily in the commercial real estate and enterprise value portfolios. We perform continual
credit monitoring on potential problem loans as part of our ongoing due diligence.
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 loans for the years indicated.
(Dollars in thousands)
Allowance at beginning of year
Impact of adopting ASC 326
Provision for credit losses
Charge offs:
Commercial real estate
Commercial
Enterprise value
Digital asset
Consumer
Total charge-offs
Recoveries:
Commercial real estate
Commercial
Enterprise value
Residential real estate
Consumer
Total recoveries
2023
Year Ended December 31,
2022
2021
$
28,069 $
(2,588)
863
19,496 $
—
56,428
1
169
4,788
—
45
5,003
—
160
55
5
10
230
4,773
21,571 $
16,517 $
1,342,729 $
1,348,425 $
130.60%
1.61%
0.35%
—
1,338
351
46,350
66
48,105
—
131
88
—
31
250
47,855
28,069 $
26,964 $
1,444,116 $
1,476,426 $
104.10%
1.94%
3.24%
18,518
—
3,887
150
216
2,764
—
315
3,445
56
133
271
2
74
536
2,909
19,496
2,675
1,453,299
1,320,160
728.82%
1.34%
0.22%
Net charge-offs
Allowance at end of year
Non-performing loans at end of year
Total loans outstanding at end of year (1)
Average loans outstanding during the year (1)
Allowance to non-performing loans
Allowance to total loans outstanding at end of the year
Net charge-offs to average loans outstanding during the year
$
$
$
$
(1) Loans are presented at amortized cost before the allowance for credit losses.
The decrease in the allowance of $6.5 million during 2023 was primarily driven by charge-offs on loans in the enterprise value portfolio
which were previously reserved. The Bank also recorded an adjustment related to the adoption of ASC 326. The decrease in the
allowance as a percentage of total loans was primarily driven by the reduction in digital asset lending.
42
The following tables set forth net (recoveries)/charge-offs to average loans outstanding during the year based on loan categories.
2023
For the Year Ended December 31,
2022
2021
Average
Balance
(Dollars in thousands)
Commercial real estate $ 436,858 $
196,066
Commercial
437,476
Enterprise value
20,805
Digital assets
Residential real estate
7,605
Net Charge-
offs /
(Recoveries)
1
9
4,733
—
(5)
% of Net
Charge-offs/
(Recoveries)
to Average
Balance
Average
Balance
Net
Charge-
offs
% of Net
Charge-
offs to
Average
Balance
Average
Balance
— % $ 416,398 $
—
1.08
—
(0.07)
—
0.42
290,409 1,207
0.07
263
373,213
112,883 46,350 41.06
—
— % $ 416,186 $
328,544
251,407
32,092
27,354
15,078
—
% of Net
Charge-offs/
(Recoveries)
to Average
Balance
0.02 %
0.03
0.99
—
(0.01)
Net Charge-
offs /
(Recoveries)
94
83
2,493
—
(2)
Construction and land
development
Consumer
Mortgage warehouse
88,236
279
161,100
—
35
—
—
12.54
—
64,172
844
203,429
—
35
—
—
4.15
—
35,305
3,388
225,946
—
241
—
—
7.11
—
(1) Includes loans held for sale in 2022 and 2021; there were no loans held for sale in 2023.
Allocation of Allowance for Credit Losses for Loans. The following tables set forth the ACLL allocated by loan category. The ACLL
allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the
allowance to absorb losses in other categories.
2023
At December 31,
2022
2021
Allowance
for Credit
Losses
% of Loans
in Category
to Total Loans
Allowance
for Credit
Losses
% of Loans
in Category
to Total Loans
Allowance
for Credit
Losses
4,471
2,493
8,166
5,915
75
407
2
42
34.92 % $
13.12
32.29
0.92
0.53
5.80
0.01
12.41
5,062
3,582
7,712
10,493
43
909
55
213
31.41 % $
15.02
30.38
2.82
0.57
5.00
0.03
14.77
4,889
5,371
6,158
2,012
38
479
168
381
% of Loans
in Category
to Total Loans
29.46 %
16.50
25.17
8.35
0.04
2.93
0.10
17.45
21,571
100.00 % $
28,069
100.00 % $
19,496
100.00 %
(Dollars in thousands)
Commercial real estate $
Commercial
Enterprise value
Digital assets
Residential real estate
Construction and land
development
Consumer
Mortgage warehouse
Total allowance for
credit losses
$
More information regarding the Allowance for Credit Losses for Loans can be found in Note 2 – Accounting Policies of the Notes to
the Consolidated Financial Statements.
43
Securities Portfolio
The following table sets forth the composition of our securities portfolio at the dates indicated.
2023
At December 31,
2022
2021
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
11,785 $
8,319
11,400 $
7,535
11,894 $
7,197
11,071 $
6,274
12,002 $
8,141
10,405
30,509 $
9,636
28,571 $
12,366
31,457 $
11,255
28,600 $
15,842
35,985 $
12,591
8,255
15,991
36,837
(In thousands)
Securities available-
for-sale:
State and municipal $
Asset-backed
Government
mortgage-backed
Total
$
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2023 are
summarized in the following table. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within
the various maturity ranges. These repricing schedules are not reflected in the table below. Weighted average yields are calculated based
on amortized cost and no tax-equivalent yield adjustments have been made, as the amount of tax-free interest-earning assets is
immaterial.
One Year or Less One Year to Five
More than
Weighted
Weighted
More than
Five Years to Ten
Weighted
More than
Ten Years
Weighted
Total
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair
Weighted
Average
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Value Yield
557 3.00% $
299
4.30% $
1,727
3.06% $
9,202
2.61% $ 11,785 $11,400
2.73%
—
—%
—
—%
6,218
2.31%
2,101
2.75%
8,319 7,535
2.42%
—
557
—%
$
603
902
1.73%
2,384
$ 10,329
2.81%
7,418
$ 18,721
2.85%
10,405 9,636
$ 30,509 $28,571
2.78%
(Dollars in
thousands)
Securities
available-for-sale:
State and municipal $
Asset-backed
securities
Government
mortgage-backed
securities
Total
$
Our portfolio of investment securities are all available for sale, and consist of state and municipal securities, asset-backed securities,
and government mortgage-backed securities and are reported at fair value. More information regarding the security classifications can
be found in Note 3 – Debt Securities of the Notes to the Consolidated Financial Statements.
Deposits
Total deposits increased $51.6 million, or 4.0%, to $1.33 billion at December 31, 2023 from $1.28 billion at December 31, 2022. The
increase in deposits was primarily driven by listing service deposits, which were $136.8 million at December 31, 2023, compared to
$7.0 million at December 31, 2022. This increased reliance on listing services and wholesale funding was in response to a decrease in
core deposits of $98.4 million, or 9.5%. The Bank intends to re-engage with its retail footprint to enhance core deposit growth and
mitigate its usage of wholesale funding.
44
The following tables set forth the distribution of total deposits by account type at the dates indicated.
Noninterest-bearing:
Demand
Interest-bearing:
NOW
Regular savings
Money market deposits
Certificates of deposit
Total
2023
Amount
Percent
At December 31,
2022
Amount
Percent
(Dollars in thousands)
2021
Amount
Percent
$
308,769
23.19% $
520,226
40.66% $
626,587
42.92%
93,812
231,593
456,408
240,640
1,331,222
$
7.05%
17.40%
34.28%
18.08%
100.00% $
145,533
141,802
318,417
153,604
1,279,582
11.37%
11.08%
24.89%
12.00%
100.00% $
197,884
155,267
419,625
60,532
1,459,895
13.55%
10.64%
28.74%
4.15%
100.00%
As of December 31, 2023, $180.0 million of our certificates of deposit were brokered certificates of deposit compared to $120.1 million
and $20.2 million at December 31, 2022 and 2021, respectively. As of December 31, 2023 deposits totaling $480.4 million were in
excess of the FDIC’s $250,000 insurance limit but were insured in full through our participation in the Massachusetts Depositors
Insurance Fund (“DIF”).
As of December 31, 2023, the aggregate amount of all of our certificates of deposit in amounts greater than or equal to $250,000, which
excludes all brokered certificates, was approximately $24.7 million, of which $22.9 million is set to mature in 2024. This shorter duration
allows the Bank repricing optionality, to maximize the benefits of any potential easing in the funding environment in 2024. The following
table sets forth the maturity of these certificates as of December 31, 2023.
Maturity Period
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
Borrowings
At
December 31, 2023
(In thousands)
$
$
10,538
4,381
7,997
1,764
24,680
Borrowings were $104.7 million and $126.8 million at December 31, 2023 and 2022, respectively. At December 31, 2023, advances
from the FHLB consisted of overnight advances of $95.0 million and advances with original maturities greater than one year of $9.7
million. The interest rate on the overnight advance was 5.56% at December 31, 2023. The interest rates on FHLB long-term advances
ranged from 1.21% to 1.32%, with a weighted average interest rate of 1.28% at December 31, 2023.
Shareholders’ Equity
As of December 31, 2023, shareholders’ equity was $221.9 million compared to $207.5 million at December 31, 2022, which represents
an increase of $14.4 million, or 6.9%. The increase was primarily due to net income of $11.0 million. Shareholders’ equity also increased
due to stock-based compensation of $1.3 million, employee stock ownership plan shares earned of $785,000, and a one-time cumulative-
effect adjustment of $696,000, net of taxes, for the adoption of CECL.
45
Average Balance Sheets and Related Yields and Rates
The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. No
tax-equivalent yield adjustments have been made, as we consider the amount of tax-free interest-earning assets is immaterial. All average
balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below
include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (1)(2)
Short-term investments
Debt securities available-for-sale
Federal Home Loan Bank stock
Total interest-earning assets
Non-interest earning assets
Total assets
Interest-bearing liabilities:
Savings accounts
Money market accounts
Now accounts
Certificates of deposit
Total interest-bearing deposits
Borrowings
Short-term borrowings
Long-term borrowings
Total borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Total liabilities
Total equity
Total liabilities and equity
Net interest income
Interest rate spread (3)
Net interest-earning assets (4)
Net interest margin (5)
Average interest-earning assets to
interest-bearing liabilities
105,187
$ 1,671,832
$ 174,110
2023
Interest
Earned/ Yield/ Average
Balance
Paid
For the Year Ended December 31,
2022
Interest
Earned/ Yield/ Average
Balance
Paid
Rate
Rate
2021
Interest
Earned/ Yield/
Rate
Paid
Average
Balance
$ 1,348,425 $ 79,469 5.89% $ 1,476,426 $ 77,253 5.23% $1,320,222 $ 63,873 4.84%
208 0.13%
708 2.08%
14 1.69%
1,566,645 90,297 5.76% 1,628,824 79,327 4.87% 1,514,727 64,803 4.28%
9,879 5.24%
769 2.79%
180 8.69%
1,277 1.08%
753 2.35%
44 2.64%
159,656
34,022
827
118,726
32,005
1,667
188,572
27,576
2,072
98,049
$ 1,726,873
72,995
$1,587,722
474,845 16,605 3.50%
111,809
767 0.69%
223,585 10,089 4.51%
984,349 30,589 3.11%
3,128 1.80% $ 152,964
341,324
219,743
74,995
789,026
235 0.15% $ 151,586
406,392
162,618
122,619
843,215
1,968 0.58%
531 0.24%
844 1.13%
3,578 0.45%
196 0.13%
1,680 0.41%
416 0.26%
793 0.65%
3,085 0.37%
27,018
13,442
40,460
1,314 4.86%
223 1.66%
1,537 3.80%
1,024,809 32,126 3.13%
11,421
14,308
25,729
814,755
422 3.69%
297 2.08%
719 2.79%
4,297 0.53%
3
13,500
13,503
856,718
—
—%
285 2.11%
285 2.11%
3,370 0.39%
415,222
16,955
1,456,986
214,846
$ 1,671,832
661,368
18,881
1,495,004
231,869
$ 1,726,873
476,743
18,895
1,352,356
235,366
$1,587,722
$ 58,171
$ 75,030
$ 61,433
$ 541,836
$ 814,069
$ 658,009
2.63%
4.34%
3.71%
4.61%
3.88%
4.06%
152.87%
199.92%
176.81%
(1) Interest earned/paid on loans also includes $3.7 million, $4.3 million and $5.3 million in loan fee income for the years ended
December 31, 2023, 2022, and 2021, respectively.
(2) Includes loans held for sale.
(3) Interest rate spread represents the difference between the weighted average yield on interest-bearing assets and the weighted average
rate of interest-bearing liabilities.
(4) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total interest-earning assets.
46
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes
in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this
table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the
changes due to rate and the changes due to volume. There are no out-of-period adjustments excluded from the table below.
Year Ended December 31,
2023 vs. 2022
Year Ended December 31,
2022 vs. 2021
Total
Total
Increase (Decrease) Due to
Volume
Rate
Increase
(Decrease)
Increase (Decrease) Due to
Volume
Rate
Increase
(Decrease)
(In thousands)
Interest-earning assets:
$
Loans
Short-term investments
Debt securities available-for-sale
Federal Home Loan Bank stock
Total interest-earning assets
9,258 $
7,467
128
123
16,976
(7,042) $
1,135
(112)
13
(6,006)
2,216 $
8,602
16
136
10,970
5,458 $
1,136
89
11
6,694
7,922 $
(67)
(44)
19
7,830
13,380
1,069
45
30
14,524
Interest-bearing liabilities:
Savings accounts
Money market accounts
Now accounts
Certificates of deposit
Total interest-bearing deposits
Borrowings
Short-term borrowings
Long-term borrowings
Total borrowings
Total interest-bearing liabilities
Change in net interest and dividend
income
2,856
13,588
598
5,575
22,617
168
(57)
111
22,728
37
1,049
(362)
3,670
4,394
724
(17)
707
5,101
2,893
14,637
236
9,245
27,011
892
(74)
818
27,829
37
588
(24)
437
1,038
2
(5)
(3)
1,035
2
(300)
139
(386)
(545)
420
17
437
(108)
39
288
115
51
493
422
12
434
927
$
(5,752) $
(11,107) $
(16,859) $
5,659 $
7,938 $
13,597
Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022
General. Net income for the year ended December 31, 2023 was $11.0 million, which represents a $32.5 million increase over the
previous year. Interest and dividend income increased $11.0 million due to improved yields on our interest-earning assets but was more
than offset by an increase of $27.8 million in interest expense. The decrease in credit loss expense of $57.1 million decrease for the year
ended December 31, 2023 compared to the year ended December 31, 2022 was primarily driven by decreases in net charge-offs which
were approximately $4.8 million for the year ended December 31, 2023 compared to $47.9 million for the year ended December 31,
2022.
Net Interest and Dividend Income. Net interest and dividend income was $58.2 million for the year ended December 31, 2023, a
decrease of $16.9 million, or 22.5%, compared to the year ended December 31, 2022. This decrease included an increase in interest and
dividend income of $11.0 million, or 13.8%, to $90.3 million for the year ended December 31, 2023, compared to $79.3 million for the
year ended December 31, 2022. This was more than offset by an increase of $27.8 million, or 647.6% in interest expense to $32.1 million
for the year ended December 31, 2023, compared to $4.3 million for the year ended December 31, 2022.
Interest and Dividend Income. Interest and dividend income increased $11.0 million, or 13.8%, to $90.3 million for the year ended
December 31, 2023, from $79.3 million for the year ended December 31, 2022. The increase in interest and dividend income was
primarily driven by the higher interest rate environment, which resulted in an increase in interest on short-term investments of $8.6
million, or 673.6%, and an increase in interest and fees on loans of $2.2 million, or 2.9%. The yield on short-term investments increased
385.19% to 5.24% for the year ended December 31, 2023, compared to 1.08% for the year ended December 21, 2022. The yield on
loans increased 12.6% to 5.89% for the year ended December 31, 2023, compared to 5.23% for the year ended December 31, 2022. The
increases in yields were partially offset by a decrease in the average balance of loans.
47
Interest Expense. Interest expense increased $27.8 million, or 647.6%, to $32.1 million for the year ended December 31, 2023, from
$4.3 million for the year ended December 31, 2022. This increase was primarily due to increases in the cost and average balances of
interest-bearing deposits. The cost of interest-bearing deposits increased 591.1% to 3.11% for the year ended December 31, 2023,
compared to 0.45% for the year ended December 31, 2022. This increase was due to both the rising interest rate environment and a
larger concentration of our portfolio in higher yield deposit products. The cost of borrowings increased 36.2% to 3.80% for the year
ended December 31, 2023, compared to 2.79% for the year ended December 31, 2022.
Provision for Credit Losses. A credit loss benefit of $678,000 was recognized for the year ended December 31, 2023, based on the new
expected loss model, compared to an expense of $56.4 million for the year ended December 31, 2022, which was based on the incurred
loss model. The credit loss benefit recognized for the year ended December 31, 2023, was driven by a decrease in the reserve on unfunded
commitments of $1.6 million. This decrease was the result of the early 2023 exiting of relationships that maintained $7.1 million in
digital asset lines of credit. This benefit was offset by general loan provisions of $863,000. The provision of $56.4 million for the year
ended December 31, 2022 were primarily related to the write-down of loans secured by cryptocurrency mining rigs. Net charge offs for
the year ended December 31, 2023 totaled approximately $4.8 million and were predominantly related to our enterprise value portfolio,
compared to net charge offs for the year ended December 31, 2022 which totaled approximately $47.9 million and were predominantly
related to loans secured by cryptocurrency mining rigs.
Noninterest Income. Noninterest income information is as follows.
Years Ended
December 31,
Change
(Dollars in thousands)
Customer service fees on deposit accounts
Service charges and fees - other
Bank owned life insurance
Gains on loans sold, net
Other income
Total noninterest income
2023
2022
Amount
Percent
$
$
3,658 $
1,825
1,120
—
458
7,061 $
2,931 $
1,770
1,046
272
130
6,149 $
727
55
74
(272)
328
912
24.8 %
3.1 %
7.1 %
(100.0) %
252.3 %
14.8 %
The increase in noninterest income was primarily due to implementation and activity fees related to our BaaS products of $1.2 million
for the year ended December 31, 2023, compared to $278,000 for the year ended December 31, 2022.
Noninterest Expense. Noninterest expense information is as follows.
$
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Equipment expense
Deposit insurance
Data processing
Marketing expense
Professional fees
Directors' compensation
Software depreciation and implementation
Insurance expense
Service fees
Other
Total noninterest expense
$
Years Ended
December 31,
Change
2023
2022
Amount
Percent
31,737 $
1,702
582
1,023
1,374
412
4,695
1,026
1,450
1,791
931
5,286
52,009 $
(471)
(10)
17
491
171
228
148
(349)
555
13
223
(1,892)
(876)
(1.5) %
(0.6) %
2.9 %
48.0 %
12.4 %
55.3 %
3.2 %
(34.0) %
38.3 %
0.7 %
24.0 %
(35.8) %
(1.7) %
31,266 $
1,692
599
1,514
1,545
640
4,843
677
2,005
1,804
1,154
3,394
51,133 $
48
The decrease in noninterest expense was primarily due to decreases in salaries and employee benefits, directors’ compensation and
other, partially offset by increases in deposit insurance and software depreciation and implementation. Salaries and employee benefits
decreased primarily due to an expense during the fourth quarter of 2022 related to an agreement between the Bank and the Company
and their former President and Chief Executive Officer entered into upon his separation from employment. Directors’ compensation
decreased due to fewer directors in 2023 when compared to 2022. The decrease in other expenses was primarily due to expenses incurred
in 2022 related to a write down of a Small Business Administration (“SBA”) receivable in the first quarter of 2022, and elevated loan
servicing expenses relating to loans secured by cryptocurrency mining rigs for the year ended December 31, 2022. Deposit insurance
increased primarily due to an increase in the FDIC’s insurance assessment rate schedules. Software depreciation and implementation
expenses increased due to the implementation of new software to support business processes and product improvements.
Income Tax Provision. We recorded an income tax expense of $3.8 million for the year ended December 31, 2023, reflecting an effective
tax rate of 25.9%, compared to a benefit of $5.8 million for the year ended December 31, 2022, reflecting an effective tax rate of (21.2%).
The tax benefit for the year ended December 31, 2022 was related to the net loss that was recorded for that period.
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is
interest rate risk. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits.
As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to
changes in market interest rates. We have established a management-level Asset/Liability Management Committee, which takes initial
responsibility for developing an asset/liability management process and related procedures, establishing and monitoring reporting
systems and developing asset/liability strategies. On at least a quarterly basis, the Asset/Liability Management Committee reviews
asset/liability management with the Investment Asset/Liability Committee that has been established by the Board of Directors. This
committee also reviews any changes in strategies as well as the performance of any specific asset/liability management actions that have
been implemented previously. On a quarterly basis, an outside consulting firm provides us with detailed information and analysis as to
asset/liability management, including our interest rate risk profile. Ultimate responsibility for effective asset/liability management rests
with our Board of Directors.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest
rates. We have implemented the following strategies to manage our interest rate risk: originating loans with adjustable interest rates;
promoting core deposit products; and adjusting the interest rates and maturities of funding sources, as necessary. In addition, we no
longer originate single-family residential real estate loans, which often have longer terms and fixed rates. By following these strategies,
we believe that we are better positioned to react to changes in market interest rates.
Net Interest Income Simulation. We analyze our sensitivity to changes in interest rates through a net interest income simulation model.
Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities,
and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income
would be for a 12-month period in the current interest rate environment. We currently 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 BankProv, calculated on a bank-only basis, that would
result from changes in market interest rates over twelve-month periods beginning December 31, 2023 and 2022.
(Dollars in thousands)
Changes in Interest Rates (Basis Points)
300
200
100
0
(100)
(200)
(300)
At December 31,
2023
2022
Estimated
Net Interest Income
Over Next 12
Months
Estimated
Net Interest Income
Over Next 12
Months
Change
$
47,002
48,184
49,345
50,472
51,457
52,023
52,187
49
(6.90) % $
(4.50)
(2.20)
—
2.00
3.10
3.40
56,084
56,176
56,259
56,286
53,345
50,216
46,983
Change
(0.40) %
(0.20)
—
—
(5.20)
(10.80)
(16.50)
Economic Value of Equity Simulation. We also analyze our sensitivity to changes in interest rates through an economic value of equity
(“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash
flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The EVE ratio represents the dollar amount of our
EVE divided by the present value of our total assets for a given interest rate scenario. EVE attempts to quantify our economic value
using a discounted cash flow methodology while the EVE ratio reflects that value as a form of capital ratio. We estimate what our EVE
would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios
representing immediate and permanent, parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest
rates increase 100, 200, 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 BankProv, calculated on a bank-only basis, that would result from changes
in market interest rates as of December 31, 2023 and 2022.
(Dollars in thousands)
Changes in Interest Rates (Basis Points)
300
200
100
0
(100)
(200)
(300)
At December 31,
2023
2022
Economic
Value of
Equity
Change
Economic
Value of
Equity
$
255,339
261,705
270,493
276,438
277,376
272,729
260,766
(7.60) % $
(5.30)
(2.20)
—
0.30
(1.30)
(5.70)
290,408
294,054
301,169
305,978
300,072
288,368
267,139
Change
(5.10) %
(3.90)
(1.60)
—
(1.90)
(5.80)
(12.70)
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require
making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the tables presented above assume that the composition of our interest-sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables
provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of
deposit inflows, borrowings, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of
loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition.
We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2)
expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability
management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term
securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and
investing activities during any given period. At December 31, 2023, cash and cash equivalents totaled $220.3 million. Debt securities
classified as available-for-sale, which provide additional sources of liquidity, totaled $28.6 million at December 31, 2023. Warehouse
loans that have a short-term duration also provide additional sources of liquidity. The balance that meets the definition of a liquid assets
totaled $131.7 million as of December 31, 2023.
At December 31, 2023, we had a borrowing capacity of $126.3 million with the Federal Home Loan Bank of Boston, of which $95.0
million in overnight advances and $9.7 million in advances with original maturities greater than one year were outstanding. At
December 31, 2023, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of
$282.4 million.
50
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, 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, the Federal Reserve Bank of
Boston, or obtain additional funds through brokered certificates of deposit.
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our
customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets. At December 31, 2023 and 2022, we had $8.6 million and
$6.1 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at December 31, 2023 and
2022, we had $178.2 million and $347.7 million in unadvanced funds to borrowers, respectively. We also had $1.7 million in outstanding
letters of credit at December 31, 2023 and 2022.
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 December 31, 2023, BankProv exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under
regulatory guidelines. See Note 12 – Regulatory Matters of the Notes to the Consolidated Financial Statements for additional
information.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements that are applicable to Provident Bancorp, Inc., see Note 2 of the
Notes to the Consolidated Financial Statements.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data included in this Annual Report have been prepared in accordance with
generally accepted accounting principles in the United States of America, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due
to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in
the same direction or to the same extent as the prices of goods and services.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, including supplemental data, of Provident Bancorp, Inc. begin on page F-1 of this Annual
Report.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
ITEM 9.
DISCLOSURE
None.
51
ITEM 9A.
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President
and Chief Executive Officer and the Senior Vice President, Finance, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended) as of December 31, 2023. Based on that evaluation, the Company’s management, including the President and Chief Executive
Officer and the Senior Vice President, Finance, concluded that the Company’s disclosure controls and procedures were effective.
Management’s Report Regarding Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such
terms are defined in Rule 13a-15(f) of the Exchange Act of 1934. Our system of internal controls is designed to provide reasonable
assurance that the financial statements that we provide to the public are fairly presented.
Our internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and dispositions of assets, (ii) provide reasonable assurances that transactions
are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in
the United States of America and that receipts and expenditures are being made only in accordance with authorizations of management
and the directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Accordingly, absolute
assurance cannot be provided that the effectiveness of the internal control systems may not become inadequate in future periods because
of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. In making
this assessment, the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-
Integrated Framework (2013) was utilized. Based on this assessment, management believes that, as of December 31, 2023, the
Company’s internal control over financial reporting is effective at the reasonable assurance level.
The Annual Report on Form 10-K does not include an attestation report on the Company’s internal control over financial reporting from
the Company’s independent registered public accounting firm due to the Company’s status as a smaller reporting company.
Remediation of Previously Identified Material Weakness
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a
timely basis.
The Company’s Audit Committee, and subsequently the Board of Directors, reviewed, with the assistance of outside legal counsel who
were independent of the underlying matters, the facts and circumstances relating to the Company’s digital asset lending practices. In
connection with this review, certain deficiencies in the Company’s internal controls were identified, which, in management’s opinion,
when evaluated collectively, amounted to a material weakness in the Company’s internal control over financial reporting initially
reported as of September 30, 2022. This material weakness in the control environment stemmed from “tone at the top” issues that
contributed to a control environment that was insufficiently tailored to monitoring of risks as it relates to the digital asset lending
program. This material weakness was a result of weaknesses in the following:
(cid:120) The precision of the design and maintenance of effective controls to sufficiently address risks pertaining to internal conflicts
(cid:120)
of interest related to the digital asset lending program; and,
effective avenues of communication regarding certain relevant information to the Board of Directors of the Company, related
to the digital asset lending program.
52
Remediation Efforts
Management has completed their efforts to remediate deficiencies that contributed to the material weakness initially identified as of
September 30, 2022.
The following represents management’s remediation plan and status:
1) The Company revised its three-year strategic plan as approved by its Board of Directors. The revised plan included the ceasing
of any new loans secured by digital assets or cryptocurrency mining rigs. The Company effectively deployed this strategic plan
with respect to loans secured by digital assets or cryptocurrency mining rigs as it did not originate any such new loans throughout
2023.
The Company continues to monitor the remaining loan in the digital asset lending program, including communicating certain
relevant information to the Board of Directors of the Company.
2) The Company developed and implemented an appropriate onboarding and ongoing monitoring process to identify and
sufficiently address the related risks associated with internal conflicts of interest specific to the digital asset lending program.
3) The company designed and implemented enhanced procedures to identify and sufficiently address the annual review and
disclosure to the Board of identified internal conflicts of interest as they relate to officers of the Company, and the timely
disclosure to the Board of identified potential internal conflicts related to officers of the Company specific to the digital asset
lending program.
The Company’s remediation steps outlined above strengthened its internal control over financial reporting. As a result, management
concluded that it had remediated the material weakness as of December 31, 2023.
Changes in Internal Control over Financial Reporting
Other than the remediation efforts with respect to the material weakness as described above, there were no changes in the Company’s
internal control over financial reporting during the year ended December 31, 2023 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
Securities Trading Plans of Directors and Executive Officers
During the three months ended December 31, 2023, none of our directors or executive officers adopted or terminated any contract,
instruction or written plan for the purchase or sale of the Company’s securities that was intended to satisfy the affirmation defense
conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement”.
ITEM 9C.
DISLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
53
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information in the Company’s definitive Proxy Statement for the 2024 Annual Meeting of Stockholders under the captions “Proposal
1—Election of Directors,” “Information About Executive Officers,” “Delinquent Section 16(a) Reports,” “Corporate Governance—
Code of Ethics for Senior Officers,” “Nominating and Corporate Governance Committee Procedures—Procedures to be Followed by
Stockholders,” “Corporate Governance—Committees of the Board of Directors” and “—Audit Committee” is incorporated herein by
reference.
A copy of the Code of Ethics is available to shareholders on the “Governance” portion of the Investor Relations’ section on the
Company’s website at www.bankprov.com.
ITEM 11.
EXECUTIVE COMPENSATION
The information in the Company’s definitive Proxy Statement for the 2024 Annual Meeting of Stockholders under the caption
“Executive Compensation,” “Director Compensation,” and “Corporate Governance—Committees of the Board of Directors—
Compensation Committee” is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
The information in the Company’s definitive Proxy Statement for the 2024 Annual Meeting of Stockholders under the caption “Stock
Ownership” is incorporated herein by reference.
Equity Compensation Plan Information
Th following table sets forth information regarding outstanding options and shares under equity compensation plans at December 31,
2023:
Equity Compensation Plan Information
Number of Securities
to Be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights (1)
Number of Securities
Remaining Available
for Future Issuance
Under Share-based
Compensation Plans
(excluding securities
reflected in first
column)
1,188,763 $
—
1,188,763 $
10.99
—
10.99
422,578
—
422,578
Equity compensation plans approved by security
holders
Equity compensation plans not approved by security
holders
Total
(1) Reflects weighted average price of stock options only
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information in the Company’s definitive Proxy Statement for the 2024 Annual Meeting of Stockholders under the captions
“Transactions with Certain Related Persons” and “Proposal 1 — Election of Directors” is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information in the Company’s definitive Proxy Statement for the 2024 Annual Meeting of Stockholders under the captions “Proposal
2—Ratification of Independent Registered Public Accounting Firm—Audit Fees” and “—Pre-Approval of Services by the Independent
Registered Public Accounting Firm” is incorporated herein by reference.
PART IV
54
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following documents are filed as part of this Form 10-K.
(i) Report of Independent Registered Public Accounting Firm
(ii) Consolidated Balance Sheets
(iii) Consolidated Statements of Operations
(iv) Consolidated Statements of Comprehensive (Loss) Income
(v) Consolidated Statements of Changes in Shareholders’ Equity
(vi) Consolidated Statements of Cash Flows
(vii) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
3.1
3.2
3.3
3.4
4.1
4.2
10.1
10.2
10.3
10.4
10.5
Articles of Organization of Provident Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement
on Form S-1 of Provident Bancorp, Inc. (file no. 333-232018), initially filed with the Securities and Exchange Commission
on June 7, 2019)
Bylaws of Provident Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (file
no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019)
Amendment to Bylaws of Provident Bancorp, Inc. (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)
Amendment to Bylaws of Provident Bancorp, Inc. (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)
Form of Common Stock Certificate of Provident Bancorp, Inc. (incorporated by reference to Exhibit 4 to the Registration
Statement on Form S-1 (file no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019)
Description of registrant’s securities (incorporated by reference to Exhibit 4.2 to the Annual Report on Form 10-K of
Provident Bancorp, Inc. for the year ended December 31, 2019, filed on March 13, 2020)
The Provident Bank Executive Annual Incentive Plan† (incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form S-1 (file no. 333-202716), initially filed with the Securities and Exchange Commission on March 13,
2015)
The Provident Bank 2005 Amended and Restated Long-Term Incentive Plan† (incorporated by reference to Exhibit 10.9 to
the Registration Statement on Form S-1 of Provident Bancorp, Inc. (file no. 333-202716), initially filed with the Securities
and Exchange Commission on March 13, 2015)
Provident Bancorp, Inc. 2016 Equity Incentive Plan† (incorporated by reference to Appendix A to the definitive proxy
statement for the Special Meeting of Shareholders of Provident Bancorp, Inc. (File No. 001-37504), filed on August 9, 2016)
Form of Incentive Stock Option Award Agreement† (incorporated by reference to Exhibit 10.2 to the Registration Statement
on Form S-8 (File No. 333-214702), filed with the Securities and Exchange Commission on November 18, 2016)
Form of Non-Statutory Incentive Stock Option Award Agreement† (incorporated by reference to Exhibit 10.3 to the
Registration Statement on Form S-8 (File No. 333-214702), filed with the Securities and Exchange Commission on
November 18, 2016)
10.6
Form of Restricted Stock Award Agreement† (incorporated by reference to Exhibit 10.4 to the Registration Statement on
Form S-8 (File No. 333-214702), filed with the Securities and Exchange Commission on November 18, 2016)
10.7
Provident Bancorp, Inc. 2020 Equity Incentive Plan (incorporated by reference to Appendix A to the proxy statement for
the Special Meeting of Shareholders of Provident Bancorp, Inc. (file no. 001-39090), filed on October 19, 2020)
10.8
Form of Incentive Stock Option Award Agreement† (incorporated by reference to Exhibit 10.2 to the Registration Statement
on Form S-8 (File No. 333-250886), filed with the Securities and Exchange Commission on November 23, 2020)
10.9
Form of Non-Qualified Stock Options Award Agreement† (incorporated by reference to Exhibit 10.3 to the Registration
Statement on Form S-8 (File No. 333-250886), filed with the Securities and Exchange Commission on November 23, 2020)
55
10.10
Form of Restricted Stock Award Agreement† (incorporated by reference to Exhibit 10.4 to the Registration Statement on
Form S-8 (File No. 333-250886), filed with the Securities and Exchange Commission on November 23, 2020)
10.11
Employment Agreement with Joseph B. Reilly† (incorporated by reference to Exhibit 10.1to the Current Report on Form 8-
10.12
10.13
10.14
K of Provident Bancorp, Inc. (File No. 001-37504), filed by the Company on February 21, 2023)
Amended and Restated Employment Agreement with Carol L. Houle† (incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37514), filed by the Company on February 21, 2023)
Amended and Restated Employment Agreement with Joseph Mancini† (incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37504), filed by the Company on February 21, 2023)
Standstill Agreement by and among Provident Bancorp, Inc., Stilwell Activist Fund, L.P., Stilwell Activist Investments,
L.P., Stilwell Partners, L.P., Stilwell Value LLC, Joseph Stilwell and Dennis Pollack (incorporated by reference to Exhibit
10 to the Current Report on Form 8-K of Provident Bancorp, Inc. (File No. 001-37504), filed by the Company on October
31, 2023)
21
23.1
31.1
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 of
Provident Bancorp, Inc. (file no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019)
Consent of Independent Registered Public Accounting Firm (Crowe LLP)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following financial statements from Provident Bancorp, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2023, filed on March 28, 2024, formatted in XBRL: (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) the Notes to Consolidated Financial
Statements.
_________________
† Compensatory arrangements.
ITEM 16.
FORM 10-K SUMMARY
None.
56
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 28, 2024
PROVIDENT BANCORP, INC.
/s/ Joseph B. Reilly
Joseph B. Reilly
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Joseph B. Reilly
Joseph B. Reilly
/s/ Kenneth R. Fisher
Kenneth R. Fisher
/s/ Julienne R. Cassarino
Julienne R. Cassarino
/s/ Kathleen Chase Curran
Kathleen Chase Curran
/s/ Frank G. Cousins, Jr.
Frank G. Cousins, Jr.
/s/ James A. DeLeo
James A. DeLeo
/s/ Lisa B. DeStefano
Lisa B. DeStefano
/s/ Laurie H. Knapp
Laurie H. Knapp
/s/ Barbara A. Piette
Barbara A. Piette
/s/ Dennis S. Pollack
Dennis S. Pollack
/s/ Arthur W. Sullivan
Arthur W. Sullivan
President, Chief Executive Officer, and
Director (Principal Executive Officer)
March 28, 2024
Senior Vice President, Finance (Acting
Principal Financial and Accounting Officer)
March 28, 2024
March 28, 2024
March 28, 2024
March 28, 2024
March 28, 2024
March 28, 2024
March 28, 2024
March 28, 2024
March 28, 2024
March 28, 2024
Director
Director
Director
Director
Director
Director
Director
Director
Director
57
PROVIDENT BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm – Crowe LLP (PCAOB ID 173)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-2
F-4
F-5
F-6
F-7
F-8
F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Provident Bancorp, Inc. and Subsidiary
Amesbury, Massachusetts
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Provident Bancorp, Inc. and Subsidiary (the "Company") as of
December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’
equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred
to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for credit losses
effective January 1, 2023 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codifications
No. 326, Financial Instruments – Credit Losses (Topic 326). The Company adopted the new credit loss standard using the modified
retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously
applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also
communicated as a critical audit matter below.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matter(cid:3)
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the
critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating
the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it
relates.
Allowance for Credit Losses for Loans – Qualitative Factors
As described in Notes 2 and 4, the allowance for credit losses for loans (“ACLL”) is an accounting estimate of expected credit losses
over the contractual life of financial assets carried at amortized cost. The Company has identified the ACLL as a critical accounting
estimate.
Management 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.
F-2
For all pooled loans except for Mortgage Warehouse, the Company utilizes a discounted cash flow (“DCF”) methodology to estimate
credit losses over the expected life of the loan. The Mortgage Warehouse portfolio utilizes a remaining life methodology. These
quantitative factors are also supplemented by certain qualitative factors reflecting management’s view of how losses may vary from
those represented by quantitative rates. Qualitative factors considered by management include 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, 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. Changes in these assumptions could have a material
effect on the Company’s financial results.
We considered auditing the qualitative factors to be a critical audit matter due to the significant judgment by management to determine
the qualitative factors, which led to a high degree of auditor judgment, subjectivity and effort to evaluate the qualitative factors.
The primary procedures we performed to address this critical audit matter included:
(cid:120) Substantively testing management’s process to estimate the allowance for credit losses for loans qualitative factors calculation,
including:
o Evaluating the reasonableness of management’s methodology for developing the qualitative factors.
o Evaluating the relevance and reliability of the internal and external data utilized in the determination of the qualitative
factors.
o Testing the mathematical accuracy of the allowance for credit losses for loans calculation, including qualitative factors.
o Evaluating the reasonableness of management’s judgments and subjective measurements used in the qualitative factor
calculation.
/s/ Crowe LLP
We have served as the Company's auditor since 2020.
Boston, Massachusetts
March 28, 2024
F-3
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2023 and 2022
(Dollars in thousands)
Assets
Cash and due from banks
Short-term investments
Cash and cash equivalents
Debt securities available-for-sale (at fair value)
Federal Home Loan Bank stock, at cost
Loans, net of allowance for credit losses of $21,571 and $28,069 as of
December 31, 2023 and December 31, 2022, respectively
Bank owned life insurance
Premises and equipment, net
Other repossessed assets
Accrued interest receivable
Right-of-use assets
Deferred tax asset, net
Other assets
Total assets
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Borrowings:
Short-term borrowings
Long-term borrowings
Total borrowings
Operating lease liabilities
Other liabilities
Total liabilities
Shareholders' equity:
At
December 31,
2023
At
December 31,
2022
$
22,200 $
198,132
220,332
28,571
4,056
1,321,158
44,735
12,986
—
6,090
3,780
14,461
14,140
1,670,309 $
$
$
308,769 $
1,022,453
1,331,222
95,000
9,697
104,697
4,171
8,317
1,448,407
42,923
37,706
80,629
28,600
4,266
1,416,047
43,615
13,580
6,051
6,597
3,942
16,793
16,261
1,636,381
520,226
759,356
1,279,582
108,500
18,329
126,829
4,282
18,146
1,428,839
Preferred stock; authorized 50,000 shares:
no shares issued and outstanding
Common stock, $0.01 par value, 100,000,000 shares authorized;
17,677,479 and 17,669,698 shares issued and outstanding
at December 31, 2023 and December 31, 2022, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Unearned compensation - ESOP
Total shareholders' equity
Total liabilities and shareholders' equity
$
—
—
177
124,129
106,285
(1,496)
(7,193)
221,902
1,670,309 $
177
122,847
94,630
(2,200)
(7,912)
207,542
1,636,381
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2023 and 2022
(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans
Interest and dividends on debt securities available-for-sale
Interest on short-term investments
Total interest and dividend income
Interest expense:
Interest on deposits
Interest on short-term borrowings
Interest on long-term borrowings
Total interest expense
Net interest and dividend income
Credit loss (benefit) expense - loans
Credit loss (benefit) expense - off-balance sheet credit exposures
Total credit loss (benefit) expense
Net interest and dividend income after credit loss (benefit) expense
Noninterest income:
Customer service fees on deposit accounts
Service charges and fees - other
Bank owned life insurance income
Gain on loans sold, net
Other income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy expense
Equipment expense
Deposit insurance
Data processing
Marketing expense
Professional fees
Directors' compensation
Software depreciation and implementation
Insurance expense
Service fees
Other
Total noninterest expense
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Earnings (Loss) per share:
Basic
Diluted
Weighted Average Shares:
Basic
Diluted
$
$
$
$
Year Ended
December 31,
2023
December 31,
2022
79,469
949
9,879
90,297
30,589
1,314
223
32,126
58,171
863
(1,541)
(678)
58,849
3,658
1,825
1,120
—
458
7,061
31,266
1,692
599
1,514
1,545
640
4,843
677
2,005
1,804
1,154
3,394
51,133
14,777
3,823
10,954
0.66
0.66
$
$
$
$
77,253
797
1,277
79,327
3,578
422
297
4,297
75,030
56,409
19
56,428
18,602
2,931
1,770
1,046
272
130
6,149
31,737
1,702
582
1,023
1,374
412
4,695
1,026
1,450
1,791
931
5,286
52,009
(27,258)
(5,790)
(21,468)
(1.30)
(1.30)
16,586,180
16,594,685
16,482,623
16,482,623
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the Years Ended December 31, 2023 and 2022
(In thousands)
Net income (loss)
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period on debt securities available-
for-sale
Unrealized gain (loss)
Income tax effect
Total comprehensive income (loss)
Comprehensive income (loss)
2023
2022
$
10,954 $
(21,468)
919
919
(215)
704
11,658 $
(3,709)
(3,709)
860
(2,849)
(24,317)
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2023 and 2022
(cid:3)
(In thousands, except share data)
Stock
Stock
Shares of
Common
Common
Additional
Accumulated
Other
Unearned
Paid-in
Capital
Retained
Earnings
Comprehensive Compensation
(Loss) Income
ESOP
Total
Balance, December 31, 2021
Net loss
17,854,649
—
179
—
123,498
—
118,087
(21,468)
649
—
(8,631)
—
233,782
(21,468)
Dividends declared ($0.12 per
share) net of forfeitures
Other comprehensive loss
Stock-based compensation
expense, net of forfeitures
Restricted stock award grants net
of forfeitures
Repurchase of common stock
Stock options exercised, net
Shares surrendered related to tax
withholdings on restricted stock
awards
ESOP shares earned
Balance, December 31, 2022
Cumulative effect of change in
accounting principle (Note 4)
Balance at January 1, 2023 (as
adjusted for change in accounting
principle)
Net income
Dividends forfeited
Other comprehensive income
Stock-based compensation
expense, net of forfeitures
Restricted stock award grants, net
of forfeitures
Stock options exercised, net
Shares surrendered related to tax
withholdings on restricted stock
awards
ESOP shares earned
—
—
—
(9,673)
(180,434)
17,904
—
—
—
—
(1,989)
—
—
(2,849)
—
—
(1,989)
(2,849)
—
1,854
—
(2)
—
—
(2,858)
(108)
—
—
—
—
—
—
—
—
—
1,854
—
—
—
—
(2,860)
(108)
(12,748)
—
17,669,698
—
—
177
(113)
574
122,847
—
—
94,630
—
—
(2,200)
—
719
(7,912)
(113)
1,293
207,542
—
—
—
696
—
—
696
17,669,698
—
—
—
—
7,421
8,783
(8,423)
—
177
—
—
—
—
—
—
—
—
177 $
122,847
—
—
—
95,326
10,954
5
—
(2,200)
—
—
704
(7,912)
—
—
—
208,238
10,954
5
704
1,308
—
(18)
(74)
66
—
—
—
—
—
—
—
—
—
—
124,129 $
106,285 $
(1,496) $
—
—
—
1,308
—
(18)
—
719
(7,193) $
(74)
785
221,902
Balance, December 31, 2023
17,677,479 $
The accompanying notes are an integral part of these consolidated financial statements.
F-7
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2023 and 2022
(In thousands)
Cash flows from operating activities:
2023
2022
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
10,954 $
(21,468)
Amortization of securities, net of accretion
ESOP expense
Change in deferred loan fees, net
(Benefit) provision for credit losses
Depreciation and amortization
Net (Gain) loss on other repossessed assets
Decrease (increase) in accrued interest receivable
Deferred tax expense (benefit)
Share-based compensation expense
Bank-owned life insurance income
Principal repayments of operating lease liabilities
Gain on loans sold, net
Net decrease (increase) in other assets
Net (decrease) increase in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of available-for-sale securities
Proceeds from pay downs, maturities and calls of debt securities available-for-sale
Redemption (purchase) of Federal Home Loan Bank stock
Loan principal collections net of originations
Proceeds from loan sales
Proceeds from other repossessed asset sales
Proceeds from principal repayments on loans held for sale
Additions to premises and equipment
Write down of other repossessed assets
Write down of other assets and receivables
Net cash provided by (used in) investing activities
158
785
(1,259)
(678)
1,095
(145)
507
1,868
1,308
(1,120)
(111)
—
2,121
(9,931)
5,552
(1,817)
2,607
210
97,873
—
6,196
—
(339)
—
—
104,730
186
1,293
1,700
56,428
1,100
26
(894)
(5,976)
1,854
(1,046)
(105)
(272)
(11,348)
427
21,905
—
4,342
(3,481)
(61,104)
30,839
3,777
2,560
(262)
597
395
(22,337)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
PROVIDENT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS(cid:3031)(CONTINUED)
For the Years Ended December 31, 2023 and 2022
(In thousands)
Cash flows from financing activities:
Net decrease in noninterest-bearing accounts
Net increase (decrease) in interest-bearing accounts
Net cash dividends forfeited (paid) on common stock
Payments from exercise of stock options, net
Net change in short-term borrowings
Proceeds from Federal Home Loan Bank long-term advances
Repayments of Federal Home Loan Bank long-term advances
Shares surrendered related to tax withholdings on restricted stock awards
Repurchase of common stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures:
Interest paid
Income taxes paid
Reclassification of loans held for sale to loans held for investment
Loans transferred to other repossessed assets
2023
2022
(211,457)
263,097
5
(18)
(13,500)
—
(8,632)
(74)
—
29,421
139,703
80,629
220,332 $
31,988 $
163
—
—
(106,361)
(73,952)
(1,989)
(108)
108,500
4,840
(11)
(113)
(2,860)
(72,054)
(72,486)
153,115
80,629
4,278
5,156
9,599
10,451
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1(cid:3031)—(cid:3031)NATURE OF OPERATIONS
Provident Bancorp, Inc. (the “Company”) is a Maryland corporation that was incorporated in 2019 whose primary purpose is to act as
the holding company for BankProv (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. 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. 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 lending and deposit-gathering area encompasses the Seacoast Region of Northeastern Massachusetts and
Southeastern New Hampshire. However, we also receive deposits from business customers who are located nationwide in addition to
our enterprise value and mortgage warehouse loans which are offered nationwide. We attract deposits from the general public and use
those funds to originate primarily commercial real estate and commercial business loans, and to invest in securities. The Company
believes that it does not have any significant loan concentrations or investment securities in any one industry or with any customer.
However, the customers' ability to repay their loans is dependent on the real estate and general economic conditions in the area.
NOTE 2(cid:3031)—(cid:3031)ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of
America (“GAAP”) and predominant practices within the banking industry. The consolidated financial statements were prepared using
the accrual basis of accounting.
Use of Estimates
To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and
actual results could differ.
Basis of Presentation
The consolidated financial statements include the accounts of Provident Bancorp, Inc., its wholly owned subsidiary, the Bank, and the
Bank’s wholly owned subsidiaries, Provident Security Corporation, 5 Market Street Security Corporation, and Prov 1, LLC. Provident
Security Corporation and 5 Market Street Security Corporation were established to buy, sell, and hold investments for their own account.
Prov 1, LLC was established to engage in any lawful act or activity for which limited liability companies may be organized. A certificate
of cancellation was executed for Prov 1, LLC in 2023. All material intercompany balances and transactions have been eliminated in
consolidation.
Reclassification
Certain amounts in the prior year have been reclassified to be consistent with the current year’s consolidated financial statement
presentation. The reclassifications had no effect on the net income reported in the consolidated statements of operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash and deposits with other financial institutions with maturities fewer than 90 days. Net cash flows
are reported for customer loan and deposit transactions and interest-bearing deposits in other financial institutions.
Debt Securities
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to
hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Debt securities
available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are 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.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent or if full
collection of interest or principal becomes uncertain. Interest accrued but not received for a security placed on non-accrual 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 year ended December 31, 2023 or December 31, 2022.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank of Boston (the “FHLB”), the Bank is required to invest in $100 par value stock of the
FHLB. The FHLB capital structure mandates that members own stock as determined by their Total Stock Investment Requirement,
which is the sum of a member’s Membership Stock Investment Requirement and Activity-Based Stock Investment Requirement. FHLB
stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par
value. Both cash and stock dividends are reported as income.
Loans
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 totaled $5.9 million and $6.4 million at December 31, 2023 and
December 31, 2022, 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.
Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on non-
accrual status, unless secured by sufficient cash or other assets immediately convertible to cash. Residential real estate loans are generally
placed on non-accrual status when reaching 90 days past due. All closed-end consumer loans 90 days or more past due and any equity
line in the process of foreclosure are placed on non-accrual status. Secured consumer loans are written down to realizable value and
unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Past due status is
based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not received for loans placed on non-accrual 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.
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.
Allowance for Credit Losses
Allowance for Credit Losses - 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
characters.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial real estate: Loans in this segment are primarily income-producing properties throughout Massachusetts and New
Hampshire. The underlying cash flows generated by the properties 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.
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 digital asset loans. Loans in this segment were made to businesses in the digital asset space and
are generally secured by digital asset mining equipment or by the United States dollar value of digital currency assets of the business.
Repayment is 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 can have an effect on the credit quality of this segment.
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.
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, the accuracy of estimates of the value of the
property upon completion, time to sell at an adequate price, and market conditions.
Consumer: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
Mortgage warehouse: Loans in this segment are primarily facility lines to non-bank mortgage origination companies. The underlying
collateral of these loans are residential real estate loans. Loans are originated by the mortgage companies for sale into secondary markets,
which is typically within 15 days of the loan closing, with the exception of construction loans which generally take longer to pay off
due to the nature of the loan. 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.
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:
(cid:120) Changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and
recovery practices.
(cid:120) Changes in the experience, depth, and ability of lending management.
(cid:120) Changes in the quality of the organization’s loan review system.
(cid:120) The existence and effect of any concentrations of credit and changes in the levels of such concentrations.
(cid:120) 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 at a level by the Company to be sufficient to absorb expected lifetime losses
related to unfunded credit facilities (including unfunded loan commitments and letters of credit).
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company measures the ACLL using the following methods:
Portfolio Segment
Measurement Method
Loss Driver
Commercial real estate
Commercial
Enterprise value
Digital asset
Residential real estate
Construction and land development
Consumer
Mortgage warehouse
Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Discounted cash flow
(cid:3) Remaining life method
National unemployment rate, national GDP
(cid:3) National unemployment rate, national GDP
(cid:3) National unemployment rate, national GDP
(cid:3) National unemployment rate, national GDP
(cid:3) National unemployment rate, national HPI
(cid:3) National unemployment rate, national GDP
(cid:3) National unemployment rate, national GDP
(cid:3) Not applicable
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.
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 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 the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding
intent or requirement to sell is met.
Accrued interest receivable on available-for-sale debt securities totaled $192,000 at December 31, 2023 and is excluded from the
estimate of credit losses.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank Owned Life Insurance
The Bank has purchased life insurance policies on certain key executives. Bank owned life insurance policies are reflected on the
consolidated balance sheets at cash surrender value. Changes in the net cash surrender value of the policies are reflected in noninterest
income on the consolidated statements of operations and are not subject to income taxes.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related
allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the
respective accounts with any gain or loss included in income or expense. Depreciation on building and leasehold improvements is
calculated primarily using the straight-line method with useful lives of seven to 40 years. Furniture and fixtures are depreciated using
the straight-line method with useful lives of one to 15 years. Computer equipment is also depreciated using the straight-line method with
useful lives ranging from one to five years.
Other Real Estate Owned and Repossessed Assets
Assets acquired through, or in lieu of, loan foreclosure or repossession are held for sale and are initially recorded at fair value less
estimated costs to sell at the date of foreclosure or repossession, establishing a new cost basis. These assets are subsequently accounted
for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is
recorded through expense. Operating costs after acquisition are expensed.
Qualified Affordable Housing Project Investments
The Bank invests in qualified affordable housing projects. At December 31, 2023 and 2022, the balance of the investment for qualified
affordable housing projects was $6.1 million and $7.3 million, respectively. These balances are reflected in the other assets line on the
Consolidated Balance Sheets. Amortization expense was $717,000 and $1.0 million and net tax benefits were $880,000 and $1.3 million
related to the years ending December 31, 2023, and December 31, 2022, respectively.
Revenue Recognition
Revenue from contracts with customers in the scope of Accounting Standards Codification (“ASC”) (“Topic 606”) is measured based
on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The Company
recognizes revenue from contracts with customers when it satisfies its performance obligations.
The Company’s performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or
over time. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.
The Company recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized
at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft
charge fees, and stop-payment and returned check fees. Additionally, revenue is collected from loan fees, such as letters of credit, line
renewal fees and application fees. Such revenue is derived from transactional information and is recognized as revenue immediately as
the transactions occur or upon providing the service to complete the customer’s transaction.
Leases
The Company determines if an arrangement is a lease at inception. Lease right-of-use (“ROU”) assets represent the Company’s right to
use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments
arising from the lease. Lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease
payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing
rate based on the information available at commencement date in determining the present value of lease payments. The lease ROU asset
also includes any lease payments made and excludes lease incentives. The lease terms may include options to extend or terminate the
lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a
straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally
accounted for separately.
Earnings (Loss) per Share
Basic earnings (loss) per common share is net income (loss) divided by the weighted average number of common shares outstanding
during the period. BankProv Employee Stock Ownership Plan (the “ESOP”) shares are considered outstanding for this calculation unless
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unallocated. Diluted earnings (loss) per common share is computed in a manner similar to that of basic earnings (loss) 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 earnings (loss)
per share calculations. Earning, losses, and dividends per share are restated for all stock splits and stock dividends through the date of
issuance of the financial statements, if applicable.
Employee Stock Ownership Plan
Compensation expense for the ESOP is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair
value of the shares during the period. The Company recognizes compensation expense ratably over the year based upon the Company’s
estimate of the number of shares expected to be allocated by the ESOP. Unearned compensation applicable to the ESOP is reflected as
a reduction of shareholders’ equity on the consolidated balance sheets. The difference between the average fair value and the cost of the
shares by the ESOP is recorded as an adjustment to additional paid-in-capital.
Stock-Based Compensation Plans
Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these
awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the
Company's common stock at the date of grant is used for restricted stock awards.
Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded
vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the award. The Company's
accounting policy is to recognize forfeitures as they occur.
Income Taxes
The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. A tax valuation
allowance is established, as needed, to reduce net deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties
related to income tax matters in income tax expense.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)
includes unrealized gains and losses on debt securities available-for-sale which are also recognized as separate components of equity.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there now are
such matters that will have a material effect on the financial statements.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the
Company to shareholders.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market and other assumptions, as more fully disclosed in a separate
note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments,
and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could
significantly affect these estimates.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to fund loans and commercial letters of credit,
issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when they are funded.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred
assets is deemed to be surrendered when the assets have been legally isolated from the Company, the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does
not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Recent Accounting Pronouncements
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with
an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of
expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan
receivables and held-to-maturity debt securities. It also applies to off-balance-sheet (“OBS”) credit exposures not accounted for as
insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases
recognized by a lessor in accordance with Topic 842 on leases. In addition, Accounting Standards Codification (“ASC”) 326 made
changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an
allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more
likely than not they will be required to sell.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS
credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts
continue to be reported in accordance with previously applicable GAAP. The Company reported a net increase to retained earnings of
$696,000 as of January 1, 2023 for the cumulative effect of adopting ASC 326. The transition adjustment included a $2.6 million increase
to retained earnings to adjust the allowance for credit losses on loans based on the new methodology offset by a decrease to retained
earnings of $1.6 million to adjust the allowance for credit losses on OBS credit exposures based on the new methodology and a $249,000
decrease to retained earnings to account for the net tax impact of these adjustments.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table illustrates the impact of ASC 326:
(cid:3)
(In thousands)
Assets:
Loans
Commercial real estate
Commercial
Enterprise value
Digital asset
Residential real estate
Construction and land development
Consumer
Mortgage warehouse
Allowance for credit loss on loans
Liabilities:
As Reported
Under
ASC 326
January 1, 2023
Pre-ASC 326
Adoption
Impact of
ASC 326
Adoption
$
4,317 $
2,871
7,442
10,336
61
396
4
54
25,481
5,062 $
3,582
7,712
10,493
43
909
55
213
28,069
(745)
(711)
(270)
(157)
18
(513)
(51)
(159)
(2,588)
Allowance for credit losses on off balance sheet credit exposures
1,864
221
1,643
Also on January 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326) – Troubled Debt
Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings
(“TDRs”) for creditors in ASC 310-40 and amends guidance on “vintage disclosures” to required disclosures of current-period gross
write-offs by year of origination. The ASC also updates the requirements related to accounting for credit losses under ASC 326 and adds
enhanced disclosures for creditors with respect to loan modifications for borrowers experiencing financial difficulty.
The Company adopted ASU 2022-02, using the modified retrospective approach, with no material impact to the financial statements.
Results for reporting periods beginning after January 1, 2023 are presented under ASU 2022-02 while prior period amounts continue to
be reported in accordance with previously applicable GAAP.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate
Reform on Financial Reporting (“ASU 2020-04”), to ease the potential burden in accounting for recognizing the effects of reference
rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and
hedge accounting. The provisions in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to loan and lease
agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract
modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying
modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification
would be considered “minor” so that any existing unamortized deferred loan origination fees and costs would carry forward and continue
to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with
no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required
for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge
accounting.
ASU 2020-04 was effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning
of an interim period that included or was subsequent to March 12, 2020, or prospectively from a date within an interim period that
included or was subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the
amendments must be applied prospectively for all eligible contract modifications. The Company selected the Secured Overnight
Financing Rate (“SOFR”) as its primary alternative to LIBOR and also used alternative reference rates, based on the individual needs
of its customers and the type of credit being extended, when necessary. Legacy LIBOR-based loans transitioned to an alternative
reference rate on or before June 30, 2023. The adoption of ASU 2020-04 did not result in a material impact to the Company’s
Consolidated Financial Statements.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2023, the FASB issued 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 will update its income tax disclosures upon adoption.
NOTE 3(cid:3031)—(cid:3031)DEBT SECURITIES
The following table summarizes the amortized cost, allowance for credit losses, and fair value of debt securities available-for-sale at
December 31, 2023 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive
loss:
(In thousands)
December 31, 2023
State and municipal
Asset-backed securities
Government mortgage-backed securities
Total debt securities available-for-sale
$
$
Amortized
Gross
Gross
Cost
Basis
Unrealized
Unrealized
Gains
Losses
Allowance
for Credit
Losses
Fair
Value
11,785 $
8,319
10,405
30,509 $
14 $
—
—
14 $
399 $
784
769
1,952
— $
—
—
— $
11,400
7,535
9,636
28,571
The following table summarizes the amortized cost and fair value of debt securities available-for-sale at December 31, 2022 and the
corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:
(In thousands)
December 31, 2022
State and municipal
Asset-backed securities
Government mortgage-backed securities
Total debt securities available-for-sale
Amortized
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
11,894 $
7,197
12,366
31,457 $
2 $
—
—
2 $
825 $
923
1,111
2,859 $
11,071
6,274
11,255
28,600
There were no realized gains or losses on sales and calls of securities during the year ended December 31, 2023 or 2022.
The scheduled maturities of debt securities at December 31, 2023 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.
(In thousands)
Due in one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Government mortgage-backed securities
Asset-backed securities
Available-for-Sale
Amortized
Cost
Fair
Value
$
$
$
557
299
1,727
9,202
10,405
8,319
30,509 $
547
300
1,734
8,819
9,636
7,535
28,571
At December 31, 2023 and 2022, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies,
in an amount greater than 10% of shareholders' equity.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities with carrying amounts of $8.1 million and $9.8 million were pledged to secure available borrowings with the Federal Home
Loan Bank at December 31, 2023 and 2022, respectively.
The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit
losses has not been recorded at December 31, 2023, aggregated by major security type and length in a continuous loss position:
(In thousands)
December 31, 2023
Temporarily impaired
securities:
State and municipal
Asset-backed securities
Government mortgage-
backed securities
Total temporarily impaired
debt securities
December 31, 2022
Temporarily impaired
securities:
State and municipal
Asset-backed securities
Government mortgage-
backed securities
Total temporarily impaired
debt securities
Less than 12 Months
Fair
Value
Losses
Unrealized
12 Months or Longer
Fair
Value
Losses
Unrealized
Total
Fair
Value
Unrealized
Losses
$
— $
1,802
— $
16
7,269 $
5,733
399 $
768
7,269 $
7,535
—
—
9,574
769
9,574
399
784
769
$
1,802 $
16 $
22,576 $
1,936 $
24,378 $
1,952
$
8,174 $
2,322
183 $
182
2,297 $
3,951
642 $
741
10,471 $
6,274
825
923
7,428
474
3,827
637
11,255
1,111
$
17,924 $
839 $
10,075 $
2,020 $
28,000 $
2,859
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 December 31, 2023, prior to this
recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s 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 December 31, 2023:
State and municipal securities: At December 31, 2023, 10 of the 19 securities in the Company’s portfolio of state and municipal
securities were in unrealized loss positions. Aggregate unrealized losses represented 3.4% 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 and
periodically evaluates the appropriate level of exposure to the market. At this time, the Company believes 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 December 31, 2023, all five of the securities in the Company’s portfolio of asset-backed securities were in
unrealized loss positions. Aggregate unrealized losses represented 9.4% of the amortized cost of asset-backed securities in unrealized
loss positions. The U.S. Small Business Administration (“SBA”) guarantees the contractual cash flows of all of the Company’s asset-
backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.
All securities are performing.
Government mortgage-backed securities: At December 31, 2023, 31 of the 32 securities in the Company’s portfolio of government
mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 7.4% of the amortized cost of
government mortgage-backed securities in unrealized loss positions. The Federal National Mortgage Association (“FNMA”), Federal
Home Loan Mortgage Corporation (“FHLMC”), and Government National Mortgage Association (“GNMA”) guarantee the contractual
cash flows of all of the Company’s mortgage-backed securities. The securities are investment grade rated and there were no material
underlying credit downgrades during the quarter. All securities are performing.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4(cid:3031)—(cid:3031)LOANS AND ALLOWANCE FOR CREDIT LOSSES FOR LOANS
A summary of loans is as follows:
(In thousands)
Commercial real estate
Commercial
Enterprise value
Digital asset (1)
Residential real estate
Construction and land development
Consumer
Mortgage warehouse
Allowance for credit losses - loans
Net loans
December 31,
2023
December 31,
2022
$
$
468,928 $
176,124
433,633
12,289
7,169
77,851
168
166,567
1,342,729
(21,571)
1,321,158 $
453,592
216,931
438,745
40,781
8,165
72,267
391
213,244
1,444,116
(28,069)
1,416,047
(1) Includes $12.3 million and $26.5 million in loans secured by cryptocurrency mining rigs at December 31, 2023 and 2022,
respectively.
The following table presents the activity in the allowance for credit losses for loans by portfolio segment for the year ended December
31, 2023 and 2022:
(In thousands)
Balance at December
31, 2022
Impact of adopting
ASC 326
Charge-offs
Recoveries
Provision (credit)
Balance at December
31, 2023
Balance at December
31, 2021
Charge-offs
Recoveries
Provision (credit)
Balance at December
31, 2022
Commercial
Real
Estate
Commercial Value
Enterprise Digital
asset
Residential Construction
and Land
Real
Development Consumer Warehouse Total
Estate
Mortgage
$
5,062 $
3,582 $
7,712 $ 10,493 $
43 $
909 $
55 $
213 $ 28,069
(745)
(1)
—
155
(711)
(169)
160
(369)
(270)
(4,788)
55
5,457
(157)
—
—
(4,421)
18
—
5
9
(513)
—
—
11
(51)
(45)
10
33
(159)
—
—
(12)
(2,588)
(5,003)
230
863
$
4,471 $
2,493 $
8,166 $
5,915 $
75 $
407 $
2 $
42 $ 21,571
$
4,889 $
—
—
173
5,371 $
(1,338)
131
(582)
2,012 $
6,158 $
(351) (46,350)
—
54,831
88
1,817
38 $
—
—
5
479 $
—
—
430
168 $
(66)
31
(78)
381 $ 19,496
(48,105)
—
250
—
56,428
(168)
$
5,062 $
3,582 $
7,712 $ 10,493 $
43 $
909 $
55 $
213 $ 28,069
At December 31, 2023 and 2022, loans with an aggregate principal balance of $458.7 million and $365.7 million, respectively, were
pledged to secure possible borrowings from the Federal Reserve Bank of Boston (the “FRB”), and loans with an aggregate principal
balance of $190.5 million and $172.1 million, respectively, were pledged to secure possible borrowings from the FHLB.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents loan delinquencies by portfolio segment at December 31, 2023 and 2022:
30 - 59
Days
60 - 89
Days
90 Days
or More
Past Due
Total
Past
Due
Total
Current
Total
Loans
(In thousands)
December 31, 2023
Commercial real estate
Commercial
Enterprise value
Digital asset
Residential real estate
Construction and
land development
Consumer
Mortgage warehouse
$
18,226 $
5
3,348
—
—
—
2
—
Total
$
21,581 $
December 31, 2022
Commercial real estate
Commercial
Enterprise value
Digital asset
Residential real estate
Construction and
land development
Consumer
Mortgage warehouse
Total
$
$
240 $
—
—
—
—
—
—
—
240 $
— $
100
—
—
—
—
3
—
103 $
— $
—
—
—
—
—
9
—
9 $
— $
1,813
—
—
236
—
4
—
2,053 $
18,226 $
1,918
3,348
—
236
—
9
—
23,737 $
450,702 $
174,206
430,285
12,289
6,933
468,928
176,124
433,633
12,289
7,169
77,851
159
166,567
1,318,992 $
77,851
168
166,567
1,342,729
1 $
41
92
—
73
—
—
—
207 $
241 $
41
92
—
73
—
9
—
456 $
453,351 $
216,890
438,653
40,781
8,092
453,592
216,931
438,745
40,781
8,165
72,267
382
213,244
1,443,660 $
72,267
391
213,244
1,444,116
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
December 31, 2023 and 2022:
(In thousands)
December 31, 2023
Commercial
Enterprise value
Digital asset
Residential real estate
Consumer
Total
December 31, 2022
Commercial real estate
Commercial
Enterprise value
Digital asset
Residential real estate
Total
$
$
$
$
Non-accrual
With No
Allowance
for Credit Loss
Non-accrual
Loans
90 Days
or More
Past Due
and Accruing
1,857 $
—
—
—
—
1,857 $
56 $
101
92
—
(70)
179 $
1,857 $
1,991
12,289
376
4
16,517 $
56 $
101
92
26,488
227
26,964 $
—
—
—
—
—
—
—
—
—
—
—
—
The Company did not recognize interest income on non-accrual loans during the year ended December 31, 2023, and 2022, respectively.
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2023:
(In thousands)
Commercial real estate
Commercial
Enterprise value
Digital asset
Commercial
Real
Estate
Business
Assets
Cryptocurrency
Mining Rigs
and Other (1)
$
$
19,693 $
—
—
—
19,693 $
— $
1,652
1,991
—
3,643 $
—
—
—
12,289
12,289
(1) Other collateral includes 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.
The following table presents the amortized cost basis of loans at December 31, 2023 that were both experiencing financial difficulty and
modified during the year ended December 31, 2023, 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.
Other-Than-
Insignificant
Payment
Delay
Principal
Forgiveness
Term
Extension
Interest Rate
Reduction
Term
Extension
and Interest
Rate
Reduction
Total Class
of Financing
Receivable
$
Total Class
of Financing
Receivable
%
$
$
— $
—
—
— $
— $
17,586
—
17,586 $
— $
—
12,289
12,289 $
— $
—
—
— $
17 $
—
—
17 $
17
17,586
12,289
29,892
0.01 %
4.06
100.00
2.23 %
(Dollars in thousands)
December 31, 2023
Commercial
Enterprise value
Digital asset
Total
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has not committed to lend any additional funds to borrowers experiencing financial difficulty whose loans had been
modified during the year ended December 31, 2023.
The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty
for the year ended December 31, 2023:
December 31, 2023
Commercial
Enterprise value
Digital asset
Weighted-
Average
Payment Delay
Months
Weighted-
Average Term
Extension
Months
Weighted-Average Term Extension and
Interest Rate Reduction
Months
Percentage
—
4
—
—
—
3
4
—
—
3.25 %
— %
— %
K
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 December 31, 2023, there were no past due balances or subsequent defaults related
to loans modified during the year ended December 31, 2023.
Prior to the Company’s adoption of ASU 2022-02 on January 1, 2023 (see Note 2 for additional information), loans were considered
TDRs when the Company granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have
considered. These concessions could include deferral of payments, extension of maturity, reduction of principal balance, reduction of
the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt could be bifurcated with
separate terms for each tranche of the restructured debt.
There were no new TDRs entered into during the year ended December 31, 2022. The total recorded investment in TDRs was $20.4
million at December 31, 2022, of which $20.0 million were commercial real estate loans, $154,000 were residential loans, $115,000
were commercial loans and $92,000 were enterprise value loans. There were no commitments to lend additional funds to borrowers
whose loans were modified in troubled debt restructurings as of December 31, 2022.
Credit Quality Information
The Company utilizes a seven grade internal loan rating system for commercial real estate, commercial, enterprise value, digital asset,
construction and land development, and mortgage warehouse as follows:
Loans rated 1-3: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness
and are being closely monitored by management.
Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately
protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that
the Company will sustain some loss if the weakness is not corrected.
Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those
classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, highly questionable and improbable.
Loans rated 7: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not
warranted.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, commercial,
enterprise value, digital asset, and construction and land development loans.
On an annual basis, or more often if needed, the Company completes a credit recertification on all mortgage warehouse originators.
For residential real estate loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such
loans as pass. Ongoing monitoring is based upon the borrower’s payment activity.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 year ended December 31, 2023 is as follows:
Term Loans at Amortized Cost by Origination Year
2023
2022
2021
2020
2019
Prior
Revolving
Loans
Amortized
Cost
Revolving
Loans
Converted to
Term Loans
Total
$
35,966 $
50,608 $
107,593 $
30,236 $
—
—
—
—
—
—
—
1,048
59,578 $
2,898
4,436
132,219 $
3,373
21,356
19,617 $
—
—
— $ 435,817
6,271
—
26,840
—
35,966
50,608
107,593
31,284
66,912
156,948
19,617
—
468,928
—
—
1
—
—
—
—
—
1
6,398
—
—
6,398
14,000
—
—
14,000
48,922
—
205
49,127
13,233
—
—
13,233
16,491
—
1,815
18,306
22,483
9,932
1,798
34,213
37,920
2,674
225
40,819
28
—
—
28
159,475
12,606
4,043
176,124
—
—
—
—
102
67
—
—
169
85,412
—
1,991
97,942
11,768
790
119,126
4,838
1,464
48,427
2,424
1,870
23,186
753
1,595
3,346
3,001
—
16,026
1,619
8,055
—
—
—
393,465
24,403
15,765
87,403
110,500
125,428
52,721
25,534
6,347
25,700
—
433,633
—
3,561
—
—
12,289
12,289
—
—
—
2
—
—
—
—
—
1,225
—
—
—
—
—
—
4,788
—
—
12,289
12,289
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
—
5
179
—
179
3,183
284
2,579
68
871
—
6,817
352
3,467
2,647
871
7,169
(In thousands)
Commercial Real
Estate
Pass
Special mention
Substandard
Total commercial
real estate
Commercial real
estate
Current period
gross write offs
Commercial
Pass
Special mention
Substandard
Total commercial
Commercial
Current period
gross write offs
Enterprise Value
Pass
Special mention
Substandard
Total enterprise
value
Enterprise value
Current period
gross write offs
Digital Asset
Substandard
Total digital asset
Digital asset
Current period
gross write offs
Residential Real
Estate
Pass
Substandard
Total residential
real estate
Residential real estate
Current period
gross write offs
—
—
—
—
—
—
—
—
—
F-24
Construction and
Land Development
Pass
Total construction
and land
development
Construction and
land development
Current period
gross write offs
Consumer
Not formally rated
Total consumer
Consumer
Current period
gross write offs
Mortgage
Warehouse
Pass
Total mortgage
warehouse
Mortgage warehouse
Current period
gross write offs
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3,701
54,925
17,015
—
—
1,429
781
—
77,851
3,701
54,925
17,015
—
—
1,429
781
—
77,851
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
121
121
—
45
45
—
—
2
2
168
168
30
—
—
—
—
15
—
—
45
—
—
—
—
—
—
—
—
—
—
—
166,567
—
166,567
—
166,567
—
166,567
—
—
—
—
—
—
—
—
—
The following table presents the Company’s loans by risk rating and portfolio segment at December 31, 2022:
Commercial
Real Estate Commercial
Enterprise
Value
Digital
Asset
Residential
Real Estate
Construction
and Land
Development Consumer
Mortgage
Warehouse
Total
(In thousands)
December 31,
2022
Grade:
Pass
Special mention
Substandard
Doubtful
Loss
Not formally
rated
$ 399,455 $ 202,895 $ 408,616 $
20,091
9,946
92
—
26,995
27,141
—
1
11,015
2,854
165
2
4,724 $
9,569
26,488
—
—
Total
$ 453,592 $ 216,931 $ 438,745 $ 40,781 $
—
—
—
—
7,938 $
—
227
—
—
—
8,165 $
72,267 $
—
—
—
—
—
72,267 $
— $ 213,244 $ 1,309,139
67,670
—
—
66,656
—
—
257
—
—
3
—
—
391
—
391
391 $ 213,244 $ 1,444,116
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage
and other loans serviced for others were $17.3 million and $20.6 million at December 31, 2023 and 2022, respectively.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain directors and executive officers of the Company and companies in which they have significant ownership interests were
customers of the Bank during 2023. The following is a summary of the loans to such persons and their companies at December 31, 2023
and 2022:
(In thousands)
Beginning balance, January 1, 2022
Advances
Principal payments
Loans transferred/sold
Ending balance, December 31, 2022
Beginning balance, January 1, 2023
Advances
Principal payments
Loans from retired directors
Ending balance, December 31, 2023
NOTE 5(cid:3031)—(cid:3031)PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 2023 and 2022:
(In thousands)
Land
Buildings
Furniture and equipment
Leasehold improvements
Accumulated depreciation and amortization
Premises and equipment, net
$
$
$
$
18,586
12,105
(12,434)
(25)
18,232
18,232
—
(35)
(2,369)
15,828
December 31,
2023
December 31,
2022
$
$
2,424 $
13,874
5,530
3,552
25,380
(12,394)
12,986 $
2,424
13,851
5,241
3,526
25,042
(11,462)
13,580
Depreciation and amortization expense was $932,000 and $940,000 for the years ended December 31, 2023 and 2022, respectively.
NOTE 6(cid:3031)—(cid:3031)DEPOSITS
The following is a summary of deposit balances by type at December 31, 2023 and 2022:
(Dollars in thousands)
Noninterest-bearing:
Demand
Interest-bearing:
NOW
Regular savings
Money market deposits
Certificates of deposit:
Certificate accounts of $250,000 or more
Certificate accounts less than $250,000
Total interest-bearing
Total deposits
At
December 31,
2023
At
December 31,
2022
$
308,769 $
520,226
93,812
231,593
456,408
24,680
215,960
1,022,453
1,331,222 $
$
145,533
141,802
318,417
11,449
142,155
759,356
1,279,582
At December 31, 2023 and 2022, the aggregate amount of brokered certificates of deposit was $180.0 million and $120.1 million,
respectively. Brokered certificates of deposit are not included in the totals for certificates of deposit in denominations over $250,000
listed above.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2023, the scheduled maturities for certificate accounts for each of the following five years are as follows:
(In thousands)
2024
2025
2026
2027
2028
Total
$
$
233,263
7,002
133
171
71
240,640
Deposits from related parties held by the Company at December 31, 2023 and 2022 amounted to $1.4 million and $11.9 million,
respectively.
NOTE 7 (cid:3031)—(cid:3031)OTHER REPOSSESSED ASSETS
During 2022, the Company repossessed cryptocurrency mining rigs in exchange for the forgiveness of a loan relationship. The
repossessed cryptocurrency mining rigs were reported as other repossessed assets at their fair value less costs to sell. These other
repossessed assets were subsequently accounted for at lower of cost or fair value less estimated costs to sell. The estimates and
assumptions that went into the valuation of the repossessed cryptocurrency mining rigs held as repossessed assets, were based on market
data and sales reported by the company.
Activity related to other repossessed assets, which consists of cryptocurrency mining rigs, was as follows:
(In thousands)
Balance at January 1,
Loans transferred to other repossessed assets
Net gain (loss) on sale of other repossessed assets
Sales of other repossessed assets
Valuation allowance/provisions charged to expense
Net balance of other repossessed assets at December 31,
Activity in the valuation allowance was as follows:
(In thousands)
Beginning balance
Provisions charged to expense
Reductions from sales of other repossessed assets
Ending balance
2023
Amount
2022
Amount
6,051 $
—
145
(6,196)
—
—
— (cid:3) $
—
10,451
(26)
(3,777)
6,648
(597)
6,051
Year Ended
December 31,
2023
2022
597 $
—
(597)
— $
—
597
—
597
$
$
$
$
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8(cid:3031)—(cid:3031)BORROWINGS
At December 31, 2023 and 2022, advances consist of funds borrowed from the FHLB and the FRB borrower-in-custody (“BIC”)
program. Maturities of advances from the FHLB and FRB for years ending after December 31, 2023 and 2022 are summarized as
follows:
(In thousands)
2024
2025
2026
2027
2028
Thereafter
Total
(In thousands)
2023
2024
2025
2026
2027
Thereafter
Total
$
$
$
$
2023
95,134
5,136
138
139
141
4,009
104,697
2022
117,132
134
5,136
138
139
4,150
126,829
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 December 31,
2023, borrowings from the FHLB consisted of overnight advances of $95.0 million and advances with original maturities more than one
year of $9.7 million. The interest rate on the overnight advance was 5.56% at December 31, 2023. The interest rates on FHLB long-
term advances ranged from 1.21% to 1.32%, with a weighted average interest rate of 1.28% at December 31, 2023. At December 31,
2023, the Company had the ability to borrow $126.3 million from the FHLB, of which $104.7 was outstanding as of that date.
At December 31, 2022, borrowings from the FHLB consisted of short-term borrowings, with original maturities of less than one year,
totaling $89.0 million and long-term borrowings, with original maturities more than one year, totaling $18.3 million. The interest rate
on FHLB short-term borrowings was 4.38% at December 31, 2022. The interest rates on FHLB long-term advances ranged from 1.21%
to 3.01%, with a weighted average interest rate of 1.91% at December 31, 2022. At December 31, 2022, the Company had the ability to
borrow $118.2 million from the FHLB.
Borrowings from the FRB BIC program are secured by a Uniform Commercial Code financing statement on qualified collateral,
consisting of certain commercial loans. There were no outstanding FRB borrowings at December 31, 2023, and as of that date the
Company had the ability to borrow $282.4 million. At December 31, 2022, FRB borrowings consisted of overnight borrowings totaling
$19.5 million and had an interest rate of 4.50%. At December 31, 2022, the Company had the ability to borrow $153.3 million from the
FRB.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9(cid:3031)—(cid:3031)INCOME TAXES
The components of income tax expense are as follows for the years ended December 31, 2023 and 2022:
(In thousands)
Current tax (benefit) expense:
Federal
State
Deferred tax benefit:
Federal
State
Rate Change
Income tax expense
2023
2022
$
$
1,755 $
200
1,955
652
602
614
1,868
3,823 $
267
(81)
186
(4,785)
(1,191)
—
(5,976)
(5,790)
The following is a summary of the differences between the statutory federal income tax rate and the effective tax rates for the years
ended December 31, 2023 and 2022:
Federal income tax at statutory rate
Increase (decrease) in tax resulting from:
State tax, net of federal tax benefit
Tax exempt income and dividends received deduction
Stock compensation
Bank owned life insurance
State rate change
Federal credits
Other
Effective tax rate
2023
2022
21.0 %
(21.0) %
5.2
(0.5)
1.2
(1.6)
4.1
(3.3)
(0.2)
25.9 %
(3.7)
(0.3)
(0.3)
0.8
(0.6)
—
3.9
(21.2) %
The following is a summary of the Company’s gross deferred tax assets and gross deferred tax liabilities at December 31, 2023 and
2022:
(In thousands)
Deferred tax assets:
Allowance for credit losses - loans
Net operating loss carryforward
Employee benefit plans and share-based compensation plans
Deferred loan fees, net
Write down of other assets and receivables
Depreciation
Reserve for unfunded commitments
Net unrealized gain on securities
General business credit carryover
Other
Gross deferred tax assets
Deferred tax liabilities:
Depreciation
Prepaid expenses
Net unrealized holding gain on securities
Gross deferred tax liabilities
Net deferred tax asset
F-29
2023
2022
$
$
5,638 $
3,558
1,059
1,190
105
84
85
442
1,282
1,097
14,540
—
(79)
—
(79)
14,461 $
7,646
3,785
2,238
1,583
109
82
60
657
—
701
16,861
—
(68)
—
(68)
16,793
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company reduces the deferred tax asset by a valuation allowance if, based on the weight of the available evidence, it is not “more
likely than not” that some portion or all of the deferred tax assets will be realized. The Company assesses the realizability of its deferred
tax assets by assessing the likelihood of the Company generating federal and state income tax, as applicable, in future periods in amounts
sufficient to offset the deferred tax charges in the periods they are expected to reverse. Based on this assessment, management concluded
that a valuation allowance was not required as of December 31, 2023 or 2022.
At December 31, 2023, the Company had federal net operating loss carryforwards of approximately $14.8 million, which do not expire.
The Company also had state net operating loss carryforwards of approximately $8.9 million, of which approximately $2.0 million do
not expire, and the remaining $6.9 million expire at various dates from 2027 to 2042.
It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s
assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At December 31, 2023
and 2022, there was no material uncertain tax positions related to federal and state income tax matters. The Company is generally not
subject to examination by the Internal Revenue Service and state taxing authorities under applicable statutes of limitations for years
prior to 2020.
NOTE 10(cid:3031)—(cid:3031)EMPLOYEE BENEFITS & STOCK-BASED COMPENSATION PLANS
401(k) Plan
The Company sponsors a 401(k) plan. All employees are eligible to join the 401(k) plan. A Safe Harbor Plan was adopted by the
Company effective January 1, 2007. Under the Safe Harbor Plan, the Company matches 100% of employee contributions up to 6% of
compensation. In addition, the Company may make a discretionary contribution to the 401(k) plan determined on an annual basis.
Employees may contribute a percentage of their annual compensation, on a pre-tax or after-tax basis, as defined under the 401(k) Plan,
up to 100% of eligible compensation subject to the maximum amount allowable under the provisions of the Internal Revenue Code
(“IRC”). Prior to March 1, 2021, participants could contribute up to 75% of eligible compensation subject to the maximum amount
allowable under the provisions of the IRC. The expense recognized under the 401(k) plan was $1.2 million and $1.1 million for the
years ended December 31, 2023 and 2022, respectively, and is included in salaries and employee benefits expense.
Supplemental Executive Retirement Plans
The Company has Supplemental Executive Retirement Agreements with certain executive officers. These agreements are designed to
supplement the benefits available through the Company’s retirement plan. The liability for the retirement benefits amounted to $802,000
and $8.5 million at December 31, 2023 and 2022, respectively, and is included in other liabilities. The expense recognized for these
benefits was $123,000 and $1.8 million for the years ended December 31, 2023 and 2022, respectively, and is included in salaries and
employee benefits expense.
Employee Stock Ownership Plan
The Bank established an ESOP to provide eligible employees the opportunity to own Company stock. The plan is a tax-qualified plan
for the benefit of all eligible 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 annually 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:
Allocated
Committed to be allocated
Unallocated
Total
December 31,
2023
December 31,
2022
551,530
89,758
897,580
1,538,868
461,772
89,758
987,338
1,538,868
The fair value of unallocated shares was approximately $9.0 million at December 31, 2023.
Total compensation expense recognized for the years ended December 31, 2023 and 2022 was $786,000 and $1.3 million, respectively.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation Plan
The shareholders of the Company approved the Provident Bancorp, Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”) on
November 23, 2020, which is in addition to the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan,” collectively
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 3 to 5 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 as directors’ fees within non-interest expense.
Stock Options
The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following
assumptions:
(cid:120) Expected volatility is based on historical volatility of the Company’s common stock price.
(cid:120) 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.
(cid:120) The dividend yield assumption is based on the Company’s expectation of dividend payouts.
(cid:120) The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the
expected life of the option.
The fair value of options granted was determined using the following weighted-average assumptions as of grant date:
Vesting period (years)
Expiration date (years)
Expected volatility
Expected life (years)
Expected dividend yield
Risk free interest rate
Fair value per option
2023
2022
5
10
36.56%
7.5
1.67%
3.45%
$3.58
5
10
33.47%
7.5
1.01%
2.63%
$5.82
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company’s stock option grants for the year ended December 31, 2023 is presented in the table below:
Outstanding at December 31, 2022
Granted
Forfeited
Expired
Exercised
Outstanding at December 31, 2023
Outstanding and expected to vest at December 31,
2023
Vested and Exercisable at December 31, 2023
Unrecognized compensation cost
Weighted average remaining recognition period
(years)
Stock Option
Awards
Weighted Average
Exercise Price
1,467,876 $
158,100
(55,200)
(155,448)
(226,565)
1,188,763 $
1,188,763 $
684,789 $
11.00
9.55
14.62
11.78
8.61
10.99
10.99
10.41
$
1,665,000
2.98
Weighted
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic Value
6.12 $
488,000
6.12 $
4.77 $
488,000
426,000
Total expense for the stock options was $645,000 and $864,000 for the years ended December 31, 2023 and 2022, respectively. The
intrinsic value of options exercised was $98,000 and $431,000 million for the years ended December 31, 2023 and 2022, respectively.
The tax benefit from option exercises was $27,000 and $103,000 for the years ended December 31, 2023 and 2022, respectively.
Restricted Stock
Shares issued upon the granting of restricted stock may come from authorized but unissued shares or reacquired shares held by the
Company. Any shares forfeited because vesting requirements are not met will again be available for issuance under the Equity Plans.
The fair market value of shares awarded, based on the market prices at the date of grant, is recognized as compensation expense over
the applicable vesting period.
The following table presents the activity in restricted stock awards under the Equity Plans for the year ended December 31, 2023:
Unvested restricted stock awards at December 31, 2022
Granted
Forfeited
Vested
Unvested restricted stock awards at December 31, 2023
Unrecognized compensation cost
Weighted average remaining recognition period (years)
Number of
Shares
Weighted
Average
Grant Price
192,748 $
29,515
(22,094)
(54,248)
145,921 $
13.16
9.55
14.62
12.75
12.37
$
1,579,000
2.71
Total expense for the restricted stock awards was $663,000 and $990,000 for the years ended December 31, 2023 and 2022, respectively.
The tax benefit from restricted awards was $194,000 and $277,000 for the years ended December 31, 2023 and 2022, respectively. The
total fair value of shares vested during the years ended December 31, 2023 and 2022 was $500,000 and $662,000, respectively.
NOTE 11(cid:3031)—(cid:3031)EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings (loss) per share is computed in a manner similar to that of basic earnings
(loss) 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 earnings (loss) per share calculations.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share
dollar amounts)
Net Income (Loss) attributable to common shareholders
December 31,
2023
December 31,
2022
$
10,954
$
(21,468)
Average number of common shares issued
Less:
Average unallocated ESOP shares
Average unvested restricted stock
Average number of common shares outstanding
to calculate basic earnings per common share
17,684,844
17,765,372
(938,526)
(160,139)
(1,028,283)
(254,466)
16,586,180
16,482,623
Effect of dilutive unvested restricted stock and stock option awards
8,505
—
Average number of common shares outstanding
to calculate diluted earnings per common share
Earnings (Loss) per common share:
Basic
Diluted
16,594,685
16,482,623
$
$
0.66
0.66
$
$
(1.30)
(1.30)
Stock options for 906,552 shares of common stock were not considered in computing diluted earnings per common share for the year
ended December 31, 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. Diluted earnings per share for the year ended December 31, 2022 was equal to the basic earnings
per share due to the Company’s net loss position.
NOTE 12(cid:3031)—(cid:3031)REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets,
liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Bank is subject to capital regulations that require a Common Equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital
to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio
of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. In order to
be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% and a Tier 1 ratio of 8.0%, a total risk-based
capital ratio of 10% and a Tier 1 leverage ratio of 5.0%. As of December 31, 2023 and 2022, 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 assets above the amount
necessary to meet its minimum risk-based capital requirements. At December 31, 2023, the Bank exceeded the regulatory requirement
for the capital conservation buffer.
Federal banking agencies have established 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 December 31, 2023, the
Bank has not opted into the CBLR framework.
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank’s actual capital amounts and ratios at December 31, 2023 and 2022 are summarized as follows:
Actual
Capital
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
(Dollars in thousands)
December 31, 2023
Total Capital (to Risk Weighted Assets) $ 212,992
Tier 1 Capital (to Risk Weighted
193,968
Common Equity Tier 1 Capital (to Risk
Weighted Assets)
Tier 1 Capital (to Average Assets)
193,968
193,968
December 31, 2022
Total Capital (to Risk Weighted Assets) $ 204,354
Tier 1 Capital (to Risk Weighted
184,025
Common Equity Tier 1 Capital (to Risk
Weighted Assets)
Tier 1 Capital (to Average Assets)
184,025
184,025
Liquidation Accounts
14.02 % $ 121,525 >
91,144 >
12.77
8.0 % $ 151,907 >
121,525 >
6.0
10.0 %
8.0
12.77
11.59
68,358
>
66,924 >
4.5
4.0
98,739
>
83,655 >
6.5
5.0
12.62 % $ 129,492 >
97,119 >
11.37
8.0 % $ 161,865 >
129,492 >
6.0
10.0 %
8.0
11.37
11.17
72,839
>
65,916 >
4.5
4.0
105,212
>
82,395 >
6.5
5.0
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.
2. The MHC’s ownership interest in the retained earnings of the Company as of the date of the latest balance sheet contained in
the 2019 prospectus plus the MHC’s net assets (excluding its ownership of the Company).
The Company and the Bank are not permitted to pay dividends on their capital stock if the shareholders’ equity of the Company, or the
shareholder’s equity of the Bank, would be reduced below the amount of the respective liquidation accounts. The liquidation accounts
will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holder’s interest in the liquidation accounts.
Other Restrictions
The Company’s principal source of funds for dividend payments is dividends received from the Bank. Federal and state banking
regulations restrict the amount of dividends that may be paid in a year, without prior approval of regulatory agencies, to the 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 year ended December 31, 2023, the Bank reported net income of $10.7 million. For the years ended December
31, 2022 and 2021, the Bank reported a net loss of $21.5 million and net income of $16.1 million, respectively. There were no dividends
paid during the year ended December 31, 2023.
The Company may, at times, repurchase its own shares in the open market. Such transactions are subject to the notice provisions for
stock repurchases of the Board of Governors of the Federal Reserve System. In March 2021, the Company announced its plan to
repurchase 1,400,000 shares of its common stock. The repurchase program was adopted following the receipt of non-objection from the
FRB, and in compliance with applicable state and federal regulations. As of December 31 2023, the Company had repurchased 1,145,479
shares of its outstanding common stock under this program, however, the Company did not repurchase any shares of its outstanding
common stock under this program during the year ended December 31, 2023.
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13(cid:3031)—(cid:3031)LEASES
The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an
arrangement meets the definition of a lease upon inception. Operating leases are included in operating lease right-of-use (“ROU”) assets
and operating lease liabilities on the Company’s balance sheet.
Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent
the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized
at the commencement date based on the present value of lease payments over the lease term. The Company’s leases do not provide an
implicit rate; therefore, the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms
to determine present value of operating lease liabilities. The Company’s lease terms may include lease extension and termination options
when it is reasonably certain that the Company will exercise the option. The Company recognized ROU assets totaling $3.8 million and
$3.9 million and operating lease liabilities totaling $4.2 million and $4.3 million at December 31, 2023 and December 31, 2022,
respectively. The lease liabilities recognized by the Company represent two leased branch locations and one loan production office.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease components, such as fair
market value adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities. Leases with an initial
term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over
the lease term. For the year ended December 31, 2023 and 2022, rent expense for the operating leases totaled $315,000.
The following table presents information regarding the Company’s operating leases:
Weighted-average discount rate
Range of lease expiration dates
Range of lease renewal options
Weighted-average remaining lease term
December 31,
2023
3.62%
1 - 12 years
0 - 20 years
25.8 years
December 31,
2022
3.59%
1 - 13 years
5 - 20 years
26.4 years
The following table presents the undiscounted annual lease payments under the terms of the Company's operating leases at
December 31, 2023, including a reconciliation to the present value of operating lease liabilities recognized in the unaudited Consolidated
Balance Sheets:
(In thousands)
2024
2025
2026
2027
2028
Years thereafter
Total lease payments
Less imputed interest
Total lease liabilities
$
$
270
280
291
293
208
5,533
6,875
(2,704)
4,171
NOTE 14(cid:3031)—(cid:3031)FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on
loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The
contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for loan
commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral
held varies, but may include secured interests in real property, accounts receivable, inventory, property, plant and equipment and income
producing properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third
party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company
may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may
take possession of the collateral, if any, securing the line of credit.
Notional amounts of financial instruments with off-balance sheet credit risk are as follows at December 31, 2023 and 2022:
(In thousands)
Commitments to originate loans
Letters of credit
Unadvanced portions of loans
NOTE 15(cid:3031)—(cid:3031)FAIR VALUE MEASUREMENTS
2023
2022
$
$
8,601 $
1,691
178,235
188,527 $
6,087
1,686
347,674
355,447
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
(cid:120) Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities;
(cid:120) 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;
(cid:120) 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.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes financial instruments measured at fair value on a recurring basis at December 31, 2023 and 2022:
(In thousands)
December 31, 2023
State and municipal
Asset-backed securities
Government mortgage-backed securities
Totals
December 31, 2022
State and municipal
Asset-backed securities
Government mortgage-backed securities
Totals
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets
Identical Assets
Level 1
Significant
Significant
Other Observable Unobservable
Inputs
Level 2
Inputs
Level 3
Total
$
$
$
$
11,400 $
7,535
9,636
28,571 $
11,071 $
6,274
11,255
28,600 $
— $
—
—
— $
— $
—
—
— $
11,400 $
7,535
9,636
28,571 $
11,071 $
6,274
11,255
28,600 $
—
—
—
—
—
—
—
—
Fair Values of Assets Measured on a Nonrecurring Basis
The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance
with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or-
market accounting or write-downs of individual assets.
Certain 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 ACLL. Fair value was
measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific
properties.
Other repossessed assets, which consists of repossessed cryptocurrency mining rigs, were accounted for at fair value. Future adjustments,
if any, will be recorded directly as an adjustment to current earnings. Fair value was measured using the appraised values of the
cryptocurrency mining rigs and adjusted as necessary by management based on unobservable inputs.
The following summarizes assets measured at fair value on a nonrecurring basis at December 31, 2023 and 2022:
(In thousands)
December 31, 2023
Loans
Enterprise value
Digital asset
Totals
December 31, 2022
Loans
Commercial
Enterprise value
Digital asset
Other repossessed assets
Totals
Fair Value Measurements at Reporting Date Using:
Quoted Prices in
Active Markets for Other Observable
Significant
Significant
Unobservable
Identical Assets
Level 1
Inputs
Level 2
Inputs
Level 3
Total
—
—
—
$
$
—
—
—
—
—
$
$
— $
—
— $
— $
—
—
—
— $
891
6,373
7,264
165
91
16,390
6,051
22,697
$
$
$
$
891 $
6,373
7,264 $
165 $
91
16,390
6,051
22,697 $
F-37
(In thousands)
December 31, 2023
Loans
Enterprise value
Digital asset
December 31, 2022
Loans
Commercial
Enterprise value
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a
nonrecurring basis at December 31, 2023 and 2022:
Fair Value
Valuation Technique
Unobservable Input
Range
Business or collateral
valuation
891
6,373 Asset valuation
Comparable company or collateral
evaluations
Comparable asset evaluations
0% - 26%
0% - 25%
Business or collateral
valuation
Business or collateral
valuation
165
91
Comparable company or collateral
evaluations
Comparable company or collateral
evaluations
0% - 10%
0% - 10%
0% - 10%
0% - 3%
Digital asset
Other repossessed assets
16,390 Asset valuation
6,051 Asset valuation
Comparable asset evaluations
Comparable asset evaluations
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 and interest paid to principal of $12,000 for the enterprise value segment and $14.4 million, net of reserves of $5.9
million and interest paid to principal of $2.1 million for the digital asset segment. At December 31, 2022, the contractual balance of
loans measured at fair value on a nonrecurring basis was $483,000 net of charge-offs of $319,000 for the commercial segment, $1.6
million net of charge-offs of $1.5 million and interest paid to principal of $23,000 for the enterprise value segment, and $26.7 million
net of specific reserves of $10.1 million for the digital asset segment.
During 2022, the Company repossessed cryptocurrency mining rigs in exchange for the forgiveness of a loan relationship. The
repossessed cryptocurrency mining rigs were reported as other repossessed assets and are accounted for at the lower of cost or fair value
less estimated costs to sell. At December 31, 2022, other repossessed assets were $6.1 million.
Fair Values of Financial Instruments
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. Certain financial instruments and all nonfinancial instruments are excluded from the
disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The carrying amounts and estimated fair values of the Company's financial instruments, all of which are held or issued for purposes
other than trading, are as follows at December 31, 2023 and 2022:
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
December 31, 2023
Financial assets:
Cash and cash equivalents
Available-for-sale debt securities
Federal Home Loan Bank of Boston
stock
Loans, net
Accrued interest receivable
Financial liabilities:
Deposits
Borrowings
December 31, 2022
Financial assets:
Cash and cash equivalents
Available-for-sale debt securities
Federal Home Loan Bank of Boston
stock
Loans, net
Accrued interest receivable
Other repossessed assets
Financial liabilities:
Deposits
Borrowings
Carrying
Amount
Level 1
Level 2
Level 3
Total
Fair Value
$
220,332 $
28,571
220,332 $
—
— $
28,571
— $
—
220,332
28,571
4,056
1,321,158
6,090
1,331,222
104,697
N/A
—
—
—
—
N/A
—
6,090
N/A
1,279,421
—
N/A
1,279,421
6,090
1,331,701
104,765
—
—
1,331,701
104,765
$
80,629 $
28,600
80,629 $
—
— $
28,600
— $
—
80,629
28,600
4,266
1,416,047
6,597
6,051
1,279,582
126,829
N/A
—
—
N/A
—
6,597
—
N/A
1,341,633
—
6,051
N/A
1,341,633
6,597
6,051
—
—
1,279,665
124,590
—
—
1,279,665
124,590
The carrying amounts of financial instruments shown above are included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
NOTE 16(cid:3031)—(cid:3031)CONDENSED FINANCIAL STATEMENTS OF PARENT ONLY
Financial information pertaining only to Provident Bancorp, Inc. is as follows:
Provident Bancorp, Inc. - Parent Only Balance Sheet
(In thousands)
Assets
Cash and due from banks
Investment in common stock of BankProv
Other assets
Total assets
Liabilities and Shareholders' Equity
Other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
2023
2022
$
$
$
$
18,149 $
196,029
7,993
222,171 $
269 $
221,902
222,171 $
17,415
181,824
8,588
207,827
285
207,542
207,827
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provident Bancorp, Inc. - Parent Only Income Statement
(In thousands)
Total income
Operating expenses
Income before income taxes and equity in undistributed net income (loss) of
BankProv
Applicable income tax provision
Income before equity in income of subsidiaries
Income (loss) equity in undistributed net income of BankProv
Net income (loss)
Provident Bancorp, Inc. - Parent Only Statement of Cash Flows
(In thousands)
Cash flows from operating activities:
Years Ended
December 31,
2023
2022
418 $
90
328
86
242
10,712
10,954 $
160
128
32
8
24
(21,492)
(21,468)
$
$
Twelve Months Ended
December 31,
2023
2022
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
$
10,954 $
(21,468)
(Equity) loss in undistributed earnings of subsidiaries
Deferred tax benefit
Decrease in other assets
(Decrease) increase in other liabilities
Net cash provided by operating activities
Cash flows from financing activities:
Cash dividends forfeited (paid) on common stock
Proceeds from exercise of stock options, net
Shares surrendered related to tax withholdings on restricted stock awards
Purchase of common stock
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
NOTE 17 – RISKS AND UNCERTAINTIES
Current Banking Environment
(10,712)
5
590
(16)
821
5
(18)
(74)
—
(87)
734
17,415
18,149 $
21,492
2
625
87
738
(1,989)
(108)
(113)
(2,860)
(5,070)
(4,332)
21,747
17,415
$
Industry events have led to a greater focus by 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:
(cid:120) The Bank’s deposit and loan portfolios were and continue to be well-diversified;
(cid:120) The Company is a member of the Depositors Insurance Fund, a private industry-sponsored insurance fund that insures all
deposits above Federal Deposit Insurance Corporation limits;
(cid:120) We have access to multiple funding sources and sufficient capacity to borrow, if needed. As of December 31, 2023 between
the Federal Home Loan Bank of Boston and the Federal Reserve Bank of Boston’s borrower-in-custody program, we had the
ability to borrow $408.7 million, of which $104.7 million was outstanding as of that date;
(cid:120) Our securities portfolio represented only 1.7% of total assets as of December 31, 2023 and the accumulated other
comprehensive loss on the portfolio was $1.5 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.
F-40
PR EMIER BUSINESS BANK ING
strengthening the
communities we serve.
We’re more than just a bank.
We’re your partner.
We are committed to strengthening the economic
development of the regions we serve by working
closely with businesses to provide future-ready
banking solutions and high-touch services
tailored to meet all their banking needs.
Fully Insured Deposits
Cash Management Services
Commercial Lending Solutions
Banking-as-a-Service
Executive Officers
Directors
Headquarters
Joe Reilly, Chief Executive Officer, BankProv
Ken Fisher, Chief Financial Officer, BankProv
Dave Gagnon, EVP, Chief Credit Officer, BankProv
Janine Jakubauskas, EVP, Chief Risk Officer, BankProv
Joe Kenney, EVP, Chief Lending Officer, BankProv
Anne Lapointe, EVP, Chief of Staff, BankProv
Joe Mancini, EVP, Chief Operating Officer, BankProv
Amber Barbere, SVP, Human Resources, BankProv
Leanne Corning, SVP, Client Experience, BankProv
Laurie Knapp, Chairman
Julienne Cassarino
Katie Chase
Frank Cousins
Jim DeLeo
Lisa DeStefano
Jay Gould
Nate Gravel (Bank only)
Barbara Piette
Dennis Pollack
Joe Reilly
Arthur Sullivan
Provident Bancorp, Inc.
5 Market Street
Amesbury, MA 01913
Stock Information
The voting common stock of
Provident Bancorp, Inc. is traded
on the NASDAQ Global Select
Market under the symbol “PVBC.”
Copyright © 2024 BankProv. All rights reserved
bankprov.com
5 Market Street • A me sbury, MA 01913 • bankprov.c o m
All content included in this Annual Report, including graphics, logos and other materials, is
the property of Provident Bancorp, Inc., and/or its affiliates, or others as noted herein, and
is protected by copyright and other laws. All trademarks and logos displayed in this Annual
Report are the property of their respective owners.
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