UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to ______________________
Commission File No.
Provident Bancorp, Inc.
(Exact name of registrant as specified in its charter)
| | | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) | |
| | | |
| (Address of Principal Executive Offices) | Zip Code |
(
(Registrant’s telephone number)
| N/A |
(Former name, former address, and former fiscal year if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| | | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 | ☐ | Accelerated Filer | ☐ | |
| | ☒ | Smaller Reporting Company | | |
| Emerging Growth Company | |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of November 4, 2024, there were
Provident Bancorp, Inc.
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| Consolidated Balance Sheets as of September 30, 2024 (unaudited) and December 31, 2023 |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operation |
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CONSOLIDATED BALANCE SHEETS
| At September 30, 2024 | At December 31, 2023 | |||||||
| (Dollars in thousands) | (unaudited) | |||||||
| 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 | ||||||||
| Total Loans | ||||||||
| Allowance for credit losses on loans | ( | ) | ( | ) | ||||
| Net loans | ||||||||
| Bank owned life insurance | ||||||||
| Premises and equipment, net | ||||||||
| 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: | ||||||||
| Preferred stock, $ par value, shares authorized; shares issued and outstanding | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Unearned compensation - ESOP | ( | ) | ( | ) | ||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended |
Nine Months Ended |
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| September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
| (Dollars in thousands, except per share data) |
2024 |
2023 |
2024 |
2023 |
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| Interest and dividend income: |
||||||||||||||||
| Interest and fees on loans |
$ | $ | $ | $ | ||||||||||||
| Interest and dividends on debt securities available-for-sale |
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| Interest on short-term investments |
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| Total interest and dividend income |
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| Interest expense: |
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| Interest on deposits |
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| Interest on short-term borrowings |
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| Interest on long-term borrowings |
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| Total interest expense |
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| Net interest and dividend income |
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| Credit loss expense (benefit) - loans |
( |
) | ||||||||||||||
| Credit loss expense (benefit) - off-balance sheet credit exposures |
( |
) | ( |
) | ( |
) | ||||||||||
| Total credit loss expense (benefit) |
( |
) | ||||||||||||||
| Net interest and dividend income after credit loss expense (benefit) |
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| Noninterest income: |
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| Customer service fees on deposit accounts |
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| Service charges and fees - other |
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| Bank owned life insurance income |
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| Other income |
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| Total noninterest income |
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| Noninterest expense: |
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| Salaries and employee benefits |
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| Occupancy expense |
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| Equipment expense |
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| Deposit insurance |
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| Data processing |
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| Marketing expense |
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| Professional fees |
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| Directors' compensation |
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| Software depreciation and implementation |
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| Insurance expense |
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| Service fees |
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| Other |
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| Total noninterest expense |
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| Income before income tax expense |
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| Income tax expense |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Earnings per share: |
||||||||||||||||
| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | |||||||||||||
| Weighted Average Shares: |
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| Basic |
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| Diluted |
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The accompanying notes are an integral part of the unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended |
Nine Months Ended |
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| September 30, |
September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
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| (In thousands) |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income: |
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| Unrealized holding gains (losses) arising during the period on debt securities available-for-sale |
( |
) | ( |
) | ||||||||||||
| Unrealized gain (loss) |
( |
) | ( |
) | ||||||||||||
| Income tax effect |
( |
) | ( |
) | ||||||||||||
| Total other comprehensive income (loss) |
( |
) | ( |
) | ||||||||||||
| Comprehensive income |
$ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| For the three months ended September 30, 2024 and 2023 |
||||||||||||||||||||||||||||
| Accumulated |
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| Shares of |
Additional |
Other |
Unearned |
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| Common |
Common |
Paid-in |
Retained |
Comprehensive |
Compensation |
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| (In thousands, except share data) |
Stock |
Stock |
Capital |
Earnings |
(Loss) Income |
ESOP |
Total |
|||||||||||||||||||||
| Balance, June 30, 2024 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income |
— | |||||||||||||||||||||||||||
| Dividends forfeited |
— | |||||||||||||||||||||||||||
| Other comprehensive income |
— | |||||||||||||||||||||||||||
| Stock-based compensation expense, net of forfeitures |
— | |||||||||||||||||||||||||||
| Restricted stock award grants, net |
( |
) | ( |
) | ||||||||||||||||||||||||
| ESOP shares earned |
— | |||||||||||||||||||||||||||
| Balance, September 30, 2024 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Balance, June 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income |
— | |||||||||||||||||||||||||||
| Dividends forfeited |
— | |||||||||||||||||||||||||||
| Other comprehensive loss |
— | ( |
) | ( |
) | |||||||||||||||||||||||
| Stock-based compensation expense, net of forfeitures |
— | |||||||||||||||||||||||||||
| Restricted stock award grants, net |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Stock options exercised, net |
||||||||||||||||||||||||||||
| ESOP shares earned |
— | |||||||||||||||||||||||||||
| Balance, September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
PROVIDENT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)
(Unaudited)
| For the nine months ended September 30, 2024 and 2023 |
||||||||||||||||||||||||||||
| Accumulated |
||||||||||||||||||||||||||||
| Shares of |
Additional |
Other |
Unearned |
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| Common |
Common |
Paid-in |
Retained |
Comprehensive |
Compensation |
|||||||||||||||||||||||
| (In thousands, except share data) |
Stock |
Stock |
Capital |
Earnings |
(Loss) Income |
ESOP |
Total |
|||||||||||||||||||||
| Balance, December 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Net income |
— | |||||||||||||||||||||||||||
| Dividends forfeited |
— | |||||||||||||||||||||||||||
| Other comprehensive income |
— | |||||||||||||||||||||||||||
| Stock-based compensation expense, net of forfeitures |
— | |||||||||||||||||||||||||||
| Restricted stock award grants, net |
( |
) | ( |
) | ||||||||||||||||||||||||
| Stock options exercised, net |
( |
) | ( |
) | ||||||||||||||||||||||||
| ESOP shares earned |
— | |||||||||||||||||||||||||||
| Balance, September 30, 2024 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Balance, December 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Cumulative effect of change in accounting principle |
— | |||||||||||||||||||||||||||
| Balance at January 1, 2023 (as adjusted for change in accounting principal) |
( |
) | ( |
) | ||||||||||||||||||||||||
| Net income |
— | |||||||||||||||||||||||||||
| Dividends forfeited |
||||||||||||||||||||||||||||
| Other comprehensive loss |
— | ( |
) | ( |
) | |||||||||||||||||||||||
| Stock-based compensation expense, net of forfeitures |
— | |||||||||||||||||||||||||||
| Restricted stock award grants, net |
( |
) | ( |
) | ||||||||||||||||||||||||
| Stock options exercised, net |
( |
) | ( |
) | ||||||||||||||||||||||||
| ESOP shares earned |
— | |||||||||||||||||||||||||||
| Balance, September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended |
||||||||
| September 30, |
||||||||
| (In thousands) |
2024 |
2023 |
||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Amortization of securities premiums, net of accretion |
||||||||
| ESOP expense |
||||||||
| Change in deferred loan fees, net |
( |
) | ( |
) | ||||
| Provision for credit losses |
||||||||
| Depreciation and amortization |
||||||||
| Net gain on other repossessed assets |
( |
) | ||||||
| Decrease in accrued interest receivable |
||||||||
| Deferred tax (benefit) expense |
( |
) | ||||||
| Share-based compensation expense |
||||||||
| Bank-owned life insurance income |
( |
) | ( |
) | ||||
| Principal repayments of operating lease obligations |
( |
) | ( |
) | ||||
| Net decrease in other assets |
||||||||
| Net decrease in other liabilities |
( |
) | ( |
) | ||||
| Net cash provided by operating activities |
( |
) | ||||||
| Cash flows from investing activities: |
||||||||
| Proceeds from pay downs, maturities and calls of debt securities available-for-sale |
||||||||
| Redemption of Federal Home Loan Bank stock |
||||||||
| Loan originations net of principal collections |
( |
) | ||||||
| Proceeds from other repossessed asset sales |
||||||||
| Additions to premises and equipment |
( |
) | ( |
) | ||||
| Net cash (used in) provided by investing activities |
( |
) | ||||||
| Cash flows from financing activities: |
||||||||
| Net increase (decrease) in noninterest-bearing accounts |
( |
) | ||||||
| Net (decrease) increase in interest-bearing accounts |
( |
) | ||||||
| Net cash dividends forfeited on common stock |
||||||||
| Payments from exercise of stock options, net |
( |
) | ( |
) | ||||
| Net change in short-term borrowings |
( |
) | ||||||
| Repayments on long-term borrowings |
( |
) | ( |
) | ||||
| Shares surrendered related to tax withholdings on restricted stock awards |
( |
) | ( |
) | ||||
| Net cash (used in) provided by financing activities |
( |
) | ||||||
| Net (decrease) increase in cash and cash equivalents |
( |
) | ||||||
| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
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| Supplemental disclosures: |
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| Interest paid |
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| Income taxes paid |
||||||||
| Transfer of premises and equipment held for sale to other assets |
||||||||
| Reduction to right-of-use assets and related operating lease liability due to renegotiated lease terms |
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Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited financial statements of Provident Bancorp, Inc. (the “Company”) were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of the financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three- and nine-month periods ended September 30, 2024 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. These financial statements should be read in conjunction with the annual financial statements and notes thereto included in the annual report on Form 10-K the Company filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2024.
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiary BankProv (the “Bank”), and the Bank’s wholly owned subsidiaries, Provident Security Corporation, and 5 Market Street Security Corporation. Provident Security Corporation and 5 Market Street Security Corporation were established to buy, sell, and hold investments for their own account.
(2) Corporate Structure
The Company is a Maryland corporation whose primary purpose is to act as the holding company for the Bank. The Bank, headquartered in Amesbury, Massachusetts, operates its business from its main office in Amesbury, Massachusetts, as well as two branch offices in the Northeastern Massachusetts area, three branch offices in Southeastern New Hampshire and one branch located in Bedford, New Hampshire. The Bank also has a loan production office in Ponte Vedra, Florida. BankProv is a Massachusetts-chartered stock savings bank that offers both traditional and innovative banking solutions to its consumer and commercial customers. The Bank’s primary deposit products are checking, savings, and term certificate accounts and its primary lending products are commercial real estate, commercial, and mortgage warehouse loans.
(3) Risks and Uncertainties
Current Banking Environment
Industry events have led to a greater focus by financial institutions, investors and regulators on liquidity positions of and funding sources for financial institutions, the composition of their deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management.
The Company believes it is well insulated on these issues due to the following considerations:
| ● | The Bank’s deposit and loan portfolios were and continue to be well-diversified; |
| ● | The Bank is a member of the Depositors Insurance Fund, a private industry-sponsored insurance fund that insures all deposits above Federal Deposit Insurance Corporation limits; |
| ● | We have access to multiple funding sources and sufficient capacity to borrow, if needed. As of September 30, 2024, between the Federal Home Loan Bank of Boston and the Federal Reserve Bank of Boston’s ("the FRB") borrower-in-custody (“BIC”) program, we had the ability to borrow $ |
| ● | Our securities portfolio represented |
(4) Recent Accounting Pronouncements
In December 2023, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures (“ASU 2023-09”), to enhance the transparency and decision usefulness of income tax disclosures. ASU 2023-09 requires annual disclosure of specific categories in the rate reconciliation table and separate disclosure for reconciling items that exceed a quantitative threshold. ASU 2023-09 also requires annual disclosure of the amount of income taxes paid disaggregated by federal, state, and foreign taxes, and separately, the amount of income taxes paid disaggregated by individual taxing jurisdictions in which income taxes paid exceed a quantitative threshold. ASU 2023-09 is effective for the Company for fiscal years beginning after December 15, 2024 with early adoption permitted. The Company is currently evaluating the impact of this Accounting Standard Update with respect to its consolidated financial statements.
In November 2023, the Financial Accounting Standards Board issued ASU No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures (“ASU 2023-07”), to improve a public entity’s disclosures surrounding reportable segments. ASU 2023-07 requires public entities to: disclose significant segment expenses, on an annual and interim basis, that are provided to the chief operating decision maker (“CODM”), disclose an amount for other segment items by reportable segment including a description of its composition, disclose all annual disclosures currently required by Topic 280 in interim periods, and disclose the title and position of the CODM. The amendments in ASU 2023-07 are applicable to companies with a single reportable segment. The amended disclosures from ASU 2023-07 will be incorporated in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2024.
(5) Debt Securities
Debt securities are classified as available-for-sale when they might be sold before maturity. Debt securities available-for-sale are valued at fair value, with unrealized holding gains and losses reported in other comprehensive (loss) income, net of tax.
The following table summarizes the amortized cost, allowance for credit losses, and fair value of debt securities available-for-sale at September 30, 2024 and December 31, 2023 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:
| Amortized | Gross | Gross | Allowance | |||||||||||||||||
| Cost | Unrealized | Unrealized | for Credit | Fair | ||||||||||||||||
| (In thousands) | Basis | Gains | Losses | Losses | Value | |||||||||||||||
| September 30, 2024 | ||||||||||||||||||||
| State and municipal securities | $ | $ | $ | $ | $ | |||||||||||||||
| Asset-backed securities | ||||||||||||||||||||
| Government mortgage-backed securities | ||||||||||||||||||||
| Total debt securities available-for-sale | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2023 | ||||||||||||||||||||
| State and municipal securities | $ | $ | $ | $ | $ | |||||||||||||||
| Asset-backed securities | ||||||||||||||||||||
| Government mortgage-backed securities | ||||||||||||||||||||
| Total debt securities available-for-sale | $ | $ | $ | $ | $ | |||||||||||||||
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
There were
Securities with carrying amounts million and $
The scheduled maturities of debt securities at September 30, 2024 are summarized in the table below. Actual maturities of asset and mortgage-backed securities may differ from contractual maturities because the assets and mortgages underlying the securities may be repaid without any penalties. Because asset- and mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary:
| Available-for-Sale | ||||||||
| Amortized | Fair | |||||||
| (In thousands) | Cost | Value | ||||||
| Due in one year | $ | 547 | $ | 546 | ||||
| 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 | ||||||||
| $ | $ | |||||||
At the time a debt security is placed on non-accrual status, generally when any principal or interest payments become 90 days or more delinquent or if full collection of interest or principal becomes uncertain, interest accrued but not received is reversed against interest income. There were no debt securities on non-accrual status and therefore there was no accrued interest related to debt securities reversed against interest income during the nine months ended September 30, 2024 or September 30, 2023.
The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or longer are as follows at September 30, 2024 and December 31, 2023:
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| (In thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
| September 30, 2024 | ||||||||||||||||||||||||
| Temporarily impaired securities: | ||||||||||||||||||||||||
| State and municipal securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||||||
| Government mortgage-backed securities | ||||||||||||||||||||||||
| Total temporarily impaired debt securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||
| Temporarily impaired securities: | ||||||||||||||||||||||||
| State and municipal | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||||||
| Government mortgage-backed securities | ||||||||||||||||||||||||
| Total temporarily impaired debt securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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 September 30, 2024, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’ strong capital and liquidity positions as well as its historically low portfolio turnover.
As a result of the analysis below, by investment type, we determined that no allowance for credit loss for investment securities was required as of September 30, 2024.
State and municipal securities: At September 30, 2024,
Asset-backed securities: At September 30, 2024, of the securities in the Company’s portfolio of asset-backed securities were in unrealized loss positions. Aggregate unrealized losses represented
Government mortgage-backed securities: At September 30, 2024, all
Allowance for Credit Losses – Available-For-Sale Securities:
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charged to earnings. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive (loss) income.
Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes an available for sale security is uncollectible, or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available-for-sale debt securities totaled $
(6) Loans and Allowance for Credit Losses for Loans
Loans:
A summary of loans is as follows:
| At | At | |||||||
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (In thousands) | Amount | Amount | ||||||
| Commercial real estate | $ | $ | ||||||
| Construction and land development | ||||||||
| Residential real estate | ||||||||
| Mortgage warehouse | ||||||||
| Commercial | ||||||||
| Enterprise value | ||||||||
| Digital asset | ||||||||
| Consumer | ||||||||
| Total loans | ||||||||
| Allowance for credit losses on loans | ( | ) | ( | ) | ||||
| Net 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 on loans totaled $
At the time a loan is placed on non-accrual status, generally at 90 days past due, or earlier if collection of principal or interest is considered doubtful, all interest accrued but not received is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for a return to accrual status. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Credit Losses for Loans:
The allowance for credit losses for loans (“ACLL”) is a valuation account that is deducted from the amortized cost basis of the loans to present the net amount expected to be collected. Loans are charged off against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance and do not exceed the aggregate of amounts previously charged-off. The Company employs a process and methodology to estimate the ACLL that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors involves pooling loans into portfolio segments for loans that share similar risk characteristics.
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments:
Commercial real estate: Loans in this segment are primarily income-producing properties throughout Massachusetts and New Hampshire. The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, can have an effect on the credit quality in this segment. Management periodically obtains rent rolls and continually monitors the cash flows of these loans.
Construction and land development: Loans in this segment primarily include speculative and pre-sold real estate development loans for which payment is derived from sale of the property and a conversion of the construction loans to permanent loans for which payment is then derived from cash flows of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, inaccurate estimates of the value of the completed project, and market conditions.
Residential real estate: All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will effect the credit quality in this segment. We no longer originate residential real estate loans, and previously we did not typically originate loans with a loan-to-value ratio greater than 80% or grant subprime loans. Loans with loan to value ratios greater than 80% required the purchase of private mortgage insurance.
Mortgage warehouse: Loans in this segment are primarily facility lines to non-bank mortgage origination companies. The underlying collateral of these loans are residential real estate loans. Loans are originated by the mortgage companies for sale into secondary markets, which is typically within 15 days of the loan closing. The primary source of repayment is the cash flows upon the sale of the loans. The credit risk associated with this type of lending is the risk that the mortgage companies are unable to sell the loans.
Commercial: Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, can have an effect on the credit quality in this segment.
Enterprise value: Loans in this segment are made to small- and medium-size businesses in a senior secure position and are generally secured by the enterprise value of the business. The enterprise value consists of the going concern value of the business and takes into account the value of business assets (both tangible and intangible). Repayment is expected from the cash flows of the business. Economic and industry specific conditions can effect the credit quality of this segment.
Digital asset: We no longer originate or hold digital asset loans. Loans in this segment were made to businesses in the digital asset space and were generally secured by digital asset mining equipment or by the United States dollar value of digital currency assets of the business.
Consumer: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
Management estimates the ACLL balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Generally, management considers its forecasts to be reasonable and supportable for a period of up to four quarters and then utilizes a four-quarter straight-line reversion period. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as portfolio mix, delinquency levels, or term as well as for changes in economic conditions, such as changes in unemployment rates, property values, gross domestic product (“GDP”), home pricing index (“HPI”), or other relevant factors. Incorporated in the estimate for the ACLL is consideration of qualitative factors, which include the following for all loan pools:
| ● | Changes in lending policies and procedures, including changes in underwriting standards and collections, charge offs, and recovery practices; |
| ● | Changes in the experience, depth, and ability of lending management; |
| ● | Changes in the quality of the organization's loan review system; |
| ● | The existence and effect of any concentrations of credit and changes in the levels of such concentrations; and |
| ● | The effect of other external factors (i.e. legal and regulatory requirements) on the level of estimated credit losses. |
In addition to the above, the mortgage warehouse pool includes a qualitative factor for changes in international, national, regional, and local conditions as the ACLL model for this loan pool does not apply an economic regression model in the calculation of the historical loss rate. The determination of qualitative factors involves significant judgment.
The allowance for unfunded commitments is maintained by the Company at a level determined to be sufficient to absorb expected lifetime losses related to unfunded credit facilities (including unfunded loan commitments and letters of credit).
The Company measures the ACLL using the following methods:
| Portfolio Segment | Measurement Method | Loss Driver | ||
| Commercial real estate | Discounted cash flow | National unemployment rate, national GDP | ||
| Construction and land development | Discounted cash flow | National unemployment rate, national GDP | ||
| Residential real estate | Discounted cash flow | National unemployment rate, national HPI | ||
| Mortgage warehouse | Remaining life method | Not applicable | ||
| Commercial | Discounted cash flow | National unemployment rate, national GDP | ||
| Enterprise value | Discounted cash flow | National unemployment rate, national GDP | ||
| Digital asset | Discounted cash flow | National unemployment rate, national GDP | ||
| Consumer | Discounted cash flow | National unemployment rate, national GDP |
When the discounted cash flow method is used to determine the allowance for credit losses, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
When the remaining life method is used to determine the allowance for credit losses, a calculated loss rate is applied to the pool of loans based on the remaining life expectation of the pool. The remaining life expectation is based on management’s reasonable expectation at the reporting date.
Loans that do not share risk characteristics, whether or not they are performing in accordance with their loan terms, are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. The Company will individually evaluate a loan when, based on current information and events, it is probable that it will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in making this determination include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Insignificant payment delays and payment shortfalls generally are not considered reason enough to individually analyze a loan. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. When management determines that a loan should be individually analyzed, expected credit losses are based on either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral at the reporting date, adjusted for selling costs, as appropriate.
The following table presents the activity in the allowance for credit losses for loans by portfolio segment for the three and nine months ended September 30, 2024 and 2023:
| (In thousands) | Commercial real estate | Construction and land development | Residential real estate | Mortgage warehouse | Commercial | Enterprise value | Digital asset | Consumer | Total | |||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision (credit) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| (Credit) provision | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| (In thousands) | Commercial real estate | Construction and land development | Residential real estate | Mortgage warehouse | Commercial | Enterprise value | Digital asset | Consumer | Total | |||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision (credit) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Impact of adopting ASC 326 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| (Credit) provision | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
The following table presents loan delinquencies by portfolio segment at September 30, 2024 and December 31, 2023:
| 90 Days | Total | |||||||||||||||||||||||
| 30 - 59 | 60 - 89 | or More | Past | Total | Total | |||||||||||||||||||
| (In thousands) | Days | Days | Past Due | Due | Current | Loans | ||||||||||||||||||
| September 30, 2024 | ||||||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| Mortgage warehouse | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Enterprise value | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| Mortgage warehouse | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Enterprise value | ||||||||||||||||||||||||
| Digital asset | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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 September 30, 2024 and December 31, 2023:
| Non-accrual | 90 Days | |||||||||||
| With No | or More | |||||||||||
| Allowance | Non-accrual | Past Due | ||||||||||
| (In thousands) | for Credit Loss | Loans | and Accruing | |||||||||
| September 30, 2024 | ||||||||||||
| Commercial real estate | $ | $ | $ | |||||||||
| Construction and land development | ||||||||||||
| Residential real estate | ||||||||||||
| Commercial | ||||||||||||
| Enterprise value | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
| December 31, 2023 | ||||||||||||
| Residential real estate | ||||||||||||
| Commercial | ||||||||||||
| Enterprise value | ||||||||||||
| Digital asset | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
There were no construction and land development loans that were on non-accrual status as of December 31, 2023.
The Company did recognize interest income on non-accrual loans during the nine months ended September 30, 2024 or 2023.
The following tables present the amortized cost basis of collateral-dependent loans by class as of September 30, 2024 and December 31, 2023:
| Commercial | Business | |||||||||||
| Real | Business | Enterprise | ||||||||||
| (In thousands) | Estate | Assets | Value | |||||||||
| September 30, 2024 | ||||||||||||
| Commercial real estate | $ | $ | $ | |||||||||
| Construction and land development | ||||||||||||
| Commercial | ||||||||||||
| Enterprise value | ||||||||||||
| Total | $ | $ | $ | |||||||||
| December 31, 2023 | ||||||||||||
| Commercial real estate | $ | $ | $ | |||||||||
| Commercial | ||||||||||||
| Enterprise value | ||||||||||||
| Digital asset (1) | ||||||||||||
| Total | $ | $ | $ | |||||||||
| (1) | Business assets include the United States dollar value of Bitcoin held in control accounts, an interest in a joint venture partnership, as well as cash accounts held at the Bank. |
Occasionally, the Company modifies loans to borrowers experiencing financial difficulty by providing the following modifications: principal forgiveness, other-than-insignificant payment delays, term extensions, interest rate reductions, or a combination of these modifications. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses on loans.
In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.
The following table presents the amortized cost basis of loans at September 30, 2024 that were both experiencing financial difficulty and modified during the three months ended September 30, 2024 by class and by type of modification. There were
| (Dollars in thousands) | Other-Than-Insignificant Payment Delay | Term Extension | Combination Term Extension and Interest Rate Reduction | Total Class of Financing Receivable $ | Total Class of Financing Receivable % | |||||||||||||||
| September 30, 2024 | ||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | % | |||||||||||||||
| Enterprise value | ||||||||||||||||||||
| Total | $ | $ | $ | $ | % | |||||||||||||||
The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty during the three months ended September 30, 2024:
| Weighted-Average Other-Than-Insignificant Payment Delay | Weighted-Average Term Extension | Weighted-Average Term Extension and Interest Rate Reduction | ||||||||||||||
| Months | Months | Months | Percentage points | |||||||||||||
| September 30, 2024 | ||||||||||||||||
| Commercial real estate | — | % | ||||||||||||||
| Enterprise value | — | — | — | |||||||||||||
The following table presents the amortized cost basis of loans at September 30, 2024 and 2023 that were both experiencing financial difficulty and modified during the nine months ended September 30, 2024 and 2023, respectively, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below:
| (Dollars in thousands) | Other-Than-Insignificant Payment Delay | Term Extension | Combination Term Extension and Other-Than-Insignificant Payment Delay | Combination Term Extension and Interest Rate Reduction | Combination Term Extension, Other-Than-Insignificant Payment Delay, and Interest Rate Reduction | Total Class of Financing Receivable $ | Total Class of Financing Receivable % | |||||||||||||||||||||
| September 30, 2024 | ||||||||||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Enterprise value | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||
| Enterprise value | ||||||||||||||||||||||||||||
| Digital asset | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||
The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty during the nine months ended September 30, 2024 and 2023:
| Weighted-Average Other-Than-Insignificant Payment Delay | Weighted-Average Term Extension | Weighted-Average Term Extension and Other-Than-Insignificant Payment Delay | Weighted-Average Term Extension and Interest Rate Reduction | Weighted-Average Term Extension, Other-Than-Insignificant Payment Delay, and Interest Rate Reduction | ||||||||||||||||||||||||||||||||
| Months | Months | Months | Months | Months | Percentage Points | Months | Months | Percentage Points | ||||||||||||||||||||||||||||
| September 30, 2024 | ||||||||||||||||||||||||||||||||||||
| Commercial real estate | — | — | — | % | % | |||||||||||||||||||||||||||||||
| Commercial | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Enterprise value | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||||||||||||||||||
| Commercial | — | — | — | — | % | — | — | — | % | |||||||||||||||||||||||||||
| Enterprise value | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Digital asset | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
The Company has committed to lend any additional funds to borrowers experiencing financial difficulty whose loans had been modified during the nine months ended September 30, 2024. The Company had committed to lend $
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 September 30, 2024 and 2023, there were no amounts past due or subsequent defaults related to loans modified to borrowers experiencing financial difficulty within the preceding 12 months.
Credit Quality Information
The Company utilizes a seven-grade internal loan risk rating system for commercial real estate, construction and land development, commercial, and enterprise value loans as follows:
Loans rated 1-3: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 7: Loans in this category are considered uncollectible “loss” and of such little value that their continuance as loans is not warranted.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and land development, commercial, and enterprise value loans.
On an annual basis, or more often if needed, the Company completes a credit recertification on all mortgage warehouse originators.
For residential real estate loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and rates such loans as pass. Ongoing monitoring is based upon the borrower’s payment activity.
Consumer loans are not formally rated.
Based on the most recent analysis performed, the risk category of loans by class of loans and their corresponding gross write-offs for the nine months ended September 30, 2024 is as follows:
| Term Loans at Amortized Cost by Origination Year | ||||||||||||||||||||||||||||||||||||
| (In thousands) | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans Amortized Cost | Revolving Loans Converted to Term Loans | Total | |||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total commercial real estate | ||||||||||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total construction and land development | ||||||||||||||||||||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total residential real estate | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||||||
| Mortgage warehouse | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| Total mortgage warehouse | ||||||||||||||||||||||||||||||||||||
| Mortgage warehouse | ||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Not formally rated | ||||||||||||||||||||||||||||||||||||
| Total consumer | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
The following table presents the risk category of loans by class of loans as of December 31, 2023 and their corresponding gross write-offs for the year then ended:
| (In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost | Revolving Loans Converted to Term Loans | Total | |||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total commercial real estate | ||||||||||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| Total construction and land development | ||||||||||||||||||||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total residential real estate | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||||||
| Mortgage warehouse | ||||||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||||||
| Total mortgage warehouse | ||||||||||||||||||||||||||||||||||||
| Mortgage warehouse | ||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Not formally rated | ||||||||||||||||||||||||||||||||||||
| Total consumer | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
(7) Deposits
A summary of deposit balances, by type is as follows:
| At | At | |||||||
| September 30, | December 31, | |||||||
| (In thousands) | 2024 | 2023 | ||||||
| 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 September 30, 2024 and December 31, 2023, the aggregate amount of brokered certificates of deposit was $
(8) Borrowings
Advances consist of funds borrowed from the Federal Home Loan Bank (the “FHLB”) and the Federal Reserve Bank of Boston's ("FRB") borrower-in-custody ("BIC") program. Maturities of advances from the FHLB and FRB as of September 30, 2024 are summarized as follows:
| (In thousands) | ||||
| Fiscal Year-End | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ |
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 September 30, 2024, borrowings from the FHLB consisted of short-term advances of $
Borrowings from the FRB BIC program are secured by a Uniform Commercial Code financing statement on qualified collateral, consisting of certain commercial loans. The Company had the ability to borrow $
(9) Fair Value Measurements
The Company reports certain assets at fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value in accordance with generally accepted accounting principles. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:
Basis of Fair Value Measurements
| ● | Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| ● | Level 2 – Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; |
| ● | Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
An asset’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Fair Values of Assets Measured on a Recurring Basis
The Company’s investments in state and municipal, asset-backed and government mortgage-backed debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these investments, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.
The following summarizes financial instruments measured at fair value on a recurring basis at September 30, 2024 and December 31, 2023:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Significant | Significant | |||||||||||||||
| Other Observable | Unobservable | |||||||||||||||
| Inputs | Inputs | |||||||||||||||
| (In thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| September 30, 2024 | ||||||||||||||||
| State and municipal securities | $ | $ | $ | $ | ||||||||||||
| Asset-backed securities | ||||||||||||||||
| Government mortgage-backed securities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 | ||||||||||||||||
| State and municipal securities | $ | $ | $ | $ | ||||||||||||
| Asset-backed securities | ||||||||||||||||
| Government mortgage-backed securities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Fair Values of Assets Measured on a Non-Recurring Basis
The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of lower-of-cost-or market accounting or write-downs of individual assets.
Certain loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for credit losses for loans. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.
The following summarizes assets measured at fair value on a nonrecurring basis at September 30, 2024 and December 31, 2023:
| Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
| Quoted Prices in | Significant | Significant | ||||||||||||||
| Active Markets for | Other Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| (In thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| September 30, 2024 | ||||||||||||||||
| Loans | ||||||||||||||||
| Enterprise value | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 | ||||||||||||||||
| Loans | ||||||||||||||||
| Enterprise value | $ | $ | $ | $ | ||||||||||||
| Digital asset | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis at September 30, 2024 and December 31, 2023:
| (In thousands) | Fair Value | Valuation Technique | Unobservable Input | Range | ||||||||
| September 30, 2024 | ||||||||||||
| Loans | ||||||||||||
| Enterprise value | $ | Business valuation | Company earnings and market assumptions | |||||||||
| December 31, 2023 | ||||||||||||
| Loans | ||||||||||||
| Enterprise value | $ | Business or collateral valuation | Comparable company or collateral evaluations | |||||||||
| Digital asset | Asset valuation | Comparable asset evaluations | ||||||||||
At September 30, 2024, the contractual balance of enterprise value loans measured at fair value on a nonrecurring basis was $
Fair Values of Financial Instruments
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The carrying amounts and estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, are as follows at September 30, 2024 and December 31, 2023:
| Carrying | Fair Value | |||||||||||||||||||
| (In thousands) | Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| September 30, 2024 | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Available-for-sale debt securities | ||||||||||||||||||||
| Federal Home Loan Bank of Boston stock | N/A | N/A | N/A | N/A | ||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Assets held for sale | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Borrowings | ||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Available-for-sale debt securities | ||||||||||||||||||||
| Federal Home Loan Bank of Boston stock | N/A | N/A | N/A | N/A | ||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Borrowings | ||||||||||||||||||||
(10) Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Bank is subject to capital regulations that require a Common Equity Tier 1 (“CET1”) capital ratio of
Applicable regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of
Federal banking agencies’ regulations establish a community bank leverage ratio (“CBLR”) framework for community banking organizations having total consolidated assets of less than $
The Bank’s actual capital amounts and ratios at September 30, 2024 and December 31, 2023 are summarized as follows:
| To Be Well | ||||||||||||||||||||||||||
| Capitalized Under | ||||||||||||||||||||||||||
| For Capital | Prompt Corrective | |||||||||||||||||||||||||
| Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||
| September 30, 2024 | ||||||||||||||||||||||||||
| Total Capital (to Risk Weighted Assets) | $ | % | $ | > | % | $ | > | % | ||||||||||||||||||
| Tier 1 Capital (to Risk Weighted Assets) | > | > | ||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to Risk Weighted Assets) | > | > | ||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) | > | > | ||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||
| Total Capital (to Risk Weighted Assets) | $ | % | $ | > | % | $ | > | % | ||||||||||||||||||
| Tier 1 Capital (to Risk Weighted Assets) | > | > | ||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to Risk Weighted Assets) | > | > | ||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) | > | > | ||||||||||||||||||||||||
Liquidation Accounts
Upon the completion of the Company’s initial stock offering in 2015 and the second step offering in 2019, liquidation accounts were established for the benefit of certain depositors of the Bank in amounts equal to:
| 1. | The product of (i) the percentage of the stock issued in the initial stock offering in 2015 to persons other than Provident Bancorp, the top tier mutual holding company (“MHC”) of the Company and (ii) the net worth of the mid-tier holding company as of the date of the latest balance sheet contained in the prospectus utilized in connection with the offering; and |
| 2. | The MHC’s ownership interest in the retained earnings of the Company as of the date of the latest balance sheet contained in the 2019 prospectus plus the MHC’s net assets (excluding its ownership of the Company). |
The Company and the Bank are not permitted to pay dividends on their capital stock if the shareholders’ equity of the Company, or the shareholder’s equity of the Bank, would be reduced below the amount of the respective liquidation accounts. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts.
Other Restrictions
The Company’s principal source of funds for dividend payments is dividends received from the Bank. Federal and state banking regulations restrict the amount of dividends that may be paid by the Bank in a year, without prior approval of regulatory agencies, to the amount by which net income of the Bank for the year plus the retained net income of the previous two years exceeds any net loss reported in those respective periods. For the nine months ended September 30, 2024, the Bank reported net income of $
(11) Employee Stock Ownership Plan
The Bank established an employee stock ownership plan (the “ESOP”) to provide eligible employees the opportunity to own Company stock. The plan is a tax-qualified plan for the benefit of all Bank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax law limits. The ESOP acquired
Shares held by the ESOP include the following:
| September 30, 2024 | December 31, 2023 | |||||||
| Allocated | ||||||||
| Committed to be allocated | ||||||||
| Unallocated | ||||||||
| Total | ||||||||
The fair value of unallocated shares was approximately $
Total compensation expense recognized in connection with the ESOP for the three months ended September 30, 2024 and 2023 was $
(12) Earnings Per Common Share
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Unallocated ESOP shares, treasury stock, and unvested restricted stock are not deemed outstanding for earnings per share calculations.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (Dollars in thousands, except per share | September 30, | September 30, | September 30, | September 30, | ||||||||||||
| dollar amounts) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Net income attributable to common shareholders | $ | $ | $ | $ | ||||||||||||
| 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 | ||||||||||||||||
| Effect of dilutive unvested restricted stock and stock option awards | ||||||||||||||||
| Average number of common shares outstanding to calculate diluted earnings per common share | ||||||||||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
Stock options for
(13) Share-Based Compensation
The Company maintains the Provident Bancorp, Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”) and the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”, and collectively with the 2020 Equity Plan, the “Equity Plans”). Under the Equity Plans, the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Plans, with
Expense related to options and restricted stock granted to directors is recognized in directors’ compensation within non-interest expense.
Stock Options
The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:
| ● | Expected volatility is based on historical volatility of the Company’s common stock price; |
| ● | Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, and the vesting period; |
| ● | The dividend yield assumption is based on the Company’s expectation of dividend payouts; and |
| ● | The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option. |
The fair value of options granted was determined using the following weighted-average assumptions as of grant date:
| 2024 | ||||
| Vesting period (years) | ||||
| Expiration date (years) | ||||
| Expected volatility | % | |||
| Expected life (years) | ||||
| Expected dividend yield | % | |||
| Risk free interest rate | % | |||
| Fair value per option | $ | |||
A summary of the status of the Company’s stock options for the nine months ended September 30, 2024 is presented below:
| Stock Option Awards | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2023 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Outstanding at September 30, 2024 | $ | $ | ||||||||||||||
| Outstanding and expected to vest at September 30, 2024 | $ | $ | ||||||||||||||
| Vested and Exercisable at September 30, 2024 | $ | $ | ||||||||||||||
| Unrecognized compensation cost | $ | |||||||||||||||
| Weighted average remaining recognition period (years) | ||||||||||||||||
For the three months ended September 30, 2024 and 2023, expense for the stock options was $
Restricted Stock
Shares issued upon the granting of restricted stock may be either authorized but unissued shares or reacquired shares held by the Company. Any shares forfeited because vesting requirements are not met will again be available for issuance under the Equity Plans. The fair market value of shares awarded, based on the market prices at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period.
The following table presents the activity in restricted stock awards under the Equity Plans for the nine months ended September 30, 2024:
| Unvested Restricted Stock Awards | Weighted Average Grant Date Price | |||||||
| Unvested restricted stock awards at December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Forfeited | ( | ) | ||||||
| Vested | ( | ) | ||||||
| Unvested restricted stock awards at September 30, 2024 | $ | |||||||
| Unrecognized compensation cost | $ | |||||||
| Weighted average remaining recognition period (years) | ||||||||
For the three months ended September 30, 2024 and 2023, expense for the restricted stock awards was $
(14) Leases
The Company recognized right-of-use assets (“ROU”) totaling $
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease components, such as fair market value adjustments, are expensed as incurred and are not included in ROU assets and operating lease liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are expensed as incurred. For the three months ended September 30, 2024 and 2023, rent expense for the operating leases totaled $
The following table presents information regarding the Company’s operating leases:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Weighted-average discount rate | % | % | ||||||
| Range of lease expiration dates (in years) | 3 - 11 years | 1 - 12 years | ||||||
| Range of lease renewal options (in years) | 0 - 30 years | 0 - 20 years | ||||||
| Weighted-average remaining lease term (in years) | ||||||||
The following table presents the undiscounted annual lease payments under the terms of the Company’s operating leases at September 30, 2024 and December 31, 2023, including a reconciliation to the present value of operating lease liabilities recognized in the Consolidated Balance Sheets:
| September 30, | December 31, | |||||||
| Fiscal Year-End | 2024 | 2023 | ||||||
| (In thousands) | ||||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Total lease liabilities | $ | $ | ||||||
The lease liabilities recognized include certain lease extensions as it is expected that the Company will use substantially all lease renewal options.
(15) Revenue Recognition
Revenue from contracts with customers in the scope of Accounting Standards Codification (“ASC Topic 606”) is measured based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations.
The Company’s performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.
The Company recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Additionally, revenue is collected from loan fees, such as letters of credit, line renewal fees and application fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction.
(16) Qualified Affordable Housing Project Investments
The Bank invests in qualified affordable housing projects. At September 30, 2024 and December 31, 2023, the balance of the investment for qualified affordable housing projects was $
(17) Assets Held for Sale
After a thorough evaluation of the Bank's current occupancy needs compared to occupancy resources during the quarter ended September 30, 2024, the Bank entered into a preliminary agreement with a third-party for a sale and leaseback transaction, expected to close within one year, related to a large Bank property where the Bank will retain its flagship branch and limited administrative space. Since the current carrying amount of the building is $
(18) Commitments and Contingencies
On October 24, 2024, the Company received a letter from the staff of the Boston Regional Office of the SEC informing the Company that the staff had made a preliminary determination to recommend that the SEC file an action against the Company for violating certain sections of the federal securities laws (the “Wells Notice”). The staff has indicated that the Wells Notice relates to the Company’s disclosures regarding loans that the Company made to companies engaged in the mining of cryptocurrency - a line of business the Company ceased originating new loans in as of October 2022. The Wells Notice indicates that the staff’s recommendation to the SEC may involve a civil injunction action or other action allowed by law, and may seek remedies that include an injunction, disgorgement, pre-judgment interest, civil money penalties, and such other relief as may be available.
The Company intends to pursue the Wells Notice process, which will include an opportunity to respond to the staff’s position via a Wells Submission, and also expects to engage in a dialogue with the staff to explore a potential resolution of this matter. The results of the Wells Notice process and any corresponding enforcement action and the costs, timing and other potential consequences of responding and complying therewith are unknown at this time.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations at September 30, 2024 and December 31, 2023 and for the three and nine months ended September 30, 2024 and 2023 is intended to assist in understanding our financial condition and results of operations. Operating results for the three- and nine-month periods ended September 30, 2024 may not be indicative of results for all of 2024 or any other period. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.
Forward-Looking Statements
This document may contain certain forward-looking statements, such as statements of the Company’s or the Bank’s plans, objectives, expectations, estimates and intentions. Forward-looking statements may be identified by the use of words such as “expects,” “subject,” “believes,” “will,” “intends,” “may,” “will be,” “would” or similar expressions. These statements are subject to change based on various important factors (some of which are beyond the Company’s or the Bank’s control) and actual results may differ materially. Accordingly, readers should not place undue reliance on any forward-looking statements (which reflect management’s analysis of factors only as of the date on which they are given). These factors include: general economic conditions; interest rates; inflation; levels of unemployment; legislative, regulatory and accounting changes; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve Bank; deposit flows; our ability to access cost-effective funding; changes in liquidity, including the size and composition of our deposit portfolio and the percentage of uninsured deposits in the portfolio; changes in consumer spending, borrowing and savings habits; competition; our ability to successfully shift the balance sheet to that of a traditional community bank; real estate values in the market area; loan demand; the adequacy of our level and methodology for calculating our allowance for credit losses; changes in the quality of our loan and securities portfolios; the ability of our borrowers to repay their loans; an unexpected adverse financial, regulatory or bankruptcy event experienced by our cryptocurrency, digital asset or financial technology (“fintech”) customers; our ability to retain key employees; failures or breaches of our IT systems, including cyberattacks; the failure to maintain current technologies; the ability of the Company or the Bank to effectively manage its growth; global and national war and terrorism; the impact of the COVID-19 pandemic or any other pandemic on our operations and financial results and those of our customers; and results of regulatory examinations, among other factors.
The foregoing list of important factors is not exclusive. Readers should carefully review the factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
Except as required by applicable law and regulation, the Company does not undertake — and specifically disclaims any obligation — to update any forward-looking statements after the date of this quarterly report.
Critical Accounting Policies
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policy, which involves the most complex or subjective decisions or assessments, is as follows:
Allowance for Credit Losses for Loans. The allowance for credit losses represents management’s estimate of expected losses over the life of the loan portfolio. Loan losses are charged against the allowance when management believes the loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance. See Note 6 - Loans and Allowance for Credit Losses for Loans of the Notes to the Unaudited Consolidated Financial Statements for additional information.
Balance Sheet Analysis
The Bank has adjusted its risk appetite to reduce the overall risk profile of the balance sheet by limiting asset growth to five percent annually and transforming the mix of the loan portfolio towards traditional real estate and in-market commercial lending, while decreasing our exposure to enterprise value lending and eliminating our digital asset portfolio. This quarter, the Bank recognized an additional $1.7 million reserve on a $17.6 million enterprise value relationship, which now carries a total of $8.8 million in individually analyzed reserves, overshadowing a quarter of otherwise positive trends in executing the aforementioned balance sheet management strategy. These improvements reflect our continued efforts to shift the mix in the loan portfolio and reduce the reliance on high-cost deposits as a primary source of liquidity.
Assets. Total assets were $1.65 billion at September 30, 2024, a decrease of $22.1 million, or 1.3%, from $1.67 billion at December 31, 2023. The decrease resulted primarily from a decrease in cash and cash equivalents, partially offset by an increase in net loans.
Cash and Cash Equivalents. Cash and cash equivalents decreased $81.7 million, or 37.1%, to $138.7 million at September 30, 2024 compared to $220.3 million at December 31, 2023, primarily due to a decrease in deposits and an increase in net loans, partially offset by an increase in borrowings. For more information on cash sources and uses please refer to “– Liquidity and Capital Resources”.
Loan Portfolio Analysis. Net loans were $1.39 billion at September 30, 2024, an increase of $65.5 million, or 5.0%, from $1.32 billion at December 31, 2023.The increase in net loans for the nine months ended September 30, 2024 was primarily due to increases in mortgage warehouse loans of $126.3 million, or 75.8%, and commercial real estate loans of $80.1 million, or 17.1%, partially offset by decreases in enterprise value loans of $85.5 million, or 19.7%, construction and land development loans of $36.5 million, or 46.8%, and a $12.3 million decrease resulting from the closure of the digital asset loan portfolio. These changes reflect $47.3 million in construction and land development loans that converted to permanent commercial real estate loans during the nine months ended September 30, 2024, as well as the reclassification of approximately $33.8 million in loans from the enterprise value portfolio to the commercial portfolio, following an internal review performed in the third quarter to identify loans in this segment that share the collateral and risk characteristics of a traditional commercial loan. The changing mix of the loan portfolio is illustrative of our current strategy to reduce exposure in our enterprise value lending portfolio in favor of more traditional commercial lending products.
Loan Portfolio Concentrations. The following table provides information with respect to our loan portfolio concentrations at September 30, 2024 and December 31, 2023:
| At September 30, 2024 |
At December 31, 2023 |
|||||||||||||||
| (Dollars in thousands) |
Amount |
Percent of total loans |
Amount |
Percent of total loans |
||||||||||||
| Commercial real estate |
$ | 549,029 | 38.98 | % | $ | 468,928 | 34.92 | % | ||||||||
| Construction and land development |
41,401 | 2.94 | 77,851 | 5.80 | ||||||||||||
| Residential real estate |
6,517 | 0.46 | 7,169 | 0.53 | ||||||||||||
| Mortgage warehouse |
292,866 | 20.79 | 166,567 | 12.41 | ||||||||||||
| Commercial |
170,514 | 12.10 | 176,124 | 13.12 | ||||||||||||
| Enterprise value |
348,171 | 24.72 | 433,633 | 32.29 | ||||||||||||
| Digital asset |
— | — | 12,289 | 0.92 | ||||||||||||
| Consumer |
94 | 0.01 | 168 | 0.01 | ||||||||||||
| 1,408,592 | 100.00 | % | 1,342,729 | 100.00 | % | |||||||||||
| Allowance for credit losses on loans |
(21,923 | ) | (21,571 | ) | ||||||||||||
| Net loans |
$ | 1,386,669 | $ | 1,321,158 | ||||||||||||
Commercial Real Estate Concentrations. The following table provides information with respect to our commercial real estate concentrations at September 30, 2024 and December 31, 2023:
| At September 30, 2024 |
At December 31, 2023 |
|||||||||||||||||||||||
| Percent of |
Percent of |
Percent of |
Percent of |
|||||||||||||||||||||
| (Dollars in thousands) |
Amortized cost |
commercial real estate |
total loans |
Amortized cost |
commercial real estate |
total loans |
||||||||||||||||||
| Industrial/manufacturing/warehouse |
$ | 94,496 | 17.21 | % | 6.71 | % | $ | 80,220 | 17.11 | % | 5.97 | % | ||||||||||||
| Multifamily |
85,521 | 15.58 | 6.07 | 56,523 | 12.05 | 4.21 | ||||||||||||||||||
| Self-storage facility |
67,762 | 12.34 | 4.81 | 56,620 | 12.07 | 4.22 | ||||||||||||||||||
| Office |
63,331 | 11.53 | 4.50 | 56,482 | 12.04 | 4.21 | ||||||||||||||||||
| Residential one-to-four family |
46,978 | 8.56 | 3.34 | 30,341 | 6.47 | 2.26 | ||||||||||||||||||
| Hotel/motel/inn |
40,462 | 7.37 | 2.87 | 17,809 | 3.80 | 1.32 | ||||||||||||||||||
| Mobile home/park |
32,278 | 5.88 | 2.29 | 32,763 | 6.99 | 2.44 | ||||||||||||||||||
| Retail |
21,406 | 3.90 | 1.52 | 23,912 | 5.10 | 1.78 | ||||||||||||||||||
| Campground/RV park |
17,802 | 3.24 | 1.27 | — | — | — | ||||||||||||||||||
| Mixed use |
7,089 | 1.29 | 0.50 | 45,241 | 9.65 | 3.37 | ||||||||||||||||||
| Other commercial real estate |
71,904 | 13.10 | 5.10 | 69,017 | 14.72 | 5.14 | ||||||||||||||||||
| Total |
$ | 549,029 | 100.00 | % | 38.98 | % | $ | 468,928 | 100.00 | % | 34.92 | % | ||||||||||||
Enterprise Value Concentrations. The following table provides information with respect to our enterprise value concentrations at September 30, 2024 and December 31, 2023:
| As of September 30, 2024 |
At December 31, 2023 |
|||||||||||||||||||||||
| Percent of |
Percent of |
Percent of |
Percent of |
|||||||||||||||||||||
| (Dollars in thousands) |
Amortized cost |
enterprise value |
total loans |
Amortized cost |
enterprise value |
total loans |
||||||||||||||||||
| Consulting services |
$ | 56,738 | 16.30 | % | 4.03 | % | $ | 63,394 | 14.62 | % | 4.72 | % | ||||||||||||
| Professional services |
43,873 | 12.60 | 3.11 | 53,516 | 12.34 | 3.99 | ||||||||||||||||||
| Advertising |
38,338 | 11.01 | 2.72 | 68,221 | 15.73 | 5.08 | ||||||||||||||||||
| Company management |
33,363 | 9.58 | 2.37 | 16,856 | 3.89 | 1.26 | ||||||||||||||||||
| Real estate services |
29,389 | 8.44 | 2.09 | 33,153 | 7.64 | 2.47 | ||||||||||||||||||
| Industrial/manufacturing/warehouse |
28,032 | 8.05 | 1.99 | 37,241 | 8.59 | 2.77 | ||||||||||||||||||
| Healthcare and social assistance |
23,234 | 6.67 | 1.65 | 36,427 | 8.40 | 2.71 | ||||||||||||||||||
| Construction |
22,383 | 6.43 | 1.59 | 32,989 | 7.61 | 2.46 | ||||||||||||||||||
| Personal services |
21,998 | 6.32 | 1.56 | 28,860 | 6.66 | 2.15 | ||||||||||||||||||
| Wholesale |
14,995 | 4.31 | 1.07 | 23,097 | 5.33 | 1.72 | ||||||||||||||||||
| Other |
35,828 | 10.29 | 2.54 | 39,879 | 9.19 | 2.96 | ||||||||||||||||||
| Total |
$ | 348,171 | 100.00 | % | 24.72 | % | $ | 433,633 | 100.00 | % | 32.29 | % | ||||||||||||
Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies, uniform underwriting criteria, and providing prompt attention to potential problem loans. Management of asset quality is accomplished through strong internal controls, monitoring and reporting of key risk indicators, and both internal and independent third-party loan reviews. The primary objective of our loan review process is to measure borrower performance and assess risk to identify loan weakness in order to minimize loan loss exposure. From the time of loan origination through final repayment, commercial real estate, construction and land development, commercial, and enterprise value loans are assigned a risk rating. We use an internal loan grading system and formally review the ratings annually for most loans, in addition to independent third-party review.
Internal and independent third-party loan reviews vary by loan type and, depending on the size and complexity of the loan, some loans may warrant detailed individual review. Other loans may have less risk, which based upon size, or inclusion in a homogeneous pool, reduces the need for detailed individual analysis. Assets with these characteristics, such as consumer loans and residential mortgages, may be individually reviewed based on risk indicators such as delinquency or credit rating. In cases of significant concern, a total re-evaluation of a loan and its associated risks are documented. We may re-evaluate the fair market value or net realizable value to determine the likelihood of potential loss exposure and, consequently, the adequacy of specific and general credit loss reserves.
When a borrower fails to make a required loan payment, we take steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the property securing the loan generally is sold at foreclosure. On a monthly and/or quarterly basis, management provides the Board of Directors delinquency reports and analysis, including information on any foreclosures, if applicable.
Delinquencies. Total past due loans decreased $5.1 million, or 21.8%, to $18.6 million at September 30, 2024 from $23.7 million at December 31, 2023. The decrease was primarily driven by modifications on a $19.7 million commercial real estate relationship to a borrower experiencing financial difficulty. The commercial real estate relationship consists of seven loans for which the Bank executed modifications in the third quarter of 2024 that provided for term extensions on all seven loans and interest rate reductions on five of the loans in the relationship totaling $18.2 million. This decrease in delinquent loans was offset by the delinquency of a $16.2 million construction and land development relationship in the third quarter of 2024, which the Bank is actively pursuing remedies to return to current, accruing status by leveraging the strong collateral position to work out the relationship under terms acceptable to the Bank.
Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status and real estate and other loan collateral acquired through foreclosure and repossession. All interest accrued but not received for loans placed on non-accrual status is reversed against interest income. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at fair value less costs to sell, establishing a new cost basis. Declines in fair value subsequent to foreclosure will result in charges against income, while operating costs after acquisition are expensed.
The following table sets forth information regarding our non-performing assets at the dates indicated:
| (Dollars in thousands) |
At September 30, 2024 |
At December 31, 2023 |
||||||
| Non-accrual loans: |
||||||||
| Commercial real estate |
$ | 58 | $ | — | ||||
| Construction and land development |
16,212 | — | ||||||
| Residential real estate |
347 | 376 | ||||||
| Commercial |
1,553 | 1,857 | ||||||
| Enterprise value |
18,990 | 1,991 | ||||||
| Digital asset |
— | 12,289 | ||||||
| Consumer |
1 | 4 | ||||||
| Total non-accrual loans |
37,161 | 16,517 | ||||||
| Total non-performing assets |
$ | 37,161 | $ | 16,517 | ||||
| Allowance for credit losses on loans as a percent of non-performing loans |
58.99 | % | 130.60 | % | ||||
| Non-performing loans as a percent of total loans (1) |
2.64 | % | 1.23 | % | ||||
| Non-performing loans as a percent of total assets |
2.25 | % | 0.99 | % | ||||
| (1) | Loans are presented at amortized cost. |
Non-accrual loans increased $20.7 million, or 125.0%, to $37.2 million, or 2.64% of total loans outstanding at September 30, 2024, from $16.5 million, or 1.23% of total loans outstanding at December 31, 2023. The increase in non-accrual loans was primarily due to a $17.6 million enterprise value loan relationship that transitioned to non-accrual status during the second quarter of 2024, and a $16.2 million construction and land development loan relationship that transitioned to non-accrual status during the third quarter of 2024, partially offset by a $12.3 million reduction in non-accrual loans due to the settlement and partial charge-off of the Bank's last digital asset loan relationship during the quarter ended June 30, 2024. The enterprise value relationship is a wellness and pain management practice, currently in a period of transition with key personnel. The Bank is in close contact with the company’s management team and tightly monitoring the execution of their plan to restore the successful operations of the practice. The Bank is diligent in its efforts to secure its position, work out the loan to perform under its original terms, or seek to exit the relationship under terms acceptable to the Bank. The construction and land development loan was originated in 2022 to fund the construction of a climate-controlled storage facility, which the Bank is actively pursuing remedies to return to current, accruing status by leveraging the strong collateral position to work out the relationship under terms acceptable to the Bank.
Repayment of non-performing loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying collateral. The Company pursues the resolution of all non-performing loans through collections, modifications, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, the Company will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.
Allowance for Credit Losses for Loans. The allowance for credit losses on loans (“ACLL”) represents management’s estimate of expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the ACLL is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACLL in those future periods.
The following table sets forth activity in our allowance for credit losses for the periods indicated:
| Nine Months Ended September 30, |
||||||||
| (Dollars in thousands) |
2024 |
2023 |
||||||
| Allowance at beginning of period |
$ | 21,571 | $ | 28,069 | ||||
| Impact of adopting ASC 326 |
— | (2,588 | ) | |||||
| Credit loss expense - loans |
2,590 | 2,090 | ||||||
| Charge-offs: |
||||||||
| Commercial real estate |
— | 1 | ||||||
| Commercial |
101 | 168 | ||||||
| Enterprise value |
— | 3,566 | ||||||
| Digital asset |
2,124 | — | ||||||
| Consumer |
37 | 36 | ||||||
| Total charge-offs |
2,262 | 3,771 | ||||||
| Recoveries: |
||||||||
| Residential real estate |
2 | 5 | ||||||
| Commercial |
18 | 160 | ||||||
| Enterprise value |
— | 49 | ||||||
| Consumer |
4 | 9 | ||||||
| Total recoveries |
24 | 223 | ||||||
| Net charge-offs |
2,238 | 3,548 | ||||||
| Allowance at end of period |
$ | 21,923 | $ | 24,023 | ||||
| Allowance to total loans outstanding at end of period |
1.56 | % | 1.80 | % | ||||
| Net charge-offs to average loans outstanding during the period (annualized) |
0.22 | % | 0.35 | % | ||||
The decrease in the allowance between September 30, 2024 and September 30, 2023 was primarily due to a decrease of $1.4 million in reserves on individually analyzed loans resulting from a payoff of an enterprise value loan which carried a $3.0 million reserve at September 30, 2023 and the settlement and partial charge-off of the last digital asset loan which carried a $7.2 million reserve at September 30, 2023. The decrease related to these two workouts was partially offset by the recognition of an $8.8 million reserve on a $17.6 million enterprise value relationship during the nine months ended September 30, 2024.
Deposits. Total deposits were $1.29 billion at September 30, 2024, a decrease of $42.7 million, or 3.2%, from $1.33 billion at December 31, 2023. The decreases in deposits were primarily due to decreases in listing service deposits, which decreased $77.4 million, or 58.7%, and brokered deposits which decreased $30.5 million, or 15.6%, from December 31, 2023. These decreases were partially offset by an increase in certificates of deposit of $28.0 million, which contributed to total retail deposit growth of $52.5 million, or 7.1%. The growth in core deposits has provided the opportunity for reductions in higher-yielding deposits from the brokered market and listing services. The Bank will continue to seek opportunities to drive core deposit generation, focusing on leveraging its commercial relationships and increasing its market share within its retail footprint.
The following table is a summary of deposit balances by account type at the dates indicated:
| At |
At |
|||||||
| September 30, |
December 31, |
|||||||
| (In thousands) |
2024 |
2023 |
||||||
| Noninterest-bearing: |
||||||||
| Demand |
$ | 318,475 | $ | 308,769 | ||||
| Interest-bearing: |
||||||||
| NOW |
92,349 | 93,812 | ||||||
| Regular savings |
140,979 | 231,593 | ||||||
| Money market deposits |
468,099 | 456,408 | ||||||
| Certificates of deposit: |
||||||||
| Certificate accounts of $250,000 or more |
61,871 | 24,680 | ||||||
| Certificate accounts less than $250,000 |
206,722 | 215,960 | ||||||
| Total interest-bearing |
970,020 | 1,022,453 | ||||||
| Total deposits |
$ | 1,288,495 | $ | 1,331,222 | ||||
Borrowings. The Bank primarily utilizes borrowings to supplement its supply of investable funds. Total borrowings were $124.6 million at September 30, 2024, an increase of $19.9 million, or 19.0%, when compared to December 31, 2023. The increase was primarily driven by an increase in short-term borrowings of $20.0 million, or 21.1%, used to temporarily fund the increase in the mortgage warehouse portfolio.
Shareholders’ Equity. As of September 30, 2024, shareholders’ equity increased $4.3 million, or 1.9%, to $226.2 million compared to $221.9 million at December 31, 2023. The increase included the Company's net income, which totaled $2.4 million for the nine months ended September 30, 2024. Shareholders’ equity to total assets was 13.7% at September 30, 2024, compared to 13.3% at December 31, 2023. Book value per share increased to $12.76 at September 30, 2024, from $12.55 at December 31, 2023. Market value per share increased 7.2% to $10.79 at September 30, 2024, from $10.07 at December 31, 2023. As of September 30, 2024, the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.
Results of Operations for the Three Months Ended September 30, 2024 and 2023
General. The Company reported net income for the quarter ended September 30, 2024 of $716,000, or $0.04 per diluted share, compared to net income of $2.5 million, or $0.15 per diluted share, for the quarter ended September 30, 2023, which represents a decrease of $1.8 million, or 71.0%. The decrease was primarily the result of a $1.7 million provision for credit losses recognized for the quarter ended September 30, 2024 related to a $17.6 million enterprise value relationship, which now carries a total of $8.8 million in individually analyzed reserves. The Company’s return on average assets was 0.18% for the quarter ended September 30, 2024, compared to a return on average assets of 0.57% for the quarter ended September 30, 2023. The Company’s return on average equity was 1.27% for the quarter ended September 30, 2024, compared to a return on average equity of 4.55% for the quarter ended September 30, 2023.
Net Interest and Dividend Income. Net interest and dividend income was $12.4 million for the quarter ended September 30, 2024, a decrease of $1.5 million, or 10.6%, compared to the quarter ended September 30, 2023. The net interest margin was 3.38% for the quarter ended September 30, 2024, compared to 3.44% for the quarter ended September 30, 2023.
Average Balance Sheet and Related Yields and Rates. The following table sets forth the average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the amount of tax-free interest-earning assets was immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
| For the Three Months Ended |
|||||||||||||||||||||
| September 30, 2024 |
September 30, 2023 |
||||||||||||||||||||
| Interest |
Interest |
||||||||||||||||||||
| Average |
Earned/ |
Yield/ |
Average |
Earned/ |
Yield/ |
||||||||||||||||
| (Dollars in thousands) |
Balance |
Paid |
Rate (5) |
Balance |
Paid |
Rate (5) |
|||||||||||||||
| Assets: |
|||||||||||||||||||||
| Interest-earning assets: |
|||||||||||||||||||||
| Loans (1) |
$ | 1,359,712 | $ | 21,257 | 6.25% |
$ | 1,327,373 | $ | 19,811 | 5.97 | % | ||||||||||
| Short-term investments |
78,925 | 932 | 4.72% |
257,580 | 3,184 | 4.94 | % | ||||||||||||||
| Debt securities available-for-sale |
27,367 | 201 | 2.94% |
27,363 | 188 | 2.75 | % | ||||||||||||||
| Federal Home Loan Bank stock |
3,476 | 39 | 4.49% |
1,902 | 45 | 9.46 | % | ||||||||||||||
| Total interest-earning assets |
1,469,480 | 22,429 | 6.11% |
1,614,218 | 23,228 | 5.76 | % | ||||||||||||||
| Noninterest earning assets |
94,258 | 103,453 | |||||||||||||||||||
| Total assets |
$ | 1,563,738 | $ | 1,717,671 | |||||||||||||||||
| Liabilities and shareholders' equity: |
|||||||||||||||||||||
| Interest-bearing liabilities: |
|||||||||||||||||||||
| Savings accounts |
$ | 155,726 | $ | 898 | 2.31% |
$ | 184,239 | $ | 1,021 | 2.22 | % | ||||||||||
| Money market accounts |
479,276 | 4,823 | 4.03% |
551,344 | 5,207 | 3.78 | % | ||||||||||||||
| NOW accounts |
79,527 | 311 | 1.56% |
103,966 | 181 | 0.70 | % | ||||||||||||||
| Certificates of deposit |
231,373 | 3,036 | 5.25% |
230,884 | 2,704 | 4.68 | % | ||||||||||||||
| Total interest-bearing deposits |
945,902 | 9,068 | 3.83% |
1,070,433 | 9,113 | 3.41 | % | ||||||||||||||
| Borrowings |
|||||||||||||||||||||
| Short-term borrowings |
66,727 | 916 | 5.49% |
14,897 | 196 | 5.26 | % | ||||||||||||||
| Long-term borrowings |
9,607 | 36 | 1.50% |
9,741 | 31 | 1.27 | % | ||||||||||||||
| Total borrowings |
76,334 | 952 | 4.99% |
24,638 | 227 | 3.69 | % | ||||||||||||||
| Total interest-bearing liabilities |
1,022,236 | 10,020 | 3.92% |
1,095,071 | 9,340 | 3.41 | % | ||||||||||||||
| Noninterest-bearing liabilities: |
|||||||||||||||||||||
| Noninterest-bearing deposits |
305,124 | 391,917 | |||||||||||||||||||
| Other noninterest-bearing liabilities |
10,377 | 13,864 | |||||||||||||||||||
| Total liabilities |
1,337,737 | 1,500,852 | |||||||||||||||||||
| Total equity |
226,001 | 216,819 | |||||||||||||||||||
| Total liabilities and equity |
$ | 1,563,738 | $ | 1,717,671 | |||||||||||||||||
| Net interest income |
$ | 12,409 | $ | 13,888 | |||||||||||||||||
| Interest rate spread (2) |
2.19% |
2.35 | % | ||||||||||||||||||
| Net interest-earning assets (3) |
$ | 447,244 | $ | 519,147 | |||||||||||||||||
| Net interest margin (4) |
3.38% |
3.44 | % | ||||||||||||||||||
| Average interest-earning assets to interest-bearing liabilities |
143.75 | % | 147.41 | % | |||||||||||||||||
| (1) |
Interest earned/paid on loans includes $796,000 and $921,000 in loan fee income for the three months ended September 30, 2024 and September 30, 2023, respectively. |
| (2) |
Interest rate spread represents the difference between the weighted average yield on interest-bearing assets and the weighted average of interest-bearing liabilities. |
| (3) |
Net interest-earning assets represent total interest earning assets less total interest-bearing liabilities. |
| (4) |
Net interest margin represents net interest income divided by average total interest-earning assets. |
| (5) |
Annualized. |
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effect attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
| For the Three Months Ended September 30, 2024 |
||||||||||||
| Compared to the Three Months Ended September 30, 2023 |
||||||||||||
| Increase (Decrease) Due to |
Total |
|||||||||||
| (In thousands) |
Rate |
Volume |
Increase (Decrease) |
|||||||||
| Interest-earning assets: |
||||||||||||
| Loans |
$ | 956 | $ | 490 | $ | 1,446 | ||||||
| Short-term investments |
(136 | ) | (2,116 | ) | (2,252 | ) | ||||||
| Debt securities available-for-sale |
13 | — | 13 | |||||||||
| Federal Home Loan Bank stock |
(31 | ) | 25 | (6 | ) | |||||||
| Total interest-earning assets |
802 | (1,601 | ) | (799 | ) | |||||||
| Interest-bearing liabilities: |
||||||||||||
| Savings accounts |
40 | (163 | ) | (123 | ) | |||||||
| Money market accounts |
326 | (710 | ) | (384 | ) | |||||||
| NOW accounts |
181 | (51 | ) | 130 | ||||||||
| Certificates of deposit |
326 | 6 | 332 | |||||||||
| Total interest-bearing deposits |
873 | (918 | ) | (45 | ) | |||||||
| Borrowings |
||||||||||||
| Short-term borrowings |
9 | 711 | 720 | |||||||||
| Long-term borrowings |
5 | — | 5 | |||||||||
| Total borrowings |
14 | 711 | 725 | |||||||||
| Total interest-bearing liabilities |
887 | (207 | ) | 680 | ||||||||
| Change in net interest income |
$ | (85 | ) | $ | (1,394 | ) | $ | (1,479 | ) | |||
Interest and Dividend Income. Total interest and dividend income was $22.4 million for the quarter ended September 30, 2024, a decrease of $799,000, or 3.4%, from $23.2 million the quarter ended September 30, 2023. The decrease was primarily due to a decrease in the average balance of short-term investments of $178.7 million, or 69.4%, to $78.9 million for the quarter ended September 30, 2024, compared to $257.6 million for the quarter ended September 30, 2023. The yield on interest-earning assets increased 35 basis points to 6.11% for the quarter ended September 30, 2024, compared to 5.76% for the quarter ended September 30, 2023. The Bank continues to produce a high-yielding loan portfolio at 6.25% for the quarter ended September 30, 2024, an increase of 28 basis points from the quarter ended September 30, 2023.
Interest Expense. Total interest expense was $10.0 million for the quarter ended September 30, 2024, an increase of $680,000, or 7.3%, from the quarter ended September 30, 2023. Interest expense on deposits was $9.1 million for the quarter ended September 30, 2024, a decrease of $45,000, or 0.5%, from the quarter ended September 30, 2023. The decrease in interest expense on deposits from the prior year quarter was primarily driven by a decrease in the average balance of interest-bearing deposits of $124.5 million, or 11.6%, partially offset by a 42-basis point increase in the average cost of interest-bearing deposits. Interest expense on borrowings totaled $952,000 for the quarter ended September 30, 2024, an increase of $725,000, or 319.4%, from the quarter ended September 30, 2023. The increase in interest expense on borrowings from the prior year quarter was primarily driven by an increase in the average balance of borrowings and an increase in the cost of borrowings. The average balance of borrowings increased $51.7 million, or 209.8%, from the quarter ended September 30, 2023. The cost of borrowings was 4.99% for the quarter ended September 30, 2024, an increase of 130 basis points from the quarter ended September 30, 2023. The Company’s total cost of interest-bearing liabilities was 3.92% for the quarter ended September 30, 2024, which is an increase of 51 basis points from 3.41% for the quarter ended September 30, 2023.
Provision for Credit Losses. The Company recognized a $1.7 million provision for credit losses for the quarter ended September 30, 2024, compared to a $156,000 credit loss benefit for the quarter ended September 30, 2023. The provision for the quarter ended September 30, 2024 was primarily driven by an additional $1.7 million reserve on a $17.6 million enterprise value relationship, which, as of September 30, 2024, carries a total of $8.8 million in individually analyzed reserves.
Noninterest Income. Noninterest income was $1.7 million for the quarter ended September 30, 2024, a decrease of $57,000, or 3.2%, compared to $1.8 million for the quarter ended September 30, 2023.
Noninterest Expense. Noninterest expense was $11.6 million for the quarter ended September 30, 2024, compared to $12.7 million for the quarter ended September 30, 2023. The decrease in noninterest expense of $1.1 million, or 9.0%, from the prior year quarter was primarily due to: a decrease in salaries and employee benefits of $509,000, or 6.5%, mainly resulting from workforce reductions; a decrease in other expenses of $301,000, or 36.0%, primarily due to a reduction in expenses related to the workout and closure of the digital asset portfolio; and a decrease in professional fees of $234,000, or 22.6%, primarily due to reductions in legal and consulting expenses.
Income Tax Expense. The Company recorded an income tax provision of $132,000 for the quarter ended September 30, 2024, compared to a provision of $628,000 for the quarter ended September 30, 2023.
Results of Operations for the Nine Months Ended September 30, 2024 and 2023
General. Net income for the nine months ended September 30, 2024 was $2.4 million, or $0.14 per diluted share, compared to $8.0 million, or $0.48 per diluted share, for the nine months ended September 30, 2023, which represents a decrease of $5.6 million, or 70.2%. The Company’s return on average assets was 0.20% for the nine months ended September 30, 2024, compared to 0.64% for the nine months ended September 30, 2023. The Company’s return on average equity was 1.41% for the nine months ended September 30, 2024, compared to 5.02% for the nine months ended September 30, 2023.
Net Interest and Dividend Income. Net interest and dividend income was $36.8 million for the nine months ended September 30, 2024, a decrease of $7.8 million, or 17.4%, compared to the nine months ended September 30, 2023. The net interest margin was 3.34% for the nine months ended September 30, 2024, compared to 3.80% for the nine months ended September 30, 2023. The decreases in net interest income and margin for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, were primarily due to higher funding costs, highlighting the challenges of operating in a persistent rate-driven, highly-competitive deposit market.
Average Balance Sheet and Related Yields and Rates
The following table sets forth the average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the amount of tax-free interest-earning assets is immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
| For the Nine Months Ended |
|||||||||||||||||||||
| September 30, 2024 |
September 30, 2023 |
||||||||||||||||||||
| Interest |
Interest |
||||||||||||||||||||
| Average |
Earned/ |
Yield/ |
Average |
Earned/ |
Yield/ |
||||||||||||||||
| (Dollars in thousands) |
Balance |
Paid |
Rate (5) |
Balance |
Paid |
Rate (5) |
|||||||||||||||
| Assets: |
|||||||||||||||||||||
| Interest-earning assets: |
|||||||||||||||||||||
| Loans (1) |
$ | 1,337,289 | $ | 61,637 | 6.15% |
$ | 1,355,086 | $ | 59,469 | 5.85 | % | ||||||||||
| Short-term investments |
101,539 | 3,979 | 5.22% |
179,086 | 6,545 | 4.87 | % | ||||||||||||||
| Debt securities available-for-sale |
27,694 | 612 | 2.95% |
28,118 | 577 | 2.74 | % | ||||||||||||||
| Federal Home Loan Bank stock |
2,379 | 108 | 6.05% |
2,262 | 140 | 8.25 | % | ||||||||||||||
| Total interest-earning assets |
1,468,901 | 66,336 | 6.02% |
1,564,552 | 66,731 | 5.69 | % | ||||||||||||||
| Noninterest earning assets |
99,161 | 106,722 | |||||||||||||||||||
| Total assets |
$ | 1,568,062 | $ | 1,671,274 | |||||||||||||||||
| Liabilities and shareholders' equity: |
|||||||||||||||||||||
| Interest-bearing liabilities: |
|||||||||||||||||||||
| Savings accounts |
$ | 204,892 | $ | 4,505 | 2.93% |
$ | 158,927 | $ | 1,540 | 1.29 | % | ||||||||||
| Money market accounts |
463,632 | 13,560 | 3.90% |
460,129 | 11,669 | 3.38 | % | ||||||||||||||
| NOW accounts |
77,373 | 718 | 1.24% |
115,568 | 529 | 0.61 | % | ||||||||||||||
| Certificates of deposit |
237,760 | 9,232 | 5.18% |
215,625 | 6,946 | 4.30 | % | ||||||||||||||
| Total interest-bearing deposits |
983,657 | 28,015 | 3.80% |
950,249 | 20,684 | 2.90 | % | ||||||||||||||
| Borrowings |
|||||||||||||||||||||
| Short-term borrowings |
32,242 | 1,375 | 5.69% |
34,098 | 1,250 | 4.89 | % | ||||||||||||||
| Long-term borrowings |
9,642 | 98 | 1.36% |
14,701 | 191 | 1.73 | % | ||||||||||||||
| Total borrowings |
41,884 | 1,473 | 4.69% |
48,799 | 1,441 | 3.94 | % | ||||||||||||||
| Total interest-bearing liabilities |
1,025,541 | 29,488 | 3.83% |
999,048 | 22,125 | 2.95 | % | ||||||||||||||
| Noninterest-bearing liabilities: |
|||||||||||||||||||||
| Noninterest-bearing deposits |
305,849 | 441,006 | |||||||||||||||||||
| Other noninterest-bearing liabilities |
10,977 | 17,880 | |||||||||||||||||||
| Total liabilities |
1,342,367 | 1,457,934 | |||||||||||||||||||
| Total equity |
225,695 | 213,340 | |||||||||||||||||||
| Total liabilities and equity |
$ | 1,568,062 | $ | 1,671,274 | |||||||||||||||||
| Net interest income |
$ | 36,848 | $ | 44,606 | |||||||||||||||||
| Interest rate spread (2) |
2.19% |
2.74 | % | ||||||||||||||||||
| Net interest-earning assets (3) |
$ | 443,360 | $ | 565,504 | |||||||||||||||||
| Net interest margin (4) |
3.34% |
3.80 | % | ||||||||||||||||||
| Average interest-earning assets to interest-bearing liabilities |
143.23 | % | 156.60 | % | |||||||||||||||||
| (1) |
Interest earned/paid on loans includes $2.2 million and $3.1 million in loan fee income for the nine months ended September 30, 2024 and 2023, respectively. |
| (2) |
Interest rate spread represents the difference between the weighted average yield on interest-bearing assets and the weighted average of interest-bearing liabilities. |
| (3) |
Net interest-earning assets represent total interest earning assets less total interest-bearing liabilities. |
| (4) |
Net interest margin represents net interest income divided by average total interest-earning assets. |
| (5) |
Annualized. |
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effect attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
| For the Nine Months Ended September 30, 2024 |
||||||||||||
| Compared to the Nine Months Ended September 30, 2023 |
||||||||||||
| Increase (Decrease) Due to |
Total |
|||||||||||
| (In thousands) |
Rate |
Volume |
Increase (Decrease) |
|||||||||
| Interest-earning assets: |
||||||||||||
| Loans |
$ | 2,957 | $ | (789 | ) | $ | 2,168 | |||||
| Short-term investments |
444 | (3,010 | ) | (2,566 | ) | |||||||
| Debt securities available-for-sale |
44 | (9 | ) | 35 | ||||||||
| Federal Home Loan Bank stock |
(39 | ) | 7 | (32 | ) | |||||||
| Total interest-earning assets |
3,406 | (3,801 | ) | (395 | ) | |||||||
| Interest-bearing liabilities: |
||||||||||||
| Savings accounts |
2,415 | 550 | 2,965 | |||||||||
| Money Market accounts |
1,802 | 89 | 1,891 | |||||||||
| NOW accounts |
408 | (219 | ) | 189 | ||||||||
| Certificates of deposit |
1,524 | 762 | 2,286 | |||||||||
| Total interest-bearing deposits |
6,149 | 1,182 | 7,331 | |||||||||
| Borrowings |
||||||||||||
| Short-term borrowings |
196 | (71 | ) | 125 | ||||||||
| Long-term borrowings |
(36 | ) | (57 | ) | (93 | ) | ||||||
| Total borrowings |
160 | (128 | ) | 32 | ||||||||
| Total interest-bearing liabilities |
6,309 | 1,054 | 7,363 | |||||||||
| Change in net interest income |
$ | (2,903 | ) | $ | (4,855 | ) | $ | (7,758 | ) | |||
Interest and Dividend Income. Total interest and dividend income was $66.3 million for the nine months ended September 30, 2024, a decrease of $395,000, or 0.6%, from $66.7 million for the nine months ended September 30, 2023. The Company's yield on interest-earning assets was 6.02% for the nine months ended September 30, 2024, an increase of 33 basis points from the nine months ended September 30, 2023. The Bank continues to produce a high-yielding loan portfolio, at 6.15% for the nine months ended September 30, 2024, an increase of 30 basis points from the nine months ended September 30, 2023.
Interest Expense. Total interest expense increased $7.4 million, or 33.3%, to $29.5 million for the nine months ended September 30, 2024, compared to $22.1 million for the nine months ended September 30, 2023. Interest expense on deposits was $28.0 million for the nine months ended September 30, 2024, an increase of $7.3 million, or 35.4%, from the nine months ended September 30, 2023. This increase was primarily driven by an increase in the average cost of interest-bearing deposits of 90 basis points, to 3.80%, and an increase in average interest-bearing deposits of $33.4 million, or 3.5%. For the nine months ended September 30, 2024, interest expense on borrowings increased $32,000, or 2.2%, primarily due to an increase in the cost of borrowings of 75 basis points, to 4.69%, partially offset by a decrease in average total borrowings of $6.9 million, or 14.2%. The Company's total cost of interest-bearing liabilities was 3.83% for the nine months ended September 30, 2024, which is an increase of 88 basis points, from 2.95%, for the nine months ended September 30, 2023.
Provision for Credit Losses. For the nine months ended September 30, 2024, the Company recognized a $2.6 million provision for credit losses, compared to $556,000 for the nine months ended September 30, 2023, due to an $8.8 million individually analyzed reserve in the enterprise value portfolio that was partially offset by the first quarter payoff of an enterprise value loan that resulted in the elimination of $1.1 million in related reserves, a settlement with a digital asset lending customer which resulted in a $3.8 million reduction in related reserves and the elimination of that portfolio and reductions in the general allowance due primarily to decreases in the enterprise value and commercial segments, which each carry a higher reserve rate than other lending segments.
Noninterest Income. Noninterest income was $4.6 million for the nine months ended September 30, 2024, a decrease of $827,000, or 15.3%, from $5.4 million for the nine months ended September 30, 2023.
Noninterest Expense. Noninterest expense was $35.9 million for the nine months ended September 30, 2024, a decrease of $2.8 million, or 7.2%, from $38.7 million for the nine months ended September 30, 2023. The decrease in noninterest expense from the nine months ended September 30, 2023 was primarily due to: a decrease in salaries and employee benefits of $1.7 million, or 7.1%, mainly resulting from workforce reductions; a decrease in other expenses of $533,000, or 22.4%, primarily due to a reduction in expenses related to the workout and closure of the digital asset portfolio; and a decrease in insurance expense of $446,000, or $33.0%.
Income Tax Expense. The Company recorded a provision for income taxes of $571,000 for the nine months ended September 30, 2024, reflecting an effective tax rate of 19.3%, compared to $2.8 million, or an effective tax rate of 25.6% for the nine months ended September 30, 2023. The decrease in the effective tax rate is primarily due to a higher percentage of net income from non-taxable sources.
Management of Market Risk
Net Interest Income Simulation. We analyze our sensitivity to changes in interest rates through a net interest income simulation model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period in the current interest rate environment. We then calculate what the net interest income would be for the same period under the assumption that interest rates increase 100, 200, and 300 basis points from current market rates and under the assumption that interest rates decrease 100, 200 and 300 basis points from current market rates, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
The following table presents the estimated changes in net interest income of the Company that would result from changes in market interest rates over the twelve-month period beginning September 30, 2024:
| At September 30, 2024 |
||||||||
| (Dollars in thousands) |
Estimated Net Interest Income Over Next 12 Months |
Change |
||||||
| Changes in Interest Rates (Basis Points) |
||||||||
| 300 | $ | 52,151 | (6.00 | )% | ||||
| 200 | 53,324 | (3.80 | )% | |||||
| 100 | 54,445 | (1.80 | )% | |||||
| 0 | 55,457 | — | ||||||
| (100) | 55,731 | 0.50 | % | |||||
| (200) | 55,617 | 0.30 | % | |||||
| (300) | 54,897 | (1.00 | )% | |||||
Economic Value of Equity Simulation. We also analyze the sensitivity of our financial condition to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The EVE ratio represents the dollar amount of our EVE divided by the present value of our total assets for a given interest rate scenario. EVE attempts to quantify our economic value using a discounted cash flow methodology while the EVE ratio reflects that value as a form of capital ratio. We estimate what our EVE would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest rates increase 100, 200, and 300 basis points from current market rates, and under the assumption that interest rates decrease 100, 200 and 300 basis points from current market rates.
The following table presents the estimated changes in EVE of the Company that would result from changes in market interest rates as of September 30, 2024:
| At September 30, 2024 |
||||||||
| (Dollars in thousands) |
Economic Value of Equity |
Change |
||||||
| Changes in Interest Rates (Basis Points) |
||||||||
| 300 | $ | 234,173 | (9.50 | )% | ||||
| 200 | 241,706 | (6.50 | )% | |||||
| 100 | 251,287 | (2.80 | )% | |||||
| 0 | 258,626 | — | ||||||
| (100) | 258,882 | 0.10 | % | |||||
| (200) | 254,279 | (1.70 | )% | |||||
| (300) | 243,739 | (5.80 | )% | |||||
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the tables presented above assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, borrowings, and loan repayments and maturities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments and sales of securities are greatly influenced by general interest rates, economic conditions and competition.
We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2024, cash and cash equivalents totaled $138.7 million. Debt securities classified as available-for-sale, which provide additional sources of liquidity, totaled $27.4 million at September 30, 2024. Warehouse loans that have a short-term duration, which totaled $259.4 million as of September 30, 2024, also provide additional sources of liquidity.
At September 30, 2024, we had a borrowing capacity of $136.8 million with the Federal Home Loan Bank of Boston, of which $60.0 million in short-term advances and $9.6 million in advances with original maturities greater than one year were outstanding. At September 30, 2024, we also had an available line of credit with the Federal Reserve Bank of Boston’s borrower-in-custody program of $263.6 million, of which $55.0 million in overnight advances were outstanding.
We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. In the event unforeseen loan demand or commitment utilization were to occur, or we experienced unexpected deposit outflows, we could access our borrowing capacity with the Federal Home Loan Bank of Boston or the Federal Reserve Bank of Boston, or obtain additional funds through brokered deposit markets.
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. At September 30, 2024 and December 31, 2023, we had $10.9 million and $8.6 million in loan commitments outstanding, respectively. In addition to commitments to originate loans, at September 30, 2024 and December 31, 2023, we had $160.5 million and $178.2 million in unadvanced funds to borrowers, respectively. We also had $1.8 million and $1.7 million in outstanding letters of credit at September 30, 2024 and December 31, 2023, respectively.
A significant decrease in deposits could result in the Company having to seek other sources of funds, including brokered deposits, 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 and we are confident in our ability to attract and retain deposits by adjusting the interest rates offered to meet customer expectations.
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 September 30, 2024, BankProv exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 10 – Regulatory Capital of the Notes to the Unaudited Consolidated Financial Statements for additional information.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Management Market Risk”.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2024. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2024, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting
On January 17, 2023, the Company reported a material weakness in financial controls on its Form 10-Q for the third quarter of 2022. Shortly thereafter, the Company began receiving voluntary requests from the staff of the Boston Regional Office of the SEC. The Company has been cooperating with the staff’s ongoing voluntary requests. On October 24, 2024, the Company received a letter from the staff of the Boston Regional Office of the SEC informing the Company that the staff had made a preliminary determination to recommend that the SEC file an action against the Company for violating certain sections of the federal securities laws (the “Wells Notice”). The staff has indicated that the Wells Notice relates to the Company’s disclosures regarding loans that the Company made to companies engaged in the mining of cryptocurrency - a line of business the Company ceased originating new loans in as of October 2022. The Wells Notice indicates that the staff’s recommendation to the SEC may involve a civil injunction action or other action allowed by law, and may seek remedies that include an injunction, disgorgement, pre-judgment interest, civil money penalties, and such other relief as may be available.
The Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows the recipient the opportunity to address the issues raised by the enforcement staff before they make an enforcement recommendation to the SEC or the SEC votes on whether to authorize an enforcement action.
The Company intends to pursue the Wells Notice process, which will include an opportunity to respond to the staff’s position via a Wells Submission, and also expects to engage in a dialogue with the staff to explore a potential resolution of this matter. The results of the Wells Notice process and any corresponding enforcement action and the costs, timing and other potential consequences of responding and complying therewith are unknown at this time.
There have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
| (a) |
Not applicable. |
| (b) |
Not applicable. |
| (c) |
Not applicable. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Director and Section 16 Officer Rule 10b5-1 Trading Arrangements
During the three months ended September 30, 2024, director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
| 3.4 | Amendment to Bylaws of Provident Bancorp, Inc. (3) |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
| 101 |
The following financial statements from the Provident Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements. |
| 104 |
Cover Page Interactive Data File (formatted as iXBRL and contained in exhibit 101). |
| (1) | Incorporated by reference to the Company’s Registration Statement on Form S-1 (file no. 333-232018), initially filed with the Securities and Exchange Commission on June 7, 2019. |
| (2) |
Incorporated by reference to the Company’s Current Report on Form 8-K (file no. 001-39090), filed with the Securities and Exchange Commission on March 29, 2021. |
| (3) | Incorporated by reference to the Company’s Current Report on Form 8-K (file no. 001-39090), filed with the Securities and Exchange Commission on January 26, 2024. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PROVIDENT BANCORP, INC. |
|
| Date: November 13, 2024 |
/s/ Joseph B. Reilly |
| Joseph B. Reilly |
|
| President and Chief Executive Officer |
|
| Date: November 13, 2024 |
/s/ Kenneth R. Fisher |
| Kenneth R. Fisher |
|
| Executive Vice President and Chief Financial Officer |